Investors got their Valentines from the stock market a bit early this year, with major indices mounting a rally over the last
few days that would likely warm the heart of even the most enthusiastic bull.
The rally had initially looked likely to continue early Thursday as investors reacted to news reports that the U.S. might be
willing to extend the China trade talks deadline by as much as 60 days, and as shares of Cisco Systems,
Inc. (NASDAQ: CSCO) moved higher after
reporting solid earnings. Some positive export data out of China didn’t hurt, either.
However, it looks like the weak markets and government shutdown situation in December might have taken a bite out of consumer
spending, as retail sales fell 1.2% that month, the government said. Wall Street had expected a 0.2% rise, according to
Briefing.com. Futures prices quickly turned tail after that report, and major indices came under pressure in pre-market trading.
Concerns about the consumer might return based on this news.
While the overall market seemed to have a positive reaction to news of a possible trade deadline extension, kicking the can down
the road isn’t necessarily a completely positive thing. It would mean more questions for corporations, which would be forced to
continue making spending and other strategic decisions without knowing how the trade deal might ultimately play out. For companies,
it’s hard to play the game if you don’t know the rules.
Wednesday marked the second straight day of the S&P 500 (SPX) closing above its 200-day moving average of 2743. Unlike
Tuesday, when the SPX barely topped the average, it eclipsed that mark Wednesday with room to spare. Sometimes a few closes above
key moving averages can help provide momentum, though certainly other factors can drive markets as well. We’ll have to wait and see
if the SPX can maintain this technical strength, something it failed to do back in early December when it last crossed the 200-day
line.
The SPX also managed to finish above 2750, another level that some technical analysts had been watching. It was the first close
above 2750 since Dec. 3, so the market is at nearly two-and-a-half month highs. It’s really pretty remarkable how far things have
come since the Christmas Eve lows down around 2350. The SPX is up more than 400 points since then, or 17%, but remains down 6% from
the all-time high close of just over 2930 recorded last Sept. 19.
Also, all of the major U.S. indices have emerged from correction (which is down 10% or more from highs). If you recall, the SPX
teetered on the edge of a bear market at the end of the day Dec. 24. Post-market trading that evening actually took it down more
than 20% from its high, which is the definition of a bear market.
Border Bill, Shutdown Still Not Wrapped Up
Hopes for a trade deal with China and chances to avert a government shutdown both played a big role in the market’s strength so
far this week. However, the shutdown situation remains fluid, so investors might want to consider keeping a close eye on things as
the week closes, especially with a three-day weekend ahead. The markets are closed next Monday for President’s Day.
It’s possible the weekend could arrive with investors uncertain about the status of the border bill in Congress. The president
has until midnight Friday to sign, and that’s hours after the market closes for three days. If there’s a hitch in the process
leading to a possible shutdown, it might be worth watching futures market action Monday night to get a sense of how things could go
Tuesday morning. A volatility spike can’t be ruled out if things don’t get resolved in Washington.
The benchmark 10-year U.S. Treasury yield climbed back above 2.7% for the first time in about a week Wednesday, possibly a sign
of investors getting more positive about the economy. On a less positive note, the U.S. dollar index edged above 97 again, possibly
a sign of investor concerns about economic growth overseas. The looming prospect of a no-deal Brexit could be one factor favoring
the dollar, and a stronger dollar can often spell trouble for major U.S. multinational companies.
That said, the industrial, energy, and info tech sectors—where many U.S. multinationals live—didn’t show much sign of impending
economic concerns. Industrials and energy were among the leading sectors Wednesday, and financials also rose. Of all U.S. sectors,
only utilities and communication services walked away in the red Wednesday.
However, the FAANGS—which have often helped drive momentum for the overall market—finished mostly lower. Also, shares of
Boeing Co (NYSE: BA) and
Caterpillar Inc (NYSE: CAT) finished
lower and just a touch higher, respectively. Both of these companies are often viewed as barometers for U.S./China relations, since
they have big businesses in China. BA has been on a roll lately, but CAT shares have struggled since the company turned in earnings
per share that fell short of third-party consensus estimates and guidance that disappointed some analysts late last month.
Volatility remains near historic averages as the VIX flirts with the 15 mark. It hasn’t fallen below that level since early
October.
Fresh Batch of Earnings, Data
This morning saw some new data with the release of January producer prices and retail sales. Overall producer prices dropped
0.1% last month, but core prices (which strip out food and energy) rose 0.3%, above expectations. Consumer prices for January
released Wednesday appeared pretty benign and didn’t seem to spark much concern about inflation getting a foothold (see more
below).
China’s January exports rose 9.1%, a big turn-around from a decline of more than 4% in December. Still, its imports fell last
month, so apparently not everything is well.
CSCO earnings, released late Wednesday, beat analysts’ revenue and earnings per share expectations. Its guidance outpaced
analyst projections, too, and the company said business in China is going well despite the trade battle. Shares were up 4% in
pre-market trading Thursday.
