Market Overview

New U.S. Tariffs On China Lighter Than Some Expected, Potentially Lending Positive Tone

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Tuesday could be one of those days where the bad news isn’t quite as negative as people had thought, giving the market a potential lift.

Though the Trump administration did announce new tariffs on China late Monday, the mood seems a little more positive than yesterday. The 10 percent tariffs on $200 billion in Chinese goods are a bit lower than the 25 percent some analysts had anticipated, and European and Asian stocks posted gains earlier in the day.

One tariff-related item that could help the info tech sector today is the administration’s decision to exempt some U.S. tech products, particularly a couple made by Apple Inc. (NASDAQ: AAPL). Info tech was one of the weakest sectors on Monday, so we’ll see if it can bounce back.

Though tariffs seem like the topic du jour, it’s partly because there isn’t much other news and sometimes the market just reacts to the latest headlines. For long-term investors, it’s important to look beyond the daily news and keep your strategic goals in mind. Without much data this week, markets might keep acting choppy.

Earnings Make an Appearance

Investors received two important earnings reports late Monday from Oracle Corporation (NYSE: ORCL) and FedEx Corporation (NYSE: FDX). Shares of ORCL dropped sharply in post-market trading after the company posted earnings per share of $0.71—which beat the average Wall Street analyst estimate of $0.69—but came up short on revenue. 

ORCL’s cloud services and license support segment posted $6.61 billion in revenue. Analysts had been looking for the segment to hit $6.68 billion, CNBC reported.

There was also tough sledding over in the FDX corner after the market closed Monday. Shares fell in post-market trading after the company’s earnings per share of $3.46 per share missed forecasts calling for $3.80 per share. However, revenue topped expectations and the company raised its full-year profit outlook. 

FDX is often seen as a barometer for economic activity, especially in the consumer discretionary sector. So the higher than expected revenue could be a positive sign that shoppers are out there, though the lower than expected earnings per share potentially raises margin worries. FDX said “accelerated wage increases” were a factor in its quarter.

FDX recently said it would be hiring 55,000 seasonal workers for holiday season, and that has some analysts concerned about the possibility of potentially narrower margins for FDX and other major delivery firms as a tight labor market could mean drivers and other workers demanding higher pay. Also, fuel costs are up from a year ago, which could also have an impact on margins for companies like FDX that depend so much on energy.

New Week, Same Worries

Tariff worries helped end a four-day rally for the Dow Jones Industrial Average ($DJI) on Monday. Other indices also fell.

Two sectors appeared to take the brunt of the blow, as both info tech and consumer discretionary dropped more than 1 percent. These two sectors just happen to be the best-performing ones of the year so far, and their losses Monday could potentially reflect some sector rotation. The FAANG stocks, including Facebook, Inc. (NASDAQ: FB) and Amazon.com, Inc. (NASDAQ: AMZN), suffered heavy losses, and FAANGS as a whole fell more than 2 percent on the day. It wouldn’t be all that surprising if after the major gains so far in 2018, there’s some rotation into so-called “value” names. 

However, this isn’t necessarily in stone, and it’s never a good idea to make assumptions based on a day or two of trading. Remember that tech has bounced back from adversity again and again over the last year and a half.

A few of the sectors that sometimes do well when geopolitical concerns tighten their noose (utilities, telecom, and staples) were among the leading gainers Monday. The info-tech heavy Nasdaq (COMP) put in the worst performance of any major index as it posted its worst daily drop since July 27, while volatility spiked.

Data Watch

Looking ahead, some key housing data dominate. Building permits and housing starts for August come out Wednesday, and existing home sales for August are due Thursday (see more below). 

Over on the factory floor, the August Empire State manufacturing index fell to 19 in September from the prior reading of 25.6, but remains in relatively strong shape. The drop looks pretty sharp, but the prior reading was a 10-month high.

Another data point to consider watching this week is Wednesday’s weekly oil inventories report from the U.S. government. World supplies have been rising, but U.S. stockpiles fell sharply last week. There’s a significant amount of uncertainty about what might happen to Iran’s supplies. The open question is whether rising supplies in other countries can make up for any absence of Iran’s oil and lower U.S. stocks.

The oil market might have gotten an early boost Monday from weakness in the U.S. dollar.  The dollar index fell about 0.5% over the course of the day, and remains below its August highs.

Yield Tease

The benchmark 10-year Treasury note yield continues to play a little game with the 3% level, hitting again early Tuesday. The Fed meeting is coming up next week and the market is betting on a rate hike, so that could be one factor helping push yields higher. Any long-term move above 3% could potentially give the financial sector a lift.

Yields are up about 11 basis points since Sept. 7, the day the August payrolls data showed a 2.9% rise in hourly wages and raised some concerns about inflation. Last week’s consumer and producer prices didn’t seem too worrisome, but there’s a sense that the Fed wants to try and stay ahead of the curve on inflation and continue gradually raising rates so it doesn’t have to jack them up in a big way to fight inflation down the road.

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FIGURE 1:  Fall Hand-Off? It’s football season, so maybe a hand-off is in order. At least that seems like it might be the case, with some investors embracing industrials (candlestick) over the last month even as the high-flying info tech sector (purple line) seems to potentially be struggling to make more yards. 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.  

Real Estate Check-Up

A few cracks appear to be developing in the home market’s armor. For instance, housing prices in the Seattle area have roughly doubled since bottoming out in 2012, but they’ve started to retreat in the last few months. New monthly data out last Friday shows median home prices across King County fell $30,000 in August from July, the third straight month of declines. County-wide the median cost of a single-family house—now $669,000—is down by $57,000 since May, the Seattle Times reported. That’s actually counter to normal seasonal trends that typically see prices rise over the summer months. Seattle isn’t alone. Nationally, real estate demand also appears to be flattening a little. Tomorrow, investors will get the August building permits and housing starts data. In July, single-family housing starts rose just 0.9 percent. Analysts expect August housing starts to come in at a seasonally-adjusted 1.229 million, according to Briefing.com, up from 1.168 million in July.

Headline Scare

These days, it seems like you can’t pick up a newspaper or go online without seeing another headline about how some financial expert or economist thinks we’re on the verge of a recession, or that a “financial crisis” is around the corner. While you never want to be too sanguine about chances for an economic slowdown (because they eventually tend to happen), you also should consider putting these articles in perspective and not letting them make you another Chicken Little. Remember, the media often focus on negatives to sell their content. Some of the recent negative articles are worth a read and consideration, because they’re written by smart people with good points to make. However, no article is worth changing your long-term investing plan over. In the long run, data and earnings are probably the best places to get a sense of the economy.

Retail Squeeze?

Two pieces of data over the last couple of weeks potentially could raise some eyebrows about the retail industry. First, the August payrolls report showed a 2.9% year-over-year rise in hourly wages. That means retailers are probably putting a bit more money into workers’ paychecks. The second bit of data was last week, when retail sales for August rose just 0.1%. The question is why higher wages aren’t translating into retail spending. If workers aren’t using their 2.9% hourly pay rise and recent tax cuts to spend on retail items, it suggests retailers could feel the blow as it costs more to pay their employees. The September retail sales data out next month, along with Q3 retail earnings, could help provide a better picture of whether this is actually the case.

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.  

Posted-In: TD AmeritradeNews Bonds Treasuries Markets

 

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