Weekend Approaches With Optimism Still Intact Despite Weak Retail Sales

The cautious optimism that helped lift stocks Thursday appears to be intact after strength in overseas markets early Friday.

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Key Takeaways

  • Overseas markets were mostly higher Friday, potentially lending U.S. stocks some strength

  • Some of the “risk-on” sentiment appears to be dissipating as the dollar weakens

  • Retail sales for August rise 0.1%, coming in below expectations as car sales fall

(Friday Market Open) Friday starts off looking a bit like Thursday. Cautious optimism still seems to be the watchword amid hope for trade talks with China and U.S. indices up near their all-time highs. On a less positive note, retail sales for August came in below expectations.

It looks like some of the “risk-on” sentiment that’s dogged the market lately might be lifting, at least judging from weakness in the dollar and yen as well as a rise in Treasury note yields back toward 3% for the benchmark 10-year. When sentiment improves, it can often drive strength in the more aggressive sectors like info tech and industrials. That appeared to be the case yesterday, and we’ll see if it continues today.

In the background, thoughts are with those affected by Hurricane Florence, which came ashore this morning in the Carolinas.

Overseas Markets Rebound as “Risk-On” Fades

Despite the disappointing U.S. data, strength in European and Asian markets overnight might help underpin Wall Street early Friday, with trade optimism and a weaker dollar also among factors potentially giving stocks a boost. Most major overseas indices rose early Friday, and the dollar stepped back a bit. 

The U.S. retail sales data might be one factor that gets in the way. The report showed retail sales up just 0.1% in August, below analysts’ average expectation of 0.4% and down from revised growth of 0.7% in July. The caveat here is weak demand for cars. If you strip autos out of the report, retail sales rose 0.3% in August, the government said. That’s still below expectations, though, and the report as a whole could raise questions about whether consumers are out spending their higher wages. Still, it helps to put things in context by checking year-over-year retail sales, which are up a healthy 6.6%.

Another data point early Friday showed import prices falling 0.6%, the biggest drop since early 2016. This could reflect a strong dollar that prevailed during August when the data were collected. 

Optimism Back in Town Thursday

Positive news on China and inflation that sent the market up at the open Thursday appeared to set a bullish tone that lasted throughout the day as the three major U.S. indices, led by Nasdaq (COMP), posted across-the-board gains. Leading sectors Thursday included info tech and health care, which both jumped more than 1%. It was a pretty broad rally, with cyclical and “defensive” sectors mostly in the black. In all, eight of the 11 S&P 500 sectors finished flat to higher. Small-caps, however, retreated slightly.

In a nutshell, investors gained a sense of optimism late this week that trade negotiations with China might resume and that the Trump administration’s threat of new tariffs might be delayed. Check in again each day for new headlines, because the news around this tends to change quickly. It could be another story next week, but the only thing we can do is wait and watch. The markets continue to be headline-driven and we’re still weeks from earnings season.

Greenback Steps Back

The relatively soft inflation data this week seems to be having a different impact on Treasury notes and the dollar than on stocks. The dollar index hit its high for the year (so far) a month ago today, up above 96.70, and now trades below 95. This might be translating into some momentum for U.S. stocks, many of which can potentially benefit from a weaker dollar making their goods cheaper for customers overseas. The weaker dollar over the last month also could inject more optimism into the Q3 earnings picture. Just a few weeks ago, there was concern around Wall Street that the higher dollar might take a bite out of some companies’ earnings results. It remains to be seen, but might be a little less of a factor if this dollar softness extends through the remaining weeks of the quarter.

Treasury notes traded both sides of unchanged before ending with the 10-year yield just above 2.97%, on Thursday, still stopping short of the psychological 3% mark. The yield edged even higher early Friday to 2.99%.

From a stock market standpoint, Apple (AAPL) led the way Thursday after sliding Wednesday in the wake of its new product event. Some positive analyst comments expressing optimism about AAPL’s product and price positioning looking ahead to the holiday season might have helped turn things around for the stock. Another turn-around story Thursday was semiconductor stocks, which rebounded from losses the previous day after positive remarks on a financial news network from a major investor in the space. 

FIGURE 1:  Keeping Some Powder Dry:  So-called “defensive” sectors including consumer staples and telecom (purple line), have kept pace with the S&P 500 (blue line) over the last month even as cyclicals like industrials and consumer discretionary have rallied. The continued strength in non-cyclicals could reflect possible investor caution amid trade worries, or might suggest that yields haven’t rallied enough to lure many investors out of dividend stocks and into Treasury notes. 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.  

Crude Puts on Brakes: While the stock market scurried higher Thursday, crude oil turned lower despite reports earlier this week of a huge drawdown in U.S. stockpiles. It looks like growing global supplies might be outweighing the weekly drop here in the U.S., as world production hit 100 million barrels a day for the first time, according to the International Energy Administration (IEA). At the same time, OPEC is pulling back on its demand estimates. If supply is going up and demand is going down, that’s not a very bullish scenario. Keep in mind, though, that production from Iran and Venezuela remain question marks that could potentially boost oil prices on any given day. Also, demand in the U.S. looks pretty decent, judging from the stockpiles report. U.S. supplies are at their lowest level in three years. Crude prices seem to have strong support at around $67 a barrel for U.S. futures, a level that held when tested recently. At the same time, buying interest appears a bit limited above $70.

Price Watch: Housing prices are up. Food prices are up. Gas prices are up. That’s what the August consumer price index (CPI) showed, and that means some consumers might feel a little pinched as they go about their daily errands, pay the rent, or consider a home purchase. The CPI is up 2.7% year-over-year, down from a 2.9% rise in July, but still well above the Fed’s target of 2%. That said, core inflation—which strips out the prices of food and energy—is up just 2.2% since a year ago, pretty much in line with the Fed’s stated policy of keeping inflation at 2% and below the pace of wage growth. 

There didn’t seem to be much in the August numbers to really change the Fed’s likely policy of a rate hike this month and probably another one before the end of the year, but the market had a positive reaction in part because the numbers didn’t seem to show inflation running away. Keeping a lid on prices last month were drops in apparel and health care costs, the government said. Investors might want to consider checking today’s University of Michigan preliminary consumer sentiment number for September to potentially get a sense of inflationary expectations.

Nasdaq Pulls Ahead on Leader Board: Nasdaq (COMP) continues to pull ahead in the index battle year-to-date, and is now up more than 16%. It’s taken a few hits along the way, including earlier this week, but the combination of strength in both biotech and much of the info tech sector keeps coming to its rescue.  Following Nasdaq on the index leader board are the Russell 2000 (RUT) small-cap index, up 11.6%; the S&P 500 (SPX), up 8.6%, and bringing up the rear, the Dow Jones Industrial Average ($DJI), up 5.8%. It’s easy to look at those standings and see how worries about trade have weighed on multinational stocks in the $DJI while helping small caps and to some extent tech, which might be more shielded against tariffs.

Good Trading, 

JJ

@TDAJJKinahan 

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