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By Pete Biebel, Senior Vice President

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As a rule, I avoid imparting any political spin in these commentaries.  Still, I think everyone would agree that it hasn’t been all sunshine and warm breezes for the Trump administration during its reign.  Now, a new and darker storm threat has appeared.  The sudden possibility that impeachment hearings might begin, has materialized as a new potential peril on the market’s horizon.

The major averages have been fluttering in relatively narrow ranges over the past several weeks.  The shifting winds of hope for progress in trade talks with China continue to have the greatest influence on the markets prevailing direction on any particular day.  Last week provided a couple more examples, first blowing stocks in a northerly direction on Wednesday (following President Trump’s tweet alleging that a trade deal could come “sooner than you think”) before driving them back south on Friday (on news that the White House was considering new limits on investment in China).  Trade talk news will likely continue to be the most significant blip on the market’s radar, but now any increase in the probability of impeachment hearings could hit the market like a winter nor’easter.

Not surprisingly, there’s been plenty of speculation regarding the degree to which the impeachment proceedings might damage the market.  The most consistent theme seems to be that Mr. Biden’s chances in the 2020 election are likely to be collateral damage if/when hearings are held.  Current opinion seems to be unanimous that a Warren victory in 2020 would have a significantly negative impact on the market.  Ergo, bad news for Biden is good news for Warren and a darkening cloud for the market.

Try not to be too concerned over media speculation on how a Warren victory might sway trading in the days after the election.  In reality, the market will discount the impact of that outcome well in advance if the poll numbers are trending that way.  And, recall that the pundits were predicting that a Trump victory in 2016 would be bad for the market, yet stocks ripped higher in the days and weeks following the election.

The major averages see-sawed in a narrow, downward trending range through the week.  For the week, the Dow Jones Industrial Average (DJIA) slid a mere 0.43%.  The broader S&P 500 Index (SPX) and the NASDAQ Composite Index (COMP) fell about 1% and 2% respectively.   In recent weeks I have suggested that the critical level for SPX seems to be in the 2940–2950 range.  SPX held just above that range at Wednesday’s low and held at 2945 at Friday’s low before rallying late in the day to end the week near 2962.

I have repeatedly suggested watching the Russell 2000 Index of small-cap stocks (RUT) as a barometer for the overall market.  RUT had seemed to be coming back to life early in September, but it has taken a turn for the worse lately.  RUT has severely underperformed large-caps over the past two weeks.  RUT loss about 2.7% last week and fell back to its 200-day average by Friday’s close.  If RUT suffers additional losses this week, it’s probably bad news for the overall market.

Three U.S. equity sectors were among the worst performers for the week.  The Energy sector lost a little over 2 ½% as the price of crude oil seeped lower through the week.  The Communication Services and the Healthcare sectors each slumped nearly 3%.  Several big social media and internet stocks had a bad week.  The S&P Communication Services Index fell back below its 200-day moving average and closed at its lowest level since the first trading day of the month.  Coincidentally, the NYSE FANG+ Index gave up a little more than 3% for the week, falling back below its 200-day average and back to near its low of the month.  The Healthcare sector was feeling the pain of the ailing Biotech and Pharma stocks.  The Healthcare sector also dropped back below its 200-day average and ended the week at its lowest level in more than a month.

The inter-bank lending liquidity squeeze, which had spooked the markets briefly in the prior week, seems to have been, at least temporarily cured by continuing rounds of Fed repos.  The yield on the benchmark Ten-Year Treasury Notes dipped another 9 basis points or so for the week.  The rally in Treasuries again helped interest rate sensitive sectors Consumer Staples, Utilities and Real Estate outperform all other equity sectors on the week.  Along with the Financials sector, they were the only four of the eleven S&P industry sectors to get through the week with net gains.

As mentioned above, SPX twice tested what I consider to be a critical support level in the 2940–2950 range.  I continue to believe that, until that level is taken out, there’s no cause for alarm.  However, sustained trading below that range would likely signal stormy weather ahead.

This week brings another long list of updates on economic data.  The employment data late in the week seem to be the most likely to spark any sizeable reaction in stocks.  In the category of random headlines that could roil the markets we need to add impeachment proceeding developments to the list that already features the yin and yang of China trade war news.

Date Report Previous Consensus
Monday 9/30/2019 Chicago PMI 50.4 50.4
Dallas Fed Manufacturing Survey 2.7 1.0
Tuesday 10/1/2019 PMI Manufacturing Index 50.3 51.0
ISM Manufacturing Index 49.1 50.0
Construction Spending, M/M +0.1% +0.3%
Wednesday 10/2/2019 Motor Vehicle Sales 17.0mm 17.0mm
ADP Employment Report 195K 152K
Thursday 10/3/2019 Jobless Claims 213K  215K
PMI Services Index 50.7 50.9
Factory Orders, M/M +1.4% -0.6%
ISM Non-Manufacturing Index 56.4 55.4
Friday 10/4/2019 Non-Farm Payrolls, M/M +130K +145K
Unemployment Rate 3.7% 3.7%
International Trade, Trade Deficit $54.0B $54.5B

 

Links to previously published commentaries can be found at benjaminfedwards.com/Company News/Blog/Market

September 30, 2019 |