China Might Take Some Starch Out of U.S. Rally With More Weak Economic Data

After hitting a five-month high in a broad-based rally on Wednesday, U.S. stock indices appear to take on a relatively neutral tone early Thursday as investors examined some weak Chinese data and assessed trade talk progress.

Bloomberg reported that a summit between President Trump and Chinese President Xi is likely to get pushed back from March to April, raising questions about progress of the trade negotiations. This could potentially be a challenge as the day continues, but the mood seems to remain mostly positive after the S&P 500 Index (SPX) hit a five-month intraday high yesterday.

China’s industrial output rose 5.3% in January and February, the slowest rate in 17 years. Although the country’s retail sales report, also out Thursday, beat analyst expectations, the industrial output data was the latest in a string of data suggesting a slowdown in the Chinese economy. If this news has any effect on U.S. stocks, some of the more China-sensitive sectors in the U.S. market including Industrials and Info Tech might be worth watching.

S&P 500 Posts New 2019 High Wednesday Amid Broad Gains

The beat went on Wednesday, with U.S. stock indices pushing through key technical resistance as the Info Tech, Energy, and Health Care sectors helped lead the way. Industrials, which got battered around earlier this week due in part to the Boeing Co BA controversy (see more below), also had a good session. Even BA shares moved a little higher despite the U.S. government joining most other major countries in grounding the company’s 737 Max 8 airliner.

What happened Wednesday looked like a continuation of Tuesday, with the S&P 500 Index (SPX) registering its highest close so far this year and its best closing level since last Nov. 7. The intraday peak above 2820 was the first time above that level in five months.

Technically, investors received a bullish signal Wednesday from the SPX when it closed above 2800 for the first time in over a week. An earlier test of that level failed, helping set off a period of softness before the rally resumed Monday. The next technical level to consider watching is an area between 2831 and 2834 that the market’s had a bit of trouble with in the past. 

There was a really important bullet point from January durable orders, which rose 0.4% and continued a string of positive reports on that front. The data appeared to reinforce a message that’s worth repeating: We continue to get numbers that show the health of the consumer, and consumer health continues to drive the economy. That’s what this week has arguably shown us so far. 

Mortgage applications also looked solid, and producer prices for February showed no sign of any worrisome inflation. New home sales for January are due later this morning, and Oracle Corporation ORCL reports after the close.

Last Friday, there was a lot of hand wringing about a “terrible” February jobs report. No argument, because it was terrible. However, it was bad for a lot of reasons, not all of which were necessarily about jobs. Weather and the government shutdown both seemed to have an impact, so now it looks like many investors are writing it off and waiting for next month’s payrolls data. Remember, one month is not a trend, and job gains are averaging 186,000 over the last three months even with February’s weakness included.

Boeing Concerns Could Spread Beyond One Company

One thing to watch is the Boeing effect. It hardly needs to be said that BA is one of the biggest U.S. companies, and when President Trump announced the grounding at midday the markets sold off a bit. Also, VIX—the most popular market “fear index”—popped up pretty quickly to nearly 14 before easing back to below 13.5 by the closing bell. Bonds also came back a bit, possibly a sign of investor caution. Still 10-year yields, which move opposite of the underlying Treasury note, climbed a little on Wednesday and stayed above 2.6%.

Credit card companies continued their strong move, and might be considered a momentum area the way they’ve been going lately. FAANGs all finished higher, led by Netflix, Inc. NFLX and Amazon.com, Inc. AMZN. Semiconductors mostly stayed hot as well, led by surging shares of Nvidia Corporation NVDA.

While there hasn’t been much news this week on the China trade front, the performance of the FAANGs, crude oil (which is now at four-month highs), and semiconductors all could hint at investor optimism about the negotiations. Some of the Consumer Staple and Consumer Discretionary stocks, which are a little less connected to any developments with China, also continue to climb. Both PepsiCo, Inc. PEP and Chipotle Mexican Grill, Inc. CMG hit 52-week highs Wednesday. 

What’s great about this market is it seems like every day we find a different area of the market leading things higher. When people ask if the rally has upside, that’s the kind of thing to consider pointing to. Unlike last year, when the market’s overall day could often be guessed at just by checking how the FAANGs did, this rally seems to have broader participation. For instance, even a defensive area, Utilities, is doing well, though it’s lagging the SPX slightly year-to-date. It stands to reason that bond proxies like Utilities and Real Estate would be performing better considering the weakness in Treasury yields that can sometimes cause investors to consider higher-yielding stocks.

