Strength Appears To Continue As China Offers Stimulus Plan

Stocks seemed determined to end what’s been a powerful week in the green. A positive tone infused the markets early Friday in part on optimism about China as investors eyed the latest trade news and also viewed more economic stimulus from the Beijing government.

We’ll get to the trade developments shortly. However, what appeared to spark Asian markets early Friday and then spread around the world was the Chinese government presenting a plan designed to stimulate growth by cutting taxes. The economy there has been slowing lately, with more soft numbers out earlier this week. So anything the government does to try to stimulate a little more economic activity could be viewed as positive.

On the trade front, some caution about negotiations crept into the market earlier this week on concerns about when the two countries’ presidents might meet. But sentiment has been shifting toward confidence as China’s state media on Friday reported progress on the terms of the deal and as President Trump remarked Thursday that China has been “very responsible and very reasonable” in the discussions.  

Another bit of overseas news might also be propping up markets early Friday as a vote by the U.K. Parliament to postpone Brexit might have momentarily lifted some concerns about that issue.

Investors are likely to also be digesting a bunch of earnings reports after several key companies released their quarterly numbers following Thursday’s closing bell. It looks like a mixed reaction so far. 

Companies reporting since yesterday’s close included Oracle Corporation ORCL, Adobe Inc ADBE and Broadcom Inc AVGO, among others. Oracle beat Wall Street’s estimates on both top- and bottom-lines, but shares fell. The stock came within a penny of its all-time high Thursday before the company reported. Adobe shares also were down before the opening bell.

Meanwhile, shares of Broadcom rose 5% in pre-market trading after a big beat on earnings per share.

Volatility Watch

There’s a chance volatility might spike Friday as it’s the quarterly “quadruple witching” day with contracts for stock-index futures, stock-index options, individual stock options and individual stock futures all expiring. Sometimes the market sees more choppiness than usual around quadruple witching as traders rebalance positions, and that could explain some of the up-and-down trading we saw yesterday.

In corporate news this morning, Tesla Inc TSLA shares were down 3% premarket as it unveiled a new SUV model it expects to deliver by next year. Amazon.com, Inc. AMZN was up about 1.2% on an analyst upgrade, and home décor retailer Kirkland’s, Inc. KIRK plunged 10% pre-market on the heels of a disappointing earnings report. 

Also, Newell Brands Inc NWL, with names like Rubbermaid and Sharpie, was up about 1.2% in premarket trade after the CEO announced his pending retirement. The past year, NWL has plunged more than 45%.

Chop Shop

If you’re looking for the perfect word to describe Thursday’s session, you could do a lot worse than “chop.” As in, “choppy.” Or “trading both sides of unchanged,” as some market veterans might say. A lack of direction seemed to prevail for most of the session, though the S&P 500 (SPX) did manage to stay above the psychological 2800 level despite a slightly lower close. A technical resistance level to consider watching today is in the 2831-2834 level, an area the SPX has had trouble with in the past.

Maybe it’s not all that surprising to see the market look a bit dead Thursday after the run it had Monday through Wednesday. A rise in volatility late Wednesday might have been a sneak preview, perhaps showing a little caution creeping in. It’s been a powerful week, but it’s ending soon. That suggests there could potentially be some profit taking Friday.

Data looks a little sparse Friday, but possibly consequential. The Michigan consumer sentiment report could be particularly important after mixed signals from a strong January retail sales report earlier this week conflicted with another tepid new home sales report for January released Thursday. 

New home sales fell 6.9% month-over-month, but with the brutally cold weather experienced by parts of the U.S. that month, perhaps a soft housing market could be expected. For instance, new home sales fell more than 28% in the Midwest, which was the epicenter of those below-zero temperatures. Not exactly the type of weather that makes people want to go out and shop for a home, unless their furnace is broken.

Next week features a Fed meeting (see more below) and earnings from Nike Inc NKE. Existing home sales and factory orders are two of the main economic data points on the weekly agenda.

Opposite Direction for Yields

On a less cautious note, some selling in the Treasury note market helped take 10-year yields a little higher Thursday. At around 2.62% they’re not far off of recent lows, but the bond selling did appear to help Financial shares a bit. Financials had the best day of any sector Thursday and might have been one factor in helping the Dow Jones Industrial Average ($DJI) make slight gains. Still, shares of Boeing Co BA continue to weigh on the overall $DJI, as BA fell another 1%. 

On the other side of the equation, Apple Inc. AAPL has been a hot stock lately and rose 1% Thursday. An analyst note referring to stabilization of sales in China seemed to help shares. AAPL is one of the most widely-held stocks, and when it does well, it seems to help market confidence in general.

