After The Close
Fears of a trade war continued to pressure large-cap stocks during Monday’s mixed session, with the multinational-heavy Dow Jones Industrial Average shedding more than 250 points at its morning nadir. But like on Friday’s dramatic session, the indexes pared their losses to varying degrees as the day wore on, with an additional surge that saw each of the composites recover considerably. In fact, the NASDAQ rose to its breakeven line as the closing bell rang. The Dow finished the day about 100 points lower. The Russell 2000 advanced into positive territory around the midday hour, underscoring small-cap equities’ relative insulation from geopolitical and economic concerns. Further capturing the indecisive nature of today’s trading, advancing and declining stocks were roughly even.
The looming tensions between the United States and China have escalated in the past week, with the former’s $50 billion tariff measure on Chinese exports triggering a retaliatory edict from the Asian superpower. Boeing (BA – Free Boeing Stock Report) and Caterpillar (CAT – Free Caterpillar Stock Report) were again the hardest hit on the trade-related downturn, given their international exposure. Still, the likelihood of a full-scale trade war remains unlikely, in our view. The mixed sentiment over the past week is also likely a result of the Federal Reserve’s signaling that it was planning to raise interest rates two more times this year. Still, the lack of a bona fide selloff is a sign to us that optimism driven by the strengthening economy is helping to offset recent insecurity on the policy and geopolitical fronts.
On the other hand, domestic crude oil added value today as investors await OPEC’s potentially pivotal summit at the end of the week. Traders will closely monitor news stemming from the confab, which will take place in Vienna, with a particular focus on the intentions of Saudi Arabia and other foreign producers as it relates to future output. Adherence to the cartel’s thus-far successful drilling accord (originally set to last through 2018) has been ostensibly challenged in recent weeks, as Russia and Saudi Arabia announced plans to augment output as a means of countering a higher-than-expected rise U.S. stockpiles. Accordingly, the energy sector was the only of the ten major industry groupings to carve out a meaningful aggregate advance.
Looking ahead, we expect the U.S./China relationship and the OPEC meeting to dominate trading in the coming week. Developments from the business beat will also consume investors, with new data on housing starts, existing home sales, and several others due in the coming days. Stay tuned.
– Robert Harrington
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
Before The Bell
The final trading day of last week went to the bears. The major U.S. equity indexes started the session in negative territory, with the Dow Jones Industrial Average off the biggest percentage, but were able to pare a good portion of the early losses as the trading day progressed. The initial selloff was driven by worries about trade relations, as the Trump Administration announced another round of tariffs on China that would be effective on July 6th, with a number of pundits suggesting that the move was made to get China more engaged in talks about North Korea. The selling was probably not as pronounced as some might have thought, as there is an underlying belief that the new batch of tariffs may not last long, though that narrative may have changed some in last 24 hours (see below). In general, trade worries have weighed the most on the Dow 30, as it is comprised of predominately multinational companies that would be affected by additional tariffs.
For the bearish session, the aforementioned Dow 30 fell 85 points; the technology heavy NASDAQ shed 15 points; and the broader S&P 500 Index finished three points to the downside. It was the fourth-consecutive decline for the index of 30-bellwether companies. Overall, declining issues led advancers on both the New York Stock Exchange and the NASDAQ, with the margin a bit wider on the Big Board. From a top-10 sector perspective, there were slightly more down than up arrows, with the basic materials stock suffering the most severe setback. The international trade concerns hit the commodities sectors the hardest on Friday. On the positive side were gains in the consumer staples and discretionary groups.
On Friday, the theme again was sector rotation. Since March 1st, when the first round of tariffs was announced by the Trump Administration, we have seen some notable sector rotation among the major equity groups. In general, the movement has been out of the multinational names, which are most likely to be hurt by strained trade relations, and into the more domestically driven companies. Not surprisingly, the multinational-dominated Dow Jones Industrial Average has been a relative laggard over the last few months, while the small-cap Russell 2000 has performed very well. On Friday, multinational stocks, including Caterpillar (CAT – Free Caterpillar Stock Report) and Boeing (BA – Free Boeing Stock Report), were hurt by the trade worries.
In addition to the trade news, the investment community received the latest monetary policy decision from the Federal Reserve last Wednesday, and to no surprise, the central bank decided to raise the federal funds rate by 25 basis points. However, the big surprise may have been signals from Fed leaders that the lead bank may raise rates two more times this year. The prevailing sentiment before the meeting was that the lead bank would raise rates once more in December, now an additional hike in September seems plausible. Typically, stocks don’t perform as well in periods of monetary tightening, but we did not get a major selloff last week on the more hawkish FOMC statement, as investors took the news as another indication that the U.S. economy is continuing to strengthen. Speaking of the business beat, the week at hand will bring a number of important reports, including data on housing starts and existing home sales.
With less than an hour to go before the commencement of trading stateside, the equity futures are presaging a lower opening for the U.S. stock market. Overnight, the main indexes finished lower on last week’s tariff announcement from the Trump Administration and retaliatory measures from China’s government. Beijing said it would retaliate immediately by slapping tariffs on American export products, including crude oil, and suspend all previous trade agreements with Trump's administration. Fears that the quarrel between the world's two largest economies could intensify and threaten the health of the global economy is weighing on the major European bourses and is adding to the recent pressure on global oil prices.
— William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
