After The Close
The major U.S. composites exhibited mixed fortunes for most of Friday, before a mid-afternoon update on trade stoked a rally that persisted until the closing bell. Indeed, while both the Dow Jones Industrial Average and S&P 500 spent the majority of the session in positive territory and were on track for weekly gains, the NASDAQ and small-cap Russell 2000 were firmly below their breakeven lines when, at about 2:00 PM EST, a report suggested that the leaders of the United States and China would hold trade discussions in November. Today’s positive undertone was all inclusive, too, with each of the major market sectors posting aggregate gains and advancing shares outnumbering declining issues by a 2.5 -to-1.0 ratio.
Prior to today’s supportive bit of trade news, positive comments on trade with China by Larry Kudlow helped spur a running of the bulls on Thursday, particularly within the Dow and S&P 500 indexes. The potential for a discussion between President Trump and Chinese counterpart Xi Jinping in November has further assuaged fears of a potential trade war between the world powers. For some time, this storyline has served as the primary check on otherwise bullish sentiment stemming from a solid economy and another impressive quarterly earnings season from Corporate America. Accordingly, easing tensions with China helped to offset persistent uncertainty in Turkey.
Meanwhile, the ostensible ease in trade tensions was unable to lift U.S. crude high enough to avoid a seventh consecutive weekly decline in per-barrel value. Adding some selling pressure to the commodity market in recent days have been a weaker demand outlook and a surprising build in U.S. stockpiles. We think traders in this market are awaiting more tacit evidence that the U.S. and China are prepared to resolve their dispute before upgrading their recently pared back demand outlook for the oil market.
Overall, the Dow was the week’s biggest winner thanks to a combination of strong earnings and reassuring developments related to trade. The S&P realized a solid gain over the five-day period, though the tech-heavy NASDAQ contracted modestly since last Friday’s closing bell. With earnings season effectively over, it is likely that developments on U.S.-China relations, Turkey, and the economy will determine the equity market’s near-term performance when trading resumes on Monday. As always, 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
First, it was Turkey and that nation's growing financial woes; now, it is China, where tariff and trade talks between that economic powerhouse and the United States are seemingly about to resume. On point, when the news out of Turkey broke late last week, stocks faltered badly, losing a combined 350 points in the Dow Jones Industrial Average over the past four trading sessions, in the aggregate. However, after news of the pending talks with China surfaced, the market got a powerful lift to start the day yesterday. In all, the Dow raced ahead to a gain of more than 300 points shortly after trading commenced.
The reason for the sudden positive turn was renewed hope that a resolution of the trade dispute with China could be on the horizon. Investors also were impressed by the strong quarterly results from retailing behemoth Walmart Inc. (WMT – Free Walmart Stock Report). That issue jumped nearly 9% in the early going. Also doing well yesterday morning on strong profit news was Cisco Systems (CSCO – Free Cisco Stock Report). That issue, like Walmart, is a component of the Dow, raced ahead by nearly 4% early on. As for the trade talks, this pending occurrence was confirmed by the head of the National Economic Council, Larry Kudlow.
The issues over trade have been a stiff headwind for the stock market to deal with in recent weeks. It is believed the Administration wants the trade issues resolved before the midterm elections in early November. Meantime, in other news, weekly jobless claims dipped to 212,000 in the latest week, which was below expectations, while housing starts rose in July, but barely, and tallies were well under expectations. At the same time, building permits, a more forward-looking indicator, edged up 1.3% in July, reaching their highest level since April, in the process.
However, on this strong day for the bulls, it remained mostly about China and the possibility that tensions between our country and the world's second largest economy could be about to ease modestly. Should that, indeed, be the case, and we are by no means there as yet, the market likely would return to focusing on the economy and earnings. That would seem to be a bullish possibility for the Street, given the strong showings of late by both corporate profits and the business beat. For now, though, even the hope of lessened tensions seems enough to whet the appetite of the bulls.
Meanwhile, as the afternoon progressed, the market strengthened further, with the largest improvement by far in the Dow, which surged by more than 400 points in mid-afternoon, or 1.7%. That gain overwhelmed the more subdued increases in the S&P 500, the NASDAQ, and the smaller composites. Breaking things down, all of the 10 leading groups were higher late in the day, led by the telecom and consumer non-cyclical issues, where Dow component Procter & Gamble is domiciled. Also, gaining stocks were ahead of losing issues by more than three to one. The bears were clearly in retreat.
The market would then proceed to hold its gains into the close, with just minor pullbacks in the major composites. Overall, the Dow added 396 points; the S&P 500 was better by 22 points; and the NASDAQ ended ahead by 32 points. Looking to a new day now, and ahead of a report on the leading indicators, we see that shares rose in Asia overnight; in Europe, the major bourses are trading lower at this hour. Elsewhere, yields on the 10-year Treasury note, which climbed to 2.87% yesterday, are now at 2.85%. Equity futures were initially suggesting a higher opening when trading resumed later this morning following yesterday's big gains, but have since pointed lower.
- Harvey S. Katz, CFA
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