Some analysts see tough technical resistance for AAPL setting up just above current levels, at around $185 a share. There’s a lot of talk on Wall Street now about AAPL transforming into a services-driven company as concerns grow about iPhone revenue, but we’ll have to wait until the next earnings report for more clarity on that from the company itself. 

The chip makers got bashed around a bit on Thursday, perhaps a sign of some profit taking after strength earlier in the week. This sub-sector might continue to bear watching as many companies here look to diversify beyond a reliance on video games.

Getting back to yields for a minute, Reuters reported Thursday that J.P. Morgan Chase & Co JPM issued a note saying it doesn’t expect the Fed to hike rates this year. Earlier forecasts from JPM predicted two hikes in 2019.

The Fed has noted a slowing world economy, but crude oil prices aren’t slowing down. A weak economy can sometimes weigh on crude, but U.S. crude reached a new four-month high Thursday above $58 a barrel. Some of the strength this week had to do with continued OPEC supply cutbacks, but crude can sometimes be a barometer for the global economy. That means its recent rally might say something about demand as well as supply. We’re about a month out from the next OPEC meeting, which we’ll talk more about in coming weeks.

From the Middle Seat: Despite the grounding of Boeing’s 737 Max 8 jets, several major airline stocks rose Thursday. That might have raised some investor eyebrows, because one school of thought suggests that BA’s issues might start having a negative impact on travel. If people start getting scared to fly and cancel reservations or if they miss out on trips because the plane they were supposed to go on is grounded, that could affect hotels, airlines, and car rental companies, too. 

However, it looks like some investors might be looking at airline capacity and taking into account fewer seats in the sky due to the grounding. When airline capacity falls and demand remains the same, airlines sometimes have to raise prices. That could mean more revenue and perhaps a better bottom line for some companies in the space. It’s still early, and analysts pointed out that the Max 8 only makes up a very small portion of total U.S. airplane seat capacity. Still, it could be something to consider, especially if BA’s grounding goes on a while. How long it might last is anyone’s guess, safety experts told the media Thursday. This type of grounding is unprecedented, they said. Past groundings have been for mechanical issues beyond the pilot’s control, whereas this appears to possibly be a software and training issue.

Right Around the Corner: Spring? Yes, it is around the corner. We’re talking earnings season, though. It’s just a month away, and that means it’s time once again to look at some estimates for S&P 500 earnings. FactSet predicts a 3.4% S&P 500 earnings decline in Q1, but research firm CFRA is a bit more optimistic, seeing just a 1.9% drop. CFRA projects a dramatic earnings decline for Communication Services companies, and also expects double-digit earnings stumbles for Materials, Energy, Real Estate, and Consumer Discretionary. Only Health Care, Industrials, and Financials will grow their Q1 earnings year-over-year, CFRA predicts.

The pessimism among analysts likely reflects in part the fading impact of the 2017 tax cut, which helped lift many companies’ fortunes a year ago. Now they face some very tough year-over-year-comparisons, and that doesn’t change in Q2, Q3, or Q4. That’s why investors might want to pay extra attention to other metrics like revenue and forward guidance this time around, as those might be more reflective of what’s happening today. It doesn’t look like the overall market is worried about earnings declines, as the S&P 500’s forward price-to-earnings ratio stood at around 16.8, slightly above the average of 16.4 since 2000. This might suggest that softer earnings could be built into stock prices already.

What If The Fed Meets and No One Comes?: That won’t happen, naturally. Still, next week’s meeting does seem a bit anticlimactic considering the futures market shows virtually no chance of any rate action. Looking further out into the year, the market builds in growing chances of a rate cut, but the thinking on Wall Street now appears to be that the Fed is unlikely to take that step anytime soon out of concern it could raise fears about the economy. Futures prices build in about a 1% chance of a rate cut next week, rising to around 8% by the June meeting. This week’s benign U.S. inflation data, turmoil around Brexit, and weak Chinese economic news—combined with the weak February U.S. job report—arguably don’t suggest the need for the Fed to get hawkish anytime soon.

One thing to consider watching, other than Fed Chair Jerome Powell’s post-meeting press conference, is any new insight into the Fed’s balance sheet plans. Late last month, St. Louis Fed President James Bullard told CNBC he believes the Fed’s bond holdings reduction program is “near an end” and that he expects a timetable to be finalized “in the next couple of months.” Halting the balance sheet reduction would potentially be one way for the Fed to give the economy a lift without taking the more dramatic step of lowering rates.

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