Investor Optimism Continues After Trade Deal; FedEx Delivers Disappointing Results

This morning the market seems to be delivering investors continued optimism, but FedEx Corporation FDX isn’t participating.

Shares of the  global delivery company were down around 7.5% in premarket trading after it reported revenue and earnings that missed expectations and slashed its yearly profit forecast. The carrier is facing higher costs as well as a loss of business and increased competition from Amazon.com, Inc. AMZN.

Despite the international shipper’s woes, Wall Street continued to seem upbeat after the United States and China announced an initial trade deal. But early market gains were small a day after the main U.S. indices also rose slightly, perhaps indicating more consolidation.

The small gains could also mean the market is getting ready to coast into the new year, as there may not be many new catalysts on the horizon between now and 2020.

Changing Focus?

Remember the good old days before the trade war and Brexit dominated the headlines day in and day out?

Well, Tuesday’s trading might be a foreshadowing of a return to that sort of environment. To be sure, some of the market’s upside momentum was likely left over from last week’s news that China and the U.S. had agreed to the first phase of a trade deal and that the UK election gave Brexiteers a clear mandate.

But with those headlines now in the rearview and arguably a lot of the upside already priced in, Tuesday trading might have marked a transition into a period—the duration of which is anybody’s guess—when the market trades more on corporate news and economic data than it does on lingering geopolitical angst. 

Cheering Fundamentals

On the economic data front, investors got some good news in the form of housing starts and building permits for November. Both came in better than expected, marking continued strength in the housing market a day after the December National Association of Home Builders/Wells Fargo Housing Market Index hit its highest point since June 1999. (See more below.)

And in good news for the flagging domestic manufacturing sector, data on Tuesday showed that industrial production rose 1.1% in November, including a 1.1% increase in manufacturing output. The headline number reflected the end of the strike at General Motors Company GM and probably cheered some investors who might have been fretting at the contractionary manufacturing data we’ve seen in recent months.

Corporate Review

In tandem with that economic data, some corporate news also helped stocks close in the green Tuesday. 

Bed Bath & Beyond Inc BBBY shares gained more than 11% on news that six senior executives are leaving or have left the company. The move comes after the stock has struggled this year but has regained some ground recently. 

Meanwhile, FAANG member Netflix Inc NFLX saw its stock rise 3.7% after disclosing solid international membership growth numbers. The move to open that part of the books to investors comes as the streaming giant is facing more competition from other services.

Boeing Co BA started out the day on the back foot after confirming it would suspend production of its 737 MAX, but the jet maker was able to erase those losses to end the day unchanged. Its shares had already been sold off steeply in the prior session after The Wall Street Journal reported the jet maker was considering halting or further cutting production amid uncertainty over the planes’ return to service.

As we continue to monitor the 737 MAX situation, it seems that companies that supply parts for the plane could end up facing some pain from the shutdown, which could also dent domestic manufacturing numbers. 

Smooth Sailing Ahead?

Even though things seem to be going well toward the end of the year, it’s probably wise to remain somewhat cautionary considering that the announced trade deal between the world’s two largest economies hasn’t been signed yet. And even if it does get signed in January, there’s still more work to be done, given that this is only the first phase of a deal.

Also, Brexit hasn’t actually happened yet, and nobody knows exactly how it might affect the economies of the UK and European Union, and whether or how much spillover to the global economy there might be. 

Also, the gains in the benchmark U.S. indices weren’t huge on Tuesday, perhaps indicating that the session’s trading was a bit of consolidation after the big headlines last week. 

FIGURE 1: BUBBLING CRUDE? Crude oil futures (/CL - candlestick)  moved above a trendline resistance level (yellow line) yesterday. It may be still too early to determine if this is a breakout but it’s worth keeping an eye on in the coming days. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Crude Awakening: After trading relatively sideways between $50 to $60 for over six months, crude is starting to awaken from its slumber (see chart above). Crude oil futures have rallied for four days. Optimistic news on the U.S.-China trade deal is encouraging from a global economic growth perspective and could mean increased demand for crude.

The two countries are large oil consumers. While a breakout above $60 may be significant, we haven’t seen enough momentum to determine how much further prices will move. A lot could depend on oil inventory levels. On a related note, the crude rally has also helped wake up the Energy sector from its nearly year-long slumber. Though still the laggard among sectors this year, over the past week or so, it's been among the top performing ones.

By the Numbers: Investors tend to closely watch housing starts and building permits because of what they can portend for the wider economy and, by extension, the fortunes of companies who make up that economy. New construction not only indicates expectations that people might be willing to fork out the cash for a new home, but it also shows potential demand for materials as well as  jobs for construction workers.

If there’s more need for copper pipes and wiring in houses, then copper miners could stand to reap a benefit. November housing starts rose to a seasonally adjusted annual rate of 1.365 million units, compared with 1.34 million units expected in a Briefing.com consensus, from an upwardly revised 1.323 million in the previous period. Meanwhile, building permits rose to a seasonally adjusted annual rate of 1.482 million units, beating out the Briefing.com consensus expectation of 1.4 million. 

Two Handle: After Tuesday’s strong new residential construction report and industrial production report, the Atlanta Fed’s GDPNow forecast for Q4 GDP got another boost, rising to 2.3% on Tuesday from 2% on Dec. 13.

Recall that the last upward revision for the estimate came after the most recent jobs report, which helped to bump up the forecast for Q4 to 2% from a previous reading of 1.5%. The two handle seems to be a psychologically important mark. While the economy isn’t going gangbusters, it seems to be doing well enough. And the latest numbers show it’s solidifying even more. With tensions easing on the trade front and companies perhaps more willing to make business decisions as trade uncertainty lessens, we could keep adding to the two handle we’ve got now.

That’s a good place to start if they need to find some cash. But violent delights have violent ends, and the longevity of such a FOMO rally would likely depend on the speed of the corresponding rally in bond yields.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

Image by John R Perry from Pixabay