Major indexes engineered a rebound from Friday's sell-off despite missile strikes on Israel by Iran over the weekend. Volatility eased but still remains near highs. Retail sales jumped 0.7%, above consensus expectations of 0.4%. The strong dollar and rising Treasury yields, along with concerns of a possible Israel response, could remain headwinds.
Markets initially take Iran attack in stride, rebounding from Friday’s sell-off despite Middle East tension
Goldman Sachs earnings surge above Wall Street’s expectations, giving shares a lift after rough Friday for banks
Treasury yields resume rally, a possible sign that investors are less focused on “risk-off” trading for moment
(Monday market open) Though major U.S. indexes rebounded early Monday from their worst week in more than a year and a weekend punctuated by missile strikes aimed at Israel from Iran, the strange sense of calm early Monday belies uncertainty bubbling beneath the surface. Volatility eased today but remains near recent six-month highs, a sign that investors continue to build in war-related concerns.
No market participant can say for sure what happens next thousands of miles from Wall Street, but when uncertainty flares, investors historically tend to get defensive. That could give U.S. Treasuries and the dollar a boost, along with the usual sector suspects like staples and health care. Companies that make medicine, diapers, food, and other staples often find buying interest in uncertain times.
Crude oil also takes center stage, almost by default. Shares of companies and sectors most exposed to transportation costs like airline, railroad, and shipping firms are among the most vulnerable, typically. The Dow Jones Transportation Average ($DJT) fell nearly 1.6% last Friday as tension mounted ahead of Iran’s weekend attack, and crude oil traded near five-month highs. However, crude slipped early Monday back toward $85 per barrel. Meanwhile, the climbing dollar and rising yields appear to be bigger headwinds for stocks this morning than crude.
Mega-cap tech is another sector to watch, as investors often seek perceived “safety” in the largest stocks when the world gets messy. It happened during Covid 19 and again last year when several U.S. banks failed. Still, there’s no established playbook for a prolonged Middle East conflict if that’s what this turns into, and that means trading across markets could remain volatile until the situation cools. Israel said Sunday it planned to retaliate, leaving the situation intensely fluid as markets opened Monday.
Back home, Goldman Sachs (GS) reports today followed by Bank of America (BAC) and Morgan Stanley (MS) tomorrow.
While Q1 results from several large U.S. banks Friday exceeded Wall Street’s expectations, weaker guidance helped send financial shares down sharply with the rest of the market that day. The S&P 500® index (SPX) fell 1.6% last week and the Nasdaq Composite® ($COMP) finished down 0.5%, marking the worst week for the broader market since last October.
“With commodity prices turning higher, led by oil and gold, amid war in the Middle East and Ukraine and job growth strong, inflation fears are running high,” according to the latest Schwab Market Perspective. “Various Fed officials have indicated concern that inflation may not be sufficiently under control to warrant easing monetary policy. The federal funds futures market is currently discounting just two or three rate cuts of 25 basis points each this year.”
Futures based on the SPX rose 0.77% shortly before the close of overnight trading and futures based on the Nasdaq-100® (NDX) climbed 0.9%. Futures based on the Dow Jones Industrial Average® ($DJI) jumped 0.8%. Though stocks got an initial lift early Monday, there’s been a notable back-and-forth pattern on Wall Street lately with equities dropping one day and rising the next. It’s a trend to potentially watch as the week continues.
Retail sales jumped 0.7% in March, well above the Briefing.com consensus of 0.4%. February’s retail sales growth got revised to 0.9% from the prior 0.6%. These are big numbers and won’t help the narrative on inflation coming down anytime soon. Retail sales were broadly strong, with the control group that feeds into GDP up a solid 1.1%. The Empire State Manufacturing Survey, also out this morning, was negative for the fourth-straight month.
Digging into the Retail Sales report paints more of a mixed picture. Electronics and appliance store sales fell 1.2%, clothing dropped 1.6%, and sporting goods tumbled 1.8%. But online sales jumped 2.7%, building materials and garden equipment and supplies grew 0.7%, and food and beverage sales rose 0.5%.
Goldman Sachs (GS) shares jumped more than 3% in the early going Monday following last Friday’s JPMorgan Chase (JPM)-led sell-off in bank stocks. JPMorgan Chase shares plunged almost 6% Friday after the bank’s 2024 outlook for net interest income fell short of expectations, overshadowing stronger-than-expected Q1 earnings.
Goldman Sachs’ results also looked solid at first glance, though it’s unclear how the market might react as trading continues considering Friday’s action. Goldman Sachs easily beat Wall Street’s earnings per share and revenue estimates, but so did JPMorgan Chase. The global banking and markets division of Goldman Sachs rolled up gains to start the year thanks to strong performances in investment banking fees, along with fixed income, currencies, commodity, and equities, the earnings release noted.
On a less upbeat note, expenses climbed 3%, and provision for credit losses was $318 million, versus a net benefit of $171 million a year earlier. These are provisions that banks use to protect themselves against potential client defaults. Provisions for Q1 related partly to the credit card portfolio driven by net charge-offs, Goldman Sachs said. Charge-offs in banking are uncollected credit card balances written off as a loss, perhaps a sign of consumer struggles.
Bank of America’s earnings tomorrow could be another opportunity to get a read on consumer health, as that company has a heavy exposure to the everyday U.S. economy through its credit card and mortgage businesses. Another consumer-related company reporting soon is United Airlines (UAL), expected tomorrow afternoon.
