With Jobs Report Ahead, Focus Turns To Economic Data, Auto Sales, Tesla Output

Following Monday’s flight to new highs as trade tensions eased, the markets face a holiday-shortened week highlighted by Friday’s jobs report. It’s unclear if there’s another catalyst before then to really spark much follow-through on yesterday’s gains.

Tuesday’s agenda includes June auto sales and Tesla Inc TSLA production numbers. New York Fed President John Williams and Cleveland Fed President Loretta Mester both approach the microphones this morning, and the OPEC meeting ended with the cartel deciding to extend production cuts to next March. That probably won’t come as much of a surprise to many, but crude prices actually slipped a little in the early going.

Overseas, there was a mixed performance Tuesday that didn’t seem to offer much direction for U.S. investors. However, direction might come Friday with the jobs report.

For a while, these monthly reports began to get a little taken for granted by some investors because jobs growth kept coming in so steady. However, on the heels of such a disappointing report last month, the question is whether that’s the beginning of a trend or an anomaly. One thing that does seem clear is that huge jobs growth can’t continue indefinitely. You start to get diminishing returns because companies can only employ so many people.

Technology, Financials Start the Week on Top

The markets took a victory lap Monday that sent the S&P 500 Index (SPX) to new record highs in the wake of the U.S./China trade truce.

The rally lost its breath a bit midday, but stocks rebounded from session lows and finished with a flourish. Technology and Financial sectors started the new week in the lead, just as they’d left off last week. Other big gainers Monday included Consumer Discretionary, Materials, and Communication Services, while “defensive” sectors Utilities and Real Estate lagged.

If the market as a whole was on a victory lap Monday, then semiconductor stocks were in the pole position, recording a 2.6% gain. While most sectors received a boost from news of a trade truce, the semis seemed to get a specific benefit from word that the U.S. would allow them to do business with Chinese tech giant Huawei. Some of the major movers Monday included Advanced Micro Devices, Inc. AMD, Nvidia Corporation NVDA, and Micron Technology, Inc. MU.

As stocks climbed the ladder, volatility got knocked down the slide. The Cboe Volatility Index, also known as the VIX, finished Monday down more than 6% at just above 14, well under the highs above 16.50 that prevailed last week as investors worried about the G-20 outcome. We’re still not out of the woods yet on volatility, however, because it seems like there’s a long way to go for a real resolution of these trade issues. 

That said, in many years there’s a seasonal aspect to volatility. Sometimes volatility wilts in the heat of summer and puts in lows for the year. Getting the threat of new tariffs pushed away for the moment certainly could cool things off from the VIX perspective. 

“Canaries” Didn’t Chirp

Surprisingly, two of the so-called “canaries in the coal mine” for trade with China—namely Boeing Co BA and Caterpillar Inc CAT—didn’t really put up much of a showing Monday. With BA, it’s probably because of well-known controversies with its aircraft, including the 737 MAX and now the 787 Dreamliner.

With CAT, it’s actually not all that surprising to see muted reaction to the truce despite all the press it’s gotten as a company with so much riding on trade with China. The China business is over-emphasized by investors as it only represents about 10% of CAT’s revenue. Basically, this isn’t the same CAT as it was back in the 1970s. For instance, many people probably don’t realize that CAT is the world’s largest operator of autonomous vehicles.

Speaking of vehicles, today is when automakers report car and truck sales, which might be worth a look as they rolls in. Some analysts who follow the industry expect a small year-over-year sales decline, Forbes reported. Year to date through May, car sales were down 10.6% to about 2 million, while truck sales were up 1.5%, to 4.9 million. Overall, car and truck sales are down more than 2% in 2019 from a year earlier, with prices continuing to climb and presenting possible affordability issues.

Economic data so far this week didn’t offer much to cheer, with the ISM manufacturing index down from the May figure and May U.S. construction spending falling when analysts had expected a flat reading. There was also a spat of weak data from overseas to start the week, with China's Manufacturing PMI still in contractionary territory, Japan's Manufacturing PMI moving lower, and the Manufacturing PMI for the eurozone also falling. Some of this weak data might be partially behind the dollar’s firm climb Monday. 

Soft Data Could Help Reinforce Rate Cut Hopes

Getting back to Monday’s ISM data, it was the third-straight month of decelerating activity, Briefing.com pointed out. That and the surprisingly weak construction reading probably didn’t do anything to lower investor confidence in a possible Fed rate cut later this month.