Will Investors Get a Brexit Rest?

Overseas, concerns about Brexit—which ticked up Tuesday with Parliament’s rejection of U.K. Prime Minister Theresa May’s recent deal with the European Union—were a little more subdued Wednesday as Parliament voted against an “no-deal” Brexit. This vote was symbolic and not legally binding, The Washington Post reported. 

Another vote is scheduled today to postpone the March 29 Brexit deadline, but some analysts aren’t sure what the U.K. could accomplish with a delay, and it’s unclear if the European Union will negotiate any further beyond what it agreed to that already got rejected by Parliament. May has suggested waiting until June, after European elections. However, the European Union would have to approve any postponement.

The long and short of it seems to be that investors will have to live with Brexit uncertainty a little bit longer, but at least it seems less likely that the U.K. would be allowed to float out to sea on its own on March 29, at least as long as the E.U. allows that date to be pushed back. If that happens, maybe Brexit could retreat into the background for a few weeks. Still, it never does seem to really go away.

New Five-Month High For SPX: This six-month chart shows the S&P 500 (candlestick) charging ahead to a new five-month intraday high Wednesday and its best close since early November. The purple line tracks the dollar index, which is down a bit this week but remains elevated and hasn’t really been able to check the SPX’s progress so far this year. Data Source: S&P Dow Jones Indices, ICE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results. 

History Lesson?: As Boeing wrestles with safety questions about its 737 Max 8 airliner, it’s interesting to note that Chipotle posted a new 52-week high this week. Although burritos and aircraft are about as different as products can be, the two companies do have something in common. Both have had their product safety questioned and saw their stocks fall sharply amid the controversy. For CMG, it started back in 2015 when an E. Coli scare caused its once high-flying stock to crater from $758 in August 2015 all the way down to $247 in February 2018. This week, CMG shares traded at $639. What changed? Well, for one, the company seems to be past its safety concerns and attracting new customers even as it raises prices. Same-store sales rose 6.1% in Q4. That was after a 23.6% decline between early 2016 and early 2017. 

Is there a lesson here for BA investors? It’s way too early to know how things will shape out for BA or how long it might take. Even though no one has proved any link between BA and the latest incident, the stock is down 16% from the 2019 high it posted less than two weeks ago. This partly reflects fear that groundings of the aircraft—which accounts for about one-third of BA’s profit—could hit the bottom line. If investigators find nothing wrong with the 737 Max 8, investors might quickly relax. CMG’s experience shows that some companies are able to storm back after safety worries come up.

The “What If?” Department: So the U.S. and Canada both grounded Boeing’s 737 Max 8 on Wednesday, leading investors to start wondering what the ramifications might be beyond BA itself. Basically, the question is whether BA can damage sentiment around not only its industry, but in related industries and the market in general. You can’t necessarily rule that scenario out. Sometimes BA is thought of as kind of a “derivative” for transportation in general. It’s the gorilla of the industry, and when the gorilla is in trouble, it sometimes brings down others. There’s also some worries about the market psychology, because BA is so heavily weighted in the Dow Jones Industrial Average ($DJI). The average person on the street who doesn’t necessarily follow stocks closely might see the Dow falling and get afraid. It depends on how things play out, but you might see people start canceling flights, too. So watch airline, hotel, and car rental stocks. If there’s a problem, those are the next stocks that could get hit.

FAANGs On a Roll: It’s been a strong week for the FAANG stocks, which were up a combined 4.4% by midday Wednesday. This follows a 1% drop last week for the five FAANG names. Cumulatively, the FAANGs are up 26% since the Dec. 24 low to outpace the S&P 500’s (SPX) 19% gain since then, but still haven’t made it all the way back to their late summer highs. Also, though all the FAANGs were up Wednesday, they haven’t acted as one solid block. Netflix, for instance, has been the greenest of the group lately, up nearly 35% so far this year. Apple Inc AAPL, which got off to a slower start than some of its cousins in 2019, is up 15% year-to-date but made up some ground lately after getting slammed in early January for cutting its revenue outlook. 

Troubles might not be over for AAPL. On Wednesday, Barron’s quoted two research notes observing soft demand for the company’s products in China. Hopes for a trade deal might be helping AAPL shares lately, but even if an agreement is made, there’s no question that the economy there is slowing. That might be an issue for all the FAANGs, but some more than others (AAPL, for instance).

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