Trade Worries Ease a Bit, Apparently Boosting Sentiment on Wall Street

Investors appear to be more optimistic this morning as worries about trade with Canada and China seeming to ease a bit.

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(Wednesday Market Open) Although trade winds have been icy recently, there may be a thaw afoot.

Investors appear to be more optimistic about trade this morning after ABC News reported that Treasury Secretary Steven Mnuchin on Tuesday urged President Trump to exempt Canada from steel and aluminum tariffs. Meanwhile, China has offered to buy nearly $70 billion of U.S. goods if the U.S. will back off of tariffs against the Asian nation, media outlets reported.

The apparent warming of sentiment seemed to be welcomed by investors Wednesday morning. Concerns about a spat between the U.S. and key trading partners have weighed on Wall Street in recent days, especially after Trump decided to impose metals tariffs on the European Union, Mexico and Canada. Tensions over trade have also been dogging U.S. relations with China, the world’s second biggest economy.

Caution Still May Be a Watchword

Despite the optimism, investors might want to consider remaining a bit cautious given recent history. These headline-driven market moves can be short lived and can serve as a reminder for longer term investors to ride out the ups and downs. 

For now, the mood among many investors seems calmer, helping push the yield on the safe-haven 10-year Treasury above 2.96%. Meanwhile, the Cboe Volatility Index (VIX) is hovering just above 12, down a good bit from where this “fear index” was just a few days ago. Last week, it touched 18.

Another New Mark for Nasdaq

On Tuesday, the S&P 500 (SPX) rose a tad and the Dow Jones Industrial Average ($DJI) slipped a little. But the story among the indices was once again the Nasdaq (COMP). The tech-heavy index posted another record close.

Bullishness on tech seems to be part of more general economic optimism. As we’ve seen reports indicating the economy is chugging along just fine, it seems that investors might also be betting on stronger demand for tech company products from everyday consumers as well as corporations.

Figure 1: Attention Shoppers:  Consumer discretionary stocks (candlestick) have been one of the leading sectors over the last month and their rally accelerated early in June. Consumer staples (purple line) showed some zip in late May but haven’t been able to keep up with their retail cousins since then. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Will This Month Be Boring? Historically, the stock market as measured by the S&P 500 tends to hit the doldrums in June, but this month could be different. Since World War II, the index has gained an average of only 0.002% in June, while all months together have risen an average of 0.67%, according to investment research firm CFRA. And June recorded the third fewest all-time highs. But there could be some factors that make this month less boring, the research firm said. We’ve already seen a stock market boost from a bumper U.S. jobs report on the first day of this month. “Also, elevated risks from escalating trade tensions, strengthening U.S. economic growth, and a Fed still solidly in the rate-tightening camp will likely support the historical pattern of increased average daily volatility in mid-term election years,” CFRA said.

Time for Caution on Retailers? We’ve been talking about retailers a lot over the past couple days. It’s worth asking whether bearishness on retailers may have gotten overdone. But if you’re of that mindset, you may want to exercise caution. This doesn’t look like a case where you could just buy a basket of retailers and call it a day. More homework may be in order as it looks like this is a case-by-case story. One note of caution that could affect retailers is real estate. As brick and mortar companies close some of their stores, that could bring a lot of that type of real estate on the market, potentially depressing prices companies could get for their properties. It could also weigh on real estate investment trusts with exposure to retail real estate.

Gain in Non-Manufacturing Index: Yesterday, investors got another piece of favorable economic news. The Institute for Supply Management’s non-manufacturing index rose to 58.6, beating expectations of economists polled by Briefing.com. That bodes well for the economy, but it also adds fuel to rising inflation expectations. “The key takeaway from the report is that it matched an uptick in the ISM manufacturing index for May,” according to Briefing.com. “The uptick in both will help substantiate the belief that second quarter GDP growth is poised to pick up noticeably from the first quarter.”

Good Trading, 

 JJ

@TDAJJKinahan 

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