Trade Fears Grip Wall Street Again?
The Dow Jones Industrial Average fell on Friday as market participants continued to worry about ongoing U.S.-China trade negotiations as well as slowing economic growth.April Joyner of Reuters also reports, S&P, Nasdaq Edge Higher as Earnings Offset Trade Fears:
The 30-stock index fell 63.20 points to 25,106.33, notching its first three-day losing streak since December. The S&P 500 eked out a small gain, rising less than 0.1 percent to 2,707.88. The Nasdaq Composite ended the day up 0.1 percent at 7,298.20.
The major indexes were lifted well off their lows in the final minutes of trading. That surge helped the Dow and Nasdaq notch their seventh straight weekly gains. The S&P 500 also posted a small gain for the week.
At their lows of the day, the S&P 500 and Nasdaq had fallen 0.9 percent each while the Dow had lost 286.49 points.
The Wall Street Journal reported on Friday that the two countries have not yet put together a draft on the matters they agree or disagree. The report comes as a key early March deadline approaches. It also follows President Donald Trump saying on Thursday he will not meet with Chinese President Xi Jinping before that deadline. White House economic advisor Larry Kudlow also said there is a "pretty sizable distance to go" before China and the U.S. reach a deal.
"The fear factor over the trade war has crept back into the market," said Peter Cardillo, chief market economist at Spartan Capital Securities. "That's going to send the market for a bumpy ride."
"We're probably looking at a more defensive situation until we have more clarity on the trade negotiations," Cardillo said.
Meanwhile, the European Commission on Thursday sharply downgraded its forecast for euro zone economic growth in 2019 and 2020, rekindling fears that the global economy may be slowing down.
"If the economy was stronger, these trade talks wouldn't be as concerning," said Benjamin Lau, chief investment officer of Apriem Advisors. "We think the economy is going to weaken a little bit here but ... we're still pretty optimistic about the future."
The rising uncertainty around U.S.-China trade relations and the growing worries over the global economy coincide with a deteriorating earnings outlook for 2019.
Earnings for the first quarter of 2019 are expected to contract by more than 1 percent, according to data from FactSet. If earnings do fall, it will be the first profit contraction for the S&P 500 since the second quarter of 2016, when they fell 2.52 percent.
"Whether the pain trade of a grinding advance in equities will persist or falter, much depends on upcoming economic and earnings data, whether protectionist tensions improve/worsen and if the bond market stays calm," strategists at MRB Partners wrote in a note.
"The technical outlook for equities looks positive, although many indexes are now approaching resistance levels. There seems to be a moderate number of investors waiting for a correction in order to add positions, which contrarily usually means that the dips will be brief," they said.
The benchmark S&P 500 index and the Nasdaq edged upward to snap a two-day losing streak on Friday as positive corporate results offset lingering skepticism over the United States and China reaching a trade deal before the March 1 deadline.So, are trade fears gripping Wall Street again? I'm not sure. No doubt, trade tensions are a huge concern. In December, Ron Mock, the president and CEO of Ontario Teachers' Pension Plan, explained very clearly why they are very worried about tariffs.
Shares of Coty Inc (COTY), Mattel Inc (MAT) and Motorola Solutions Inc (MSI) jumped after the companies reported better-than-expected quarterly results.
In addition, shares of Electronic Arts Inc (EA), which plunged on Wednesday after the company's quarterly results, surged after the videogame publisher said that its game Apex Legends had attracted 10 million players in three days.
Electronic Arts and Motorola Solutions were among the top boosts to the S&P 500.
Earlier, U.S. stocks dragged as trade concerns continued to weigh on investor sentiment. President Donald Trump said on Thursday he did not plan to meet Chinese President Xi Jinping before the deadline set for reaching an agreement.
U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will travel to Beijing for principal-level meetings on Feb. 14-15, a statement from the White House said.
As the session wore on, Wall Street's major indexes regained lost ground.
"What's expected, based on the way the market has performed, is that there is a risk that we'll see another round of tariff-hiking, but that risk will be overridden by some type of agreement," said John Stoltzfus, chief investment strategist at Oppenheimer Asset Management in New York. "These are not indices that are showing extreme investor concern at this point."
