As Trade Talks Approach, "Barometer" Stocks Like Apple And Boeing Could Be In Focus

That didn’t take long.

Trade talks haven’t even started yet, but stock futures took a hit early Tuesday apparently because optimism is already running out of steam. The laundry list of issues includes concerns about the ability of the lead Chinese negotiator to make a deal, reports that China isn’t ready to move on the really big issues, and new U.S. additions to a group of “blacklisted” Chinese companies.

We’ve noted all along that it wouldn’t make sense for investors to get too optimistic about the talks that start Thursday, because past negotiations have fizzled out when it comes to the two countries agreeing on some of the major bottlenecks. It looks like many investors are going into the negotiations—which start Thursday—with caution. Bonds are up again early Tuesday after falling Monday, and gold is also finding a bid.

Worries are starting to grow because higher U.S. tariffs on $250 billion of Chinese goods are scheduled to take effect in mid-October if progress doesn’t get made. While caution is never a bad thing, it might also not be the best idea to throw away any hopes for a positive outcome, even if it’s not a full agreement.

At this point, even if we end up getting news that negotiations will continue after this week or that those new tariffs could get delayed, it might be seen as a market-friendly development. If you’re someone who trades daily, that’s more of an issue. Long-term investors probably would be better off not following every twist and turn, and not getting too focused on how each move affects their portfolio.

Otherwise, news looks a little thin this morning aside from some data (more below). The S&P 500 Index (SPX) appears like it might drop below its 100-day moving average of 2928 early today, possibly setting up a test of psychological support at 2900. The 200-day moving average of 2843 remains well below current levels. Volatility is on the rise, with the Cboe Volatility Index (VIX) back above 19 early Tuesday after falling below 18 recently.

No Signs of Inflation

It’s still weeks until the Fed meets, but today’s Producer Price Index (PPI) for September and Thursday’s Consumer Price Index (CPI) for the same month could offer potential hints about what the Fed might be discussing when it meets. PPI surprised with a negative reading for September, falling 0.3%. Analysts had expected a 0.1% rise. It’s just one month, but any pullback in prices isn’t necessarily the best news as far as economic health is concerned. Goods and services prices both fell in September, and the core PPI, which excludes food and energy costs, was flat.

Some analysts are already arguing that the negative PPI might be another quiver in the doves’ bow over at the Fed. Though PPI and CPI could play a role in the Fed’s rate deliberations later this month, we already saw that the Fed’s most closely-watched inflation indicator, Personal Consumption Expenditure prices (PCE), barely budged last time out. That, along with last week’s fair but not too exciting September jobs report, don’t seem to show much potential for any kind of major pick-up in inflation. Weakness overseas, the strong dollar, and falling crude prices are other factors that might give the Fed a clear runway to cut rates. 

One possible argument against that thesis is if tariffs start causing prices to rise for U.S. producers. It’s always possible some of the pain might get passed along. That doesn’t seem to be the case yet, judging from Tuesday’s report.

Markets didn’t really show much direction Monday, maybe in part because there wasn’t a heck of a lot of news. What’s interesting is how the SPX continued to play with what some analysts see as a key support area near the 50-day moving average, which began Monday close to 2942. In a setback for any bullish investors, the SPX closed just below that on Monday. That, along with the market’s inability to find more buyers following an early rally Monday could suggest that the risk-off tone persists amid concern surrounding the trade talks.

While one day isn’t a trend, something worth noting is how both gold and bonds fell Monday. With both trading near recent highs, you might chalk this up to simple profit taking. Or it might reflect hopes for trade talk progress. However, stocks didn’t seem to get much juice from this bond and gold pullback, which means it might have been more of a technical move.

Which “Trade Barometer” Are You Watching?

Like much of the market, shares of Apple Inc AAPL couldn’t hold on to most of their early Monday strength. That said, AAPL is getting really close to its all-time high posted more than a year ago. With AAPL rallying into trade talks, there’s some talk that AAPL might be seen among some investors as a proxy for progress on trade.

In the past, stocks like Caterpillar Inc. CAT and Boeing Co BA often played that role, and might still be worth a watch. Today, BA shares look like they’re coming under pressure from a Wall Street Journal article talking about more possible delays getting the 737-MAX back into the air in Europe. The other sector that’s sometimes been seen as a barometer for trade is semiconductors, which lost a little ground Monday but played a part in Friday’s sharp market gains.

