After The Close
U.S. equities struggled on Wednesday, with declining shares outnumbering advancing issues from bell to bell. The bull market continues to face some turbulence as a decline in oil prices and ongoing uncertainty regarding tax reform conspired to bring the large-cap indexes lower during the session. There were notable selloffs in the non-cyclical consumer goods, energy, technology, and utilities sectors, while only telecommunications stocks were able to muster a meaningful aggregate advance.
There were some positives, however, specifically from the business beat. Traders are hoping the solid retail spending update from the Commerce Department is a positive harbinger for things to come during the impending holiday season. Moreover, the Department of Labor reported a pickup in inflation during October. These two releases served to bolster the belief that the Federal Reserve will tighten monetary reins in December.
Still, with a hike largely factored into valuations already, today’s downturn reflected an increasing doubt that Republicans can pass, much less implement, a tax reform bill by the end of the year. The most recent reports suggest that the measure may not go into effect for corporations until 2019, while individual cuts could be temporary. The Senate also intends to include an item that would threaten the individual mandate of the Affordable Care Act, a potentially divisive inclusion that may well serve to ramp up opposition to the tax reform efforts. Recall that the historic rally in the past year is largely due to the prospect of a moderated taxation environment for businesses, so any further delay or inability to deliver the policy change will add pressure to stock prices going forward.
Meanwhile, domestic oil prices fell further amidst concerns about 2018. Previously, the prospect of elevated demand trends, particularly in China, had helped to stoke prices to recent highs over the past several weeks. Since then, unexpected increases to domestic stockpiles and a lessened outlook for international supply/demand trends have dampened sentiment. U.S. crude is now valued at $55.29 per barrel, $0.41 lower than yesterday’s closing level.
By the closing bell, none of the major indexes was able to bounce back. While each of them pared respective losses through most of the afternoon, the uncertainty regarding tax reform continued to pressure valuations. In the session’s final minutes, the Dow, S&P 500, and NASDAQ each slipped closer to their day-long lows. Looking forward, we expect the political headwinds to influence trading as earnings season winds down. Stay tuned.
– Robert Harrington
At the time of this article’s writing, the author did not have any positions in the companies mentioned.
Mid-Day Update - 12:00 PM EST
Stocks are pulling back today, in a continuation of the weaker tone the market has been experiencing since late last week. Right around the noon hour on the East Coast, the Dow Jones Industrial Average is off 78 points; the NASDAQ is down 18 points; and the S&P 500 is eight points lower. Market breadth is decidedly negative, with declining issues outpacing advancers by a wide margin.
The pullback is not limited to equities, as global commodity prices are easing. For instance, copper prices peaked at around $3.25 a pound in October, but are now only slightly above the $3.00 mark.
Crude oil quotations have fallen about 3% this week in NYMEX trading, as well, to near $55.25 a barrel. A slightly bearish inventory report this morning from the Energy Department did not change the mood.
Signs of a slowing economy in China are part of the reason for poor recent trend in commodities and oil. A rise in the yield on the 10-year bond in China to almost 4.00% reflects the less compelling growth prospects.
However, this morning’s business data in the United States was somewhat more reassuring about the state of the domestic economy. The Commerce Department reported a solid rise in retail spending during October that augurs well for the upcoming holiday season. Black Friday is only nine days away, following Thanksgiving Day next Thursday.
In addition, the Labor Department noted a pickup in inflation during October, although not nearly to the point where the economy would be considered to be overheating.
Overall, the uptick in inflation and the steady rise in consumer spending probably give the Federal Reserve the green light to go ahead with its plans to raise short-term interest rates next month.
The Fed has been attempting to normalize rates for a number of years, and there is likely a particular incentive to nudge rates higher on the part of Fed Chair Janet Yellen, in order to leave her proposed successor more room to maneuver should the need arise.
Heading into the afternoon session, stocks are well off of their lows, but still firmly in the red. Vexing changes to proposed tax reform in Congress appear to be undermining sentiment on Wall Street.
— Robert Mitkowski
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
Before The Bell
The stock market, which has suffered some nicks and dents recently on worries about the latest political headwinds in Washington, most notably regarding efforts to get tax reform passed and implemented, sold off notably at the outset of trading yesterday, with the Dow Jones Industrial Average quickly tumbling to a loss north of 165 points. Encouragingly for the bulls, that early selling didn't mushroom, with the market quickly rebounding from that drop. To wit, tax reform efforts, which are ongoing against a self-imposed Thanksgiving deadline for the presentation of a sponsored Republican bill, figure to be difficult going forward.
As such, we can expect further shakiness and choppiness in the market going forward. But worries about taxes is not all investors have on their collective minds. There also is earnings and dividend action, the latter relating to Dow conglomerate General Electric (GE - Free GE Stock Report). Action by that company's Board of Directors on Monday to halve its quarterly disbursement to $0.12 a share caused that issue to sell off badly that day. The unloading of GE stock then continued yesterday, with the equity falling below $18 a share in the morning. Concerns are that the reduced payout could cause the stock to fall even more.
The company's new CEO, John Flannery indicated that he was not surprised at the selling as GE had disappointed investors with its recent earnings and dividend action. Equities also were under pressure following the release of disappointing economic news out of China. The selling, meantime, was broad-based, with only the utility group heading a bit higher among the 10 major equity sectors, with the energy and basic materials categories being the biggest laggards. Overall, the Big Board saw about twice as many losing issues as gaining stocks as the morning concluded.
In all, the Dow headed into the noon hour in New York sporting a loss of some 65 points. Similar percentage deficits were being posted by the S&P 500 Index and the NASDAQ. The small-cap Russell 2000 was somewhat weaker, meantime, suggesting some aversion to more elevated risk at this juncture. As to earnings, which are starting to roll in among the retail chains, Dow component The Home Depot (HD - Free Home Depot Stock Report) reported results that bested consensus, and the stock, which had eased early in the day when the market encountered its most serious selling, perked up some during partial late-morning recovery.
Things did not change all that much as the afternoon moved along, with the key averages remaining in the loss column throughout, but staying well off their worst levels of the day. As before, the worries centered on Washington (principally taxes), earnings, where there have been a few disappointments of note, valuations, with P/E ratios still quite extended, and the concerns about a possible global economic slowdown. This latter worry surfaced overnight, after China issued uninspiring economic data. On that count, this fast-emerging nation released reports showing missed expectations on retail sales, industrial output, and fixed asset investment.
At the close, the market's losses remained in place, only less so than during the mid-morning. All told, the Dow fell 30 points and the NASDAQ gave back 20 points. Losing issues also held the lead, while most of the leading groups faltered on the day. The big individual story, meantime, remains GE, which again tumbled, closing at its lowest level since 2011. That setback comes after disappointing quarterly results, a large cut in the dividend, and a cautious and rather disappointing outlook and long-term turnaround plan for the beleaguered conglomerate.
Now, looking out on a new day, and peering overseas, we see that stocks in Asia were sharply lower in overnight dealings on softer oil prices and fears of slipping global growth, while in Europe, the leading bourses are thus far trading with notable losses. Elsewhere, oil prices, off yesterday, are weaker again so far this morning and Treasury yields, which eased off in dealings yesterday, are now trending lower once more. Finally, U.S. equity futures are pointing to a decidedly weaker opening this morning.
— Harvey S. Katz, CFA
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
