The stock market is bouncing back nicely from the week’s soft start as hopes grow for trade talk progress. A series of analyst upgrades and a mixed set of earnings are also in focus.
Positive tone to start day amid trade hopes, analyst upgrades
Pre-market gains come after positive showings in Europe, Asia
Investors preparing for tomorrow’s November jobs report
(Thursday Market Open) Things are looking up.
That little hitch in the markets last Friday and early this week appears to be behind us, setting the stage for more solid gains ahead of the opening bell today. The positive tone followed overnight advances in Europe and Asia, mostly on ideas that trade talks might be headed in the right direction. Specifically, The Wall Street Journal reported early Thursday that Beijing says China’s trade negotiations with the U.S. “remain on track,” and both sides maintain close communication.
Naturally, the next negative headline or tweet could send things the opposite way, so it’s hard to get too optimistic. Still, the quick turnaround from Tuesday morning’s steep losses could indicate that there’s plenty of resilience in the stock market, trade war or no trade war. Resilience means a lot, and it’s been a recurring theme all year as major indices remain on track for their best annual showing since 2013.
Though today’s early news on the tariff front was positive, stocks exposed to the trade war continue to see fallout from the situation. One example might be Tiffany (TIF), whose earnings per share missed analysts’ estimates significantly. The company reported strong mainland China sales, but softness in the Americas. That could reflect fewer Chinese tourists coming to shop at the firm’s U.S. stores, normally a big source of revenue.
In other corporate news, United Airlines (UAL) CEO Oscar Munoz will leave his job as CEO next May, CNBC reported. President Scott Kirby will take over. UAL shares fell slightly in pre-market trading. The airline is having a good year from an earnings standpoint, but its stock has mostly bounced around in 2019, trailing the broader market. It’s up significantly since Munoz took the job, however.
Another company with share gains early Thursday was Dollar General (DG), up more than 3%. The discount retailer’s quarterly results surpassed Wall Street’s estimates and same-store sales rose a solid 4.6%. The company said in a press release that it had its best customer traffic and same-store sales increase in five years. It also raised guidance. More evidence, it seems, of a healthy consumer, though discount retailers often do better in tough economic times when people cut back.
Over the last day there’ve been the usual analyst upgrades and downgrades, but this time some of the upgrades include a handful of big names, like Nike (NKE), Facebook (FB), and Alphabet (GOOGL). It’s possible those stocks could get boosts from the analyst reports.
Next week is Fed week, but before that comes this week’s gathering of OPEC. The organization continues to pump at a reduced rate, and analysts expect it to either extend those production cuts further out into 2020 or announce it’s taking additional production offline before it wraps up its meeting.
Crude prices rallied earlier this week ahead of OPEC’s get-together (see chart below), but if OPEC decides to just keep production at current levels, it’s possible some of that enthusiasm might get checked. There’s still plenty of new non-OPEC production expected to come online over the next year, so OPEC probably needs to shed some barrels if it wants to support prices.
Stocks, like crude, mounted a comeback Wednesday, but some of the gains melted away in the last hour of the day. It was still a solid performance, led by Energy. To date this year, Energy shares are by far the weakest sector, but some analysts believe if OPEC does cut production, some Energy names could conceivably attract buyers looking for possible bargains. The Energy sector is barely up at all this year, compared with a 24% gain year-to-date for the S&P 500 Index (SPX). All other sectors are up at least 14% in 2019.
Every sector finished in the green on Wednesday amid optimism around trade talks, and the three horsemen of risk—volatility, bonds, and gold—returned to the stables after galloping around the track on Tuesday. The Cboe Volatility Index (VIX) fell back below 15, down from a peak near 18 the day before. Ten-year Treasury yields stand near 1.8%, not far off of the near-term average. There’s not much of a sense that people want to push that yield back toward 2%, but every attempt to test recent lows near 1.7% appears to bring out the bond sellers.
In corporate news, investors seemed to welcome announcements of leadership changes at GOOGL and Expedia (EXPE) on Wednesday. Shares of both rose, with EXPE up a solid 6% and GOOGL up 2%. We’ll have to wait and see if there’s any follow-through.
It’s possible trading could be a little thin and directionless today as people await tomorrow’s big monthly payrolls report (see more below). Wall Street estimates for job growth in November have come down a bit in recent days amid weak data, but analysts do expect a healthy 0.3% rise in weekly wages. That would keep the annual growth near 3%, where it’s been for a while.
