The last day of November means it’s almost winter in the U.S., but it’s spring in Argentina and that’s likely
where focus will be going into the weekend as the G20 meeting gets underway.
Stocks seem to have a weaker tone ahead of the meeting after overnight losses in Europe and another leg down in
the crude market. There’s a lot of debate about whether the U.S. and China can make any progress on trade as President Trump and
Chinese President Xi prepare to dine together Saturday. One thing to consider keeping in mind is the chance that the meeting won’t
result in anything quantifiable. We could be back here Monday morning trying to figure out which elements , if any, might have a
market impact.
That said, it’s probably a good idea to monitor events over the weekend and then take a look at pre-market
trading Sunday night for possible clues to the market’s reaction. One thing that does seem clear but perhaps unlikely: If there’s
no positive news out of the meeting, that could be very bearish.
Is Santa Going To Swing By Buenos Aires?
It’s hard to recall any recent event with so much potential to swing influence as this weekend’s meeting between
Trump and Xi. There’s often hope this time of year for a “Santa Claus rally,” but whether that happens could hinge to some extent
on how things look coming out of Buenos Aires.
That’s in part because if U.S. tariffs rise to 25 percent in January—as could be the case without some sort of
agreement—it’s likely to be bad for the U.S. economy, with possible corresponding pressure on stocks. That could make it tough for
a Santa Claus rally to materialize.
On the other hand, it’s possible the meeting could result in pragmatism from the two sides and potentially lead
to some sort of rally. In fact, The Wall Street Journal ran an article Thursday that hinted at the chance for a coordinated backing
down from the two countries. Still, there’s likely to be a lot of tough talk in the near future, and that might keep volatility
elevated. It’s actually hard to see volatility, as measured by the VIX, coming down much from current levels of just below 20
without some sort of trade resolution. In fact, it wouldn’t be surprising to see VIX go right back to 20 today from the current
level of just over 19.5
If there’s a Santa Claus rally, one sector to consider watching is info tech, which has arguably suffered the
most due to the tariff issue. Apple (AAPL) and its suppliers come to mind, along with the chip makers.
On a more near-term note, trading today might be a bit slow ahead of the weekend meeting, with investors perhaps
unwilling to take big new positions with so much apparently on the line as trade talks get underway. It could be interesting to
take a look at how stocks perform in pre-market trading Sunday night for a first possible reaction to any meeting news.
Win Streak Ends as High-End Retailers Pummeled
A choppy market prevailed Thursday as some of the higher-end retail names got pushed around while financials and
info tech also came down. The major indices fell moderately early on, came back to post big midday gains, and then lost ground and
finished lower. The skid ended a three-day winning streak for the Dow Jones Industrial Average ($DJI), but indices remain on firmer
footing for the week.
Retailers under pressure Thursday included Nordstrom, Inc. (NYSE: JWN), Kohl’s Corporation (NYSE: KSS), and Macy’s Inc. (NYSE: M). This followed Tiffany & Co. (NYSE: TIF) getting taken to the woodshed Wednesday and again Thursday as investors appeared
to punish the luxury brand for missing analysts’ quarterly same-store sales forecast.
Even as high-end retailers got smacked, some of the discounters like Dollar Tree, Inc. (NASDAQ:
DLTR) and Dollar General Corp. (NYSE:
DG) ticked higher on what appeared to be strong earnings from
DLTR. Amazon.com, Inc. (NASDAQ: AMZN) also
moved in a positive direction early before giving up its gains.
One possible explanation for this divergence in retail could be that luxury retailers might again be feeling
competitive heat from AMZN as that stock revives a little. Another possibility is that some investors might be preemptively selling
some of the big retail stocks on fears that they could see their businesses hit by higher tariffs starting in January if no
U.S./China agreement is reached. On the other hand, this is just one or two days of trading, so it’s early to call it a
trend.
On the tech beat, Microsoft Corporation (NASDAQ: MSFT) lost some ground Thursday but has generally been on an upswing over the last
week, running neck and neck with Apple Inc. (NASDAQ: AAPL) for highest market cap. MSFT might be enjoying some benefits from its
business model pivoting toward cloud computing. The cloud business continues to heat up and MSFT made a bet in that space that
arguably seems to be paying off.
Also in tech, some of the semiconductor companies have been doing a little better lately, including
Intel Corporation (NASDAQ: INTC) and
Nvidia Corporation (NASDAQ: NVDA). Some of
the recent strength in NVDA might reflect its cheaper valuation, along with the holiday shopping season, which might have the
potential to help boost technology shares amid increased demand for electronics.
Crude Changes Mood
Crude appeared to execute a major reversal Thursday. Early in the morning, U.S. crude futures fell below $50 a
barrel for the first time in more than a year after another U.S. weekly supply build and U.S. production staying at record daily
levels. Then media reports surfaced that Russia might be ready to cut output, and crude quickly scooted back up to above $51 before
losing its grip early Monday and falling back below $51 again. The OPEC meeting coming up on Dec. 6 continues to loom large for
this market, as well as for the energy sector and possibly even bonds.
