US equity markets took the Fed’s 25 basis point rate cut and Chair Powell’s press conference in stride last week. However, the specter of risk associated with US/China trade talks re-emerged at the close of the week.
As an indication of just how fragile the trade talks are, the announcement on Friday that the visiting Chinese trade delegation had canceled their scheduled trip to the US heartland sent US equity markets into a tailspin. The Nasdaq Composite lost 0.8% while the Dow industrials slipped 0.6% and the S&P 500 ticked 0.5% lower. Interestingly, the Russell 2000 (small caps) closed nearly unchanged.
Though Friday’s volume was amplified by expiring options and futures contracts and US equity indices did lose ground, the damage was relatively insignificant and the current outlook for US equity markets remain in a confirmed uptrend. All three major indices closed within 1%-3% of their all-time highs. Markets remain above their 200 DMA and 50 DMA as we head into the close of Q3 – in 6 trading sessions. The lift we have seen in September has been fueled in large part by better than expected August economic data, in-channel corporate results, and the expectation of a rate cut by the Fed.
With the resumption of US/China trade talks, the quarter coming to a close in coming days, the Fed cut behind us, and Q3 results weeks away, we are entering a period that will likely see a focus on geopolitical themes. Those concerns will certainly focus on US/China trade talks but may also involve other geopolitical themes: Iran/Saudi tensions; the follow through on the Israeli election and attempts to form a coalition government; resolution around Brexit; and any host of other ongoing issues. Given that October has historically been a month with elevated volatility, it is likely that these geopolitical themes will play a part in that.
As we have discussed at length over the past several years, the FAANG stocks have provided a meaningful lift to the broader market. And also as we have discussed, I have been particularly dour on some of those issues for a variety of reasons. I have been concerned about growth, the prospect of federal regulation, business model maturation, valuations, and a sense that the trade simply became too crowded. Investors Business Daily had an interesting article in the weekend’s edition that speaks directly to that narrative:
“Among the five FAANG stocks, the two left standing at this point are Google parent Alphabet (GOOGL) and Leaderboard stock Apple (AAPL). Alphabet is near highs and not far from a 1,268.49 buy point. And Apple’s chart is still intact as it trades just below a 221.47 entry. But don’t expect Amazon.com (AMZN) and Netflix (NFLX) to resume market leadership roles anytime soon. Amazon is flirting with another test of its 200-day moving average. Netflix gapped below key support levels in mid-July, and sellers remain in control. Facebook (FB) still has a chance to form a new base, but it got turned away at its 50-day moving average Friday.”
The question for index investors is whether the broader market can continue to record new highs without the leadership of these bull market stalwarts. Q3 earnings season will likely provide investors with an answer to that question.
Last week’s economic Calendar highlights:
The long awaited FOMC announcement on rates, released on Wednesday, did provide a 25 bp cut in rates. That cut, however, was tempered by Chair Powell’s assessment that the US economy is on solid ground at the moment – effectively removing from markets the leverage to move rates lower, knowing that the Fed will not necessarily move in that direction without a meaningful tick lower in economic activity. The Fed gave markets what they were clamoring for in the announcement but simultaneously informed the markets that an additional cut by year-end was not automatic.
Chair Powell’s constructive tone on the economy is not unwarranted. On Tuesday of last week, the Industrial Production figures for August were released and they were significantly stronger than expected. Econoday had been calling for a marginal reversal of fortunes from July’s -0.2% to a gain of 0.2%. Instead, July figures were revised higher to -0.1% while August’s results came in at 0.6%. Manufacturing, M/M, reversed from July’s -0.4% to 0.5% and capacity utilization rose to 77.9%. August’s Industrial Output results were supportive of Chair Powell’s outlook.
Another factor in last week’s economic releases that appeared to confirm Chair Powell’s current assessment of the market came in the Housing Starts data for August. Starts–Level–SAAR M/M, August’s starts were 1.364 M vs Econoday consensus of 1.251 M and the prior month’s revised reading of 1.215 M.
The Philadelphia Fed Business Outlook Survey for September, released last Thursday, came in above consensus as well. August’s reading was 16.8 and Econoday consensus for September was 11.0 – it was actually 12.0.
This week’s economic calendar highlights:
New Home Sales figures – Level – SAAR for August are released at 10:00 am. Econoday consensus is 655k versus July’s 635k.
The EIA Petroleum Status Report for the week ending 9/20 is due out at 10:30 am. Last week’s report reflected little change in inventories across all three verticals.
Real GDP – Q/Q change SAAR Q2 (f) is released at 8:30 am. Econoday is calling for an unchanged topline Q/Q reading of 2.0%. All other verticals within the report are also expected to be unchanged from the last reading.
International Trade in Goods figures are due out at 8:30 am. July’s figures were $-72.3 B. Econoday is calling for $-73.4 B in August.
Weekly Jobless Claims are out at 8:30 am. Last week’s report reflected continued labor market tightness, 208k, with new claims at 2k.
Durable Goods Orders figures for August are released at 8:30 am. Econoday is calling for contraction last month (-1.2%). July’s reading was 2.1%.
Personal Incomes and Outlays for August are due out at 8:30 am. Income is expected to tick higher on a M/M basis to 0.4%. Spending however is expected to tick down to 0.3% from July’s stronger than expected 0.6%.
A sub-text that will run through this week’s economic calendar will be provided by regional manufacturing data released by the Fed. On Monday the Chicago Fed National Activity Index. Tuesday, the Richmond Fed Manufacturing Index. Thursday, the Kansas City Fed Manufacturing Index are leased.