Things weren’t looking quite as robust over at The Coca-Cola Co (NYSE: KO), which met Wall Street’s earnings expectations and beat revenue
estimates but appeared to disappoint some investors with its outlook. Shares fell 2% in pre-market trading.
Nvidia (NVDA) is due to report after the close today, and Deere & Co (NYSE: DE) and PepsiCo, Inc. (NASDAQ: PEP) are tomorrow morning.
Unpack Your Bags
A couple of travel sector names opened their earnings suitcases Wednesday, and the response was particularly good for
Hilton Hotels (NYSE: HLT). Shares rose
nearly 7% Wednesday as HLT easily surpassed third-party consensus earnings per share projections and delivered a forecast that,
while not judged spectacular by analysts, also was a bit better than many on Wall Street had expected.
Like other companies this earnings season, HLT noted in its call that there’s been a bit of a slowdown in some areas. While
business travel continues to look strong, executives said, leisure is where things have slowed a bit, particularly in China. HLT’s
CEO said on the call that every economy has its ups and downs, and that while China might be down, HLT doesn’t see that as long
lasting. Judging from how the stock reacted, the Street seemed to like that statement.
Still, when you look at HLT’s hotels, they’re catering to the middle- to upper-middle kind of customer, not the top of the food
chain. So its struggles in China could mean the middle class in China is suffering more than we think.
HLT also took some market share during the quarter, perhaps putting some pressure on competitors like Hyatt Hotels
Corporation (NYSE: H), which reported later Wednesday,
and Marriott International Inc. (NASDAQ: MAR), which reports later this month. Market share seems to be the measure everyone
is getting measured on, if you will, more than the expense of gaining market share. Also, hotels like HLT are finding every
possible way to eke more revenue out of each room.
Figure 1: “TWO C’s” OF RISK: Copper futures (candlestick) and crude futures (purple line) are both up solidly
since hitting recent lows in late December. Both of these commodities often see investor demand in times of economic growth amid
ideas that demand could rise. Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For
illustrative purposes only. Past performance does not guarantee future results.
Reining in the Horsemen: When economic tides crash against the shore, we often talk about the so-called
“horsemen” of risk, namely VIX (volatility), gold, the dollar, and U.S. Treasury bonds. These holdings all tend to see investor
interest when there’s a move toward “safe havens,” though no investment can truly be called “safe.” When the tides retreat a
little, as they seemed to this week, many of the horsemen get reined in, and instead investors often gravitate toward areas that
typically do better when economic conditions improve.
At this juncture, some of that seems evident, with sectors like energy and industrials leading the charge higher. Copper—often
seen as an indicator of economic activity because it’s used in so many industrial applications—has also bounced from December lows,
and crude is up about 20% since diving under $50 a barrel late last year. Other areas that sometimes signal investor optimism also
are enjoying nice runs, including U.S. small- and mid-cap stocks, along with transports. All of these are places investors might
want to consider watching for further indication of market sentiment in coming weeks, but it’s also noteworthy that the U.S. dollar
continues to trade near recent highs, gold hasn’t eased much, and Treasury yields remain quite low. These could be signs that at
least some investors don’t see hard times being truly over.
Eat Your Veggies: If you feel like you’ve been paying a bit more for restaurant meals, or if a new home
purchase left your wallet light, it’s probably not just your imagination. Yesterday’s consumer price index (CPI) for January showed
a 2.8% year-over-year jump in prices for food bought outside the home, and a 3.2% rise in shelter costs. Home heating costs also
rose well above the overall 1.6% headline inflation increase since a year ago, the Labor Department said. Higher food costs in
January weren’t evenly spread, with beef among the biggest price gainers while fruit and vegetable prices fell. Even if you avoid
restaurants and try to eat at home, you could get hit by higher food costs, depending on where you shop. Major media outlets
reported this week that Amazon.com, Inc. (NASDAQ: AMZN) has increased prices at its Whole Foods stores. Perhaps investors might want
to tune in to Walmart, Inc (NYSE: WMT)
earnings call next week and also look at Kroger Co (NYSE: KR) earnings early next month to get a better sense of where grocery prices might be
going.
Looking Overseas: A trade deal with China presumably would get a nice reaction from U.S. stocks, judging from
the way things have gone lately just on rumors of possible progress. However, some analysts say any trade deal might benefit
international stock markets more than those in the U.S., in part because of China’s vast demand for goods that’s been clipped a bit
by the trade war, and because U.S. stocks might already have built in a good portion of the optimism around a possible
resolution.
Assuming Chinese demand for goods like food, automobiles, and energy tick up, that would have a chance to help many European
companies. Some of the biggest beneficiaries might be those that make automobiles and chemicals, or supply raw materials or other
manufactured goods. These were among the products China imported most from Europe in recent years, according to the European
Commission. Canada, too, might benefit, as it exports billions of dollars worth of commodity and natural resource products to
China, according to Stats Canada. So far this year, European stocks are up about 8%, while Canada’s main stock index is up 9%. By
comparison, the S&P 500 Index (SPX) is up nearly 10% year to date, while the Nasdaq (COMP) is up almost 12%.
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