Speaking of bonds, the U.S. 10-year Treasury yield briefly dipped under 3 percent for the first time in more
than two months early Thursday but recovered a bit to end the day near 3.02 percent. Analysts also said they saw some buying in the
municipal and corporate bond markets after Fed Chair Jerome Powell’s speech on Wednesday. Debate continues about the exact possible
ramifications of Powell’s remarks (see more below).
Some further thoughts from the Fed surfaced Thursday afternoon in the form of minutes from the last Federal Open
Market Committee (FOMC) meeting. One takeaway is that Fed officials considered removing language about “further gradual rate hikes”
out of fear that it might slow economic expansion. A number of companies have voiced concern about rising interest rates, so
perhaps the Fed is picking up on that. The Fed also discussed emphasizing that it would react to data in deciding on its policy
outlook. We’ve seen that recently in remarks from Fed Vice Chair Richard Clarida, who said this week that the central bank should
be “data dependent.”
Anyway, the minutes kind of took a back seat after Powell’s comments this week about rates being “just below”
neutral. The Fed news is more forward looking now, with investors likely to focus closely on the next FOMC meeting coming up Dec.
18-19.
Figure 1: Checking Risk Tolerance: This one-month chart tracking the tech sector (candlestick) vs.
utilities (purple line) shows some signs of revival for the tech, traditionally a sector embraced when investors are more eager to
take on risk. However, utilities, a so-called “defensive” sector, continue to outpace tech as concern centers on the U.S./China
trade relationship. Data Source: S&P Dow Jones Indices. Chart source: The
thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future
results.
Inflation Still Appears Muted
One day after Fed Chair Jerome Powell seemed to indicate a more dovish view, inflation data came out that might support his
position. Of all the inflation data each month, the Fed has said it most closely watches the Personal Consumption Expenditures
(PCE) price number. For October, it looked pretty benign, growing just 0.2 percent. This came even as personal spending rose a
solid 0.6 percent and personal income rose 0.5 percent. Basically, the report showed that people continue to freely spend but
prices remain relatively tame. The only fly in the ointment, Briefing.com pointed out, is that some of the higher spending was due
to a rise in electricity and gas prices, so it wasn’t necessarily voluntary. At any rate, there didn’t appear to be much if
anything in the data that would cause the Fed to take fright, and the report might support the recent dovish tone from Powell and
other Fed officials.
Debating the Chair
Speaking of “dovish,” a lot of the post-game analysis after Powell’s speech Wednesday talked about how he hadn’t really been
that dovish at all. Some analysts pointed out that he didn’t mention slower economic growth or sliding inflation, for instance.
They called the market’s huge rally an over-reaction. It’s certainly arguable that the market didn’t have to zoom up the elevator
the way it did, and Thursday’s losses might have been partly a reaction to some of the Wednesday exuberance. However, it’s a hard
argument to make if you’re trying to say Powell didn’t change his tone. After all, in September he said rates were “a long way”
from neutral, and now he’s saying they’re “just below” neutral, even though rates didn’t change between now and then.
That said, some economists note that “neutral” could be as high as a range of between 2.5 percent and 3.5 percent, giving the
Fed plenty of room for more rate hikes to get there from the current range of 2 percent to 2.25 percent. Other analysts argue that
Powell is trying to send a reassuring message to the market, but that’s also debatable, because the Fed isn’t supposed to have the
markets in mind as it makes decisions. Its responsibilities are price stability and maximum employment, not making Joe Investor
happy. Perhaps Powell’s press conference on Dec. 19 after the next Fed meeting can help investors get a better sense of where the
Fed chairman stands. For now, chances of a December rate hike are on the rise, reaching 86 percent Thursday according to the
futures market. Chances of a March hike to follow December’s, however, are only around 40 percent.
Under the Radar
A couple of major and potentially market-moving developments kind of got pushed under the table this week amid excitement about
Powell’s speech and the G20 meeting this weekend. There’s still Brexit and a possible U.S. government shutdown to contemplate, both
of which could become factors in coming weeks. British Prime Minister Theresa May is having a hard time selling her Brexit plan to
Parliament, with chances still out there for a “hard Brexit” that could potentially hit the euro, boost the dollar and potentially
lead to pressure on U.S. stocks. Remember, a strong dollar has recently been one reason cited for U.S. market weakness. On
Thursday, May warned that a “no-deal” Brexit could occur if Parliament doesn’t approve her plan before year-end, and the Bank of
England warned that such a scenario could trigger a recession.
A partial U.S. government shutdown also could sneak up on investors, and in the past these events have sometimes weighed on
stock prices. Congress continues to debate the president’s request for a border wall, and a deal needs to be done by Dec. 7—this
coming Friday—to avoid a partial shutdown.
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