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Market Update

Is Rally Simmering? Oil Tips into Bear-Market Territory; Pulls Down Dow, S&P 500

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August 3, 2016

(Wednesday Market Open) The markets were showing some signs of angst again in early trading Wednesday after broad-based fallbacks across the pond, Tuesday’s pullback among the three major U.S. benchmarks and prices of crude oil settling below $39 a barrel for the first time in four months, putting it solidly in bear-market territory. Is the market again dependent on the ebbs and flows of oil prices?

If the Dow Jones Industrials (DJIA) stays on this downward path till the close, it will mark the eighth straight day of declines, the longest losing streak in a year at a time when all three benchmarks are at relative all-time highs. The Dow closed at 18,313.77, off 0.49%, or 90.74, and off the session lows. What changed? Some analysts suggest it is tied to the strength of the dollar and more weakness in the oil patch. West Texas Intermediate (WTI) settled below the key $40 per-barrel level at $39.77, marking the eighth decline in nine sessions.

That’s reigniting worries among some market watchers that acutely indebted companies and countries reliant on commodities may find themselves in deeper trouble, according to the Financial Times. “Should oil slice through $40 towards $35, macroeconomic fears will pick up,” Michael Hartnett, chief investment strategist at Merrill Lynch, told the FT. That led to pulldown among global stocks, with Japan’s Nikkei and Europe’s Stoxx dipping again Wednesday.

But early signs of gains were on tap in the U.S. today as WTI edged moderately higher amid hope that this week’s Energy Information Administration report, released later today, will show a drop in oil supplies. The American Petroleum Institute said late yesterday that there was a drawdown of U.S. crude supplies by 1.3 million barrels last week. The government’s report generally follows that of the private trade industry’s data.

But among the biggest S&P 500 (SPX) decliners yesterday were airlines, which have benefitted greatly from low oil prices. All major carriers tumbled solidly in the red, led by Delta (DAL). What spooked that sector? DAL’s sharp decline in July in unit revenue, a key industry measure, coupled with the Centers for Disease Control’s travel warning for parts of Miami tied to an outbreak of the Zika virus there. DAL lost 7.4% in value while United Continental (UAL) slumped by 6.5% and American (AAL) by 5.9%.  That underscores the jitteriness in the markets, analysts say, and the lack of conviction investors may have in its strength.

By the close, the SPX backtracked 13.81, or 0.64%, to 2,157.03 while the technology-heavy Nasdaq Composite Index (COMP6) snapped its five-day winning streak to lose nearly 1%. The index finished at 5,137.73, off 46.46, or 0.90%.

All of this puts more weight on Friday’s important jobs numbers. If they match or exceed those of private-sector payrolls tallied by ADP, which they tend to, they may be pulling the U.S. closer to full employment. The ADP July payrolls, released earlier today, climbed by 179,000, indicating that though job growth is slowing, it may because full employment is in the wings.

“The job market is fine,” said Mark Zandi, chief economist at Moody’s. “It’s a good number,” he said on CNBC this morning. He estimates that Friday’s government numbers will come in at plus-189,000.

S&P 500

FIGURE 1: FINDING NEW LEVELS.

The S&P 500 (SPX), plotted through Tuesday's close on the TD Ameritrade thinkorswim platform, has been trading in a tight range in recent sessions with support now sitting at 2,150. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Are Auto Sales Coming to a Screeching Halt? If yesterday’s reports of a surprising downturn in July auto sales from Ford (F) and General Motors (GM) tell the story of a plateau, or worse yet, a slowdown in what has been among the most hearty industries for several years is a signal, the answer may be yes. Many analysts yesterday were talking up an “auto recession,” prompted by F executives on a conference call, as July sales for light vehicles fell at both automakers, but are still on an annual path to reach 17.9 million, a high point that may be tough to sustain.

"The industry's six-year sales streak is clearly plateauing, though plateauing at a rate above 17 million annual sales isn't the worst place to be," Kelley Blue Book analyst Karl Brauer told MarketWatch. "Trucks and SUVs have driven the lion's share of growth in recent years, yet many of the market's most popular models were flat last month, suggesting even the utility gravy train is slowing down."

Not so fast, says GM’s chief economist in a company report. Low interest rates, which have fueled auto sales for some time, coupled with fuller employment, stable prices at the pump and rising wages “point toward a strong second half of the year and another potential record year for the industry,” Mustafa Mohatarem wrote.

Maybe It’s the Cost of New Cars? Amid all this talk of sales slumps comes Kelley Blue Book’s tally of record prices of new autos in July. The estimated average transaction price for new cars, what the industry refers to as “light vehicles,” jumped 2.5% in July year-over-year to $34,264. That’s a hefty $832 price hike that’s also up some $82 over last month.  “Low interest rates, longer loan terms and increased leasing are helping consumers afford their monthly payments, which would be upwards of $550 per month on a traditional 60-month term,” said Tim Fleming, a KBB analyst. “As the price gap to late-model used cars increases, more shoppers may turn to the pre-owned market for their next vehicle, which could mark a big departure from the new-car sales growth the industry has seen during the past five years.”

Steamy Weather Ignites Sales. Of air conditioners that is, according to Planalytics, which bills itself as the business-weather intelligence source because it ties weather conditions to sales results. Nationally, July was the warmest on record in 55 years, driven by the eastern seaboard and the West, though some regions were dumped on by rain, the firm said. As a result, sales of air conditioners surged 9% in North America, fueled by a 48% jump in Los Angeles and a 24% rush in Tampa. Demand for pool chemicals also was swamped with sales swelling 66% in San Francisco, 29% in Baltimore and even 18% in Chicago. Meanwhile, in the more tepid-temperature climate of Portland, Ore., sleeveless tops sales plunged 36%.

Good Trading,

JJ

@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR

Source: Briefing.com

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