(Wednesday Market Open) Futures trading pointed toward a three-week low for the Dow Jones Industrial Average ($DJI) Wednesday amid headwinds from Europe and Asia, concerns about the tax debate in Washington, a crumbling oil market, and disappointing news from the retail sector.
The stock market is down three of the last four days and pre-market trading pointed to yet another tough open Wednesday, but it’s a little early to panic. It just feels strange because it’s been so long since stocks had a stretch like this. Besides the factors above, the recent weakness could reflect a lack of catalysts with Q3 earnings season winding down. The suffering at General Electric (GE) also casts a pall, and pressure on GE and Apple (AAPL) weighed on the DJIA yesterday.
Another issue is the tax bill under debate in Congress. Some people feel unsettled because a lot is seemingly at stake and many questions remain. The lack of other catalysts might give the tax bill more influence over the market than at some other times.
There’s also concern about the oil market, where U.S. futures fell another 1% early Wednesday to around $55 a barrel after a private firm projected another weekly build in U.S. supplies and the geopolitical concerns in the Middle East appeared to die down a bit. The official government stockpiles report comes later today. Weakness in oil just surfaced as an issue the last few days, but remember oil’s had a long rally so it’s not surprising to see some selling pressure crop up.
On the positive side of the ledger, data continue to look strong, including yesterday’s producer price index (PPI) for October (see below). In addition, Home Depot (HD) helped wrap up an excellent overall earnings season on Tuesday and Target (TGT) earnings early today topped analysts’ estimates with earnings per share of $0.91 beating the average projection by six cents.
However, TGT shares fell in pre-market trading, perhaps due to the company’s forecast for flat to 2% growth in Q4 same-store sales. “While we expect the fourth-quarter environment to be highly competitive, we are very confident in our holiday season plans,” the company said in a press release. It’s the “highly competitive” part that the market seems to be reacting against. The disappointment at TGT followed yesterday’s weak results from TJ Maxx (TJX), so the retail stocks continue to see a bit of a drag.
Wal-Mart (WMT) tomorrow represents one of the last really big firms to report. WMT is expected to report $0.97 in adjusted EPS, down a penny compared to the prior-year quarter, on revenue of $121.02 billion, up 2.3% year-over-year. Comp sales (sales at stores open for a year or more), traffic, and online sales are likely to be three of the areas that analysts hone in on when they report third-quarter results.
Amid all the negative sentiment, the economy is approaching “full employment” according to Atlanta Fed President Raphael Bostic. The holiday season nears with consumers apparently in pretty decent shape ahead of Black Friday just nine days away. Retail sales in October rose 0.2% — not a really huge number but above analysts’ expectations. Vehicle sales looked particularly strong, a sign that people are out there buying big-ticket items. Keep in mind, too, that stocks are only down about 1% from their recent all-time highs.
In Asia, the Chinese economy performed a little worse than expected in October (see below). Any hiccups in China could spell trouble ahead for U.S. multinationals. Stocks in Europe and Asia were a sea of red on Wednesday, and weakness abroad could roll over into U.S. markets as well.
Meanwhile, back home, the yield curve continues to flatten in a pattern we mentioned last week. The financial sector fell again Tuesday, though just a smidgen, in part because the gap between 10-year and two-year yields fell below 70 basis points. When the yield curve slips, it can hurt banks’ profit margins.
At the same time, some analysts worry that the Fed’s more aggressive rate policy might slow the rally. Not only is there a nearly 97% chance of a rate hike before the end of the year, according to Fed funds futures, there’s a better than 50% chance of another hike by next March. A rise of just 0.1% in the consumer price index (CPI) reported early Wednesday, however, means consumers might not be feeling much pressure from higher prices.
From a sector perspective, energy took a belly flop Tuesday amid the weak Chinese economic data and news that the International Energy Agency (IEA) had chopped expected oil demand. It was the worst day for front-month crude oil futures in more than a month, though U.S. oil futures remain more than $13 above the summer lows. Other weak sectors included materials and telecom.
Some of the more traditionally “defensive” sectors, including consumer staples and utilities, led Tuesday’s gains. Utilities have easily outpaced the S&P 500 Index (SPX) over the last month, something that’s a bit unsettling. Only info tech has performed better over that stretch.
Industrial Production Up Next: Yesterday’s inflation data appeared to put some more vigor behind arguments that jobs growth and other strong economic numbers are starting to finally affect prices. October’s 0.4% core and total growth in producer prices — the second month in a row with those exact same figures — reinforced ideas that the Fed might raise rates next month. The consumer price index released early today rose just 0.1%, however. Another number to watch as we await next month’s Fed meeting is Thursday’s industrial production figure for October, due at 8:15 a.m. ET. That number rose 0.3% in September, but might have been hurt slightly by late-summer hurricanes. Analysts on Wall Street expect much bigger 0.5% industrial production growth in October, according to Briefing.com, and a figure like that could be yet another bow in the quiver for interest rate hawks.
Trans-Continental: You never want to make too much over one day’s data, but Tuesday offered investors an interesting flyover of numbers from Europe and Asia that bear watching for follow-up next month. The data from Germany showed the economy growing 0.8% in Q3, and at an annual rate of 3%. That was better than expected and appeared to give the euro a boost. On the other side of the world, however, disappointing October figures from China’s industrial and retail sectors raised some eyebrows and seemed to put a dent in the oil market.
Crude fell to $55 a barrel by late Tuesday, down 3%, in part due to lower demand forecasts and rising U.S. output. However, don’t discount the Chinese data as another possible factor, because that economy drives so much industrial and trade growth. Any hitches in China’s economy could help slow the oil rally, but let’s see if there’s any additional weakness in November before speculating further on that.
About That 35% Tax Rate: A lot of the tax reform debate so far has focused on whether the corporate rate might go down starting in 2018, as proposed by the House Ways and Means Committee, or in 2019 under the Senate’s plan. It’s still too soon to see where this one might go, but something that seems to be overlooked is the fact that the much-criticized 35% corporate tax rate is well above what most companies pay. The average tax rate for companies in the S&P 500 is closer to 25% than 35%, noted Sam Stovall of CFRA, a research group. That’s thanks in part to many companies taking advantage of various state and local incentives. If the overall rate goes down to 20%, it might not be that much lower than many companies already pay, and could deliver less of an economic boost than some investors might be thinking.
Looking at tax rates by sector, it appears consumer staples, industrials, and telecom service companies paid the most, Stovall said, with energy, health care, technology, and utilities paying below-average amounts. “The sectors that currently pay higher tax rates will likely benefit more than those that are already paying below-average rates,” Stovall wrote. “But the devil remains in the details.”
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