By Pete Biebel, Senior Vice PresidentPrint This Post
Following a September with more than its share of dull, narrow-range trading sessions, the first two weeks of October have been far more action-packed. Seven of the nine trading days so far this month have had a big gap opening or a very wide daily range, or both. In most of those cases, the market action came in response to trade war headlines; and in most of those cases, the averages ripped higher on the mere suggestion that there was a possibility of progress on the trade talks in the near future.
After the big gain on trade war rumors the previous Friday, stocks opened lower on Monday but spiked higher midday following positive trade talk comments from the President’s economic advisor. Then, on Tuesday morning, news that the U.S. had blacklisted 28 Chinese companies and imposed visa restrictions on Chinese officials caused stocks to gap steeply lower, erasing all of that Friday gain. The averages recovered most of their Tuesday losses through Wednesday and Thursday largely on hopes for a “skinny deal” in the trade talks. News that President Trump was going to meet with China’s Vice Premier combined with the President’s comment that trade talks were going “very well” launched the averages about 1% higher Friday morning. Both the Dow Jones Industrial Average (DJIA) and the NASDAQ Composite Index (COMP) finished the week with net gains of about 0.9%. The S&P 500 Index (SPX) was up 0.62% for the week.
Seeing such wild and optimistic reactions on such vague and insubstantial headlines seems odd. Why did the market rally so steeply on just the hint of potential progress in the trade talks with China?
In circumstances in which a looming news event is expected to generate a significant market reaction, traders know that if they wait for the actual news, they’ll be too late. Think about buying land around the area of a proposed new interchange along an interstate highway. Everybody knows the land will be far more valuable if the interchange is built, but if I wait until the project is completed, I’ll be too late. The biggest profits will accrue to those who are in ahead of the news. It’s a self-fulfilling phenomenon. The larger the expected “pop” on the news, the greater the incentive to be loaded up just before the news hits. The market seems to expect a very big “pop” when the trade war is resolved, so any hint that the negotiators are nearer to a resolution can bring a rush of early-bird buying.
Those same early-birds won’t be bashful about cashing in their positions if/when good news hits and the big pop occurs. If that rush of profit-taking begins to overwhelm the buying by investors who waited for the news, then much if not all of the news “pop” could be quickly erased. Hence the age-old adage “Buy the rumor, sell the news.”
One unique aspect of the pending trade war news is that lack of a resolution would probably be bad news. Most such big news events are unilateral, either good/bad news or no news. With the trade war, no news is bad news. In the case of the trade negotiations, an agreement that eliminates or reduces tariffs would be good news in that it would likely rekindle world trade and reverse the slow-down in global economic growth. But, no resolution, or more likely a long delay before a resolution, would mean that the tariffs would continue to weigh on global growth and that companies around the world could continue to experience pressure on operating margins and profits.
The best performing U.S. equity sectors for the week were Materials, Technology and Industrials, all sectors whose component stocks should enjoy the greatest benefit from a resolution on trade. Three of the four poorest performing were interest rate sensitive sectors: Real Estate, Consumer Staples and Utilities. The bond market also sold-off as trade optimism increased through the week. The yield on Ten-Year Treasuries rose from 1.52% early in the week to 1.76% by week’s end.
International equity groups outperformed even the strongest of the U.S. sectors, thanks in part to weakness in the Dollar. The Wall Street Journal U.S. Dollar Index, which hit its high of the year in late-September has declined about 1% since then, most of that slide was in the second half of last week. A trade deal isn’t necessarily bad for the Dollar, it would just be relatively more beneficial to smaller, more trade-dependent countries.
Small-cap stocks also enjoyed a big rally on Friday. The Russell 2000 Index of small-cap stocks (RUT) was a whopping 2.7% at its Friday morning high. It closed with about a 1.7% gain for the day, up about 0.8% net for the week. That performance, while impressive, was just enough to get RUT back up to its 200-day moving average. So, RUT is still lagging its larger-cap peers, a condition which could continue to be a drag on the overall market if it persists.
SPX ended last week just above 2970, less than 2% below its record high of about 2 ½ months ago. Back in mid-September, SPX, along with COMP and DJIA, got to within a whisker of their highs, but failed to find the traction to drive them to new highs. With any help from trade war headlines, the indices could once again be on the doorstep of new highs. My guess is still that the higher high might be in the 3040-3050 range but probably not much higher.
The first full week of the new earnings season will feature dozens of quarterly reports. A handful of big banks and several consumer staples companies are likely to be the most prominent. Prominent on the economic report calendar are the Retail Sales numbers on Wednesday and the Jobless Claims figure on Thursday. The manufacturing data on Tuesday and Thursday might have a greater than normal impact.
|Monday 10/14/2019||Columbus Day Holiday, Banks and Bond Market Closed|
|Tuesday 10/15/2019||Empire State Manufacturing Survey||2.0||0.8|
|Wednesday 10/16/2019||Retail Sales, M/M||+0.4%||+0.3%|
|Retail Sales, less Autos & Gas, M/M||+0.1%||+0.3%|
|Business Inventories, M/M||+0.4%||+0.3%|
|Housing Market Index||68||68|
|Fed Beige Book|
|Thursday 10/17/2019||Jobless Claims||210K||215K|
|Housing Starts, SAAR||1.364mm||1.300mm|
|Philadelphia Fed Business Outlook Survey||12.0||7.1|
|Industrial Production, Production, M/M||+0.6%||-0.2%|
|Industrial Production, Manufacturing, M/M||+0.5%||-0.3%|
Links to previously published commentaries can be found at benjaminfedwards.com/Company News/Blog/Market