Market Overview

As Anticipation Firms For Trump/Xi Meeting, Focus Is On Earnings, Iran Tensions

As Anticipation Firms For Trump/Xi Meeting, Focus Is On Earnings, Iran Tensions

This week is all about anticipation, as everything arguably comes down to the meeting between Presidents Xi and Trump at G20 starting Friday.

With this big event on the near horizon, it looks like we might be back in “risk-off” mode as people buy bonds hoping for protection. Treasury yields are under pressure again this morning and the Cboe Volatility Index (CBOE) remains above 15 even though stocks are near all-time highs. These are often signs of caution.

A big thing to consider is that aside from the G20, there’s not a lot of news this week, so investors might want to be very, very careful moving in and out of the market. 

A Little Earnings In the Mix

Earnings season doesn’t officially start until mid-July, but it might not seem like it by mid-week. A host of major companies—some of which could deliver important tidings on consumer health and the trade situation with China—share results this week.

Some of the companies reporting between now and Friday include homebuilding firms Lennar Corporation (NYSE: LEN) and KB Home (NYSE: KBH), FedEx Corporation (NYSE: FDX), Micron Technology, Inc. (NASDAQ: MU), and last but not least, Nike Inc (NYSE: NKE). In all, 10 S&P 500 companies report this week.

The homebuilders might be worth a look for what executives say about consumer demand for big-ticket purchases at a time when the economy appears to be slowing a bit. The housing market might be on slightly firmer footing judging from recent data, but it’s probably not out of the woods yet despite lower mortgage rates.

FDX is often considered a key barometer of consumer health as well, and NKE and MU could provide new insights into their industries’ issues with China tariffs. Both semiconductors (MU) and shoes (NKE) are products very close to the heart of the trade battle, and NKE’s Asian business was off the charts the last time it reported.

Getting back to Asia, many investors hope some sign of trade progress could emerge from the meeting between Trump and Xi at the G-20. A major breakthrough seems highly unlikely, but some analysts say it might cheer the market if there’s a handshake and the promise of more talks. It would also help to hear that the U.S. plans to postpone any additional tariffs. Those aren’t necessarily the outcomes, of course, but they’re arguably the most positive takeaways to realistically consider hoping for.

Don’t discount the possibility of a negative outcome, either. If the two leaders meet and can’t get on the same page, both countries’ follow-up remarks might put trade talks in a negative light and dampen investor enthusiasm. There’s also the possibility for a repeat of last year’s conference in South America, when a statement came out a week later contradicting everything we heard out of the meeting. With so much riding on this meeting, investors might want to consider caution.

Early Monday, the news flow was pretty light following gains in Asia overnight and softness in Europe. Tensions with Iran continue to be a theme, with the U.S. threatening new sanctions. Crude prices continued to rise amid the Iran drama, and Treasuries also moved higher. The 10-year yield is back down to 2.03%, not far above last week’s lows and maybe a sign of a potential “risk-off” tone.

Entering Potentially Volatile Stretch Ahead of July 4 Holiday

Despite the crowded earnings calendar this week, we’re soon headed into the July 4 holiday period and kind of a slow corporate news cycle, which means possible low volume and extra market sensitivity to any major headline or tweet that shows up on the financial news programs. If you’re a long-term investor, it might be a good idea not to get too caught up in every tick of the market as the holiday approaches.

It’s not really fair to read too much into Friday’s slightly lower close, especially considering that the S&P 500 Index (SPX) finished up more than 2.4% for the week and set a new all-time intraday high above 2960 on Friday. Still, it was the first decline since June 14 for the SPX, and, as noted, stocks traded in a tight range and without much conviction on the last day of the week. 

The Nasdaq (COMP) also finished down on Friday, hurt by some China-related pain in the semiconductor sector. Reuters reported that the Department of Commerce barred several more Chinese supercomputing companies from purchasing parts from U.S. companies. The Philadelphia Semiconductor Index lost 0.7%.

However, the struggling semis weren’t really representative of how the Technology sector as a whole performed lately. It was second on the leaderboard last week behind Energy as stocks like Apple Inc. (NASDAQ: AAPL), Nvidia Corporation (NASDAQ: NVDA) and Microsoft Corporation (NASDAQ: MSFT) did well. The strong outcomes for Technology and Energy, along with gains in cyclicals like Communication Services, Consumer Discretionary, and Industrials over the last five sessions was a refreshing change from most of the last month when “defensive” sectors like Real Estate and Utilities led the way. 

