Doubt Appears To Creep Into Stock Market On News Flow

Although stocks have been chalking up gains in recent days, the market is looking like it is beginning to doubt that the rally has much more steam left.

Stocks seesawed between losses and gains Thursday as investors digested a bevy of inputs, some bearish and others encouraging. The market ended higher, marking the 5th consecutive day of gains for the three main U.S. indices. The small-cap benchmark Russell 2000 (RUT) also ratcheted higher for the 5th straight session.

Whether U.S. equities can prolong those gains into a 6th consecutive day remains to be seen. Some pressure crept into the market in early trading today after Reuters reported that China plans to lower its economic growth target this year amid U.S. tariffs and slackening domestic demand. 

Technically speaking, it could be important if the S&P 500 (SPX) can hold above the key 2584 level. Meanwhile, the 24000 mark for the Dow Jones Industrial Average ($DJI) looks like a psychologically significant level. 

In economic news this morning the Labor Department said consumer prices in December fell 0.1% month over month, in line with a Briefing.com consensus estimate.

Fed Doubles Down On Dovish Talk

The market was able to shrug off the negatives Thursday, at least enough to end in the green, even though it’s arguable that the mostly disappointing news flow capped what could otherwise have been a stronger up day.

Investors cheered fresh comments from Federal Reserve Chairman Jerome Powell, who reiterated that the central bank will be patient with monetary policy. In remarks prepared for a Thursday evening speechFed Vice Chair Richard Clarida said policy makers “can afford to be patient” as inflation is “muted,” adding to the dovish tone that has been emanating from the central bank in recent days. 

Although Clarida’s speech came after market was closed, Powell’s comments and the apparently positive market reaction were an echo of what happened Wednesday, when stocks rose after minutes from December’s Federal Open Market Committee meeting showed Fed officials indicating they might have more patience before raising rates further. 

The dovish commentary in recent days seems to have gone a long way to reassure market participants that only recently had been worried Fed policy makers might make a mistake and hike rates too quickly even though inflation doesn’t appear to be problematic.

With all the dovish commentary from the Fed, one school of thought suggests the bank may be ready to pause on hikes. But as we’ve said before, central bank policy makers are likely to remain vigilant about inflation. A pause isn’t a foregone conclusion after the recent jobs report blew away expectations and oil prices have been showing signs of strength lately. (See chart below.)

China Optimism Fades, Shutdown Continues

Despite optimism on the Fed’s monetary policy trajectory, other headwinds haven’t gone away.

Recent positive sentiment about a possible resolution to the China-U.S. trade war ebbed a bit on Thursday after China said that recent trade talks had provided a foundation but perhaps provided fewer details than the market would like. Late Thursday, U.S. Treasury Secretary Steven Mnuchin said that a high ranking Chinese official will likely come to Washington later this month to continue trade talks. But if this morning’s pre-market trading is any indication, investors weren’t that enthused. 

In other China-related news, data showed sluggish consumer and producer prices in the Asian nation, compounding worries about slowing growth in the world’s second largest economy. The data come on the heels of weak manufacturing sector numbers in China, adding to evidence that the trade war, which according to media reports has disrupted the flow of hundreds of billions of dollars worth of goods, is taking a bite out of global growth.

Meanwhile, the partial U.S. government shutdown continued, and a tweet by President Trump saying that he was canceling his trip to the World Economic Forum suggested Democrats and Republicans could remain at loggerheads. 

Disappointing Corporate News

In corporate news, shares of Macy’s M fell a whopping 17.69% Thursday after the retailer reported weak holiday results and cut its outlook. That puts a dent in the outlook for consumer spending, but it’s also important to remember that not all retailers are cut from the same cloth. Notably, Target Corporation TGT reported solid holiday sales. Still, the consumer discretionary sector was the only one in the S&P 500 (SPX) to post a decline for the day, with M by far the biggest loser there.

In other corporate news, Ford F announced job cuts in Europe as the company faces struggles in that market, adding another a signal that the European economy is facing softness. The news comes on the heels of weak manufacturing data and amid worries surrounding Britain’s exit from the European Union.

Meanwhile, American Airlines AAL shares slid more than 4% after the transportation company cut guidance. The AAL news comes on the back of recent bad news from Delta Airlines DAL and a major downgrade yesterday on United UAL.

Investors may be in for more disappointing earnings news and corporate guidance during this earnings season, according to investment research firm CFRA. Overall, earnings per share are still expected to show growth, but perhaps not as much as in previous quarters. (See more below.)

Figure 1: Barrel Rolling: An October-to-December selloff in crude oil (/CL)—of about 45% tip-to-tip, and including a record 12-session losing streak—seems to be reversing a bit, with crude recently seeing a winning streak that started on December 31 but seems in danger based on this morning’s trade. The gains have been a plus for producers but can hit consumers’ wallets. The potentially inflationary impact of rising energy prices may be something to keep an eye on as the Fed weighs its next policy move. Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Closing the Catalog On Sears?: In these days of online shopping and some companies promising delivery by drones, it may be hard to grasp how important the Sears Catalog was back at the turn of the 20th Century. Farmers living hours from the nearest city could comb through it and buy anything from a rifle to a piano. Not to mention all sorts of clothes, strange potions that the FDA probably would have impounded had it been around, and yes, even buggy whips. At one point, you could actually pay Sears $945 for the materials—down to the last nail—to build an “eight-room bungalow-style house.”

People born 40 or 50 years ago couldn’t order a home through Sears, but the catalogs from that era still have sentimental value to adults today. That chapter of American life appears to be hanging from a thread as Sears Holdings Corp. considers a revised takeover bid from billionaire Chairman Edward Lampert. That bid temporarily staved off a liquidation that would have permanently closed the doors after 126 years. It’s easy to forget that Sears’ struggles to keep the lights on are more than just a nostalgic walk down the block for 68,000 people still working at the company across 400 stores. It might also serve as a reminder that a company on the cutting edge of innovation might not last forever, especially if it fails to continue to innovate along the way.

Earnings Growth Seen Slowing: One reason for stock’s dismal performance heading into the end of last year could be that investors were pricing in less of the heady corporate growth that we saw earlier in the year. After all, the stock market is forward looking. Projections indicate Q4 earnings for the S&P 500 (SPX) will top 12%, according to investment research firm CFRA. That’s not too shabby, but it’s a far cry from the growth companies saw in the first three quarters of 2018. For this year, annual earnings growth expectations have been reduced to 6.1%, compared with the 22.2% projected for all of 2018, the research firm said. “Fourth-quarter earnings will be the first quarter that growth begins to taper off after three consecutive quarters of growth exceeding 20%,” CFRA said. “Lower growth is expected as the benefits from tax reform and fiscal stimulus are cycled and GDP moderates, making it more difficult for annual growth to exceed historical averages in 2019.”

 What could be interesting to see is whether the recent stock market decline has fully priced in these expectations and the negative corporate guidance we’ve seen, most notably with Apple’s AAPL revenue outlook reduction. “Corporations have every incentive to be conservative at this point given the weakness in economic activity from China, a slowdown in Europe, uncertainty regarding the trade outcome, and higher interest rates domestically,” CFRA said. But if investors have indeed set the bar low, that leaves open more opportunity for any better-than-expected surprises to help push stocks higher, CFRA said.

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