U.S. market participants awoke to a trio of positive news tidbits touching on the partial government shutdown, trade war, and
Fed policy even as sentiment from a largely positive earnings season continued to provide momentum.
On the political front, senators from both sides of the aisle said they would introduce an amendment that would temporarily
reopen part of the government. While it’s too soon to tell exactly when the shutdown might end, it seems like lawmakers may be on
the path to resolving the issue. Positive developments there are likely to encourage Wall Street, as companies have increasingly
been voicing worries about the shutdown costing them money, or having the potential to.
Meanwhile, Treasury Secretary Steven Mnuchin told Reuters that the United States and China were “making a lot of progress” on
talks to end the ongoing trade war that has sparked worries about global economic growth and weighed heavily on companies’
outlooks. His comments served as a counterpoint to less optimistic talk from Commerce Secretary Wilbur Ross (see more below).
To round out the threesome of news apparently making the bulls happy, The Wall Street Journal reported that Fed officials are
closer to ending the central bank’s bond portfolio wind-down. It said officials are near a decision to maintain a bigger portfolio
than they had thought when they started shrinking those holdings two years ago.
Also, in The Wall Street Journal, Facebook (NASDAQ: FB) Chairman and CEO Mark Zuckerberg defended the social media giant in an opinion
piece, saying the company doesn’t sell users’ data. The op-ed seemed to help boost FB’s shares, giving more lift to a tech sector
that has been a highlight to this earnings season, with a notable exception being Intel Corporation (NASDAQ:
INTC).
One geopolitical situation to consider monitoring is the fallout from presidential election turmoil in Venezuela and what that
might mean for oil prices. Yesterday, West Texas Intermediate futures gained ground amid talk of sanctions against the South
American OPEC member. It remains to be seen how much the situation might affect oil prices going forward, but it’s probably worth
watching as oil prices help form key costs for transportation companies like airlines.
Earnings Season Rolls On
Western Digital Corp.'s (NASDAQ: WDC) shares were higher, even though it reported adjusted earnings that missed
expectations, as the company told investors its revenue would improve later this year.
Meanwhile, Starbucks Corporation (NASDAQ: SBUX) shares had a nice buzz going this morning after the company beat
expectations on its top and bottom lines and said its same-store sales grew 4% in the U.S. market. Major companies reporting before
the opening bell included consumer products company Colgate-Palmolive Company (NYSE: CL), homebuilder D.R. Horton Inc (NYSE: DHI) and biopharmaceutical company AbbVie Inc (NYSE: ABBV).
CL shares were down nearly 4% in early trade after it reported Q4 earnings that missed the Street view, although revenue was a
bit more than expected. DHI shares were also in the red, down about 1%, on its Q1 earnings disappointment and despite revenue gains
amid rising home prices. Earnings were $0.76 per share, up 52% from a year prior as homebuilding revenue increased 6% to $3.4
billion.
The U.S. Census Bureau was scheduled to release its monthly new home sales report today, but that’s likely to be put off as it
was last month due to the partial government shutdown.
Administration Trade Comments Weigh
The market on Thursday continued to be caught between optimism on the back of great earnings and fear resulting from
geopolitics. Stocks ended mixed, with the S&P 500 (SPX) eking out gains, the Nasdaq (COMP) performing a bit better, and the Dow
Jones Industrial Average ($DJI) ending slightly in the red.
First, let’s consider what drove bearish sentiment. Mostly, it seemed to stem from comments by Commerce Secretary Wilbur Ross,
who told CNBC that the United States and China are “miles and miles” from reaching a trade deal and have “lots and lots of
issues.”
It seems that Ross’s comments may have put a cap on gains in a market that has been seeing positive momentum from a generally
solid earnings season. The tariff issue is arguably more of a threat to company earnings growth than recent fears about the Federal
Reserve possibly making a mistake and tightening monetary policy too aggressively even as inflation is muted. Based on recent
commentary from the Fed, it seems that the latter worries have eased up somewhat.
Tech Shares Shine
During a day when tech was the best performing of the 11 SPX sectors, it was interesting to note that Apple
Inc (NASDAQ: AAPL) shares finished the day
slightly softer. True, much of the gains were focused in the chip space, and that’s a different business than what AAPL does. But
the pressure on the company’s shares Thursday seems to be a reminder of just how much exposure AAPL has to what happens in China,
which makes up a good chunk of its sales and supply chain.
Talking about technology shares leads us to the other side of yesterday’s coin: optimism about corporate results.
The tech-heavy COMP edged out the other two main indices after Xilinx, Inc. (NASDAQ: XLNX), Lam Research Corporation (NASDAQ: LRCX), and Texas Instruments Incorporated (NASDAQ:
TXN) reported better-than-expected earnings. The PHLX
Semiconductor Sector Index (SOX) rose more than 5.7%. (See more below.)
The chipmaker party also appeared to be fueled by good expectations for Intel’s (NASDAQ: INTC) quarterly report after the bell. But those hopes short circuited after
the big semiconductor maker reported quarterly revenue and a Q1 earnings outlook that were short of analyst expectations.
In separate corporate news, Pacific Gas & Electric Corp. (NYSE: PCG) shares jumped more than 74% after California investigators cleared the utility
of responsibility in a deadly 2017 fire. But the company, which recently said it intended to file for bankruptcy, said it “still
faces extensive litigation, significant potential liabilities and a deteriorating financial situation.” The company’s shares remain
down significantly from their 2017 peak above $70, even when including Thursday’s rally that took the shares to a close just shy of
$14.
Figure 1: Chip on Your Shoulder? The PHLX Semiconductor Sector Index (SOX) rallied on Thursday amid optimism in
the space after strong earnings reports, but ahead of results from Intel, which ended up disappointing on revenue. Overall, the
index has been under pressure in recent months on worries about the U.S.-China trade war and concerns about iPhone sales. Data
Source: Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance
does not guarantee future results.
Looking at Labor: With much focus on the hundreds of thousands of workers out of jobs during the partial
government shutdown, it may be worth remembering that overall the nation’s job market remains tight. Data from the Labor Department
(which was funded before the shutdown and remains open) on Thursday showed that weekly initial claims for unemployment dropped by
13,000 to 199,000, less than a Briefing.com consensus expectation of 217,000. The new figure is the lowest level for initial claims
since mid-November 1969. Perhaps a more helpful data set is the four-week moving average for initial claims. That figure also
dropped, by 5,500 to 215,000. While a tight labor market can lead to wage inflation, it is also a signal of a strong
economy.
US GDP Growth Could Slow: But the job market isn’t the only economic indicator out there. Fresh data from the
Conference Board Thursday added to the drumbeat of worries about the potential for slowing growth in the United States. Its index
of leading economic indicators dropped by 0.1% in December, in line with a Briefing.com consensus forecast. The decline suggests
that growth in the U.S. economy could slow this year, the Conference Board said. “While the effects of the government shutdown are
not yet reflected here, the (index) suggests that the economy could decelerate towards 2% growth by the end of 2019,” according to
Ataman Ozyildirim, director of economic research at the Conference Board.
Technically Speaking: While geopolitical factors seem to be providing the macroeconomic reasons for tepid gains
in stocks on Wednesday and Thursday, technical factors could also be at play. According to i10 Research, the SPX has been in a zone
of resistance between 2629 and 2674. The market has been testing the lower end of that range, as the SPX has dipped below 2629 in
each of the last three sessions but then managed to close above that level. Still, the bias remains bearish as long as the index is
below 2674, according to i10.
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