After The Close
The stock market opened sharply lower this morning, and was able to selectively recover some ground in the afternoon. At the close of trading, the Dow Jones Industrial Average was down about 181 points; the broader S&P 500 Index was off 10 points; but the NASDAQ was higher by six points. Meanwhile, market breadth showed some underlying weakness during today’s session, as decliners outnumbered advancers on the NYSE. From a sector perspective, the industrial and noncyclical consumer stocks retreated, while energy and technology issues forged ahead.
Traders received no notable economic reports today. Tomorrow, the Conference Board will release its consumer confidence figure for the month of September. Looking ahead, on Wednesday, the FOMC will wrap up its two-day meeting with an interest-rate decision. Some of today’s weakness may reflect speculation that another small rate hike will be approved. Also, many on Wall Street may have concerns that relations with China are souring further, as more tariffs are being implemented, and negotiations seem to have stalled.
In corporate news, it was a quiet day in terms of earnings reports. However, in the M&A space, Barrick Gold (ABX) has agreed to acquire Randgold Resources in a roughly $6 billion stock-based transaction. The deal, assuming it closes, will create the world’s largest gold mining company.
Technically, stocks have pulled back a bit today, consolidating some of the gains made over the past week, or so. Looking ahead, traders will likely want to see a healthy third-quarter earnings season, and possibly some negotiations with China.
– Adam Rosner
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
Before The Bell
The U.S. equity market delivered a mixed showing last week, with some of the disparity in the performance driven by the uncertainty about how the ongoing trade dispute between the United States and China will affect the global economy in the coming months, The stock market has weakened when the world’s two-largest economies announce new rounds of tariffs and retaliatory measures. However, when sentiment emerges that the tariffs will ultimately lead to the two superpowers meeting at the bargaining table and coming to agreements on trade, the major international equity averages tend to rally, as global investors add riskier assets to their portfolio. And with a relatively light stretch for earnings and economic news last week, the aforementioned scenario was on display on Wall Street.
For the five-day stretch, the Dow Jones Industrial Average and the broader S&P 500 Index produced respective advances of 2.3% and 0.8%, while the technology heavy NASDAQ and the small-cap Russell 2000 finished 0.3% and 0.5% lower, respectively. In general, we witnessed some sector rotation, both at the broader and the industry-specific levels. There was some rotation out of the more domestically dominated small-cap sector and into some of the larger, more internationally driven areas. We think this was the main reason for the outperformance from the Dow Jones Industrial Average, which is mostly comprised of multinational companies. Sentiment among many market pundits that the tough stance from Trump Administration on trade with China—whose economy is more reliant on export activity than the United States—is a tactic to get China to the bargaining table and may ultimately lead to new trade agreements, which benefited the stocks of the multinational companies. On an industry level, the most notable rotation was out of the higher-yielding groups (i.e., utilities, consumer staples, and telecom) and into the financial and commodities sector. The recent uptick in fixed-income yields, which helps the earning power of the banks and insurance companies, was the main reason why the financial stocks were in favor. Conversely, rising bond yields make the higher-yielding equities less attractive to income-oriented investors, Hence, the pullback seen in the high-yield area.
Speaking of fixed-income yields, interest rates will be a big focus of Wall Street this week, as the Federal Reserve begins its two-day monetary policy meeting tomorrow morning. The prevailing sentiment is that the central bank will announce a 25-basis-point interest-rate hike on Wednesday afternoon (the Fed statement is due at 2:00 P.M. EDT). Our sense is that the market has already baked into its valuation two more rate hikes this year (this week and in December), so the monetary tightening is unlikely to have a major effect of the direction of the equity market. What might have some impact is just how hawkish the lead bank appears to be about monetary policy in 2019. Nevertheless, investors would still be wise to keep a close eye on the aforementioned high yielding and financial stocks, as their performance may well be dictated near-term by the Fed’s monetary policy stance.
Meantime, we also will get some economic data this week, highlighted by reports on consumer confidence and new home sales. We will also get the final revision to the second-quarter GDP estimate, which currently stands at 4.2%. In general, the U.S. economic data have proved highly supportive for the domestic equity market and served as a nice offset to the worries about the international trade front, which have been present since the U.S. first began imposing tariffs on goods from foreign counties on March 1st. The economy remains a focus for the equity market during this quiet period for earnings news. Speaking of earnings, Dow-30 component Nike (NKE - Free Nike Stock Report) will release its latest quarterly results tomorrow. This report could be an indicator of how the retailers performed during the third quarter. A few weeks ago, the retail sales figures for August were uninspiring.
With less than an hour to go before the commencement of the new trading week stateside, the equity futures are indicating a modestly lower opening for the U.S. stock market. News that U.S. regulators went ahead with a planned 10% tax on a $200 billion of China-produced goods, and that China’s government responded with tariffs on $60 billion of American-made products is appears to be behind the slightly bearish mood this morning. Investors should note that President Trump will be speaking before the United Nations General Assembly this week on trade and his “America First” policies. His prepared remarks may have an impact on the global equity markets on what will be a busy week of news for Wall Street. Stay tuned.
- William G. Ferguson