The Dow Jones Industrial Average fell 63.2 points, or 0.25 percent, to 25,106.33, the S&P 500 gained 1.83 points, or 0.07 percent, to 2,707.88 and the Nasdaq Composite added 9.85 points, or 0.14 percent, to 7,298.20.
For the week, the Dow added 0.17 percent, the S&P 500 rose 0.05 percent, and the Nasdaq gained 0.47 percent.
The S&P 500 has risen more than 15 percent from 20-month lows in December, spurred by a dovish Federal Reserve and largely positive fourth-quarter earnings, as well as hopes for an eventual U.S.-China trade deal.
Of the S&P 500 companies that have reported quarterly results, 71.5 percent have beaten profit estimates, according to IBES data from Refinitiv.
However, analysts now expect current-quarter profit to dip 0.1 percent from the year before, not grow the 5.3 percent estimated at the start of the year.
Declining issues outnumbered advancing ones on the NYSE by a 1.15-to-1 ratio; on Nasdaq, a 1.04-to-1 ratio favored decliners.
The S&P 500 posted 20 new 52-week highs and two new lows; the Nasdaq Composite recorded 35 new highs and 37 new lows.
Volume on U.S. exchanges was 6.83 billion shares, compared to the 7.46 billion average over the last 20 trading days.
Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm's chief economist and a senior fellow at Yale University's Jackson Institute of Global Affairs, recently warned the global trade cycle is facing major stress in 2019, downward revisions have just begun, and the risk of a major slowdown in world GDP growth cannot be minimized.
But it's not just trade fears lurking out there. Brexit remains a huge concern as the eurozone economy slows, mostly owing to trade tensions and the ongoing slowdown in China.
The rest of the world remains very fragile which is why sovereign debt yields are so low outside the US and why everyone is buying Treasurys these days, anticipating a global slowdown. The yield on the 10-year US Treasury note hit 2.63% sending US long bond prices (TLT) higher (click on image):
As shown above, the iShares 20+ Year Treasury Bond ETF (TLT) is about to break above an important resistance level at 125.
You know my thoughts on US bonds, I'm a big-time bull. Earlier this week, I discussed the optimal rebalancing strategy where I noted that while I admire Leo de Bever and Wayne Kozun for their unbelievable investment acumen, I respectfully disagree with their bearish bond views.
While you won't make a killing in bonds (it's mathematically impossible unless you're leveraged 100 to 1!), my contention is we have yet to see the secular low in US long bond yields, a point Lacey Hunt has aptly discussed many times in Hoisington' quarterly economic outlooks.
In short, my fear is that global deflationary headwinds are still alive and well and when the next crisis/ global recession hits, only good old US nominal Treasurys will save your portfolio from getting clobbered.
And I wouldn't be surprised if by the end of the year, US Treasurys will end up being the number one asset class in terms of risk-adjusted performance.
I don't care what Jeffrey Gundlach or the former bond king Bill Gross think (the latter retired this week after a few miserable years where he significantly underperformed his peers), I have very strong views on the looming pension/ retirement crisis, rising inequality and the limits of capitalism, and why the endgame will eventually be deflation striking the US.
I know, I sound like a broken record, I've repeated these warnings many times in the past and we're not even close, but don't be fooled, there are serious structural issues in the US, Europe and Asia which have not been addressed and all central banks can do is increase their balance sheet, buying some more time waiting for policymakers to address them (they won't until a crisis hits us hard).
Fortunately, we don't have to worry about these structural issues right now and since the weekend is around the corner, I'm going to keep it light and fun.
First, the stock market. Last week, I discussed whether US stocks and the economy are flying high and mentioned this:
The easy money was made. As shown below, the S&P 500 ETF (SPY) is going to run into such major resistance very soon (click on image):Unless we get good news on trade talks, a favorable Brexit outcome, and signs the global and US economy aren't slowing and a profits recession won't materialize, I don't see us breaking above that resistance very easily.
I even drew a picture to highlight what I mean.
