As Trade Optimism Grows, Markets Turn Green and Boeing, Caterpillar Among Leaders

Remember how good it felt back in high school to get an extension on a term paper? Early Monday, the market seems to feel good about getting an extension on trade talks with China. Stocks around the world were painted green, with the Shanghai Composite rising a massive 5.6% and U.S. indices also getting a lift in pre-market trading.

The early March deadline for a trade deal disappeared over the weekend when President Trump tweeted  about what he called “substantial progress” in the talks and said tariffs wouldn’t go up at the end of this week as previously scheduled. The media are now reporting about a possible meeting later next month between Trump and President Xi of China.

Optimism seems to be the operative word as the week gets started, though trade talks aren’t the only news out there. Fed Chairman Jerome Powell will be testifying to Congress about the economy this week, and retail earnings are on tap. Trump is also scheduled to wing his way to Vietnam to hold meetings with North Korea’s leader.

Tariff Threat Put Off, But Not Necessarily Gone for Good

Despite the tariff deadline coming off the calendar for now, tariffs might remain an overhang even if China and the U.S. eventually reach a deal. The U.S. has shown willingness to threaten and use tariffs to punish trade partners, and that doesn’t just go away. There’s still the threat of tariffs against European automobile imports, for instance, which some analysts say could have negative repercussions for the U.S. economy. Another trade issue that’s unresolved is here in North America. Congress will need to eventually vote on the administration’s updated trade agreement with Canada and Mexico.

Last week delivered some trade-related cheer with gains in many of the stocks closely associated with China tariffs, including Boeing Co BA, Deere & Company DE, and Caterpillar Inc CAT. The microchip sector, which also could see an impact from U.S./China trade relations, also got a lift, with Nvidia NVDA and Intel Corporation INTC both rising Friday after analyst upgrades. Also, copper futures (traditionally seen as a barometer of world economic demand) rose sharply last week, and Chinese stocks also performed well.

For the ninth week in a row, the NASDAQ (COMP) and Dow Jones Industrial Averages ($DJI) posted gains last week. The S&P 500 (SPX) also moved higher. Major indices start the new week near three-month highs, and volatility keeps flagging. On Friday, the VIX—the market’s most closely watched fear indicator—fell below 14 for the first time since late September. It was above 30 in late December.

26,000: What’s In a Number?

Speaking of numbers, there were some headlines in the financial press late Friday when the $DJI pushed through 26,000 again. This is mainly a psychological mark, and it’s also important to remember not to put too much focus on what the $DJI does. It’s only 30 stocks. With its 500 stocks, the SPX might be a better reflection of the broader market. Another key number is 2800 in the SPX, which got taken out in pre-market trading Monday. A close above that level might be seen as a sign of technical strength.

The crude market also might be on some peoples’ minds. U.S. crude rose above $57 a barrel late last week despite a bigger stockpile build-up than many analysts had expected, though prices fell back a bit early Monday.

You could argue that higher crude prices say good things about the U.S. economy, because part of what they reflect is consumer demand. More trucks might be carrying goods to customers, and more people might be flying for business and leisure. All this tends to suggest more need for crude and corresponding price growth. 

Powell Heads to the Hill Tomorrow

Humphrey-Hawkins time is here again, and that means Fed Chairman Jerome Powell will make the short trip down the Mall to Capitol Hill Tuesday and Wednesday to brief Congress on the economy.

Powell’s so-called “Humphrey-Hawkins” testimony arguably might have less impact this year than the last few, simply because the Fed has declared a pause in rate hikes for now. Instead of rates, the focus might be more on Powell’s conclusions about the current state of the economy as growth worries persist. Like all Fed chairs, Powell is probably going to choose his words carefully, but potential market reaction can’t be ruled out if he says anything investors judge as particularly hawkish or dovish.

Last week’s Fed minutes made it clear that most Fed officials see slowing growth both here and abroad as a growing threat. Later in the week, investors are due to finally receive long-awaited gross domestic product (GDP) data for Q4, and some economists expect growth to drop below 2%, from 3.4% in Q3. However, this might get written off as built into the market, and also could be chalked up to the impact of a cratering stock market during that particular quarter that might have suppressed consumer and business investment.

