Market Optimism Continues on Potential Progress Toward Ending Govt. Shutdown

U.S. market participants awoke to a trio of positive news tidbits touching on the partial government shutdown, trade war, and Fed policy even as sentiment from a largely positive earnings season continued to provide momentum.

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6 min read

Key Takeaways

  • Bipartisan group of senators eyeing temporary, partial reopening

  • Treasury secretary says progress being made on trade talks

  • Report says Fed officials may keep larger bond portfolio than thought

(Friday Market Open) U.S. market participants awoke to a trio of positive news tidbits touching on the partial government shutdown, trade war, and Fed policy even as sentiment from a largely positive earnings season continued to provide momentum.

On the political front, senators from both sides of the aisle said they would introduce an amendment that would temporarily reopen part of the government. While it’s too soon to tell exactly when the shutdown might end, it seems like lawmakers may be on the path to resolving the issue. Positive developments there are likely to encourage Wall Street, as companies have increasingly been voicing worries about the shutdown costing them money, or having the potential to.

Meanwhile, Treasury Secretary Steven Mnuchin told Reuters that the United States and China were “making a lot of progress” on talks to end the ongoing trade war that has sparked worries about global economic growth and weighed heavily on companies’ outlooks. His comments served as a counterpoint to less optimistic talk from Commerce Secretary Wilbur Ross (see more below).

To round out the threesome of news apparently making the bulls happy, The Wall Street Journal reported that Fed officials are closer to ending the central bank’s bond portfolio wind-down. It said officials are near a decision to maintain a bigger portfolio than they had thought when they started shrinking those holdings two years ago.

Also in The Wall Street Journal, Facebook (FB) Chairman and CEO Mark Zuckerberg defended the social media giant in an opinion piece, saying the company doesn’t sell users’ data. The op-ed seemed to help boost FB’s shares, giving more lift to a tech sector that has been a highlight to this earnings season, with a notable exception being Intel (INTC). 

One geopolitical situation to consider monitoring is the fallout from presidential election turmoil in Venezuela and what that might mean for oil prices. Yesterday, West Texas Intermediate futures gained ground amid talk of sanctions against the South American OPEC member. It remains to be seen how much the situation might affect oil prices going forward, but it’s probably worth watching as oil prices help form key costs for transportation companies like airlines.

Earnings Season Rolls On

Western Digital’s (WDC) shares were higher, even though it reported adjusted earnings that missed expectations, as the company told investors its revenue would improve later this year. 

Meanwhile, Starbucks (SBUX) shares had a nice buzz going this morning after the company beat expectations on its top and bottom lines and said its same-store sales grew 4% in the U.S. market. Major companies reporting before the opening bell included consumer products company Colgate-Palmolive (CL), homebuilder D.R. Horton (DHI) and biopharmaceutical company AbbVie (ABBV).

CL shares were down nearly 4% in early trade after it reported Q4 earnings that missed the Street view, although revenue was a bit more than expected. DHI shares were also in the red, down about 1%, on its Q1 earnings disappointment and despite revenue gains amid rising home prices. Earnings were $0.76 per share, up 52% from a year prior as homebuilding revenue increased 6% to $3.4 billion. 

The U.S. Census Bureau was scheduled to release its monthly new home sales report today, but that’s likely to be put off as it was last month due to the partial government shutdown.

Administration Trade Comments Weigh

The market on Thursday continued to be caught between optimism on the back of great earnings and fear resulting from geopolitics. Stocks ended mixed, with the S&P 500 (SPX) eking out gains, the Nasdaq (COMP) performing a bit better, and the Dow Jones Industrial Average ($DJI) ending slightly in the red.

First, let’s consider what drove bearish sentiment. Mostly, it seemed to stem from comments by Commerce Secretary Wilbur Ross, who told CNBC that the United States and China are “miles and miles” from reaching a trade deal and have “lots and lots of issues.”

