Stocks Stall as Fed Meeting Comes Into Focus
Stocks finished mixed on Monday, with technology stocks keeping the Nasdaq afloat, while the other major indices slipped into the red. After Friday's "Goldilocks" jobs report - with payroll growth strong but wage gains modest - investors decided to cool their heels a little in a the midst of heavy issuance from the Treasury, another Federal Reserve policy meeting and the realization that Washington will need to hammer out another budget deal before the end of the month.
In the end, the Dow Jones Industrial Average lost 0.6%, the S&P 500 lost 0.1%, the Nasdaq Composite gained 0.4% and the Russell 2000 gained 0.3%. Treasury bonds were mixed, gold inched higher, crude oil weakened and the dollar fell.
Breadth was slightly positive, with advancers outpacing decliners by a 1.2-to-1 ratio with 148 new highs on the NYSE vs. 25 new lows. Key industrial stocks were hit, ostensibly on trade war fears, with Boeing Co (NYSE: BA ) down 2.8%, United Technologies Corporation (NYSE: UTX ) down 1.9%, and Caterpillar Inc. (NYSE: CAT ) down 2.4%.
Semiconductors were on the move in a big way, with the Market Vectors Semiconductor ETF (MUTF: SMH ) up 1% to a new high with Micron Technology, Inc. (NASDAQ: MU ) up 8.8% after getting an upgrade from analysts at Nomura. Broadcom Ltd (NASDAQ: AVGO ) gained 3.6% after the Wall Street Journal reported Intel Corporation (NASDAQ: INTC ) is considering a bid for the company; which in turn, is seeking a deal with Qualcomm, Inc. (NASDAQ: QCOM ).
The next major catalyst is the Federal Reserve meeting later this month. The first headed by new chairman Jerome Powell.
Citigroup analysts, in a recent note to clients, wondered aloud why investors have been so slow to price in the receding tide of central bank stimulus. Setting aside whether the Fed will raise interest rates by 0.75% or 1% or maybe even more this year, the pace of "quantitative tightening" is set to continue to accelerate as years of bond buying stimulus is reversed.
As central bank asset purchases slow and eventually turn negative, history shows a close connection to the performance of high-yield bonds and global equities. Without much stronger (and inflation-free) economic growth and credit creation (especially in China) these will be massive headwinds as 2018 pushes towards 2019.
Moreover, the "trade war" threat hasn't gone away. Over the weekend, China's Commerce Minister said the U.S. calculation of its trade deficit with China is exaggerated by 20%. Watch for possible retaliatory actions. And the Russia probe is coming to a head with reports that Trump's lawyers are in contact with Special Council Mueller to accelerate the probe, possibly by agreeing to sit for an interview.
Goldman Sach's chief equity strategist David Kostin, for his part, tries to answer the question from clients of "what happens next?" by suggesting a focus on the 10-year yield, which appears to be on the verge of pushing past the 3% threshold. As long as the rise in interest rates is relatively controlled, stocks can continue to rise.
Only when rates push towards the 4% level, which should happen sometime in 2019 as things stand now, will higher economic growth be needed to keep equity valuations aloft.
Today's Trading Landscape:
To see a list of the companies reporting earnings today, click here .
For a list of this week's economic reports due out, click here .
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