Tough Talk: Weaker Tone After U.S./China Point Fingers Over Weekend

The S&P 500 Index managed to record back-to-back gains to end the old week, but tech and consumer discretionary are both sagging. The new week is a holiday-shortened one, but it includes some important housing and earnings data.

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Key Takeaways

  • Stocks have a weaker tone early Monday after more trade static with China over weekend

  • The shortened week ahead brings key housing data and a couple of big earnings reports

  • Crude chalked up its sixth-consecutive losing week, and gas prices are down sharply

(Monday Market Open) Stocks seem to go where the trade winds blow, and that might be the case to start the week. There’s a softer tone on Wall Street early Monday after some tough talk over the weekend between the U.S. and China.

In addition, the tech sector appears to be coming under pressure again, with Apple (AAPL) shares getting hit in pre-market trading after The Wall Street Journal reported a possible slide in iPhone demand.

Still, it isn’t all negative. Asian and most European stocks rose Monday, so maybe that will spill over a bit into U.S. trading. Also, the old week ended with two straight days of gains for the S&P 500 Index (SPX). That doesn’t guarantee anything for today, but it does seem like a little positive momentum might have developed after all the U.S. indices took big hits a week ago. The SPX starts the week 6.6% below September’s all-time high.

Trading is likely to be a little thin this week as people start to head out for the Thanksgiving holiday. At times like this, caution is often warranted, because thinner markets can sometimes exacerbate moves either up or down. 

All the uncertainty about trade, Brexit, and interest rates still hangs over the proverbial trading floor, while info tech can’t seem to buy a break from bad news. Semiconductor earnings weakness and iPhone demand worries are just the latest issues to hit tech after the sector suffered earlier this year from the privacy controversy and more recently from earnings disappointments at IBM (IBM) and Apple (AAPL). The Nasdaq (COMP), which many of the tech firms call home, didn’t join in Friday’s gains.

Apple clawed back a little on Friday after hitting bear market territory earlier in the week, but it was generally a rough week for AAPL and its fellow FAANGs. All five seem to be having trouble getting momentum behind them. At this point, they can’t seem to get out of the mud. 

Meanwhile, trade with China arguably remains the biggest issue to wrestle with. Vice President Pence and China’s President Xi had some tough words for each other at the Asia-Pacific Economic Cooperation (APEC) conference over the weekend, when neither seemed ready to budge much from their respective positions. That doesn’t seem to bode well for the meeting later this month between President Trump and Xi, but those trade winds sometimes shift quickly, so we’ll have to wait and see.

On another China-related note, shares of JD.com (JD), a China-based e-commerce competitor of Alibaba (BABA), tumbled Monday after the company reported revenue that came up short of analysts’ estimates. This might be something to monitor, as some interpret this as a symptom of China’s slowing GDP growth.

There’s not much data to pore over today, but tomorrow stay tuned for October housing starts and building permits. Last month, both readings declined—housing starts by 5.3% and building permits by 0.6%.  On Wednesday, a fresh snapshot on existing home sales is due to be released—another housing number that showed a decline last month. When you consider the recent volatility among home builder stocks, plus the weaker guidance offered by DIY giant Home Depot (HD) when it released earnings last week, this week’s housing data may be worth watching. 

Not Over Yet: More Earnings On Way

More earnings are on the way, holiday or no holiday. Two major ones are Target (TGT) on Tuesday and Deere (DE) on Wednesday. TGT could give investors more insight into consumer sentiment heading into the holidays after Walmart (WMT) reported mostly solid results and raised guidance. Target’s guidance might get a close look, in part because of soft outlooks from a number of big firms that have raised questions about demand. That’s especially true in the electronics sector where semiconductor companies loom large, and amid concerns about iPhone demand after AAPL’s guidance drew a fisheye from many investors.

It wouldn’t be surprising if focus on DE turns to tariffs and their potential impact, as DE is a big player in Asian markets. As a reminder, DE missed analysts’ average earnings estimate last time out, in part due to what the company said were higher costs for raw materials and freight. Perhaps the company’s Q3 results could provide more perspective on those dynamics as U.S. tariffs remain a factor for many other companies that have reported already. Countless executives have expressed concern about the potential for more tariffs and rising costs of goods.

Meanwhile, consumer discretionary stocks were the worst performing sector Friday after Nordstrom (JWN), issued guidance that failed to impress Wall Street analysts. But even the weak guidance might have played second fiddle to news that JWN was taking a $72 million charge to refund customers who were incorrectly charged higher interest rates on its store credit card. Shares plunged double digits.

Looking deeper at JWN earnings, it’s possible the company might be a victim of its own success. Its online sales were very good, but some analysts worry that means more shoppers log in to buy the one thing they need and don’t buy additional items, as they would in the store. Or if they do want to buy more, they might take a drive to Nordstrom Rack, which is doing well but where margins tend to be lower.

Other retailers also suffered recently despite strong earnings. Macy’s (M) shares revived a little on Friday but fell earlier in the week, and Walmart (WMT) shares never capitalized on what looked like a pretty good quarter overall, by the numbers. It looks like some WMT investors might have been spooked by WMT referring to possible tariff impact, but 43% e-commerce growth was very impressive. Also, even if tariffs do begin taking a bigger toll, it’s possible WMT could actually benefit since it has a reputation as being the low-cost grocery store. WMT could be an interesting stock to watch in coming weeks.

