Even as holiday shoppers flock to take advantage of big sales, the stock market continues to face pressure from the tech sell-off, weak crude, and concerns about trade with China.
Techs likely to come under pressure again as FAANG stocks still sagging
Black Friday sales monitored for possible impact on retail sector
Chinese stocks get slammed amid continued concerns about trade
(Friday Market Open) Black Friday dawns with high hopes for a solid shopping season as the firm economy continues to deliver solid job and wage growth. At the same time, tech stocks remain under pressure and look poised to continue their descent.
All the FAANG stocks lost ground in pre-market trading Friday, extending recent losses that put them into a bear market and helped send the Nasdaq (COMP) into correction. The question is whether tech bearishness and continued worries about the trade dispute with China might outweigh what looks like a frenzied start to holiday retail sales as Friday’s abbreviated session continues. The stock market closes at 1 p.m. ET today.
The National Retail Federation forecasts nearly a 5% jump in holiday sales this year, with shoppers expected to lay out $721 billion between now and the end of December. Some of the major stocks to watch during this sales bonanza include Amazon (AMZN), Target (TGT), Lowe’s (LOW), Macy’s (M), Walmart (WMT), and eBay (EBAY).
Before the shopping season began in earnest, all wasn’t well in retail land—at least from a stock market perspective. Earlier this week, TGT’s earnings helped deal the market another blow, but there was actually a lot to like in the company’s report. Walmart (WMT)—another big-box behemoth—just missed analysts’ revenue estimates in its recent quarter and saw its shares get hit, but huge e-commerce sales growth and a strong outlook might speak to a U.S. consumer base that’s ready to go out and spend now that the holidays are here.
There was more evidence of that just before Thanksgiving when the University of Michigan’s final read on consumer sentiment for November ticked down just slightly from earlier in the month and remained relatively positive. As the report said, “Consumer sentiment has remained largely unchanged at very favorable levels during 2018,” and the November reading of 97.5 was right about in the middle of the yearly range.
We’ll have to wait and see where confidence goes in coming weeks and months, as it might feel pressure if the markets keep getting hit. There’s a theory that people tend to feel a “wealth effect” from rising stock prices, and they’re probably not feeling much of that now with the S&P 500 (SPX) heading out of Thanksgiving down 9% so far this quarter.
Of course, there’s a lot more to the market over the next few weeks than holiday shopping. Investors will come back next week to heavy anticipation ahead of President Trump’s Nov. 30 and Dec. 1 meetings with China’s President Xi. A lot of hope centers on those meetings, but remember that neither country has shown much sign of stepping back from the tough trade talk over the last month or two. Just last weekend, we saw Vice President Pence and Xi indirectly exchanging unpleasantries. A thaw would probably be welcomed by the markets, but shouldn’t necessarily be expected.
Also, the overseas markets didn’t have a Thanksgiving holiday, and European investors seem to still be skittish in the middle of Brexit and Italian budget worries. The broad European Stoxx 600 Index is down nearly 8% this quarter. European stocks mostly rose early Friday, but stocks in China got slammed. The Shanghai composite fell nearly 2.5%, with analysts blaming trade tensions and weak crude.
Looking back at Wednesday’s pre-holiday market performance, the ending was a bit disappointing as the Dow Jones Industrial Average ($DJI) couldn’t hold onto 200-point early gains. The so-called “Apple effect” seems to be firmly in place, with investors worried about the fortunes of that widely-held tech name. At times during the last few weeks, Apple (AAPL) by itself has accounted for major portions of the $DJI’s daily losses. Going forward, AAPL’s influence shouldn’t be discounted. If this stock stays under pressure, it could continue to cast a shadow.
Crude could be another pressure point Friday and next week as it continues to put the energy sector under a smog. U.S. crude futures slid more than 6% to below $51 a barrel early Friday, trading at new one-year lows after another big stockpile build in the U.S. and amid concerns of how the U.S./China trade war might affect the global economy. Stockpiles have risen nine straight weeks, though that’s not uncommon this time of year. Total inventories reached 446.91 million barrels, the highest level in nearly a year.
Worries are widespread about possible excess crude supplies worldwide as U.S. production keeps churning higher and Russia and Saudi Arabia also continue to pump furiously. The question is whether Saudi Arabia might feel pressure to keep the taps freely flowing in the wake of the killing of a journalist that raised tensions between the kingdom and the U.S. We might get a better sense of that at the Dec. 6 OPEC meeting.
Today is pretty light on data, as you might expect for the session between Thanksgiving and a weekend. Trading might be low-volume and choppy, so remember that thin trading can sometimes exacerbate moves. With the session ending early, hopefully people have enough time to enjoy leftovers and get ready for all the weekend football.
Figure 1: A Lift For Transports: The Dow Jones Transportation Average (candlestick) is holding its own lately, despite another leg down for the S&P 500 Index (purple line). Falling crude costs, with oil prices down about 25% over the last month, might be helping transports outpace the broader index. 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.
Outlook Valued Over Results: If you think way back to the start of Q3 earnings season, you might remember hearing in this column about earnings data being backward looking and investors having more concern about company outlooks. Well, that seems to be exactly the way things played out, judging from the performance of companies that reported. According to a Wall Street Journal article citing Factset data, 161 companies in the S&P 500 announced better than expected earnings through the end of last week but saw their stock pounded anyway. While it’s true that those earnings announcements came at a time when the market was under pressure, it’s also a potential sign that an “upside earnings surprise” just doesn’t seem to carry the weight it once did. Investors appear more interested in what companies say about their outlooks, as well as the “quality” of earnings—meaning whether the numbers can be sustained beyond a single quarter. This arguably makes investors’ jobs a bit harder. It’s not simply a game of who beat consensus. It now takes more digging into the numbers, assessing guidance, and listening for signals on conference calls if you want a better sense of where a particular stock, or sector, might go next.
Tech and Tariffs: If you want to know why tech’s in a rut, it pays to look across the Pacific. The trade battle between the U.S. and China is arguably the main catalyst haunting tech stocks. These companies have been at the forefront of U.S.-China discussions,and volatility in tech could get even more sizzling as President Trump plans to meet with President Xi later this month. If no progress is made, tariffs could rise to 25% starting in the new year and potentially put tech companies, especially semiconductor firms, in a delicate position. The tariffs could hit these companies in two ways, either by raising the price of components they buy from China to make chips, or by hitting chips made in China by U.S. firms and imported back into the U.S., as TheStreet.com points out. That’s why tech, but especially semiconductor firms, have been hit so hard lately.
Durables on Defense: The headline durable goods number earlier this week might have looked pretty negative with a 4.4% monthly drop in October. As is the case much of the time, however, a deeper dig into the data revealed slightly less reason to worry. Most of the big headline drop reflected a 59.3% decline in “defense aircraft and parts” orders. Total defense capital goods orders fell more than 16%. That might be bad news for defense companies like Boeing (BA) and Lockheed Martin (LMT), but it doesn’t necessarily say much about the broader economy. Spending in that category can be fickle from month to month, and non-transportation durable goods orders actually rose 0.1%., helped by a rise in orders for motor vehicles and parts. That doesn’t mean the report didn’t have any warnings. There were declines in orders for many industrial materials and machinery, which might indicate some economic slowing. The declines could also reflect companies pulling back as tariffs start to take a bite. This report might become even more noteworthy if higher U.S. tariffs on Chinese goods take effect in January, as the U.S. has threatened.
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