Milder Trade Winds Help Ease Chill as Last Week of Quarter Gets Underway

Optimism appeared more widespread early Monday amid reports that China and the U.S. were talking over their trade disputes.

8 min read

(Monday Market Open) Better tidings on the U.S./China trade front this morning sent stocks up sharply in pre-market trading as investors hoped for some sort of reprieve. Still, the last week of Q1 begins with two of the three major indices needing a big rally to avoid posting quarterly losses.

On the trade front, media reports said China and the U.S. are negotiating to improve U.S. access to Chinese markets, firing up optimism among some investors that the countries could find a way to avoid a major trade war. Uncertainty around the potential impact of tariffs hit stocks last week after President Trump announced he’d levy tariffs on as much as $60 billion of imports from China. In turn, China announced higher tariffs on $3 billion in U.S. goods and threatened additional steps.

The Wall Street Journal reported late Sunday that the two countries were talking and the tone was positive. This seems to go back up what some people have said about the way President Trump operates, and it’s something investors might want to keep in mind. The president starts off with a big statement that sometimes rattles markets, but then often becomes more pragmatic. This helps to create volatility. The VIX, a closely-watched volatility measure, dropped to 22 early Monday from 25 late Friday, but remains elevated.

For long-term investors, the turmoil we experienced last week can be frustrating. At times like these, consider reminding yourself that if you’re in the market for the long term, you don’t need to worry about every headline or even a particularly bad quarter. It’s important not to get carried away one way or another, and to keep positions small. Last year it seemed like any trade might work, but this year it looks like it’s going to be hard to commit big amounts to any one trade. You have to be sort of crafty, and you have to monitor. If you are in for the longer term, don’t get caught up in day-to-day news.

Sectors to watch as talks continue include materials, industrials, and info tech in particular. Those are pretty heavily exposed to the Chinese market. Like the Facebook (FB) data security issue last week, this trade issue isn’t going to go away in a day, so investors might want to brace themselves for more potential turbulence. These things can hang around for a while.

Even if the market manages to revive today, it might be a stretch for two of the three major indices to post quarterly gains. The S&P 500 Index (SPX) goes into Monday down 3.2% year-to-date. The last time the SPX had a losing quarter was Q3 of 2015, when it fell nearly 7%, according to Morningstar. The Dow Jones Industrial Average ($DJI) is down 4.8% for the year. Only the Nasdaq (COMP) has gains, up 1.3% since Dec. 31.

From a technical standpoint, here are a couple of numbers to watch as the week begins: 2,532.69 and 23,360.29. Those are the Feb. 9 intraday lows for the S&P 500 Index (SPX) and $DJI. Both indices started the week perched just above those lows.

Another level is the SPX’s 200-day moving average, which is just under Friday’s close at 2,585.38. Sometimes, a plunge below key moving averages can trip program-selling and send markets skidding even lower. However, that didn’t appear to be an immediate concern early Monday as the pre-market trading sent the $DJI up by triple-digits. If the SPX manages to bounce from here and close well above the 200-day moving average, some investors might see that as a positive technical sign.

With fear stalking the Street last week, money began gravitating toward some of the more defensive areas. The interest rate complex attracted buyers, and so did gold and the yen. The leading SPX sector (if it’s fair to call a sector that fell 2.5% a “leading” one), was utilities. Other SPX leaders were real estate and consumer staples. Real estate may be the one thing that doesn’t look like the others, as utilities and staples are places investors tend to put their money when they’re worried about future weakness.

In one development that may be a sign of rising concerns about economic growth, copper futures fell below $3 a pound last week for the first time this year. Copper, a material used in many industrial applications, is sometimes seen as a barometer of the broader economy.

The $DJI, dominated by some of the biggest names across all industries, plunged 5.67% last week, and the broader SPX fell nearly 6%. The info-tech and biotech-dominated Nasdaq (COMP) fell more than 7%, with info tech stocks leading the way down.

One key data point this week is the government’s final estimate on Q4 gross domestic product — due Wednesday morning. Wall Street analysts’ consensus is for 2.6% growth, up from the previous government estimate of 2.5%, according to Consumer confidence on Tuesday and personal consumption expenditure (PCE) prices on Thursday also stand out. The markets are closed Friday for the Good Friday holiday, so it’s a shortened trading week.

Fed speakers are back, and it looks like a busy day on that side of things. The New York Fed’s William Dudley speaks at 12:30 p.m. EDT about regulatory reform and the economy. Cleveland Fed president Loretta Mester is scheduled to deliver a speech at Princeton University at 4:30 p.m., and Fed vice-chairman Randal Quarles speaks at 7:10 p.m. at the Hope Global Forum.

Also pay heed to oil prices, which ramped up last week amid geopolitical jitters and hawkish talk from Saudi Arabia, as well as a surprise drop in U.S. inventories. Oil was stable right around $65 a barrel early Monday. In the interest rate complex, the benchmark 10-year rate climbed to 2.84%, up a couple of basis points from Friday. Overseas stock markets were mostly moderately higher.



The last three months haven’t been kind to the three major indices. The S&P 500 (SPX, candlestick) and the Dow Jones Industrial Average ($DJI, purple line) are both lower, while the Nasdaq (blue line) is just above even. Data sources: Dow Jones & Co., Nasdaq, Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Cryptocurrencies, Not “Crypto” Taxes: If you jumped on the cryptocurrency bandwagon sometime in 2017, you’re not off the hook as far as the Internal Revenue Service (IRS) is concerned. The IRS put out a note late last week reminding cryptocurrency traders that income from cryptocurrency transactions is reportable on their income tax returns.

“Virtual currency transactions are taxable by law just like transactions in any other property,” the IRS warned. “Taxpayers who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions and, when appropriate, can be liable for penalties and interest. In more extreme situations, taxpayers could be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions. Criminal charges could include tax evasion and filing a false tax return.”

Quarter-End Ledgers: The quarter enters its last week, and that means it could be a good time for long-term investors to examine their balance sheets. For many, it’s been a disappointing three months, with the stock market struggling after its January rally to record highs.

However, sectors haven’t moved in sync, so if you’re doing your best to make sure you have exposure balanced across various sectors, consider double-checking this week to see where you stand. Are you still comfortable with your exposure to say, info tech, after its recent wobbles? Do you feel you have enough of an investment in dividend-producing sectors, and what’s your mix of equities vs. cash and fixed income? It may seem like a chore, but the end of the quarter might be a natural time to pull out the spreadsheets and spend an hour catching up on your positions to help you head into the next quarter feeling like you have the right approach for your particular investing style.

Fields of Green: Were you losing sleep about the parched winter wheat crop in Kansas? Perhaps you don’t need to worry as much. Heavy rains splashed the region earlier this month, sending U.S. wheat futures to a record one-day decline and a 4% drop in a single week. It’s easy to ignore the crop and livestock markets, but they can have an impact on upstream prices for consumer staples companies, in particular. That can filter down to consumers, though raw materials don’t form a huge percentage of the cost of say, a box of cereal.

One looming question for the agriculture markets and agricultural processing companies is the potential impact if China and the U.S. get into a trade war. Should this controversy eat into U.S. exports, it could hurt prices on the farm and perhaps put a bit of pressure on key ag-related companies like Caterpillar (CAT), Archer Daniels Midland (ADM), and Deere (DE). “Ag exports could be at risk for retaliation over President Trump's new steel and aluminum tariffs,” said Paul Georgy, president and CEO of Allendale, Inc., a worldwide agricultural advisory and research firm, citing comments from U.S. Secretary of Agriculture Sonny Perdue.

Good Trading,

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