If there was ever a morning to illustrate the outsized impact one stock can have on the Dow Jones Industrial Average ($DJI),
this is it.
The new week is off to a very turbulent start for Boeing Co (NYSE: BA), whose shares fell more than 9% in pre-market trading after the crash of one of
the company’s planes in Africa over the weekend. Several countries have now grounded the airliner. Since BA is one of the 30 stocks
in the $DJI and a high-priced one, it’s causing an outsized impact with such a big drop. The $DJI was down 150 points ahead of the
opening bell.
This shows what we’ve often said about the $DJI not being the best indicator of the overall market, especially when you look at
the S&P 500 (SPX) and Nasdaq (COMP) and notice both of them were higher in pre-market trading.
That’s because aside from BA, there’s not a lot of negativity to start the week. Asian stocks bounced back from Friday’s losses
after a Chinese government official hinted at progress in trade talks, and Apple Inc. (NASDAQ: AAPL) shares got a boost in part from an analyst upgrade.
Fed Chair Jerome Powell appeared on 60 Minutes last night and repeated what’s becoming kind of a Fed mantra about being patient
and watching the data. Not surprisingly, he didn’t specifically discuss interest rates in the interview, but did repeat what he
said recently to Congress about seeing signs of slowing global growth.
There was also some better news early Monday on retail sales, which climbed 0.2% in January after a dramatic drop in December.
This could have people a little less worried about consumer spending. Analysts had expected January retail sales to fall
slightly.
A Week To Forget
Fear came from all corners of the globe last week as U.S. indices fell each day. Lower growth projections out of Europe, soft
export data from China, lack of progress on the U.S./China trade front, and last but not least, a surprisingly sluggish U.S.
February jobs report, combined to make last week the worst of the year for U.S. stocks.
The stats don’t look too pretty. It was the first time all the major U.S. indices declined each day of a week since Oct. 31-Nov.
4, 2016, right before that year’s U.S. Presidential election, Dow Jones Newswires reported. The Dow Jones Transportation Average
($DJT) finished Friday on an 11-day losing streak, its longest stretch in the red since May 1972.
Technically, things don’t look that healthy, either. The S&P 500 (SPX) hit what many analysts saw as resistance right near
2815 a week ago, and quickly fell back below 2800. After that, the index descended beneath the 200-day moving average of just over
2750, finishing the week on the wrong side of that key technical support point. The only saving grace might be a late-day revival
Friday from session lows that kept the day from being a total washout. Still, the SPX fell about 2% for the week, and the Nasdaq
(COMP) did slightly worse.
Friday’s focus was on the February U.S. jobs report (see more below), which at 20,000 new positions came in way under Wall
Street’s expectations for gains of around 180,000. It’s never a good idea to look at one report in isolation, and the same goes for
this one. Three-month average jobs gains are right around 186,000, which is pretty good, but the volatility of the numbers is
keeping investors on their toes. It’s possible the government shutdown affected the data, so what we really need to see is a full
month of numbers not affected by that situation.
All that aside, there’s no way to ignore what looks like a slowing jobs market, at least for the month of February. Many
analysts saw the data as more evidence of weakening U.S. economic growth, and the Atlanta Fed’s GDPNow indicator for Q1 gross
domestic product (GDP) is now at just 0.5%. That compares with the government’s estimate of 2.6% for Q4 growth.
China Tariffs Still Center Stage, But Brexit Also In Focus
Going into the new week, China tariffs remain front and center. Whatever else might go on, that’s the story most likely to
have a big impact.
Last week’s news that there’s no date yet for a presidential summit likely contributed to Friday’s early weakness, along with
the U.S. ambassador saying a deal isn’t as close as many people thought. The market ran out of positive catalysts last week on the
geopolitical side, and probably won’t get much traction without progress on the China front. The Wall Street Journal reported late
Friday that a signing ceremony for the U.S. and Chinese presidents could be pushed back into early April. The talk a week ago was
late March. Word now, according to the paper, is that China wants a firm deal in hand before any presidential meeting.
Early Monday, The Wall Street Journal had a more optimistic report in which it said China’s top banker signaled that
the two countries are getting closer to a deal on the currency aspects of an agreement.
Remember, until negotiations conclude, U.S. companies really don’t have a roadmap for trade, and that appears to be affecting
many of their capital expenditure plans. It’s getting close to Q1 earnings season and many analysts expect year-over-year losses
for S&P 500 earnings. If there’s no resolution on trade heading into the next round of earnings, that means investors might not
be able to glean much information from CEOs and other executives of future spending plans. That’s especially true for the big
multinational firms with major business operations in Asia.
This week also brings more Brexit news, putting that uncertainty into the headlines again as the March 29 deadline approaches
for Britain to make a deal with the European Union. Prime Minister Theresa May’s withdrawal agreement is up for a vote Tuesday, and
she warned last week that no one knows what will happen if the vote fails. Markets don’t tend to like uncertainty, and that sort of
talk is the very essence of uncertainty.
