- China comments casting doubt on a longer term deal hurt stocks
- Chicago-area "PMI" weaker than expected.
- Personal Income of 0.3% was in line. Personal Spending of 0.2% was below the 0.3% estimate but two prior months were revised higher.
Stocks are lower today shedding about 200 Dow points on a weak regional manufacturing release and China’s comments about a longer term trade deal, all against a torrent of earnings releases. The House also voted to begin the public phase of it's impeachment inquiry.
The S&P 500 closed at a record high last night. The main reasons for recent stock gains have been better than feared earnings, China and the Fed. The Fed did its part yesterday with a 25bp cut but headlines this morning are that China has expressed doubts about a long-term trade deal though I don’t think that surprises anyone. A limited deal that covers “about 60% of a total deal” in Trump’s words would still mark progress. Most market watchers think that China is not going to budge on tougher issues like intellectual property, especially with an election only a year away.
We are now solidly into Q3 earnings season with releases today from Cigna, Iron Mountain, DuPont, Dunkin Brands and many others hitting the wires pre-open. As of Friday, according to FactSet, the blended earnings growth rate for Q3 S&P 500 EPS was (3.7%), an improvement over the 4.7% decline expected a few weeks ago. If the trend continues, the market is looking at a third consecutive (slightly) negative quarter – companies generally beat estimates in the aggregate by about 3.2%. Do flat earnings and lowered Q4 and 2020 estimates suggest stocks should be at all-time highs? Not really, but we have two other factors in play.
One is China and the hopes despite today’s comments that the first phase of the deal are “basically completed,” though now a new location is needed since Chile cancelled the November APEC summit.
Another major driver for recent market gains has been the Fed, with the market implied probability for a 25 basis point rate cut at 99.5% just before yesterday’s FOMC meeting. The Fed did not disappoint, cutting rates to a 1.50-1.75% target range. The accompanying statement suggested a further rate cut in December is less likely.
With yesterday’s 3Q advance GDP of 1.9% beating the 1.6% consensus, both the market and the Fed seem to be in agreement on rates and the macro environment. The economy is slowing but not tipping into a recession. Steady but slow growth and low rates are currently supportive of stock prices. Investors and Fed officials will continue to watch data including manufacturing and jobs numbers for future clues about the economy and stock prices.
Today, September Personal Income of 0.3% was in line with consensus and Personal Spending of 0.2% was a tenth below expectations but July and August were both revised higher. Consumer spending is still solid, with the savings rate also creeping up. The PCE Core Deflator, which the Fed watches closely, indicated no inflation in September, also in line with expectations but below the Fed’s target. Jobless Claims were just about in line at 218,000 (215,000) but a concerning release was the “MNI Chicago PMI”, a business barometer of Chicago area activity was reported at 43.2 vs. 48.0 expectations. Given weak manufacturing PMIs lately both here and abroad, investors are sensitive to this data.
Brian’s Technical Take
Yesterday Chairman Powell and colleagues delivered the expected quarter point rate cut and thus fulfilled its “mid-cycle adjustment” of three rate cuts. Powell said the current policy is now at appropriate levels implying rates are on hold for a period of time.
While still early to make an affirmative call, markets for now seem relatively comfortable with the Fed’s desire to hold short term rates here and assess the landscape. The S&P 500 gained a modest 0.3% yesterday and managed to close at a new all-time high. And even with senior officials from China lowering expectations for a comprehensive trade deal, the SPX is still holding this week’s gains.
From a technical perspective be mindful of the resistance line connecting the highs from January and October ’18 which later marked the top in July of 2019. Price is currently up against this clearly defined resistance line once again. And this week’s breakout to new highs is not yet seeing much momentum behind it which puts it on watch for a potential downside reversal in the near term. In addition the breadth is not all that great as the percentage of members making new 52-week highs (lower panel) has been in a steady decline since June.
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Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen-based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.
Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.
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Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq, Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).
Michael Sokoll, CFA is Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.
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