Market Overview

Clock Ticking On Canada Trade Talks While Sector Rotation Seen

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The market might go into waiting mode Thursday, as trade talks with Canada just resumed and the August payrolls report drops tomorrow morning. The chance for additional tariffs on China also hangs over Wall Street. With all this up in the air, it’s possible investors could draw back a bit today and wait for the next shoe to drop.

Overnight hours saw Asian markets continue their retreat, but European indices stabilized slightly. Emerging markets are close to entering bear market territory, about 20 percent off their highs. 

It looks like a little sector rotation could be in the mix this week, as we saw tech stocks take it on the chin yesterday to help send the Nasdaq (COMP) to its worst day in a month and a half even as industrial stocks bounced. Is there any long-term meaning here? Perhaps, but not necessarily. People seem to be searching for anything meaningful, but still don’t know what to make of the tariff situation, so things could keep sloshing around, so to speak.

Can Tech Rebound After Rough Wednesday?

One question entering Thursday is whether tech stocks, which got slammed Wednesday, can make a comeback. The Nasdaq (COMP) took a big hit from weakness in tech stocks including Twitter Inc. (NYSE: TWTR) and Netflix, Inc. (NASDAQ: NFLX). Both TWTR and Facebook, Inc. (NASDAQ: FB) were back in the privacy spotlight due to testimony by their executives in Washington. 

Earlier this year, the social media sector took a dive amid scrutiny over companies’ ability to protect accounts, and that scrutiny could now be growing as the November elections approach. Nothing really new came out of Wednesday’s testimony, by the way, but just having the companies back in front of Congress might have caused some nervous selling.

NFLX plummeted more than 6 percent Wednesday on what some analysts said was technical weakness, but the stock was still up 89 percent for the year going into this week and also moved higher in pre-market trading Thursday. The next big milestone for NFLX, and for FB, could come once earnings season begins and investors get a look at Q3 user growth. Both companies got tripped up on that metric last time out. 

Consumer discretionary also got hit Wednesday, mainly from a more than 2 percent drop in Amazon.com, Inc. (NASDAQ: AMZN). This might just be some profit-taking after the stock hit $1 trillion in market value Tuesday.

Feeling Down? Recent Losses Not Too Steep

Despite the recent market weakness, keep in perspective that stocks really aren’t down too much from last week’s all-time highs. The S&P 500 (SPX)—which rose about 3 percent in August and hit a record intraday high of 2916.5 late in the month—is now down less than 1 percent from that peak. Nasdaq (COMP) fell more than 1 percent percent on Wednesday to just below 8000, but remains less than 2 percent off its August high of 8133.3.

In addition, the bond market has been relatively flat, maybe a sign that investors aren’t getting ready to flee for the exits. The 10-year yield has been holding at around 2.9 percent as of mid-week, near the middle of its recent range. The yield appears to have found technical support down at around the 2.8 percent level, which it tested late last month. Any move back toward that area could raise more concern that investors might be getting nervous about geopolitics, so it might bear watching.

Crude oil has pulled back a little this week, dropping below $70 a barrel as a Gulf storm sputtered out and demand fears, partially related to China (see more below), started to surface. Emerging markets have been hit hard lately, which could also keep oil prices in check. A weaker oil market might signal economic softness, but it could potentially underpin transport stocks by reducing their costs and perhaps helping margins. However, low oil prices would have to persist a while longer for that to become a major factor.

Seasonal Factors In Focus

Volatility continued its slow grind higher Wednesday,  as the VIX rose to around 13.6 by day’s end and then climbed to 13.9 by Thursday morning. That’s still below historical norms, but elevated compared to lows of around 11 back in the summer months. 

Another thing to keep in mind is seasonality. September is often a relatively weak month, though history doesn’t necessarily repeat. In addition, markets sometimes tend to rebound after midterm elections (again, no guarantees, but that’s the historic pattern). 

With all that on the plate and earnings season well behind, it’s possible some investors are consolidating positions. That might be playing into the slight weakness that began about a week ago. Volume, meanwhile, has been pretty decent, though not spectacular. There’s been a lot of movement in the FAANG stocks, particularly in AMZN yesterday, and that’s helped keep the action moderate.

