Stocks Rebound on Hopeful Trade Signals
Market Movers
- Talk that the US and China are moving closer on trade helped stocks this morning
- ADP's employment report missed, adding 67,000 jobs instead of the 135,000 estimated.
- Services PMI, while lower than expected, showed expansion in this important segment in the economy even as Manufacturing PMIs have contracted for four consecutive months.
Mike’s Commentary
I think we've heard this before. "Stocks move higher on hopeful trade rhetoric." This is of course after stocks fell sharply yesterday following Trump's comments that perhaps a deal could wait until after the (November 2020) election. Trade war de-escalation along with an accommodating Fed and a slowly growing economy are the underpinnings of strong performance that saw stocks rise about 4% in November and achieve YTD returns of about 30% for Nasdaq indexes even after yesterday's downdraft. The ISM Manufacturing release Monday soured the mood as December got off to a rocky start. As Brian points out below we may be looking at a more positive end to 2019 than last year's "December to remember."
Clearly if trade talks falter stocks are vulnerable, hence yesterday's 400 Dow point decline for most of the day before a late rally pared losses to -280 Dow points.
Today, stocks have regained a little over half of that this morning after "people familiar with the talks" let it be known that President Trump's speaking off the cuff yesterday should not be interpreted that trade talks are stalling. In fact, the (leakers) stated that the US and China are closer to agreeing to a deal in which tariffs would be rolled back in a Phase One deal. We'll watch for the afternoon's action to see if this morning rally is short covering or something more meaningful.
In non-trade news, the ADP jobs report showing payroll growth of only 67,000 jobs vs.135,000 estimated was a negative surprise. Goods producing jobs fell 18,000 which offset the 85,000 jobs added by service providers. Stock futures barely budged after the release, suggesting the market is more concerned about trade, or is factoring in the noisiness of the ADP data. Later, the November ISM Non-Manufacturing Index fell to 53.9 vs. the 54.5 estimates and October's 54.7 reading. Once again, we have services expanding and manufacturing declining. A separate reading called Market US Services PMI was consistent with ISM, at 51.6 and in line with estimates.
All in, we still seem to have slow but stable growth, some hopeful signs on the trade front and nothing to suggest the Fed will alter course anytime soon so stocks moved higher led by trade-focused sectors like Industrials and Materials. Energy is leading after yesterday's weakness following an API report showing inventories fell more than forecast. "Safety" sectors like Staples, Utilities and Real Estate are all in the green but lagging slightly. See the table below for details.
Sector Recap
Brian’s Technical Take
President Trump’s response to France’s Digital Tax is reminiscent of an exchange between Otto and Boon from the 1978 comedy, Animal House: “He can't do that do that to our pledges. Only we can do that to our pledges.” During yesterday’s meeting with NATO leaders in London, Trump defended large U.S. tech companies when saying “I'm not going to let people take advantage of American companies. If anyone is going to take advantage of American companies, it's going to be us. It's not going to be France.”
The tariff man is firing on all cylinders this week as the looming December 15th tariff deadline on Chinese imports is fast approaching, and now has just opened new trade war front targeting Brazil and Argentina. While U.S. equity markets have seen three straight days of declines, the large cap indices are within 3% of all-time highs. Stocks are on pace for their best performance since 2013, and select sectors like Technology are having their best year in over a decade.
Speaking of 2013, fellow technician Ryan Detrick of Nasdaq-listed LPLA Financial Holdings Inc. tweeted the following late yesterday: “The S&P 500 is down the first two days of December for the first time since 2013. That was also the last time it was up >25% YTD heading into the final of the year. It managed to gain 2.4% in December 2013.” And while the S&P 500 declined 3.1% the following month in January 2014, it gained it all back and then some in February and finished that year +11.4%.”
In many ways the present environment is obviously very different from 2013-2014, however long term momentum for the S&P 500 looks good. The monthly MACD (12,26) made a bullish crossover above its signal line (9-month average) this past September, and is now holding positive for the fourth consecutive month. According to technician Katie Stockton, founder of Fairlead Strategies, going back to late 1990 the S&P 500 has gained an average of 5.5% over six months, and 10% over twelve months, following this signal.
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