Stock Market Appears To Focus On US-China Tariff News As US, Canada Continue Talks

As a week relatively light on economic data and corporate earnings reports continues, investors appear poised to continue digesting the latest headlines concerning trade tensions between Washington and Beijing.

Stock futures appeared to take a breather from yesterday’s rally, and the yield on the 10-year Treasury was above the psychologically important 3 percent mark. While higher longer-term yields can reflect optimism about the economy and boost banks, they can also spark worries about higher corporate borrowing costs and pressure utilities and other sectors considered to be “bond proxies."

In corporate news, Tesla Inc. TSLA shares fell yesterday and declined more in pre-market trading this morning after Bloomberg reported the electric car maker is under investigation by the Department of Justice after a tweet by CEO Elon Musk that said he had “funding secured” to take the company private. That investigation is reportedly in addition to a Securities and Exchange Commission civil probe.

Trade Winds

U.S. stocks gained ground on Tuesday, despite news of new U.S. tariffs on some Chinese goods and additional Chinese duties on certain U.S. products scheduled to go into effect next week, as well as President Trump’s reiteration of the potential for even more duties.

One theory for the seemingly counterintuitive market move is that the tariffs scheduled to take effect next week are lower than what they could have been. Another explanation is that some market participants could have been buying equities to close out of short positions.

“There is a positive bias, and traders are running with it for the time being,” Patrick O’Hare, chief market analyst with Briefing.com, wrote Tuesday. “That could be providing some fuel for short-covering activity that will make things look better initially than they might have looked otherwise.”

By starting out next-week’s tariffs at 10 percent, with the potential to raise them to 25 percent in January, the United States has kept open room for further negotiations.

In other trade news, the U.S. and Canada are scheduled to continue trade negotiations today. It remains to be seen what, if any, new deal comes out of continuing talks.

A Tale Of Two Sectors

The consumer discretionary sector was by far the best performing of the S&P 500’s 11 sectors on Tuesday, gaining 1.27 percent. The next best performer, the industrial sector, was up 0.89 percent. (See more on industrial sector performance below).

As of Tuesday’s close, consumer discretionary stocks were also the best performing sector over the past year, with the sector having gained more than 30 percent. That’s a better showing than technology stocks, the second-best performing sector over the past year. 

Because consumer discretionary stocks are considered cyclical, meaning that they often perform better when the economy is in growth mode but worse when there is a downturn, it seems that investors are using the consumer discretionary space as a proxy for exposure to the solid growth we’ve been seeing in the U.S. economy. 

On the other hand, consumer staples stocks are considered defensive, meaning that investors buy them with the idea that they will outperform other sectors when the economic going gets rough. So it’s perhaps no surprise that the consumer staples sector was among the poorest performers Tuesday, losing 0.44 percent even as their discretionary counterparts did better.

The biggest loser in the sector was General Mills (GIS) after an earnings report. In addition to the pressure from GIS, it also seemed like one of those days where investors were willing to expand into other sectors, such as more discretionary names, perhaps booking profits in consumer staples because of that sector’s defensive nature. 

Figure 1: A Positive Spin On Higher Rates: Some might feel trepidation about the 10-year Treasury note yield hitting its highest level in four months, as it did Tuesday. But another way to look at it is to see optimism about the economy and consumers, and that’s arguably evident in the performance of the consumer discrepancy sector (purple) line over the same time period shown in this six-month chart. Data Sources: Cboe Global Markets, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Sector Strength

A couple of sectors that often come under pressure from China trade worries—industrials and materials—both held their own Monday. Industrials also performed well on Tuesday, and materials were up slightly.  Strength in these sectors could reflect some investors looking for dividend names. For instance, shares of Deere (DE) and Caterpillar Inc. CAT—two firms that have historically paid dividends—were among the gainers Monday despite both companies potentially having exposure to China tariffs. Remember, outside of utilities, staples, and telecom, which are traditional dividend sectors, industrials have one of the highest average sector yields. That could partially explain some of the sector’s recent strength.

52-Week Highs

A number of stocks have hit 52-week highs, and one of the interesting things about this phenomenon is that it’s been across different sectors. That’s often an indicator that stock market strength could be broad-based. It comes against a backdrop of a strengthening economy, based on recent economic data, as well as generally solid corporate earnings growth. Another interesting note about the apparently broad-based nature of the stock market’s current strength is that it’s coming as the FAANG names are not at their 52-week highs. Facebook, Inc. FB, Apple Inc. AAPL, Amazon.com, Inc. AMZN, Netflix, Inc. NFLX and Google parent Alphabet Inc. GOOG GOOGL can have tremendous sway over the broader market because they are so widely held and so large in terms of market capitalization. Although AAPL has been doing well, the FAANG stocks as a whole don’t seem to be in the driver’s seat of the market’s strength at the moment. Perhaps a bit counterintuitively, that could be an argument that the market is healthy overall given its strength even without FAANG leadership.

Leading Indicators

This week is relatively light in terms of economic reports scheduled for release. But one of the data points — the Conference Board’s Leading Economic Index — is basically a one-stop shop for many key economic indicators. The latest reading for the composite index is scheduled for release on Thursday and is expected to show a gain of 0.5 percent, according to a consensus of economist estimates provided by Briefing.com. That would be a slightly less robust number than the July reading of a 0.6 percent increase but would still keep the figure in line with what Briefing.com said of the July data: “The key takeaway from the report is that it points to a sustained pace of economic expansion for the foreseeable future.”

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