Market Overview

Investors Appear To Like Small Caps Amid Continued Trade Worries

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Continuing worry over international trade has been weighing on stock futures, as investors appear to be worried about the implications for global growth and for large multinational companies. Meanwhile, the small-cap Russell 2000, which closed at a record high yesterday, starts the day slightly higher. See figure 1 below.

This week, President Trump threatened tariffs on an additional $200 billion in Chinese goods on top of the $50 billion he targeted last week. China responded tit for tat.

Investors have been worried about escalating trade tensions between the world’s two largest economies for some time now. In the U.S., it’s the major multinationals, chipmakers, and automakers that might come to mind as perhaps having the most to lose if trade relations decline further. (See more below.)

Tech Strength

Meanwhile, the Nasdaq hit another record high yesterday. This tech heavy index tends to be more insulated from trade fallout. China already has its own mega tech companies, so it’s not like U.S.-based tech companies don’t already have competition there, or so the thinking goes.

Micron Technologies, Inc. (NASDAQ: MU) was the biggest Nasdaq leader this morning in early trading as the chip maker reported sales and profit that apparently pleased investors. Its shares were up around 4 percent in pre-market trading.

Eyes on OPEC

Investors also appear focused on oil this morning. Crude is lower as traders look for the outcome of this week’s OPEC meeting that could result in increased global production. That could bode well for transportation companies for whom fuel is a big cost, but oil producers could end up taking it on the chin if prices drop meaningfully.

Risk-On?

On Wednesday, the Dow Jones Industrial Average ($DJI) continued its slide to end lower for the seventh straight session. The selling appeared to be a continuation of worries about U.S.-China trade.

But despite the continued worries about global trade, Wednesday was largely a "risk-on" type of trading day, as traditional safe-havens gold and the 10-year Treasury fell while the CBOE Volatility Index (VIX) also declined.

Entertainment and Food

On the other hand, the Nasdaq (COMP) had a record close at 7781, with its biggest gainer Twenty-First Century Fox Inc. (NYSE: FOXA) on news that Disney (DIS) had raised its bid for Fox assets to $71.3 billion in cash and stock. In a statement, Fox called the new Disney offer "superior" to a Comcast Corporation (NASDAQ: CMCSA)  proposal made last week. Fox also led the S&P 500 as a percentage gainer on the news, which comes on the heels of last week’s news that the mega merger between AT&T, Inc. (NYSE: T) and Time Warner got the go ahead.

Big M&A deals can spark optimism beyond the companies that are involved as they tend to be an indication of a certain amount of confidence in markets and the economy.

Among companies reporting earnings this morning, Darden Restaurants (DRI) beat analyst estimates on both the top and bottom line, and announced an increase in its dividend by 19 percent. Earnings came in at $1.39 a share vs. a consensus estimate of $1.34. Revenue came in at $2.13 billion, up over 10 from a year ago. In pre-market trading, shares were about 9 percent higher.

The results from DRI, parent company of many familiar restaurant chains such as Olive Garden, Capital Grille and Longhorn Steakhouse, may be a reflection of strong consumer sentiment. As we head into another earnings season, investors might want to keep an eye on consumer strength, as consumption comprises about 70 percent of the economy.

On the flip side, there wasn’t a lot of optimism about Starbucks Corporation (NASDAQ: SBUX) among traders on Wednesday. The market response was "decaffeinated," as SBUX shares lost more than 9 percent on worries about growth prospects for the coffee chain. It said it plans to close 150 U.S. stores next year and issued a disappointing same-store growth estimate. Starbucks could also face pressure on overseas sales because of a strengthening U.S. dollar.

rut-dji-6-21-18.pngFigure 1: Small Cap Surge.  The Russell 2000 Index (RUT - candlestick chart), comprised of small-cap stocks, touched another new high Wednesday, even as the Dow Jones Industrial Average ($DJI - purple line) moved lower for its 7th day in a row, reflecting in part the likelihood of trade tensions favoring smaller, domestic firms over blue-chip multinationals. Data source: S&P Dow Jones Indices, FTSE Russell. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

A Harbor From Trade Winds

As trade tensions continue, many investors seem to have considered exposure to sectors that theoretically aren’t as exposed to the fallout. Utilities are considered one such sector that isn’t likely to be affected as much as some others. The risk to the utilities sector may be if interest rates rise suddenly. But in the current environment of gradually rising rates, that risk appears muted.

Content Reigns

You’ve probably heard the phrase “content is king” before. Nowadays, it appears that statement is as true as ever. Take Netflix, Inc. (NASDAQ: NFLX) for instance. Its shares gained nearly 3 percent Wednesday. Meanwhile, Facebook, Inc. (NASDAQ: FB) Instagram is now supporting hour-long videos in a move apparently designed to challenge Alphabet Inc. (NASDAQ: GOOG) YouTube platform.

Windows Into Housing Market

Housing data this week has been mixed. Month-over-month numbers showed housing starts jumped 5 percent in May to a more-than-expected seasonally adjusted 1.350 million units. But building permits declined by almost the same percentage to a less-than-forecast 1.301 million units. “The key takeaway from the report is that permits – a leading indicator – declined for both single-family units (-2.2 percent) and multi-unit dwellings (-8.8 percent), suggesting there might not be follow-on strength for badly needed single-family homes in June,” according to Briefing.com. But the permits data are paired with strong housing starts numbers that come amid a bevy of other decent economic data, perhaps mitigating some of the concern over permits.

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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