Today’s initial unemployment claims figure (which was on the low side at 203,000) isn’t likely to play into tomorrow’s report, because that data has already been collected. What’s more relevant to consider ahead of Friday is that claims jumped to their highest level in several months for a couple of weeks in November. That caused some worry about possible declining employer demand, but the numbers really weren’t too high from a historic sense.
There’s additional data headed at investors before tomorrow, namely October factory orders. This is one that worried some people last time out when it fell 0.6%. Remember to keep an eye on nondefense-related capital goods excluding aircraft, which is considered a proxy for business spending. That data point slid 0.7% in September as the trade war apparently put pressure on companies.
Until some sort of trade agreement is signed and people know the rules of the game, they’re probably going to be hesitant to play. We’re seeing that in this week’s manufacturing and services sector data, so we’ll keep an eye on factory orders for what could be further evidence.
Speaking of trade, that Dec. 15 deadline for new U.S. tariffs to take effect on Chinese consumer goods is just 10 days away. That’s possibly enough time for a Phase One deal to get made, or for the U.S. to put some sort of extension on the start date for tariffs. We’ve seen extensions before, and some analysts say that’s a likely outcome again this time, especially because these tariffs—which would conceivably raise prices for consumers on a lot of goods they buy regularly—would begin hitting stores right at the beginning of an election year.
That’s all speculation for now, so it might be best to try and ignore the tariff noise as much as possible and focus on stuff like data and earnings, as well as results from holiday shopping season as they filter in.
CHART OF THE DAY: CRUDE MAY HAVE FOUND ITS GROOVE. Crude futures (candlestick) are showing signs of moving higher, breaking above their 200-day moving average (blue line). If crude breaks out above $58.70—a possible resistance level prices were bouncing off of a couple weeks ago—Energy stocks, which have generally underperformed the broad equity indices this year, may get a boost. Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
What Will OPEC Do? Track the Probabilities: Most people who closely follow the markets are probably familiar with CME Group’s (CME) “FedWatch” tool, which tracks the odds of a Fed rate hike or cut based on the Fed funds futures market. Now investors can track odds of another metric: Chances of OPEC cutting or raising crude oil output. The exchange recently introduced a product called the CME OPEC Watch Tool, which uses NYMEX WTI Crude Oil Option prices to calculate probabilities of certain outcomes of the next OPEC meeting. This tool derives probabilities from the closest expiration month that expires after the OPEC meeting, CME said.
It seems appropriate to mention this new tool considering OPEC’s latest meeting begins today and concludes by the end of the week. At this point, the odds are roughly 50-50 that OPEC will retain its current output or cut output further this time around, the CME tool says. That’s a higher probability of a production cut than what options predicted going into last summer’s meeting, meaning it appears market participants are coming around to the idea that OPEC might be getting more aggressive trying to support prices.
Reining In Payroll Hopes: In the wake of disappointing manufacturing and services sector data this week, some analysts are starting to pull back on their projections for November jobs growth. The consensus not long ago was for growth of around 180,000, but more recent estimates flagged a bit, down toward the 150,000 level. That sounds decent, but remember, it includes around 45,000 jobs “added” when striking General Motors (GM) workers returned to the workforce. A closely watched estimate for private payrolls released early Wednesday also looked disappointing, showing growth of just 67,000 in November, down from 121,000 in October. It’s important to remember, though, that the private sector jobs number doesn’t look at all the same metrics that the government tracks, so a weak number on Wednesday doesn’t necessarily mean a weak Friday follow-up.
And even if Friday’s data do look soft, keep in mind that with unemployment at 50-year lows, it’s simply getting more challenging for employers to find new workers. Any number of 100,000 or more is probably enough to keep up with population growth, economists have said. The pessimistic side of the equation, which some analysts subscribe to, is that the trade war has depressed companies’ plans for new business and infrastructure development, putting a damper on jobs growth.
Crude May Be Late to the Party: The Energy sector has been left out of this year’s party, lagging in performance against the broader equity indices. But it may at least get an invite before the year ends. With the OPEC bi-annual meeting kicking off today, the general consensus is that OPEC members may want to see stability in oil prices. This could mean OPEC may make some production cuts. Crude oil prices generally have a tendency to fluctuate. This year alone, U.S. crude oil futures (/CL) have moved between a low of around $45 to about $66 per barrel. After hitting a low of close to $55 per barrel, Wednesday’s action took the commodity to over $58, breaking out above its 200-day moving average (see chart above). Where it goes from here could depend on decisions made in the bi-annual meeting. Remember, however, that even if OPEC does decide to cut production, December tends to be a weak month seasonally for crude, meaning it’s probably best to keep any hopes for a major rally in check.
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