Earnings front: Though banks dominate, health care is also on tap with Johnson & Johnson (JNJ) and UnitedHealth (UNH) expected to report tomorrow followed by Abbott Labs (ABT) on Wednesday. And while tech heavyweights aren’t up to bat until next week, a smaller semiconductor firm, ASML (ASML), opens the books Wednesday.
Stocks on the move:
Weekly preview: Various housing reports could give investors a better sense of the real estate market, but the data were collected before last week’s yield spike lifted mortgage rates.
Stay tuned for March housing starts and building permits tomorrow morning, followed by Existing Home Sales Thursday. Consensus is for little change to either starts or permits from the previous month, according to Trading Economics.
China countdown: Before U.S. trading begins tomorrow, investors will have in hand the latest numbers from China. Tonight brings a host of Chinese data, including quarterly GDP growth, industrial production, unemployment, and home prices.
The key figure might be GDP, with analysts forecasting 5% year-over-year growth, according to Trading Economics. Last week raised more questions about China’s recovery, however, with export data coming in below expectations. The data from China conceivably could affect U.S. trading today, especially considering how the export data alone last week appeared to help soften U.S. Treasury yields Friday.
Middle East and crude: The attack’s impact on crude is potentially mitigated by several factors. First, OPEC has plenty of spare oil capacity due to its recent production cuts. That doesn’t mean Saudi Arabia and others will immediately increase production, but in general, Middle East supplies aren’t on a knife’s edge. Second, crude prices already were at the top of a range some analysts believe OPEC wants to keep in place. This range, between roughly $75 and $90 per barrel for Brent Crude, is considered profitable for producers but not high enough to hurt demand. If prices spike to $100, say, it might cause OPEC to reconsider its supply curbs. The U.S. economy is vulnerable to rising oil costs, but less so than decades ago. This partly reflects easing gasoline demand across the U.S. and most Western countries thanks to growing use of electricity and natural gas, as well as more efficient cars, trucks, and planes. Second, the United States is producing record amounts of crude at around 13 million barrels daily. That’s up from around 5 million barrels a day in the early 2000’s when oil rallied to nearly $200 on an inflation-adjusted basis during the Iraq war.
Overseas, the Japanese yen remained at a 34-year low as the week began after the dollar’s surge last week. There’s growing anticipation that Japan could intervene to boost the slipping currency, Reuters reported, so be on the lookout.
Friday in review:
Friday’s session is one many investors would probably rather forget. The $DJI tumbled to its lowest level since late January as concerns over the Middle East conflict flared and a “risk-off” mood took hold. The SPX ended at a four-week low.
Early today, futures traders saw 98% odds the Federal Open Market Committee (FOMC) will keep rates unchanged following its April 30 to May 1 meeting, based on the CME FedWatch Tool. Chances of a quarter-point rate cut following the FOMC meeting in June are seen at around 21%, rising to roughly 44% for the late-July meeting.
Check-up time: Watch the latest Market Snapshot from Liz Ann Sonders, Schwab’s chief investment strategist, to get her perspective on the markets and the economy.
Ideas to mull as you trade or invest
Pause for perspective: Days like Friday aren’t pleasant but try to keep things in perspective. The market came very far, very fast, and hasn’t had a 5% correction since last October. Typically, stocks have two or three setbacks of 5% to 10% each year, so it wouldn’t be surprising to see more softness. Also, even with Friday’s losses factored in, the SPX is up almost 25% from its October lows. The question is whether buyers again step in, especially for mega-cap tech stocks. That scenario could potentially lift the major indexes due to the mega caps’ hefty market capitalizations, even if most other stocks lose ground. That sort of bifurcated move was common a year ago before the brief period of lower rates in late 2023 fueled more widespread gains across sectors.
Unity threatened? With so many FOMC members speaking every day, all the chatter tends to add to the market’s rate uncertainty and the churn in market leadership from different sectors. “It’s not the (former Fed Chairman Alan) Greenspan era when he alone controlled the megaphone,” Schwab’s Sonders said. “There are times when Fed speakers have been very aligned and don’t bring a lot of volatility. This isn’t one of those times. At the point we get some sort of action on the part of the Fed, we might not have everyone on the same page. Assuming the next move is a cut, we may have a dissenting voice or two.”
April 16: March Housing Starts and Building Permits and expected earnings from UnitedHealth (UNH), United Airlines (UAL), Johnson & Johnson (JNJ), Morgan Stanley (MS), and Bank of America (BAC).
April 17: Expected earnings from Abbott Labs (ABT), ASML (ASML), Travelers (TVR), U.S. Bancorp (USB), and Alcoa (AA).
April 18: March Existing Home Sales, March Leading Economic Indicators, and expected earnings from Alaska Air (ALK), Marsh McLennan (MMC), and Netflix (NFLX).
April 19: Expected earnings from American Express (AXP), SLB (SLB), and Procter & Gamble (PG).
April 22: Expected earnings from Verizon (VZ) and Nucor (NUE).
Do Not Sell or Share My Personal Information
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
Charles Schwab & Co., Inc. (“Schwab”) and TD Ameritrade, Inc., members SIPC are separate but affiliated subsidiaries of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. © 2024 Charles Schwab & Co. Inc. All rights reserved.