Market Seems to be Steadying, But Worries Appear To Cap Upside

While pre-market activity wasn’t pointing to steep losses like in the previous session, equity index futures still weren’t pointing to a large bounce either. The threat of a partial government shutdown continued to add to a bevy of worries weighing on investors ahead of Christmas holiday-shortened trading next week.

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6 min read

Key Takeaways

  • Government’s third Q3 GDP estimate shows annualized growth of 3.4%

  • Nike beats estimates on top and bottom lines

  • Oil prices falter with stocks on Thursday

(Friday Market Open) Today is the Northern Hemisphere’s winter solstice—the shortest day of the year, at least in terms of daylight. The stock market, however, is still trading normally, and some bulls may be wishing for shorter hours.

While pre-market activity wasn’t pointing to steep losses like in the previous session, equity index futures still weren’t pointing to a large bounce either. The threat of a partial government shutdown continued to add to a bevy of worries weighing on investors ahead of Christmas holiday-shortened trading next week.

In addition to concerns out of Washington, investor perceptions appeared to be that the latest Fed rate hike and outlook indicated that central bankers could be more hawkish than some had been hoping. Those issues provided a double whammy of sorts to send some investors scurrying out of riskier assets Thursday.

While all three of the main U.S. indices finished sharply lower, the Nasdaq Composite (COMP) only just managed to avoid a bear market on a closing basis. The tech-heavy index has been weighed down in recent days amid worries about the trade war between the U.S. and China, plus a bit of regulatory overhang, with authorities in the U.S. and abroad eyeing data privacy regulations.   

Overseas, the United States and China still haven’t solved a trade dispute that has been weighing on the market for months over concerns about the prospects for global economic growth, and tensions in Europe continue to swirl surrounding Brexit. 

Without much in the way of corporate earnings guidance to potentially temper the negativity, there seems to have been little to stem the December selloff. 

Another factor to remember is that today is a quadruple witching day, which involves the simultaneous expiry of stock index futures, stock index options, stock options and single stock futures. While some of the previous selling may have been related to this, it’s possible that we could see more volatility before the end of today’s close.

In economic news, the government’s third estimate of Q3 gross domestic product showed economic output increased by an annualized rate of 3.4%, slightly under a Briefing.com consensus estimate of 3.5% and a downward revision from the previous government figure of 3.5%. 

Havens Rise As Risk Switches Off

Stocks weren’t the only investments on the back foot on Thursday.  Both U.S. and international crude benchmarks fell about 5% Thursday as the mood on Wall Street seemed to sap enthusiasm for riskier assets. The risk-off sentiment Thursday comes on top of lingering worries about the global economy and doubts that demand can soak up enough supply to push prices meaningfully higher. Energy shares suffered the largest drop of any of the S&P 500 sectors Thursday, finishing 2.79% lower. 

With Wall Street’s fear gauge, the Cboe Volatility Index (VIX), hitting an intraday high above 30, its highest mark since February, amid the seemingly panic-induced selling, it was perhaps no wonder that perceived safe havens increased. 

Gold, often considered a haven in times of market tumult, gained ground as stocks fell. It also appears that the precious metal got some help as the U.S. dollar fell. A weaker dollar makes dollar-denominated gold less expensive for investors and traders using other currencies, potentially helping demand.

And gold wasn’t the only thing shining Thursday. Utilities gained ground to make for the only S&P sector in the green, also apparently on safe-haven buying. Utilities are often considered a more stable investment because of their history of paying dividends and the fact that people will need power regardless of what the economy and stock market are doing. 

In that vein, you may have thought that consumer staples might end on a positive note, but it was right there in the red alongside many of the S&P 500 sectors. The biggest loser in the sector was Conagra Brands (CAG) which was down more than 16% after the food packaging company reported mixed results for the quarter and issued weak guidance that appeared to disappoint investors.

Nike Jumps After Earnings

In corporate news, Nike (NKE) shares were off to the races in post-market trading after the athletic shoe and apparel maker reported quarterly revenue and earnings per share that beat analyst expectations. NKE was up more than 8% in pre-market trading this morning.

The company’s performance can be seen as somewhat of a bellwether on the health of the consumer. Sportswear isn’t a must-have item like food and toilet paper, and revenue growth at Nike could be seen as an indicator that the consumer is healthy, or at least optimistic.

Tech Pressures COMP:Steep selling in the tech-heavy Nasdaq Composite (COMP), shown here as a candlestick chart, took the index into bear-market territory on an intraday basis Thursday. But the COMP managed to close just above that mark. Data Source: Nasdaq Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

When is a Hike Not Hawkish? It may seem like a contradiction in terms, but according to investment research firm CFRA, Wednesday’s Fed move was a “dovish hike,” echoing other market watchers with the phrase. Although the central bank raised its key rate by 25 basis points to 2.25%-2.50%, it’s dot plot projection now shows two versus three hikes in 2019. And the high end of the current rate range is now at the low end of what the Fed projects is a neutral range of 2.5%-3%. “However, other investors may have felt as if they were given a lump of coal, as the policy statement left in the phrase about the need for ‘some further gradual increases in the target range for the federal funds rate,’” CFRA noted. And with the Fed’s statement that it will “continue to monitor global economic and financial developments and assess their implications for the economic outlook,” CFRA is anticipating a rate hike at the Fed’s March 19-20 meeting. This puts the research firm squarely in the minority, however, as futures markets currently point to about a 25% chance of a hike at or before the March meeting.

End of an Era? One reason the market may be reacting so negatively to the Federal Reserve commentary could be that, as Briefing.com put it, we have reached “the end of a policy era.” Comments from Fed Chair Jerome Powell including that monetary policy doesn’t need to be accommodative at the moment and that current policy isn’t restrictive helped to undercut what could have been considered dovish in the Fed’s actions Wednesday. The market is “waking up to the reality that the Jerome Powell-led Federal Reserve isn’t inclined to ride to its rescue with market-friendly policy actions and pronouncements,” said Patrick J. O’Hare, chief market analyst with Briefing.com.

Santa Claus Bounce? Market participants often talk about a Santa Claus rally, referring to a rise in stock prices often seen as the year comes to an end and the new year begins. According to Dow Jones Market Data reported by the Wall Street Journal, the S&P 500 since 1969 has averaged a 1.3% rise over the last five sessions in December and the first two in January. So it’s not too late to see this effect this year. In fact, one argument for a Santa Claus rally this year would be that stocks have gotten hammered so hard this month that they may hit a bottom and rise from there. In that case, maybe we should call it a Santa Claus bounce. 

Good Trading, 

JJ

@TDAJJKinahan 

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Economic calendar for this week. Source: Briefing.com
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Key Takeaways

  • Government’s third Q3 GDP estimate shows annualized growth of 3.4%

  • Nike beats estimates on top and bottom lines

  • Oil prices falter with stocks on Thursday

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