Soft Start: Pressure Descends From Overseas, with Inflation, Walmart Later in Week

The week looks like it might get off to a soft start following overseas losses amid Hong Kong and trade jitters. Still, the market is in healthy shape, and Walmart earnings later this week are a possible highlight. Reserve: morning Market Update
5 min read
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Key Takeaways

  • Stocks appear to be under pressure from overseas market weakness

  • Bond market is closed today for Veteran’s Day, meaning volume could be thin

  • Retail sales and inflation data on tap later this week

“Happy Veterans Day! I encourage all of you to say thank you to a veteran. They call it service for a reason, so let them know that you appreciate the service they gave this great country. Therefore, to any and all veterans who may read this, “Thank You!”

(Monday Market Open) It’s Veteran’s Day, and that means remember to thank the veterans you know. It also means we could have a thin market because bond trading is closed.

The weak volume and slow trading last Friday didn’t happen in a vacuum. With investors anticipating a quieter market on Monday without as many players, people might not have been as anxious to buy stocks ahead of the holiday. Veteran’s Day is typically slow, and there really isn’t any reason to expect anything different this year.

The market has a softer tone early Monday following losses overseas. Factors at play here appear to include unrest in Hong Kong, a decline in Chinese producer prices that raised more concern about China’s economy, and a rising dollar.

We just finished an impressive stretch with the S&P 500 Index (SPX) now up five weeks in a row. Some of the momentum appeared to fade toward the end of last week, but that might have reflected pre-holiday consolidation and possibly a little profit-taking as investors lightened up.

The fact that Friday featured small gains in the SPX and Nasdaq (COMP) by the end of the day could be seen as a real victory considering the timing, and more proof that we’re in a very strong market. The general tone is likely to remain cautiously optimistic as hopes for a trade deal haven’t gone away and earnings have generally over-achieved.

Rotation Watch

One trend last week that might be interesting to track as the new week starts is a shift out of some of the bond proxy sectors like Real Estate and Utilities into cyclicals like Financials and Technology. It’s also possible some investors are moving out of bonds and into stocks. The 10-year Treasury yield is knocking at the door of 2% for the first time in three months, and even the German bund has moved up quite a ways from lows a month or two ago. It does remain negative, but it’s closing in on just 25 basis points below zero. Sounds like a January temperature in Chicago.

The start of this new week brings very little data, but consumer and producer price numbers for October loom Wednesday and Thursday, respectively. Retail sales come Friday. Late last week saw the preliminary November University of Michigan consumer sentiment data narrowly top analysts’ estimates and remain in relatively solid territory.

Meanwhile, the earnings picture takes a walk down the retail aisle as the week advances, with Walmart (WMT) scheduled to open its books on Thursday. Those looking for clues as to the state of retail ahead of the holiday season—yes; Black Friday is 2 ½ weeks away—might look across the Pacific. According to media sources, Alibaba’s (BABA) annual Singles Day, the world's largest one-day shopping event,  chalked up about $31 billion in sales—a new record.

Also worth noting: American retailers and brands took the number-two spot behind China in terms of sales on Singles Day. There had been concern from some analysts that Chinese consumers might avoid U.S. goods due to the ongoing trade war. In other words, if there’s a global slowdown and trade war happening, it’s hard to tell from these figures.

Technology remains the best-performing sector so far this year, and got another boost last week from a semiconductor rally that just keeps going and going. The Philadelphia Semiconductor Index (SOX) rose another half a percent Friday, helped in part by positive trade sentiment and follow-through buying of Qualcomm (QCOM) after its strong earnings, noted. The SOX is up an astonishing 50% year-to-date. Investors get a look at Nvidia’s (NVDA) latest quarter on Thursday.

With most of earnings season now in the rear-view camera, S&P 500 companies have reported a 2.4% average drop in EPS year-over-year, FactSet said. That’s the third-straight quarter of EPS declines. Revenue for Q3 is up 3.2%, the slowest revenue growth since Q3 2016. However, some might point out that these numbers are better than analysts had anticipated going into the Q3 reporting cycle.

Overseas Drama Muted, Limiting Volatility

Other than the China trade drama, one thing that’s kind of missing from headlines lately is geopolitics. Think about it. When was the last time you saw an article about Brexit, Iran, or North Korea? Those were all issues that kept people awake not too long ago, and none have gone away. They’re just not getting much attention, and that could be one reason volatility remains almost a non-issue.

The CBOE Volatility Index (VIX) sank 5% on Friday to near 12, not far from the summer lows. It then popped back above 13 by early Monday. Some say a low VIX can be a contrary indicator, but that theory isn’t working so far this month. Things can change quickly, of course, but geopolitics were a big reason VIX spiked earlier in the year and those issues just aren’t showing up to the party at this point.

