Market Seems to Retain Some Trade-Related Optimism Heading Into Holiday

Positive comments from Washington and Beijing on trade continue to keep the wind in investors’ sails despite a lowered outlook from Deere as the trade war drags on.

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5 min read
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Key Takeaways

  • Deere lowers guidance as trade war continues

  • Trump says U.S., China nearing a deal 

  • Chinese Commerce Ministry says both sides have agreed to discussions

During this holiday-shortened week, we’d like to wish everyone a safe and happy Thanksgiving.

(Wednesday Market Open) It’s the day before Thanksgiving, so unlike many of us after stuffing ourselves on turkey and dressing, trading today could be thin. By noon the most exciting thing among market participants might be the race to the airport.

Light volumes can exacerbate moves in either direction, but for now Wall Street seems to be relatively sedate, with the tone generally positive on lingering optimism that helped stocks close at record highs to end yesterday’s session. Regardless of how quiet the market might be today, a finish of even a smidge higher in the main three U.S. indices would mean fresh closing records

President Trump said the world’s two largest economies were getting close to a deal. And the Chinese Commerce Ministry said negotiators from both sides had agreed to discussions about a partial trade deal.

Still, without a deal officially inked, investors and traders may want to use caution in following the trade-related headlines, since the news flow has had plenty of ups and downs as the trade war has dragged on.

In trade-related corporate news, Deere (DE) shares were getting taken out to the woodshed this morning despite the heavy equipment maker reporting profit that slightly beat expectations and revenue that exceeded forecasts. Shares were down more than 4% in premarket trading after the company lowered guidance and said its agricultural equipment sales could drop 5%–10% in fiscal year 2020.

The company’s CEO cited trade tensions and difficult growing and harvesting conditions in causing many farmers to be cautious about buying new equipment.

For now though, the market seems optimistic, which seems to be helping lift stocks as well as oil prices. It seems that sentiment is positive among oil investors and traders who could be thinking that companies will ship more goods and increase the demand for black gold if a trade deal does get signed.

Retailers Help Boost Market Tuesday

Traders and investors went on a shopping spree Tuesday, pushing the three main U.S. indices to another round of record closes.

Retailers were in focus as earnings season continued. Best Buy (BBY) encouraged investors by beating analysts’ consensus earnings and revenue estimates and raising its guidance as the company has kept itself relevant and its stores updated. It’s shares rose more than 9.8%. Dicks Sporting Goods (DKS) did even better, rising more than 18.6% after easily topping estimates and raising guidance.

On the other end of the spectrum, Dollar Tree (DLTR) fell more than 15%, after the company came up short of analysts’ earnings expectations.

DLTR joined Home Depot (HD) and Kohl’s (KSS) in disappointing investors, but overall, it’s been a pretty good earnings season for retailers, and recent retail sales figures have been slightly better-than-expected. The growth in discretionary spending, especially after the prior month’s contraction, seems to be a welcome sign ahead of the holiday shopping season, which many retailers rely upon for a good chunk of their revenue.

While Black Friday this year could be a litmus test for whether the U.S. consumer is as strong as we’ve been thinking, the shopping event is arguably waning in importance.

Decent weather around the nation heading into Thanksgiving may have had people shopping earlier this year, as perhaps have early deals from some companies. Couple those factors with Amazon (AMZN) regularly offering products at discounted rates and the increased importance of Cyber Monday sales and Black Friday’s impact this year may not be as high as in past years.

It also appears that an optimistic view of the economy from Powell on Monday also helped market sentiment yesterday. The Fed’s accommodative stance on monetary policy has been one of the factors helping stocks to their current record levels. 

CHART OF THE DAY: RISK RECKONED RECEDING. With stocks notching fresh records as investors apparently were in risk-on mode, it’s probably not too much of a surprise that Wall Street’s main fear gauge, the Cboe Volatility Index (VIX) eased on Tuesday. The VIX often moves lower when investors are feeling optimistic about the market and are more willing to buy perceived riskier assets like equities. Note that 2019 has seen a few spikes above 20 (purple line) followed by periods of grinding lower. Data source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

A Roof Over Your Fed: Although consumer confidence numbers from the Conference Board have been retreating, from a global perspective the U.S. consumer is one of the brighter spots in the world economy at the moment. That seems to bode well, not only for the upcoming holiday shopping season, but also for the housing market, as buying a home is one of the biggest discretionary purchases a person can make. According to the Federal Reserve, easier monetary policy this year is already helping the housing market. “The full effects of these monetary policy actions will be felt over time, but we believe they are already helping to support consumer and business sentiment and boosting spending in interest-sensitive sectors, such as housing and consumer durable goods,” Powell said in a speech Monday.

Housing Data Better Than Forecast: Housing data on Tuesday seemed to bear that out. New home sales for October came in stronger than expected at 733,000 units, compared with 710,000 forecast in a Briefing.com consensus. While the new figure did represent an unexpected decline from the previous month, that was largely because September’s figure was revised substantially higher, from 701,000 initially reported to 738,000, marking the highest level since July 2007. “The key takeaway from the report is that the October showing was better than what meets the eye at first blush given the large upward revision to the prior month's number,” Briefing.com said.

Tight Jobs Market Helps Housing: While lower mortgage rates are helping spur home buying, they’re not the only factor. In addition to “ebullient market sentiment,” a strong jobs market is also contributing to homebuyer demand, according to mortgage finance agency Freddie Mac. That makes sense because when people feel secure about their employment they might feel better about making a big purchase like a house. Also, tight labor markets can lead to higher wages as companies try to attract employees. More money in people’s bank accounts can lead to feeling more secure when buying a home. Data from Freddie Mac showed the U.S. weekly average for a 30-year fixed mortgage at 3.66% as of Nov. 21, substantially lower than the 4.81% from a year prior. “Residential real estate accounts for one-sixth of the economy, and the improving real estate market will support economic growth heading into next year,” Freddie Mac said.

Good Trading,
JJ
@TDAJJKinahan

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This week's economic calendar. Source: Briefing.com
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Key Takeaways

  • Deere lowers guidance as trade war continues

  • Trump says U.S., China nearing a deal 

  • Chinese Commerce Ministry says both sides have agreed to discussions

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