Back To The Grind: Iran Fears Ease, So Focus Turns To Jobs, Fed Speakers, Earnings

And now back to your regularly scheduled programming. 

At least that’s the way it feels early Thursday, with the market riding higher in pre-market trading as geopolitical fears ease and investors contemplate news of China’s vice premier heading to Washington next week for a trade deal signing ceremony.

Crude, which fell below $60 a barrel for the first time in almost a month yesterday, is trading right around that level this morning. It’s down from highs above $65 earlier this week when concerns about Iran peaked.

All the positives might outweigh some of the negatives, including Kohl’s Corporation KSS shares falling nearly 6% overnight that same-store sales fell  0.2% in November and December. J.C. Penney Inc. JCP shares fell, too, on disappointing holiday sales. This follows a slight sales drop for Macy’s Inc M, so the year starts with more disappointment at the mall, it seems.

Meanwhile, Bed Bath & Beyond Inc. BBBY is down double-digits in pre-market trading after earnings missed expectations and the company withdrew its outlook for the year. So far, it hasn’t been a good day for retail. As much as we hear about the consumer being healthy, it looks like some stores are struggling. However, in retail, it’s often an individual story for each company, so a tough quarter for some might be a great one for others. 

Turnaround Wednesday?

Turnaround Tuesday came one day late this week, but bullish traders probably welcomed it anyway. After every sector fell on Tuesday, all sectors but one rose on Wednesday as Iran and the U.S. walked back from confrontation. Markets pared their gains in the last minutes yesterday after word of missiles hitting Baghdad. A day later, it looks like that particular fear might have been overblown, but it does point out how skittish the market remains.

Though Wednesday might have come as a relief to anyone who was on the edge of their seat watching the news Tuesday night, we’re not necessarily out of the geopolitical woods yet. The latest developments seem encouraging, but the Middle East is still a potential flash point that could keep people on edge over the next few weeks. It’s probably a good idea to keep positions a bit smaller than usual, even though volatility has declined. 

With some of the fear banished at least for one session, a few “defensive” parts of the market went into retreat Wednesday. Namely bonds, where the 10-year yield jumped all the way up to 1.87% by the end of the day. It had fallen below 1.8% a few days back as bonds rallied. Gold also took a step back after climbing above $1,600 an ounce earlier Wednesday, its highest level in nearly seven years. 

Semiconductor stocks helped lead the gains through most of the day Wednesday, but fell from their highs in the last hour. This might have been profit-taking, because the sector has been rolling up new highs for weeks. It’s quite a change from a year ago when chip makers looked like they were on the ropes, in part due to inventory issues. Those issues appear to now be behind, at least for many companies.

Energy Misses The Party

The sector that didn’t react positively to the Iran news? Energy. Some of the heaviest losses occurred in shares of oil producers like Exxon Mobil Corporation XOM and oil field services companies like Halliburton Company HAL. Those two took haircuts of 1.5% to 2.5% as U.S. crude futures slipped below $60 a barrel for the first time since Dec. 15 intraday.

As we noted here a few days ago, crude seems to have its work cut out for it if it’s going to test $70 a barrel for the first time since 2018. Even the military skirmishes in the Middle East didn’t really get prices too close. A surprise gain in U.S. weekly supplies reported Wednesday by the government didn’t help, either. Now crude is just trying to hold $60.

The blow to crude looked like a relief for transport stocks, with many airline and shipping company shares rising Wednesday and the Dow Jones Transportation Average ($DJT) posting gains of nearly 1%. The $DJT, sometimes thought of as a leading indicator, lags the S&P 500 Index (SPX) by quite a bit over the last year despite generally low crude prices and solid consumer demand. With some exceptions, shipping, railroad, and airline shares haven’t enjoyed the same sort of rally as the broader market since a year ago (see chart below). 

Earnings, Fed Speakers, Jobs All Straight Ahead

More earnings are straight ahead, and many analysts expect continued softness from Q4 results. The latest estimate from S&P Global Market Intelligence is for a 2% earnings per share drop among S&P 500 companies in Q4. The firm expects things to improve in Q1 with 3.7% growth and sees full-year 2020 gains of 7.8%.