When you look specifically at Brexit, people might be starting to write it off as far as potential impact on the U.S. market. Arguably, the biggest impact it had was back in mid-2016 when voters approved it and the S&P 500 Index (SPX) briefly dipped below 2000. The SPX is up more than 50% since then and the pound has held its own vs. the dollar for the last three years even while Brexit keeps being unresolved (See Chart of the Day below). If you cry wolf enough times, investors learn to ignore it.

As for China trade, it’s definitely one of the biggest issues in the mix and does have the potential to directly impact the market in many ways. However, it’s too easy to use China as a crutch for whatever the markets do on a given day, and many headline writers are guilty of that.

For instance, early Friday saw major indices retreat slightly, and the news media blamed it on the White House saying it didn’t plan to remove tariffs. This contrasted with the previous day’s narrative when stocks rose and the media said this was because China believed tariffs would be removed.

While the tariff news might have had some effect on both days, the Friday morning weakness probably had more to do with something right under peoples’ noses that got overlooked: The profit-taking ahead of Veteran’s Day. While China tariffs definitely have a lot more chance to move the market than Brexit at this point, it is one of those “noise” issues that might be best to ignore until there’s some real developments on a Phase One deal.

CHART OF THE DAY:  UNION JACK. Back when Brexit passed in mid-2016, the British pound (GBP/USD—candlestick) got hammered and so did the S&P 500 Index (SPX—purple line). However, over the last three years, as this chart shows, the pound/dollar relationship has been pretty steady, even as the SPX has charged steeply higher. That raises questions whether investors might have been wrong to worry about a second British invasion in the first place. Data Sources: S&P Dow Jones Indices, CME Group. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

Before You Eye the Eggnog: We’re closing in on the end of a very impressive year for the stock market. So far, Q4 hasn’t been anything like it was a year ago when volatility was soaring and major indices were plummeting in some cases into bear market territory. While that’s a relief, it doesn’t necessarily mean it’s OK to head off to holiday parties without looking at your portfolio and making sure it still works for your goals. For instance, if a large part of your portfolio is allocated to stocks, the recent rally might be putting you into allocation territory above your original goal vs. fixed income or cash. 

Even if you consider yourself a passive investor and mainly own index funds, it’s important to check your investments every three months. That’s only four times a year. Most people spend that much time planning their vacations, so you can at least check your financial health just as often. We’re in an unusual time. We’ve kind of gone straight up the last few years. It’s not likely to continue that way forever. That’s why it’s important to know your plan and invest for your goals.

2020 Vision: There’s a good argument to make that the current rally has already factored in a lot of the potential positive news like decent Q3 earnings, the departure of Brexit from the front pages, and hopes for a trade deal. This school of thought suggests the market is doing a great job building in optimism, but might not have much farther to roll up once the positive events actually occur. People peddling this theory tend to be less bullish about 2020.

You could counter that, however, by remembering a lot of investor money appears to still be on the sidelines, including in shorter-term fixed income. In fact, money flows into fixed income have outpaced flows into stocks most of this year, suggesting that maybe some of that could start going into stocks instead if people get more optimistic. A peace treaty in the trade war could be one reason we see this, and recent bond market weakness might also lead to more of a flow into some of the cyclical-sector stocks. None of this is guaranteed, but it’s at least a counter-narrative to some of the more bearish talk that’s out there.

Bond Proxies in Need of Epoxy? Looking ahead to 2020 also raises some questions about sector rotation. While you never want to make big predictions based on one day, it was notable to see both Chevron (CVX) and Exxon Mobil (XOM) shares getting cooked on Friday. Individually, the two stocks face some headwinds, including the tepid price of crude oil and price-to-earnings ratios near 20. In addition, the U.S. shale market remains under pressure, with the rig count falling again last week. More pressure might have had to do with XOM issuing a dividend Friday, which may have led to some investors collecting it and selling shares.

Another pressure point, however, has more to do with the Energy sector as a whole and not so much CVX or XOM or any particular energy name. The 10-year Treasury yield is really close to 2%, so these names and many others in the sector could be losing one of the things that’s driven them this year: Low bond yields. A lot of people are scratching their heads looking for beaten-down sectors to get into for 2020, and wondering if energy might be one of them. You also have the Verizons (VZ) and AT&T’s (T) of the world, which are in a different kind of industry battle but keep getting bids because of where rates have been. If we see the 10-year yield go above 2% in 2020, as it appears it might, it’s going to be interesting to see where that rotation goes.

Good Trading,



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This week's economic calendar. Source:

Key Takeaways

  • Stocks appear to be under pressure from overseas market weakness

  • Bond market is closed today for Veteran’s Day, meaning volume could be thin

  • Retail sales and inflation data on tap later this week

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