Health care—led by a new high for Dow Jones Industrial Average ($DJI) component Merck (MRK), was among the better performing sectors Friday. Also high on the leaderboard were energy (which might have gotten a boost from Friday’s slight rebound in crude), and materials. However, most sectors finished the old week down from the previous Friday. 

On a positive note, Friday marked the second day that the stock market rallied into the close. It also was the first time the S&P 500 Index (SPX) recorded back-to-back daily gains since a three-session stretch in the green from Nov. 5-7.

What Tidings From Washington?

It’s hard to completely rule out politics playing a role in the coming weeks. There’s been a bit of muttering about chances for at least a partial government shutdown as lawmakers and the president face off over a proposed border wall. Funding for the Department of Homeland Security and a handful of other agencies runs out Dec. 7, and a partial shutdown would go into effect unless Congress and President Trump act before then. Even a partial shutdown would still lead to thousands of federal workers being sent home without pay and could cause challenges throughout the country, the Washington Post reported.

Also consider keeping an eye out for any further talk of an infrastructure bill, something that came up again after the midterms. Congress has a lame-duck session ahead, but any movement on this issue could be a boost for sectors like energy, materials, and industrials.

Stocking Stuffers From Crude?

Crude suffered its sixth-straight week of declines, ending Friday up slightly for the day but still down more than 6% for the week. One possible benefit could be holiday shoppers and anyone planning to drive long distance to visit friends or family this holiday season. The national average price per gallon of gas was $2.67 on Thursday, down from $2.90 a month earlier, and some analysts say the price could fall even more—perhaps below $2.50—in part because this is a low-demand time of year. 

Stock market volatility leveled off a bit at the end of the week, as the VIX fell below 19 late Friday after climbing above 22 the day before. It’s way too soon to say if this means the slowdown can continue, but remember that not too many days ago, VIX fell to the 16-area before ticking up again. Also, benchmark 10-year Treasury yields sank as low as 3.07% late Friday, the lowest that yield has been since Oct. 30. This could have partly reflected market reaction to dovish comments early in the day from Fed Vice Chair Richard Clarida (see more below).

Now for some logistics: U.S. markets are shut this coming Thursday for Thanksgiving, and close at 1 p.m. ET on Friday. Market Update will publish as normal on Wednesday and Friday, but will take a day off on Thursday. 

Figure 1: Sticking with Staples: Despite what looked like mostly good numbers from the department and big-box stores that recently reported earnings, the consumer discretionary sector (candlestick) didn’t enjoy a very good week. Meanwhile, consumer staples (purple line), a sector investors tend to embrace during rough times, performed a bit better than their cousin. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade.  For illustrative purposes only. Past performance does not guarantee future results.

Crack in the Armor? If there’s one thing the Fed has emphasized at its last few meetings, it’s the necessity of gradually raising interest rates. That’s what it said as recently as Nov. 8 (just over a week ago). Fed Chair Jerome Powell said just last month that interest rates are still “a long way” from neutral—a level where they’re neither accommodative nor restrictive. That was after the Fed raised the target range to 2% to 2.25%, the highest in more than a decade. But on Friday, after a rocky two months for the market and with Powell expressing worry this week about slow economic growth abroad, the Fed might have shown the potential for some wiggle room. A December hike still seems very likely, judging from the 69% odds forecast by the futures market. However, 2019 looks a little more murky after Fed Vice Chair Richard Clarida told CNBC that the Fed is close to the point of being “neutral” on interest rates and should base further increases on economic data. Ten-year Treasury yields fell below 3.1% after his remarks, down from above 3.24% a week ago.

Remember: The Fed’s target range didn’t change between early October when Powell said rates were a “long way” from neutral and Friday, when Clarida said the Fed is “close” to neutral. What seems to have possibly changed is where neutral might be in this economic climate. Some analysts see the neutral rate somewhere between 2.5% and 3.5%, and the Fed’s last “dot plot” showed many Fed officials expecting rates to top 3% by late next year. Now, perhaps the goal posts are moving a bit, though a lot more clarity could come a month from now at the Fed’s next meeting Dec. 18-19. 

Follow the Dots: One thing to watch is that next Fed dot plot. Will the 2019 dots start trending lower, and, if so, could that mean the Fed keeps its powder dry the first half of the year? It’s dangerous to make predictions, but that theory seems to hold more power than it did even a week ago. Clarida said economic data will determine future rate increases, meaning the Fed might let numbers be the guide rather than reflexively raising rates to keep the economy from  overheating, as it seems likely to do next month. It could be an interesting show Dec. 19 when the Fed delivers its next statement and Powell takes the podium.

Checking Perspective: One thing to consider as the market continues to slog along well below its September highs is that despite recent weakness, the SPX hasn’t really moved much from where it’s been most of 2018. If you look at the average level of the SPX this year, it’s near 2763. That’s less than 1% above Friday’s closing price. Also, on a 12-month basis, the SPX has traded between about 2530 and 2940, so the current level is in the middle of that range. Markets don’t always move straight up, but investors might have gotten a bit spoiled with the calm rally of 2017. That could make the recent volatility seem harder to handle, even though the roughly 7% downturn from late September’s highs hasn’t really changed the picture all that much.

The SPX has a 200-day moving average of 2760, so that’s probably the most important technical resistance level to watch as the new week starts. The index has pivoted on both sides of that the last couple of weeks, showing no real tendency to move too far from that chart point in either direction. A dip below 2700 or above 2760 could potentially signal a turn in direction, analysts say, but the SPX would probably have to stay below or above those levels for more than just a few hours intraday to really get traction one way or the other.

Good Trading, 

JJ

@TDAJJKinahan 

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