After The Close
The stock market continued to trade in an unsettled fashion to end the week. Volatility has been high since the previous Wednesday as investors have had to weigh the effects of rising interest rates, tariffs, and potentially slowing global growth against the backdrop of corporate earnings season. Investors do not like uncertainty, and the increased number of factors that could cause trouble has not gone over well on Wall Street.
However, volatility can spell opportunity as selling becomes overdone. That looked to be the case early in the day on Friday as the Dow Jones Industrial Average climbed to a 229-point gain early on, taking back a large measure of Thursday’s sharp 327-point reversal. As might be expected, the biggest gains did not hold, and the major indexes swung back and forth over the course of the session.
At the close, the Dow was up 65 points, but the S&P edged lower and the NASDAQ lost 36 points. The Dow gained for the first time in four weeks.
The market exhibited a defensive tone on Friday, with sectors such as consumer staples and utilities among the best performers. Investors liked what they heard from Dow-30 component Procter & Gamble (PG– Free Procter and Gamble Stock Report), which recorded a surprising jump in sales.
As for utilities shares, it has seemed counterintuitive that the sector is enjoying relative strength as interest rates have moved up. But the lure of their comparative safety has helped the group.
Tech stocks were weak, as high valuations and concerns over possible regulation dampened sentiment.
Small-cap stocks have especially been hurt by the rising rate scenario. That is often the case, since smaller companies are seen as being more reliant on outside funding. The popularity of this sector has clearly faded. Small-cap stocks were favored over large caps for much of 2018 when the big, internationally focused companies were seen as being hurt by tariffs. But sentiment has soured among the former lately.
The correction in stock prices has also had a negative effect on the IPO market. A couple of initial public offerings had to be postponed in the past week. Some others needed to be priced lower than envisioned.
Truthfully, though, the increased investor acceptance of shares of unprofitable companies was probably a sign of an expensive market. Assuming recent volatility subsides, the number and pricing of IPO issuances should normalize.
Next week will bring a heavy dose of earnings reports, but it is not clear if the market’s bout of volatility has ended.
- Robert Mitkowski
At the time of this writing, the author did not have positions in any of the companies mentioned.
Before The Bell
As to interest rates, yields on the 10-year Treasury note climbed to 3.20%. That was or just a handful of basis points below their earlier-secured seven-year high. Meanwhile, in economic news, housing stocks fell anew following the report on Wednesday that homebuilding had taken a step back in September. However, the Index of Leading Indicators came in for September, showing a gain of 0.5%. That was the forecast increase. That report did little to excite either the bulls or the bears. Regarding earnings, they continue to come in as expected, with nearly 85% of the companies already reporting results exceeding targets.
Meanwhile, after that weak start, the market tried to come back as we moved more deeply into the morning and saw some success initially in that endeavor. Thus, the Dow's loss, once near 200 points, eased back to fewer than 50 points for a brief spell, before the selling resumed, dragging that composite back to a triple-digit loss. The NASDAQ remained deeply in the red throughout the early going. Weakness in select tech names, including Apple (AAPL – Free Apple Stock Report) kept the NASDAQ well under water. The small- and mid-cap indexes also struggled as the session continued.
Regarding earnings, shares of Textron (TXT) fell after the industrial company posted weaker-than-expected quarter net. However, shares of Alcoa (AA) climbed on upbeat results, on higher alumina prices. But these individual stories aside, the main influence remained the Federal Reserve, where a fairly hawkish report on the FOMC's last meeting suggested that a fourth interest rate hike in 2018 was increasingly likely. That took the steam out of the Tuesday comeback by the equity market. Socks then would tumble further as the noon hour approached, with the Dow tumbling by close to 400 points at the morning nadir.
Another recovery try then commenced as the afternoon began. But again, it would prove short-lived. In fact, as we moved inside the final two hours of the session, the Dow's swelled to about 450 points. But that subsequent tumble would again be reversed, at least partially, with that index's fall moderating to below 300 points for a time. The selling would then step up modestly, dragging the Dow down to a closing loss of 327 points. The NASDAQ would suffer somewhat more, proportionately, declining by about two percent, or 158 points. Also, declining stocks led gaining issues by better than tree-to-one on the Big Board.
Following this woeful performance by the bulls, the market will again try to right the ship. As to signs for the day ahead, meantime, stocks in Asia were mostly higher in overnight dealings. In Europe, the principal bourses are thus far trending downward. In addition, oil prices are off and yields on the 10-year Treasury note, which fell to 3.18% yesterday, are showing little change so far this morning. Finally, the U.S. equity futures are showing early gains. As to news in the day ahead, and in addition to an array of earnings reports, the National Association of Realtors will be reporting on sales of existing homes for September.
