Are the “three horsemen of risk” ready to ride again as trade worries push the market around?
It looks like a “definite maybe” after a report from Reuters Wednesday that the “Phase One” trade deal might get delayed to next year. Volatility, bonds, and gold—three investments people often embrace when they’re trying to lower their risk profile—all moved higher in the minutes after that negative news, but none really got much traction. Gold actually ended the day lower. And the Cboe Volatility Index (VIX), eased back from intraday highs above 13 by the close of Wednesday’s stock market session.
Stocks initially crumbled on the trade news, with the S&P 500 (SPX) falling back below 3100. However, stocks did appear to find some support at the lows and climbed back above the psychological 3100 mark. The SPX’s ability to rebound from its weakest level of the day and claw its way up to 3100 again could be a positive technical sign that flows into today’s trading, but we’ll have to wait and see.
The fact that stocks showed resilience and most of the main risk horsemen got reined in might be evidence that investors continue to see the trade situation for what it is: A noisy distraction from what’s been a much better than expected earnings season and from continued health among consumers. That’s not to say trade isn’t important—it’s arguably the biggest issue out there. But people are starting to get used to these interruptions and might be taking them more in stride. It’s probably no use getting too hot or cold on any daily tariff headlines until pen hits paper on an agreement.
On the tariff front, there was some positive news early Thursday as Dow Jones Newswires reported a chance for possible meetings between U.S. and Chinese negotiators in Beijing before Thanksgiving next week. Turkey and stuffing in China, anyone?
Despite the late revival, yesterday was a tough day for many of the trade-sensitive sectors, including Materials, Technology, and Industrials. Also, the Financial sector has been wrestling this week with a flattening yield curve. That continued Wednesday as trade concerns kept weighing on the benchmark 10-year yield, helping push it down to 1.73%. That’s nearly 23 basis points below the month’s high, and the lowest level in about two weeks. That’s still about 16 basis points above the two-year and three-month yields, so a quick return to the inverted curve seen earlier this year doesn’t appear imminent.
Retail Earnings Haven’t Checked Out Yet
On the earnings circuit, we’re far from done with retail results. JW Nordstrom, Inc. (NYSE: JWN) and Gap Inc (NYSE: GPS) both step to the plate after today’s close, and Foot Locker, Inc. (NYSE: FL) is scheduled to open its books before the open Friday.
Macy’s Inc (NYSE: M) became the latest retailer to report early Thursday, and investors didn’t seem to like what they saw. Shares fell 6% in pre-market trading after the company posted a same-store sales decline and missed analysts’ revenue expectations. In a press release, M said sales were hurt by the late arrival of cold weather, continued soft international tourism and weaker than anticipated performance in lower-tier malls. The disappointing report followed weak results from Kohl’s Corporation (NYSE: KSS) earlier this week, so it’s been tough going for department stores lately.
It’s been a mixed week on the retail earnings front. Target Corporation (NYSE: TGT) and Lowe’s Companies Inc. (NYSE: LOW) both looked solid yesterday, but Home Depot Inc (NYSE: HD) disappointed the day before. TGT shares rose an astonishing 14% Wednesday, one of the best days for any major stock all year and a signal that investors appear eager to award retailers who succeed in this environment. That’s an interesting change from say, a year ago, when many investors seemed to yawn at good news but quickly punish bad news on earnings.
TJX Companies Inc (NYSE: TJX) also beat analysts’ estimates and saw strong same-store sales growth. Importantly, the company said its holiday quarter is off to a strong start. It’s the current quarter that a lot of people are likely going to focus on more than the last when it comes to retailers, with holiday season now well underway and Black Friday coming right up.
There’s still some data coming at the market before the week wraps up. Front and center early Thursday were weekly jobless claims coming in at 227,000. That was 8,000 above consensus and the same as last week’s upwardly revised number. Consider keeping an eye on this metric in weeks to come, because it’s starting to tick higher.
University of Michigan November sentiment tomorrow also stands out as a possible attention getter. Existing home sales and leading indicators later this morning could also be worth a look. Last time out, in September, existing home sales fell sequentially but still rose from a year earlier. Home prices just keep zooming higher, which is making it tougher for first-time buyers to get into the market.
Speaking of higher, that’s where crude went Wednesday. Inventories rose in the U.S., as many analysts had expected, but the futures market executed a little snapback. It might have reflected some people getting back into the market after the bad news passed.