At this point, futures show 80% odds of the Fed cutting rates 25 basis points at its July meeting, and 20% odds of a 50-basis point slice. However, Fed speakers recently have sounded like they’re trying to talk down investor expectations for a dramatic 50-basis point move. The question is whether this will be a “one and done” kind of deal or if the Fed just feels it might need to spread out cuts over time. Futures markets predict further easing after July. Next week’s release of the Federal Open Market Committee (FOMC) minutes from last month’s meeting might provide more insight.

We’ll see how the auto sales come in and await retail sales later this month, but data continue to show slowing business investment even as consumer demand seems pretty solid across much of the spectrum. 

Whether consumers can keep dipping into their pockets is an open question we might get some answers to with Friday’s June jobs report. Early analyst estimates show expectations for year-over-year wage gains to again be over 3%, but the pace of job growth under last year’s sizzling levels. We’ll take a deeper dive into it tomorrow. 

Also, earnings season looms, and there’s some trepidation heading in. According to FactSet, 113 S&P 500 companies have issued guidance for Q2, and 87 have issued negative guidance, with 26 issuing positive guidance. The number of companies issuing negative guidance is above the 5-year average of 74.

One company whose earnings are often closely watched is Apple Inc AAPL, and Citigroup Inc C  said this week that it expects more volatility in AAPL shares as earnings estimates for the company drop and U.S./China trade negotiations get back underway. It pointed out that consensus estimates for AAPL’s June quarter are toward the mid-range of the company’s guidance.

With new highs in place, the technical picture gets a little harder to read. There’s possible psychological resistance at the 3000 level for the SPX, while support below the market might be found down at 2881, the 50-day moving average. Last week’s low of 2913 could be another level to potentially watch if things start heading down.

Retail Prime Time: It’s a long time until the holidays, but two retailers are trying to get customers off the beach and into their stores (or onto their internet sites) later this month. Target Corporation's TGT “Target Deal Days”, which it called its "biggest sale of the summer, with no membership required to shop thousands of deals,” takes place July 15 and 16. It promises deals on top national and only-at-Target brands across categories like home and apparel. Competitor Amazon.com, Inc. AMZN holds its Prime Day 2019 for two full days from midnight PT July 15 through July 16. The company said the event will include more than a million deals around the world. Investors might want to consider tuning in the days after these promotions to see how consumers responded. For comparison, AMZN’s 1.5-day Prime Day event last July saw more than 100 million items sold. Some analysts say the coming Prime event could get close to last Thanksgiving’s for AMZN, which was slowed by technical glitches.

Financial Refresh: Amid all the euphoria over the tariff truce, one thing that might have gotten a bit lost in the shuffle was a refreshing aspect of last week’s comeback: Leadership by some of the big bank stocks. A lot of this can probably be traced to the successful Fed stress tests announced last Thursday, which paved the way to new buybacks and increased dividends. Whether this means any kind of rotation back into banks by investors remains to be seen, and it might be worth watching to see if there’s follow-through this week, especially with low Treasury yields still a possible weight on many bank stocks. Remember, one school of thought suggests it’s hard to sustain a market rally without the Financial sector’s vigorous participation.

SPX-3K? With Monday’s rally, the S&P 500 Index (SPX) started to close in on 3,000. It’s been less than five years since the SPX first closed above 2,000 on Aug. 27, 2014. It took a lot longer to go from 1,000 to 2,000, with the first close above 1,000 back on Feb. 2, 1998, or more than 16 years before the debut of 2,000. One potential difference this time that might give the SPX more of a fighting chance to keep moving up even if it eclipses the 3K barrier could be valuations. Back in 1998, the forward price-to-earnings (P/E) ratio on the SPX was up near 22, well above the historic average of just over 16. Even in 2014, long after the dot-com bubble burst had taken stocks back to more normal levels, the P/E was closing in on 20 when the 2,000 mark fell. 

Today, estimates from The Wall Street Journal show the forward SPX P/E at 17.7. That’s above average, but well below the numbers at previous times when the index zeroed in on  “thousand-marks.” Lower P/E values can often keep investors more interested in buying, though a lot of other factors also play in. One of those factors that could potentially be a rally barrier this time is analysts’ forecasts for slow earnings growth in Q2 and Q3, which means the underlying “earnings” wouldn’t be keeping up with the top-line “price” of the P/E ratio. We’ll have to wait and see.

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