Looking for a Spark? M&A News In Health Care

One bullish item Wednesday came in the health care sector, as The Wall Street Journal reported that the Department of Justice is close to approving CVS Health Corp. (NYSE: CVS) acquisition of Aetna Inc. (NYSE: AET) and Cigna Corporation (NYSE: CI) acquisition of Express Scripts Holding Co. (NASDAQ: ESRX). Both deals could receive formal antitrust approval as soon as the next few weeks, the paper said, citing unnamed sources. The Wall Street Journal is often seen as a reliable source by the mergers and acquisitions community.

While those mergers are in health care, the Justice Department’s apparent move toward antitrust approval in this sector might help raise optimism that the department could become more open to approvals in other merger cases. On the other hand, the department is still appealing a federal judge’s approval of AT&T Inc. (NYSE: T) proposed $85 billion merger with Time Warner.

2018-09-06-chart.jpg FIGURE 1: Checking the Barometers: Two markets sometimes thought of as economic barometers have moved in different directions recently. The Dow Jones Transportation Average ($DJT), shown here year-to-date in candlestick form, continues to climb and remains near all-time highs. But copper (purple line), exposed as it is to emerging market demand, is sagging. Data Source: S&P Dow Jones Indices, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Payrolls Up Next

Of all the data this week, none are likely to move the market more than Friday morning’s monthly payrolls report. In July, job creation slowed slightly to 157,000, but the government upwardly revised the June and May numbers and wage growth stayed steady at 2.7 percent. For August, analysts expect jobs growth to rebound a bit to 187,000, according to the consensus reading from Briefing.com. Average hourly earnings are seen rising 0.2 percent, down from July’s 0.3 percent growth, and the unemployment rate is seen remaining at 3.9 percent. 

Once again, it’s the year-over-year wage number that might get the most attention, as any move toward 3 percent might be viewed as a possible inflation signal. As for jobs growth, remember that even a figure down around 100,000 would still be enough to imply continued economic strength. Jobs growth averaged a solid 224,000 a month between May and July, so if we do get a headline number that’s an outlier (either up or down), it might be helpful to consider it in the context of the three-month average. Also check for labor force participation, which stayed at a low 62.9 percent last month. An uptick in that statistic might be seen as a sign that higher wages are drawing more people into the job market.

Flashing Lights

It’s probably too soon to be alarmed, but a few of the traditional market warning signs appear to be flashing. Commodity prices, including copper and crude oil, came under pressure early this week thanks in part to a weak economic reading out of China’s services sector. Demand for these key industrial commodities can rise and fall with the Chinese economy to some extent, so a drop in price might indicate rough sledding for that market amid its trade dispute with the U.S. In addition, emerging markets, which some analysts see as a barometer for the overall economic climate, are taking a tumble. Stock markets across the world from Indonesia to China to Saudi Arabia all came under pressure this week. A strong dollar, along with fears of Argentina and Turkey’s currency softness, seemed to be among the key factors. Back here in the U.S., some of the cyclical stock market sectors like info tech and energy were among the worst performers, another sign that investor caution might be growing. 

Shifting Into Neutral?

A lot of debate around the Fed has centered on where a “neutral” interest rate might be that doesn’t encourage or discourage economic growth. Conventional wisdom on Wall Street is that it might rest up around 3 percent, where the Fed’s latest “dot plot” shows the Fed funds rate likely to approach sometime in 2019 (it’s between 1.75 and 2 percent now). Last month, Fed Chair Jerome Powell said that it’s unclear exactly what a “neutral” rate is, but on Wednesday, St. Louis Fed President James Bullard said we might be there already. “Financial market information suggests that current monetary policy is neutral or even somewhat restrictive today,” Bullard said in a presentation at an investor conference in New York, Bloomberg reported. 

Bullard, a non-voting member of the Federal Open Market Committee (FOMC) this year, has been seen as a dovish voice, and on Wednesday he warned about the narrowing yield curve between two-year and 10-year Treasury notes, now near its lowest level since 2007. After his speech, Bullard told reporters he expects the yield curve to go “inverted” later this year or sometime next year. Inverted yield curves have often accompanied recessions, though cause and effect are far from clear. Bullard also said the Fed’s latest projections for additional hikes are “too hawkish for the current macroeconomic environment.”

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