Enthusiasm about a trade deal between the United States and Mexico seemed to spill over into a second day Tuesday, a day after news of an agreement appeared to lessen worries over the administration’s trade policies.
News of deal with Mexico comes after Fed comments seen as dovish
Utilities stocks fell Monday as risk appetite and Treasury yields rose
GDP data on the schedule later in the week
(Tuesday Market Open) The U.S. equity market may be this year’s summer sleeper hit. If you’re like many summertime investors, having spent some time away from the hustle and bustle, you might be surprised to see that, amid the geopolitical tensions, trade worries, and interest rate uncertainty, the market has been steadily knocking out solid gains. And now we find ourselves once again in record territory.
Recently, trade disputes between the U.S. and key trading partners have apparently caused some investors to worry about the pace of global economic growth. While it still remains to be seen how the issues could work out between the U.S. and China, the European Union and Canada, enthusiasm about the Mexico deal appeared to help stocks on Monday.
All three major U.S indices ended in the green Monday, with the S&P 500 (SPX) and Nasdaq Composite (COMP) closing at records. The tech-heavy COMP traded above 8,000 for the first time. According to the Wall Street Journal, it took the COMP a little less than eight months to rally from the 7,000 mark, making the 1,000-point sprint the fastest since the index went from 4,000 to 5,000 near the height of the dot-com era.
The Dow Jones Industrial Average ($DJI) outperformed the other two indices, perhaps because of its concentration of large multinational blue chips that are more sensitive to international trade issues than domestic small-cap stocks. $DJI has been lagging the other two indices, with market experts blaming trade as a factor.
With the trade news seeming to blunt some worries Monday, the dollar fell against a basket of currencies and the yield on U.S. Treasuries rose. Both are often considered haven investments and demand can fall in times when investors are more optimistic. (Treasury yields move opposite to their prices.) While the Cboe Volatility Index (VIX), often considered the market’s fear index, rose, it still finished at a relatively subdued level just over 12 (see figure 1 below).
The bullish sentiment on the U.S.-Mexico trade front comes on the heels of Fed Chairman Jerome Powell’s comments in Jackson Hole on Friday. The market seemed to interpret them as dovish, especially a bit about him not seeing much risk of the economy “overheating” as far as inflation goes.
FIGURE 1: RISK OFF AGAIN. As equity markets march higher amid the cooling of trade tensions and dovish talk on the economy, the Cboe Volatility Index (VIX) has pulled back to 12 from a high near 17 two weeks ago. But it’s worth noting that the index got down to 10 just prior to the last market scare, when tensions in Turkey dominated the headlines. Data source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Consumers Swiping: Over the last year, the financial sector of the S&P 500 has only trailed the broader index just a bit, with the sector up 14.1% and the index up 17.62%. While financial stocks aren’t the best performing sector, they’re not the worst either. But there’s one segment of the sector that has markedly outperformed the wider index—credit card companies. Over the same time period, American Express (AXP) is up more than 25%, Visa (VISA) is up more than 40%, and MasterCard (MA) is up nearly 60%. One reason for the divergence could be that banks appear to have been weighed down by a flattening yield curve. At the same time, recent data and company earnings reports appear to be showing that the U.S. consumer is healthy, indicating shoppers may be swiping those cards.
Utilities Cool Off: With the stock market reaching new highs, it’s perhaps not surprising that some defensive sectors are doing poorly. Investors often buy into these sectors when they’re worried about an economic downturn because people will still need to buy things like toothpaste and electricity regardless of what the economy is doing. So, when investors are more confident about economic growth and the rise in share prices that can come with it for some sectors, they tend to eschew defensive sectors. On Monday, utilities was the worst performing sector in the S&P 500, losing 0.64%. The sector is down 2.27% over the past year, while the wider index is up more than 17%. Another apparent headwind for utilities on Monday was the rise in Treasury yields. Dividend-paying utilities often compete with fixed income as investors seek yield.
GDP Data on Tap: The government gets another crack at gross domestic product on Wednesday with its second estimate for Q2 GDP. Investors tend to keep a close eye on GDP reports, as they can give insight into the pace of economic growth (or contraction) and shed light on the state of inflation (if there is any). That’s the idea behind the government’s GDP estimates in general. More specifically, the report this week is expected to show annualized GDP growth of 4%, according to a consensus of economists polled by Briefing.com. That would be a slight revision down from the last estimate of 4.1%. A surprise revision any lower has the potential to weigh on the markets because it would take the estimate below the 4% threshold, which could be a psychologically important level.
The TD Ameritrade Network is brought to you by TD Ameritrade Media Productions Company. TD Ameritrade Media Productions Company and TD Ameritrade, Inc. are separate but affiliated subsidiaries of TD Ameritrade Holding Corporation.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2018 TD Ameritrade.