Fed Seems Poised To Stay Right Where It Is
In the “no surprises” department, Fed minutes released Wednesday showed no one on the Federal Open Market Committee (FOMC) itching to lower rates any further at this point. That backs up what some analysts have been saying about the Fed wanting to step back and watch for a while to see if the 75-basis point lowering since July starts to reverberate around the economy. As seasoned investors probably know, these rate cuts can take time to have an impact.
On the other hand, there’s a school of thought that suggests no amount of rate cuts can have much effect on business spending until companies have a playbook on how to approach trade with China. A couple of Fed speakers take the podium later today, so perhaps that’s something to consider being on the lookout for.
The futures market suggests there’s still about 50% odds that rates by mid-2020 will be right where they are now, and even a year out there’s a pretty good chance for rates at current levels. Later in December we’ll get the Fed’s updated “dot-plot” showing where FOMC officials expect rates to go in the next year or two, and that might be interesting to check for any signs of views getting more hawkish.
CHART OF THE DAY: OUT-SOXED. FAANGs ($NYFANG:IFUS-candlestick) are keeping pace with the Nasdaq (COMP-purple line) so far this year, but semiconductor stocks (SOX-blue line) are way ahead of both. That said, few sectors arguably are as prone to trade-related ups and downs as the chips. Data Sources: Philadelphia Stock Exchange, Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Yield Signs: Earlier this year, so-called “defensive” sectors like Utilities, Staples, and Real Estate surged as Treasury yields came under pressure. Then the situation reversed and yields started climbing this fall, weighing on those same sectors. Could we be heading for another plot twist in this long-running story? Over the last two weeks, the 10-year Treasury yield has fallen from a three-month high near 1.96% down to below 1.75%. When yields fall, that sometimes makes defensive sectors (which are often referred to as “bond proxies”) look more attractive to certain investors seeking dividends in a low-yield environment. Last week, the average S&P 500 dividend yield was about even with the 10-year Treasury yield.
Now the Treasury yield is below the average dividend yield. If Treasury yields keep dropping, it might be interesting to see if Staples, Utilities, and Real Estate start getting bids. A lot of it could hinge on the next moves in the trade war, because recent pressure on Treasury yields stems in part from worries a deal might not be inked in the near future.
Small Packages: Speaking of trade, some analysts see small-cap stocks as one way to track market sentiment on the tariff negotiations. Because small-cap companies tend to do more of their business here in the U.S. and don’t sell as much abroad, the thinking goes, they might have a better chance to stay healthy if the trade situation worsens. That thinking seems dominant recently, at least judging by the performance of the Russell 2000 Index (RUT), which tracks small-cap companies and has a heavy weighting toward regional bank stocks.
Until recently, the RUT was getting outmatched as large-cap indices like the S&P 500 (SPX) and Dow Jones Industrial Average ($SDJI) scored new all-time highs even as the RUT languished well below last year’s peaks.
Over the last month, the RUT is up 4%, and it outpaced some of the other indices this week as trade worries burdened some of the big multinational stocks. Still, RUT seems to be having a hard time getting past long-term resistance at the 1600 level. That’s a mark it hasn’t spent much time above since mid-2018. We’ll have to wait and see if eventually buyers start putting more faith in the small guy.
Chips vs. FAANGs: Despite everything you might hear about how FAANGS have left the building in 2019, they’re actually doing a pretty decent job keeping pace with the broader Nasdaq (COMP) so far this year (see Fig. 1 above). As of midday Wednesday, the Nasdaq was up 28.4% and FAANGS were up 27.3% since the end of 2018. Not a bad performance by either, but that doesn’t hold a candle to the 2019 darling of the market: Semiconductors. That sector is up more than 48% year-to-date, led by companies like Advanced Micro Devices, Inc. (NASDAQ: AMD), Micron Technology, Inc. (NASDAQ: MU), and Nvidia Corporation (NASDAQ: NVDA).
Earnings are in the rear-view mirror for most of the chip sector, but MU is expected to open its books in mid-December, something we’ll discuss in more detail as it gets closer.
The thing to remember is that while the chip sector has seen some mixed earnings numbers over the last quarter, it also holds onto a lot of investor optimism about consumer demand. Those chips go into all kinds of devices, including (probably) the one you’re reading this on. If the global economy takes a turn for the worse or trade talks break down, chips might be the first to feel it. That certainly was the case back in May when trade negotiations withered and the chip sector took a dive. Chips are an exciting sector, but probably not one for the meek.
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