Data today look a little light, with everyone getting ready for tomorrow morning’s non-farm payrolls figure. Consensus on Wall Street is for a December job gain of 160,000, according to Briefing.com, down from 266,000 in November. Keep in mind, however, that the November figure might have gotten artificially inflated by General Motors Company GM employees returning to work after a strike.

If tomorrow’s headline number comes in as analysts expect, it would represent very solid growth not far from the long-term monthly average. Remember that even job gains of 100,000 a month would probably be enough to keep up with population growth, economists say. Weekly jobless claims of 214,000 reported Thursday morning were unremarkable from a statistical standpoint. 

It’s been a while since Fed speakers were on the agenda, but a bunch of them appear today. The list includes Minneapolis Fed President Neel Kashkari, New York Fed President John Williams, Richmond Fed President Tom Barkin, Chicago Fed President Charles Evans, and St. Louis Fed President James Bullard.

It might be tough to keep track of it all, but we’ll see if any of them have something illuminating to say about the economy. The next Federal Open Market Committee (FOMC) meeting is still a few weeks away.

CHART OF THE DAY: TRANSPORTS CAN’T KEEP PACE: Over the last year, the Dow Jones Transportation Average ($DJT-purple line) has lagged behind the S&P 500 Index (SPX-candlestick). Sometimes transports are seen as a leading indicator of economic health, so the recent small gains might be cause for some hope. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

What Could Change in the 20s? Emerging market stocks struggled in the decade that just wrapped up even as U.S. stocks soared to one record high after another. A commodities crash around mid-decade and slowing Chinese growth both helped keep emerging markets down on the mat over the last 10 years, but now that might be changing, according to some analysts. Innovation has seemed focused in Western countries, one reason markets in the U.S. and Europe have outpaced developing markets.

However, Barron’s reported recently that China, South Korea, and Taiwan are rivaling the West in the next wave of technology, including batteries, gene therapy, and telecommunications equipment. Improved financial infrastructure for start-ups in China could also help developing markets in the decade to come, the article said. Easier access to the public market for these start-ups could mean many private firms with $1 billion valuations appearing on stock exchanges over the next few years.

Soft IPO Market in Spotlight as Banks Report: Many of the big banks begin reporting next week, and one question mark for major investment banks is the initial public offerings (IPO) market. After new offerings swelled to nearly 20-year highs in the first half of 2019, several high-profile disappointments appeared to clip IPO interest in the second half.

That could potentially be a drag on bank profits. Most tech companies that went public closed 2019 below their first-day opening prices and at least nine closed below their IPO prices. Shares of Uber Technologies Inc UBER, Lyft Inc LYFT, and Slack Technologies Inc WORK ended the year down 40% from their first-day opening prices, on average, The Wall Street Journal said. General weakness in the IPO market since the middle of last year might reflect growing reluctance among public investors to accept inflated private market valuations—a sentiment that sharpened after the WeWork IPO flameout, the paper reported.

Musk Gets Praise: The recent rally to all-time highs for Tesla Inc TSLA occurred as it successfully rolled out the Model 3, opened its plant in China, and surpassed the Street’s production estimates. While all that is important, so is the company’s ability to cut costs, said former GM executive Bob Lutz, interviewed on CNBC yesterday. As CNBC pointed out, Lutz has been a critic of Tesla and its CEO Elon Musk. On Wednesday, Lutz praised TSLA, saying, “Tesla is finally being run like a normal business.” He added, "Musk finally reined in his costs.

He’s reduced personnel and reduced unnecessary expenditures and has basically done what any other businessman would do in a situation where you’re selling a bunch of stuff but you’re not profitable” on a sustained basis. Shares of TSLA raced to nearly 5% gains Wednesday and knocked on the door of $500 a share. The 52-week low was under $177.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

Image by Peggy und Marco Lachmann-Anke from Pixabay