Steeling Up For Retail Earnings Later This Week

The other big watchword in the days ahead will likely be retail—as in earnings from big retailers. Investors got their first taste of that last week with Walmart Inc WMT, and this week await numbers from Macy’s Inc M, Lowe’s Companies, Inc. LOW, Nordstrom, Inc. JWN, and Foot Locker, Inc. FL, among others. Things start Tuesday before the open with Macy’s. It was a pretty rough start to the quarter for shares of Macy’s when they fell more than 17% on Jan. 10 after the company reported weak holiday sales. Since then, we’ve seen retail sales for December also crater, so investors might be primed for more bad news when retail earnings come down the aisle. 

One metric that was a source of a little market pressure—the dollar index—retreated a bit late last week from recent highs and now is back well below 97. This might reflect hopes for a trade deal with China, as well as the Fed’s continued dovish tone, analysts said. However, investors seem to be keeping some of their powder dry, if the bond market is any indication. The benchmark 10-year U.S. Treasury yield remains stuck at 2.65%, well below highs above 3.2% last fall. The Fed’s stance likely has a lot to do with this, but it might also reflect investor caution as earnings growth slows and economies around the world, especially in Europe, seem to be dragging a bit.

Getting back to corporate news, there were reports early Monday that General Electric Company GE would sell the biopharma portion of its life sciences business to Danaher Corporation DHR for $21.4 billion. Shares of GE roared 17% higher in pre-market trading on the news as investors appeared to cheer what media outlets said was a deal that might help the company pay down debt.

Figure 1: Caution Flag Waving?: While a lot of the attention early this year has focused on the big 18% rally in the S&P 500 Industrial sector (purple line), the Utilities sector (candlestick) caught a wave last week to lead all sectors with 2.4% gains. Sometimes Utilities are seen as a defensive area, so investors putting more money there might suggest caution. 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.  

Is Social Media Emptying Your Wallet?: Spend a lot of time on social media? Many Americans do, and that could be one reason fewer of them are putting money away for a rainy day, according to a new study. In 2018, the personal saving rate was near 7%, down from double digits a few decades ago. While plenty of other reasons might exist to explain that, economists who authored the study—reported last week in The Washington Post—say that logging into sites like YouTube and Facebook, Inc. FB and seeing what our friends and neighbors are buying might make us more prone to buy new things ourselves. Other studies say “FOMO,” or Fear of Missing Out, might be leading some people to make impulsive purchases based on what they see online. That doesn’t mean people shouldn’t have any fun, only that maybe too many Americans aren’t thinking enough about saving for the future. As a long-term investor, it’s important to consider not letting yourself get overly distracted by what you see online and remember your ultimate savings goals, whether it’s retirement or a college education for your children. 

Sector Watch: Looking at things from a sector point of view, the S&P 500 Industrials sector continues to sizzle, rising 18% year-to-date to lead all S&P sectors. Energy and Info Tech aren’t far behind, with each up nearly 14% so far this year, while so-called “defensive” sectors like Health Care and Consumer Staples bring up the rear. Small caps have also been hot lately.  Something to potentially monitor in days ahead is whether the strength in cyclicals continues, or if other sectors move in to take the lead. It might be instructive to note that Utilities—a traditionally defensive sector that functions more like a bond proxy—led all sectors with 2.4% gains last week. Could that be a sign of some investors getting cautious? Perhaps time will tell.

Good Things in Small Packages: Thanks to the fierce early 2019 rally, all the major U.S. indices had returned to their 200-day moving averages by late last week...except one, the small-cap Russell 2000 Index (RUT). That changed Friday as the RUT climbed above 1587, the 200-day moving average, and posted 25% gains from its Dec. 24 lows. That’s actually a better performance than the S&P 500 (SPX) over the same period. The SPX is up 18% from Dec. 24, but surpassed its 200-day moving average earlier this month. That helps underscore just how strongly the RUT was trading last year before the Q4 rout, when it was outpacing large-caps. One reason the RUT has taken longer to recover to the 200-day is because it had farther to climb. Another reason could be the relatively modest gains in the regional banking sector, which has a big weighting in the RUT. Strength in small-caps is often seen as a bullish sign for the market as a whole, because small-cap stocks are sometimes seen as more of a “risk-on” trade, meaning their strength could reflect investors’ willingness to get more aggressive.

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