There’s not much in the way of earnings news this week aside from Delta Air Lines, Inc. DAL on Thursday. The big names in banking are lined up for next week, starting with a bunch on Tuesday morning. Last quarter you might remember that the Financial sector set a solid tone not only with its results, but with the positive things their executives said about consumer demand. That’s why this time it’s arguably more important than ever to get a sense of what the banking leaders are thinking. We’ve seen jobs growth and manufacturing slow recently, so how is that affecting demand for loans and the credit card market? Next week could give us a sense.

Overall, however, the earnings outlook seems a bit uninspiring as the season approaches. The latest S&P 500 earnings estimate from FactSet is for a loss of 4.1% from a year ago. If earnings do end up in the red, it would be the third-straight quarter that happened, and the first negative earnings trifecta since 2015/2016. Most analysts do expect improvement next year, though that’s against much easier comparisons. (See more on FactSet’s outlook below.)

As the SPX continues to trade in its long-term range between roughly 2800 and 3000, retail investors overall seem to be pulling back from their stock exposure, according to the Investor Movement Index® (IMXSM), released Monday. It measured at 4.51 in September, down slightly from its August score. The IMX is TD Ameritrade’s proprietary, behavior-based index, aggregating Main Street investor positions and activity to measure what investors actually were doing and how they were positioned in the markets.

Stocks finished Q3 roughly where they started, but getting there was a volatile ride. Investors appeared to react by rotating holdings away from equities and toward fixed income in September, the IMX showed. Many investors sold some of their FAANG positions as the Technology sector suffered from ongoing tariff uncertainty surrounding the U.S. and China. (See more on the latest IMX reading below).

Trade War, Sentiment and the Dollar: Some of the consumer sentiment reports are picking up peoples’ worries about the trade situation. Tariffs hitting popular consumer goods could also become an issue consumers have to grapple with in the near future. The next measure of consumer sentiment comes this Friday with the University of Michigan’s preliminary October sentiment reading, and we’ll maybe see then if this concern continues to show up on consumers’ minds. The interesting thing will be to monitor sentiment in coming months when it’s possible consumers might have to pay more for some of their favorite goods. Meanwhile, the stronger dollar means it’s probably harder for U.S. businesses to keep their products competitive on the world market, especially with tariffs in the picture. The dollar index finished Monday near 99, close to the two-year highs it posted earlier this year.

Expected vs. Actual Earnings: Just because analysts have low expectations for Q3 earnings doesn’t mean things will turn out quite so bad. On average, over the past five years actual SPX earnings have exceeded estimated earnings by 4.9%, according to FactSet, and over that time more than 70% of SPX companies have reported actual earnings per share growth above the mean estimate. The number and magnitude of positive earnings surprises resulted in the earnings growth rate typically increasing by an average of 3.7 percentage points from the end of Q3 through the end of the earnings season over the last five years. If you apply that increase to the estimated earnings decline as of Sept. 30 of -3.8%, the actual earnings decline for Q3 would be just 0.1% when all is said and done.

As we’ve said before, earnings are the main driver of the stock market over the long term, and buy-and-hold investors may want to tune some of the noise from the trade war and other geopolitical events as earnings blips tend to smooth out over time. Also, as the FactSet data indicate, even shorter- term earnings results can end up beating expectations.  

Selling Pressure: That said, if you’re a more active investor, it can be difficult to ignore all the noise about the trade war, especially given all the related market volatility. So it might not be surprising to have seen some shifting from stocks to bonds among TD Ameritrade clients, amid ongoing tariff uncertainty during September. But even though the IMX showed TD Ameritrade clients were net sellers of equities in September— lightening their holdings of popular tech names including Apple, Facebook, Inc. FB, Alphabet Inc GOOG, and Netflix Inc NFLX—they did find some popular names to buy during the month. Those included Slack Technologies WORK, Walt Disney Co DIS, Roku Inc ROKU, and AbbVie Inc ABBV. Like the larger client population, millennials with TD Ameritrade accounts also net bought WORK, DIS, and ROKU, but they also chose a few names to net buy that the overall population didn’t, such as Aurora Cannabis Inc ACB, Square Inc SQ, and Lyft Inc. LYFT.

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