Now, is it game over for stocks and we're headed back down to retest the December lows or will the CTAs and other leveraged funds smash through resistance as they go "max long" as the Fed hits the pause button?
Who knows. All I know is that the easy money was made and going forward, you need to be wary of the buyback bull and pick your stocks well to make money in this market, and I mean really well.
You're also going to have to pick your shorts well, especially if you're still charging 2& 20 for yourleveraged betaalpha.
But while the overall market is languishing here, there are plenty of stocks doing quite well. The hard part is finding them, analizing them fundamentally and technically and figuring out which ones will continue doing well going forward.
Every day, at the end of the day, I visit barchart.com and look at several things:
- Which stocks registered the biggest advances and declines today?
- Which are the 5-day gainers and decliners?
- What are the top and bottom 100 stocks?
- Which stocks are up the most year-to-date and which have declined the most year-to-date?
- Which stocks are making new 52-week highs and lows?
- What is the performance of the major market sectors year-to-date?
- How are the major market indices performing?
I also look at what top funds are buying and selling every quarter to get ideas (next week we get a glimpse into their Q4 moves) and I get ideas from what top pensions are doing.
For example, in my last comment, I discussed how CPPIB and GIC are taking Ultimate Software private and noted while it's too late to make money on Ultimate Software (ULTI) , there are some interesting plays in this sector like Paycom (PAYC) which has one of the best weekly 5-year charts I've seen (click on image):
Earlier today, I saw shares of Ubiquiti Networks (UBNT) pop after the company beat on earnings and noticed it has an equally impressive weekly 5-year chart (click on image):
And earlier this week, I noticed shares of MacroGenics (MGNX) soared nearly 200 percent in a day after the company reported positive news from late-stage trials of its breast cancer therapy candidate.
I remember the name because I remembered that Steve Cohen's Point 72 was among the top holders.
Now admittedly, picking the next big biotech winner is akin to picking the winning numbers of a lottery, and even top biotech funds like Perceptive Advisors get dinged from time to time, like they did with La Jolla Pharmaceuticals (LJPC) last month and Solid Biosciences (SLDB) this week (click on images):
Picking stocks isn't an easy game, especially biotech stocks which are binary by nature.
Next week, I'm honed into Teva Pharmaceuticals (TEVA) which reports before the bell on Wednesday morning and has among its top investors Berkshire, Fidelity, Abrams Capital Management, Polaris Capital Management and other top value funds (click on image):
The chart isn't particularly bullish but I expect the company to report solid numbers and it remains a core long position of mine.
Anyway, my point in all this is it's increasingly harder to make money playing the overall market and to make money you need good active managers who can really pick great stocks and manage downside risk. Good luck finding both.
On that note, I'm bushed, I hope you enjoyed reading this comment and all the others I posted this week. As always, I ask all my readers to please donate or subscribe via PayPal on the right-hand side, under my picture. I thank all of you who take the time to donate, it's greatly appreciated.
Below, CNBC's Kayla Tausche reports on sources saying President Trump and China's Xi Jinping are unlikely to meet before March 1.
Second, Niall Ferguson of Hoover Institution at Stanford and Dan DiMicco, former Nucor CEO, joined 'The Exchange' to discuss what they expect from President Trump's trade policy. Ferguson said China is likely afraid of trade war escalation.
Third, Cornerstone Macro's Carter Worth on whether there are cracks in the industrials (XLI). With CNBC's Melissa Lee and the Fast Money traders, Tim Seymour, Brian Kelly, Dan Nathan and Guy Adami. I told you last week, I remain short Boeing shares (BA).
Fourth, earnings to watch next week with CNBC's Melissa Lee and the Fast Money traders, Tim Seymour, Brian Kelly, Dan Nathan and Guy Adami.
Lastly, Erik Townsend and Patrick Ceresna welcome back Alex Gurevich to MacroVoices. Great discussion, Alex talks about the bigger picture, Treasurys, the US dollar, QE, QT, China and more. Interestingly, he disagrees with me that you can't make big money in bonds unless you're highly leveraged. I embedded the podcast below or click here to listen to his views and download charts and trasncript.
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