It seems that Ross’s comments may have put a cap on gains in a market that has been seeing positive momentum from a generally solid earnings season. The tariff issue is arguably more of a threat to company earnings growth than recent fears about the Federal Reserve possibly making a mistake and tightening monetary policy too aggressively even as inflation is muted. Based on recent commentary from the Fed, it seems that the latter worries have eased up somewhat.

Tech Shares Shine

During a day when tech was the best performing of the 11 SPX sectors, it was interesting to note that Apple (AAPL) shares finished the day slightly softer. True, much of the gains were focused in the chip space, and that’s a different business than what AAPL does. But the pressure on the company’s shares Thursday seems to be a reminder of just how much exposure AAPL has to what happens in China, which makes up a good chunk of its sales and supply chain. 

Talking about technology shares leads us to the other side of yesterday’s coin: optimism about corporate results. 

The tech-heavy COMP edged out the other two main indices after Xilinx (XLNX), Lam Research (LRCX), and Texas Instruments (TXN) reported better-than-expected earnings. The PHLX Semiconductor Sector Index (SOX) rose more than 5.7%. (See more below.)

The chipmaker party also appeared to be fueled by good expectations for Intel’s (INTC) quarterly report after the bell. But those hopes short circuited after the big semiconductor maker reported quarterly revenue and a Q1 earnings outlook that were short of analyst expectations. 

In separate corporate news, Pacific Gas & Electric Corp. (PCG) shares jumped more than 74% after California investigators cleared the utility of responsibility in a deadly 2017 fire. But the company, which recently said it intended to file for bankruptcy, said it “still faces extensive litigation, significant potential liabilities and a deteriorating financial situation.” The company’s shares remain down significantly from their 2017 peak above $70, even when including Thursday’s rally that took the shares to a close just shy of $14.

Figure 1: Chip on Your Shoulder? The PHLX Semiconductor Sector Index (SOX) rallied on Thursday amid optimism in the space after strong earnings reports, but ahead of results from Intel, which ended up disappointing on revenue. Overall, the index has been under pressure in recent months on worries about the U.S.-China trade war and concerns about iPhone sales. Data Source: Nasdaq. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

Looking at Labor: With much focus on the hundreds of thousands of workers out of jobs during the partial government shutdown, it may be worth remembering that overall the nation’s job market remains tight. Data from the Labor Department (which was funded before the shutdown and remains open) on Thursday showed that weekly initial claims for unemployment dropped by 13,000 to 199,000, less than a Briefing.com consensus expectation of 217,000. The new figure is the lowest level for initial claims since mid-November 1969. Perhaps a more helpful data set is the four-week moving average for initial claims. That figure also dropped, by 5,500 to 215,000. While a tight labor market can lead to wage inflation, it is also a signal of a strong economy. 

US GDP Growth Could Slow: But the job market isn’t the only economic indicator out there. Fresh data from the Conference Board Thursday added to the drumbeat of worries about the potential for slowing growth in the United States. Its index of leading economic indicators dropped by 0.1% in December, in line with a Briefing.com consensus forecast. The decline suggests that growth in the U.S. economy could slow this year, the Conference Board said. “While the effects of the government shutdown are not yet reflected here, the (index) suggests that the economy could decelerate towards 2% growth by the end of 2019,” according to Ataman Ozyildirim, director of economic research at the Conference Board.

Technically Speaking: While geopolitical factors seem to be providing the macroeconomic reasons for tepid gains in stocks on Wednesday and Thursday, technical factors could also be at play. According to i10 Research, the SPX has been in a zone of resistance between 2629 and 2674. The market has been testing the lower end of that range, as the SPX has dipped below 2629 in each of the last three sessions but then managed to close above that level. Still, the bias remains bearish as long as the index is below 2674, according to i10.

Good Trading, 

JJ

@TDAJJKinahan 

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Economic calendar for week of Jan. 21. Source: Briefing.com
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Key Takeaways

  • Bipartisan group of senators eyeing temporary, partial reopening

  • Treasury secretary says progress being made on trade talks

  • Report says Fed officials may keep larger bond portfolio than thought

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