Shakiness in Europe, where the European Central Bank pulled down its 2019 growth estimate to just 1.1% last week from the
previous 1.7%, could potentially have an impact on U.S. Treasury note yields if investors start trying to find shelter from the
Brexit winds and yield that’s better than the negligible rates offered in Europe. The German bund yield is down about 13 basis
points from its March peak, recently trading just above 0.06%. U.S. 10-year Treasury yields, which stayed pretty steady during the
two-month stock rally of January and February, finished the old week near 2.63%.
Dollar Starting To Show Muscle
Investors might want to consider watching the dollar index this week. It closed a little lower on Friday but remained above 97.
It’s not at extremely high levels yet, but weakness in overseas economies seems to be giving it a lift lately, and that isn’t
necessarily good news for multinational U.S. companies going into earnings season next month. The dollar might also get a boost if
there are any signs of stumbles in the talks between China and the U.S., because the dollar is often seen as a place to go when
there’s more risk in the picture.
Sector-wise, Energy was the big loser on Friday, hurt in part by weakness in Exxon Mobil Corporation (NYSE:
XOM) after an analyst downgrade of the company. Food and gold
companies, on the other hand, had pretty solid sessions. Industrials, Health Care, and Consumer Discretionary all fell Friday.
Earnings this coming week are a little sparse, but computer tech company Oracle Corporation (NYSE:
ORCL) is expected to report after the close Thursday, perhaps
offering investors a fresh look at the cloud space. Look for a preview of ORCL’s earnings on Ticker Tape later this week.
There’s also a full helping of economic data ahead, starting with U.S. retail sales for January today. This report could get
more attention than usual after the surprisingly soft December figure, but keep in mind that the government shutdown might
have caused more weakness in the January data.
Other data to consider watching include consumer and producer price index reports for February due Tuesday and Wednesday,
respectively, as well as durable orders and construction spending for January.
While there’s a lot of uncertainty and we’re coming off the worst week of the year, it’s also important to try and keep things
in perspective. The SPX is still up 9% year-to-date, and that doesn’t sound too bad if you consider the mood back around Christmas.
Also, volatility appears to remain in check with the VIX sitting at just above 16 to end the week. That’s not far from the
historical average and way down from the holiday peaks above 30. A mild VIX could suggest that many investors aren’t necessarily
expecting a major washout, though there’s no way to ever be sure of that.
Speaking of washout, Saturday marked the 10th anniversary of the March 2009 low for stocks reached during that year’s market
crash, and the birthday of the long bull market we’re still in. It’s pretty incredible to think that 10 years ago we hit the
closing low under 680 in the SPX, and are up more than 300% since then. The biggest thing most people have probably learned from
that experience is that we don’t go straight up.
Under the Line! After a rough time last week, the S&P 500 Index (candlestick) begins Monday just below its
200-day moving average (blue line), which has been an important support and resistance point. 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.
No Panic Button On Jobs: First, let’s acknowledge that there’s no way around a sluggish February jobs growth
number of 20,000, no matter how you slice it. Job growth is slowing, no doubt about that. However, there are a number of reasons
not to read too much into one report. First, there’s been a lot of volatility recently in the payrolls data, and that may be
related to the government shutdown and recent extreme weather in the Midwest. Also, job weakness was concentrated in the
construction and hospitality sectors, which are very dependent on the weather. That likely contributed to this number being
screwy.
Also consider keeping in mind that the government actually raised the figures for December and January jobs growth, both of
which came in very strong. So what we saw in February may have been a bit of an anomaly, and it arguably makes the March report
more important in case of any major revisions to the February number or in case some of February’s jobs growth gets pulled into the
March report.
A Few More Job Takeaways: The last two times monthly payrolls reports came in way below estimates and below
trend, in September 2017 and September 2018, the next month showed a big recovery. That doesn’t mean it will happen again, but it’s
something to ponder. Also, other parts of the report, including wage growth of 3.4% and the unemployment rate of 3.8%, were both
very strong and might help raise hopes for more consumer spending. Last year, numbers like that might have had some investors
worried about possible Fed response, but the Fed doesn’t appear to be a factor anytime soon. Inflation has been benign for months,
so it’s looking like the Fed might be right when it says wage growth won’t necessarily pump up prices. One more note: A widely
watched metric, the U6 unemployment rate—which accounts for unemployed and underemployed workers who choose part-time work for
economic reasons—was 7.3% in February vs. 8.1% in January.
Housing Chatter: December new home sales released last week might deserve a closer look for some insights into
the economy. Though average and median new home sales prices fell year-over-year in December, some housing analysts are focusing
more on the month-to-month figures, which showed median and average sales prices climbing from November to December. The median
price rose a solid 5% in December from the previous month, to $318,600.
That might underscore a home market which appears relatively strong on the high end—with builders demanding (and receiving)
higher prices during December even as a government shutdown loomed and the stock market cratered. The high-end consumer seems to be
doing pretty well, judging from sales of expensive items like new homes and earnings results from high-end retailers. It’s the
lower-income segments that seem to be facing more of a struggle. Need more insight into new home sales? It’s coming right up, as
the government will release January new home sales on Thursday. The reports are bunched together because of a delay caused by the
government shutdown.
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