China, U.S. Back Away From Trade War, Helping Market Sentiment

Favorable trade winds continue to fill the market’s sails this morning.

After stocks rallied yesterday on news that the potential trade war between the U.S. and China was being put on hold, the positive news flow continued. China said it would cut tariffs on car parts and vehicles, and President Trump may lift the ban on U.S. companies selling to Chinese smartphone and telecommunications maker ZTE (ZTCOF), according to media reports.

Kohl’s Shakes Off Winter Blues

Adding to positive sentiment, Kohl’s Corporatrion KSS reported better-than-expected earnings and revenue, and same-store sales were up 3.6 percent. It’s interesting that the company was able to do this despite wintery weather, particularly in areas where Kohl’s stores are concentrated. The company’s  shares were up more than 5 percent in premarket trading. 

We’ll see how other retailers’ results come in. If they’re also better than expected, that could point to a robust U.S. consumer sentiment. Target Corporation TGT, Lowe’s Companies, Inc. LOW, Gap Inc. GPS, Foot Locker, Inc. FL, and Tiffany & Co. TIF are among the big names scheduled to report this week. Last week saw mixed signals from retailers, with Macy’s Inc. M and Walmart Inc. WMT both delivering impressive results while J.C. Penney Company Inc. JCP and Nordstrom, Inc. (JWN) received poor reviews from the Street.

Automakers Accelerate in Pre-Market On China Fortunes

In auto news, General Motors Company GM, Ford Motor Company F and Tesla Inc. TSLA gained on the trade news, as China is an important market for them. Meanwhile, AutoZone, Inc. AZO reported earnings that handily beat expectations. This may reflect some of the nervousness about the market during the period of the company’s results. When there are jitters about the market and economy, people can hold off on buying new cars in favor of working on their own car. If worries continue to ease, investors might want to consider watching what sales of new cars do.

On Monday, U.S. stocks gained across the board after Treasury Secretary Steve Mnuchin said that the U.S. would hold off on any tariffs against China as the two countries continue their trade talks.

The news especially helped the Dow Jones Industrial Average ($DJI), which gained more than 1.2 percent to clear the 25,000 level for the first time since March. The industrial sector was the biggest gainer among the S&P 500 (SPX) sectors, which were a sea of green.

Worries about U.S.-China trade have dogged Wall Street. So signs that things appear to be thawing between the world’s two biggest economies seemed to come as a relief to many investors.

Also in industrial news, shares of General Electric Company GE climbed nearly 2 percent, apparently helped by positive sentiment surrounding its agreement to merge its transportation business with Wabtec (WAB), which makes railroad industry equipment.

FIGURE 1: CHINA HELPS LIFT INDUSTRIALS. The industrial sector (purple line) has been on the upswing lately and got further help yesterday from an easing of trade tensions with China, which theoretically could help big industrial companies that do lots of business there. Meanwhile, consumer staples (blue line) hasn’t gotten much of a lift despite strong retail earnings, and both industrials and staples trail the S&P 500 (SPX, candlestick). 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.

Small Caps and the Dollar

The U.S. dollar has been on an upswing against other major currencies in recent weeks. That can be an ill omen for U.S. companies that sell into foreign markets because it can make their goods more expensive overseas, putting them at a disadvantage. These companies tend to be large multinational firms with big market capitalizations. So, if you’re worried about how a stronger dollar might affect, say, blue chips, you may want to consider small-cap stocks. These companies tend to have less international exposure, so they can be a good place to be now if you’re concerned about the dollar, Rick Wedell, chief investment officer with RFG Advisory, said Monday.

FOMC Minutes

Tomorrow, the Fed is scheduled to release minutes from its last meeting. As you’ll recall, the central bank left its key interest rate unchanged at its May meeting. It noted that inflation is near its objective of 2 percent. That indicates the economy is humming along nicely, but probably not so hot as to cause concerns about inflation. The not-too-hot, not-too-cold reading has been described as a Goldilocks scenario for the economy. What could be interesting is if the Fed minutes this week give us any clues for how long the Fed thinks this might last and, especially, what policymakers might be thinking about a potential fourth rate hike this year.

The S&P and 3%

There’s been plenty of worry in the stock market about the yield on the 10-year Treasury moving above 3 percent. Investors appear worried about what that says about inflation, the potential for the yield curve to invert, and what it could portend for corporate borrowing costs. But a historical perspective may offer some insight. Since 1953, the S&P 500 Index (SPX) has actually gained in price whenever the 10-year Treasury yield rose on the month, up to a point, according to investment research firm CFRA. That held true even when the yield was between 5 percent and 6 percent. It wasn’t until you get above 6 percent that the average monthly SPX price started to decline. “While there is no guarantee that history will repeat, we think the rise in the 10-year yield above the 3 percent threshold is not something to fear,” the research firm said. “Indeed, it is likely reflecting the optimism toward the health of the U.S. economy.”

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