“Risk-Off” Train Hasn’t Necessarily Left the Platform

Some of the “momentum” stocks like Energy and Technology have performed well, but it does seem like many people are still searching for yield.

Another possible concern is that, as one analyst pointed out, each market high over the last few months has come with fewer S&P 500 stocks above their 200-day moving average. That’s kind of like the scenario we had a year ago when the FAANGs kept zooming into the stratosphere but much of the market acted sluggish. For a lasting rally with real momentum, it’s better to see lots of companies from various sectors all moving higher in sync.

Stocks conceivably could also be a bit more vulnerable than normal if the geopolitical drama accelerates this week, especially around Iran. That’s not just because they’re at historically high levels, but also because the S&P 500 forward price-to-earnings (P/E) ratio is back above 17. That’s slightly higher than the historic average of around 16, and up from below 15 at the end of 2018. The higher valuations might stem in part from hopes of a rate cut or series of rate cuts that would potentially spark borrowing activity and drive profits higher. 

Figure 1: COMMODITY COMEBACK STILL EARLY: It’s tempting to look at what copper (candlestick) and crude (purple line) have done the last week or two and talk about a comeback for beaten-down commodities. If that’s happening, though, both have a ways to go to catch up to where they were earlier this year, as this six-month chart demonstrates. Data Source: CME Group.  Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Full Basket of Numbers: The final week of the quarter is packed with economic data following last week’s signs of life in the housing market. The most recent data—existing home sales for May released Friday—came in a bit higher than analysts had expected and up month over month. Sales were still down slightly from a year ago, but it looks like lower mortgage rates might be sparking some home-buying activity. The median home price rose nearly 5% in June to another record high, and lower rates might be driving some people to buy more house than they would have maybe six months ago. 

There’s more housing data this week, with new home sales for May due on Tuesday. Thursday brings the government’s third estimate for Q2 gross domestic product (GDP). It was last seen at 3.1%, but that’s a trailing indicator, and many people might be more focused now on a first look at Q2 GDP due in late July. University of Michigan sentiment and durable goods are among the other reports market participants might have their eyes peeled for as the week advances. Monday, however, brings no major new numbers.

Strange Days, Indeed: On the face of things, this is a slightly odd-looking market. We have stocks making new record highs even as 10-year Treasury yields sink to their lowest levels since late 2016 and gold touching its highest point since 2013. The Treasury market remains inverted. In other words, investors are embracing risky assets (stocks) and at the same time running away from risk, it seems. 

One analyst speaking on CNBC recently said this might not be as out of sync as it sounds. He noted that if you look at what’s led the stock market over the last nine months or so, it’s the “defensive” sectors like Utilities, Health Care, Staples, and Real Estate, all of which tend to do better in cautious times. Last week saw a slight change in that, with more strength in the so-called “cyclicals” like Energy, Financials, and Technology, all of which often do better in a booming economy. Technology is the second-leading sector this month. It’s unclear if this is a temporary trend or has any staying power, but it could be key to whether the broader rally continues. That’s because some analysts believe defensive sectors look a bit overbought and might face some profit taking. 

Do-It-Yourself Crude Supplies: The counter to the crude price run-up is that the U.S. is a lot less dependent on Middle Eastern oil than it was, say, going into the 2003 Iraq war. At that time, U.S. daily crude production was around 5.8 million barrels, according to the U.S. Energy Information Administration (EIA). That compares with average U.S. production recently above 12.2 million barrels a day. Also, U.S. imports are down moderately from 2003. Back then, U.S. daily imports of crude averaged between 8 million and 10 million, compared with 6 million to 7 million barrels a day now. 

This home-grown supply and less dependence on imports potentially could give the U.S. a bit of padding against any possible blockage of crude coming out of the Persian Gulf. Still, a situation where crude can’t make it to markets might pose a serious threat to China and Japan, which source much of their oil from the Middle East. Remember, too, that there already are some supply issues in oil-producing countries like Venezuela and Libya, and a Persian Gulf skirmish could exacerbate the impact of those shortages. As we’ve seen in recent years, China’s economy can drag down others if it starts having issues, and an oil shortage would be a serious threat to China’s growth. That means the U.S. having bigger crude supplies of its own won’t necessarily allow it to escape economic impacts from tangling with the Islamic Republic.

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.


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