Stocks Seem to Shake off Tariff Fears, Continue March Higher in Early Trade

The major stock indices shook off early tariff fears yesterday to finish higher , and the rally has followed through to early trading Thursday. Friday's monthly employment report is up next.

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(Thursday Market Open) Equity futures continued their march higher ahead of the opening bell Thursday, a continuation of the turnaround that began mid-morning Wednesday as investors seemed to shrug off some of the worry about the trade spat with China.

Amid the follow-through buying, it’s notable that gains in the Russell 2000 futures (/RTY) were outstripping futures for the three main indices on Thursday morning. It might be interesting to see if the Russell can maintain those gains as small cap stocks can be seen as a leading indicator. Small cap stocks may also weather potential negative impacts of trade issues with China better than their larger brethren.

Stocks appear to have gotten a boost from additional clarity from Facebook (FB) as CEO Mark Zuckerberg talked to reporters yesterday about the impacts of the data breach. (See more on that below.)

Yesterday, all three of the major U.S. indices staged an intraday comeback to finish higher after starting off deeply in the red. Initially, markets were under pressure after China announced a series of tariffs targeting the U.S. that affect more than 100 products, including soybeans and automobiles. But as the day wore on and trade fears eased, consumer staples stocks such as Hormel Foods Corp. (HRL), Walgreens Boots Alliance (WBA) and CVS Health Corp. (CVS) helped boost the market and showed that U.S. consumer spending appears to be healthy. The question remains whether consumers are done spending on big-ticket items and now are focused on staples. Homebuilders also had a good day, helped by strong Q1 results from Lennar Corp. (LEN).

By the end of the session, all the major indices finished higher. The Dow Jones Industrial Average ($DJI), which had been down as much as 500 points, closed up 230 points, at 24264. The S&P 500 (SPX) finished up 30 points, or 1.1%, and the Nasdaq Composite (COMP) led them all, on a percentage basis, to finish the trading day up 100 points, or 1.45%.

Whether investment stays in consumer staples and homebuilders remains to be seen. Investors appear to be trying to figure out how to position themselves, and that can lead to surprises like we saw in yesterday’s trading. The gains in homebuilders and consumer stocks came a day after financials faltered but industrials did relatively well. So it doesn’t appear we can use the word “rotation” in this market yet as it’s hard to pinpoint sectors that investors truly believe in. It may stay like this until we get more guidance from corporate earnings.

The gyrations can serve as a reminder for long-term investors to not be sucked in by emotional temptations to respond to the short-terms highs and lows. Over the long term, these peaks and troughs tend to even out.

Tomorrow is a big day for economic news, as we’ll see the government’s Employment Situation report for March at 8:30 a.m. ET. Arguably the biggest headline to watch is the non-farm payrolls report section, which can often be a trigger for big moves in the market. But wage growth is also a key stat to consider paying attention to. Stocks rose sharply after the last jobs figures came in well over what Wall Street analysts were expecting. Wage growth, which in January advanced by the fastest pace since 2009, cooled a bit in last month's report, which makes Friday's wage growth reading something to watch.. Wage growth is a key component to inflation and is an important factor the Fed watches when determining interest rate policy. (See more on wages below.)

Wall Street analysts surveyed by Briefing.com are expecting an increase of 175,000 non-farm jobs for March, an unemployment rate of 4%, and monthly growth in average hourly earnings of 0.2%. Recall that last month, nonfarm payrolls blew away expectations, adding 313,000.

Wall Street has been awaiting the figures amid worries over the trade spat with China and woes in the tech industry. But in the absence of the guidance that can come from corporate earnings, it seems that there has been some outsized emotional reaction to initial news. But earnings season is just around the corner.

That could serve as a reminder to perhaps not worry so much about how the market initially reacts to the jobs figures tomorrow, since a dearth of other news may exacerbate any emotional reaction to unexpected data.

Soybeans vs. S&P 500, April 4, 2018

FIGURE 1: TARIFF TALK HITS AG PRODUCTS.

Tariff fears hit equities and agricultural products alike in the early hours Wednesday. But while the S&P 500 Index finished over 1% higher on the day, soybean futures (/ZS, purple line), finished the session down over 2%. Data source: S&P Dow Jones Indices, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Cool beans.  Among the 100-odd components targeted for tariffs by China are soybeans. The versatile, protein-rich oilseed is a top export from the U.S. to China, which imported $14 billion in soybeans from the U.S. last year, according to the USDA—about a third of the total U.S. production. So, although the stock market roared higher throughout the trading day to finish substantially higher, soybeans remained weak. After falling over $0.50 out of the gate, or 5%, soybean futures (/ZS) pared their losses a bit, but still finished lower by $0.21, or 2%. (see figure 1 above).   

Wages and the Fed. One of the reasons Wall Street celebrated the non-farm payroll report last month was that the jobs growth was coupled with year-over-year average hourly wage growth slowing to 2.6% from the previous month’s 2.9%. That allayed some fears of inflation and potentially hawkish moves by the Fed. But the wage growth was still high enough to support consumer spending. Tomorrow, consider watching the Fed funds futures after the hourly wage data comes out. Those financial instruments are used to try to forecast what the Fed might do with interest rates. Chances for a 4th rate hike in 2018 may increase if wage growth picks up, or they may decrease if we continue to see slowing wage growth. 

Facebook’s Future. While the Facebook (FB) data breach has made headlines lately, it remains to be seen what the lasting impacts on the company will be. Zuckerberg told reporters yesterday that information on as many as 87 million users may have been improperly shared but that the company hasn’t seen a meaningful impact on usage or ad sales as a result, according to Reuters. The social media behemoth has scheduled a conference call with investors to coincide with its Q1 earnings release on April 25 after the market closes. The release is likely to be closely watched, but we probably won’t see much effect from the data security issue in the Q1 numbers. Still, investors likely will want to watch whether initial impressions about revenue from yesterday become the long-term reality.

Good Trading,
JJ
@TDAJJKinahan

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FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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