Stock Market Continues its March Higher Despite Mixed Signals on China Trade Deal

(Tuesday Market Open) The ongoing U.S.-China trade-deal saga seems like one of those daytime soap operas. Missed a few episodes? No worries; you can get right back into the story line. The back and forth headlines on the tariff situation between the world’s two largest economies and the seesaw effect on the stock market continued yesterday.

Wall Street seemed to be continuing to search for clarity on the tariff situation. The three major U.S. indices notched slight gains Monday after erasing losses, but the trading didn’t feel like it had a lot of conviction behind it.

Here’s a brief play-by-play.

It had looked like stocks might open in the green on optimism from a Chinese state media report that the two sides held a “constructive” phone call over the weekend.

But then equity index futures reversed course after a CNBC report, citing a Chinese government source, said Beijing is pessimistic about a trade deal amid President Trump’s reluctance to scale back tariffs. That left stocks to open lower.

They were then able to erase those losses, helped by news that the U.S. Commerce Department has granted an extension allowing U.S. companies to continue doing business with Huawei Technologies, a U.S.-blacklisted Chinese company whose status has been an issue in the trade negotiations between the two nations.

Whiplash anyone?

With the day-to-day market playbook so closely attuned to every ebb and flow in the trade-dispute news cycle, the ups and downs can be welcome for short-term traders but a bit irritating for many long term investors. Depending on your portfolio time horizon, sometimes it can be a good idea to tune the noise out.

Optimism from the Huawei development seems to be bleeding over into this morning’s trading, helping investors shrug off some mixed news from the retail space.

Retail Earnings/h3

Investors got a snapshot of the retail sector this morning as Kohl’s (NYSE:KSS), TJX (NYSE:TJX), and Home Depot (NYSE:HD) reported earnings. While two of the companies focus on clothing retailing, HD can also be viewed as a barometer on the health of the consumer because many people might only shell out for DIY home renovations when they’re feeling good about their financial prospects. Shares of KSS were getting taken out to the woodshed this morning—down about 13%—after the retailer reported lower-than-expected earnings, revenue, and same-store sales growth. The company also lowered its earnings-per-share guidance for this year. Shares of HD were also getting hammered in the pre-market—down about 4%—on mixed results. Though HD beat earnings consensus by a penny, revenue fell short of consensus. Plus, the outlook from HD wasn’t stellar as the company reduced its sales-growth forecast for 2019.TJX looked to be the bright spot of the bunch. Shares, which were down 1% ahead of its release, flipped to the upside as the company reported a 4% increase in same-store sales. TJX earnings came in at 68 cents per share, a couple cents above consensus. The growth forecasts from HD and KSS might not bode well for the upcoming holiday shopping season, but the results come after last week’s slightly better-than-expected retail sales figures. October retail sales showed a 0.3% gain, compared to a Briefing.com consensus that had expected a 0.2% rise. The growth in discretionary spending, especially after the prior month’s contraction seems to be a welcome sign ahead of the holiday shopping season, which many retailers rely upon for a good chunk of their revenue.Urban Outfitters (NASDAQ:URBN) is expected to report after the close today, and other retailers expected to open their books later in the week include Lowe’s (NYSE:LOW), Target (NYSE:TGT), L Brands (NYSE:LB), Macy’s (NYSE:M), Gap (NYSE:GPS), Nordstrom (NYSE:JWN), and Foot Locker (NYSE:FL).

Stocks Rise, But So Does Gold/h3

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Overall, there remains little selling pressure in the market. Perhaps some people don’t want to miss out on all of these all-time highs we’ve been hitting, adding to a bump from the Fed’s softer monetary policy and better-than-forecast earnings.

But it may be a good time to remember that much of this record rally has hinged on the thinking that a partial trade deal could get inked sometime soon. We haven’t seen one yet.

Also, investors seem to be injecting some caution into the market. Despite the upward move in stocks Monday, three indicators of risk all finished the day higher as well. Investors sought the safe-haven allure of gold, pushing prices higher (see chart below). They also bought another safe-haven investment, U.S. government debt, sending Treasury yields lower. Meanwhile, Wall Street’s main fear gauge, the Cboe Volatility Index (VIX), ticked up.

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CHART OF THE DAY: GOLD GETTING A SHINE? In recent months—and much of the time in general—gold futures (/GC - candlestick) move inversely to equity indices such as the S&P 500 Index (SPX - purple line), as many investors view gold as a safe-haven investment. Yesterday, however, both gold and stocks moved higher. Investors were apparently slightly rattled by a report suggesting Beijing is pessimistic about a trade deal, news that also sparked buying in U.S. government debt. Data sources: CME Group (NASDAQ:CME), S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Poorer Profit Potential: Even though the stock market is at record highs, earnings estimates for this year and next have been slipping, seemingly because of the continued drag from the U.S.-China trade war. According to investment research firm CFRA, the S&P 500 was recently forecast to earn $162.12 a share this year, down from $171.93 projected at the start of this year. Earnings per share are expected to hit $176.88 by the end of next year, down from an initial forecast of $191.23. “Until details of the deal are revealed, along with the prospects for continued conversations, EPS estimates are likely to undershoot potential,” according to Sam Stovall, chief investment strategist with CFRA.

Slowdown in Dividend Growth: Even as profit estimates have been slipping, global dividend growth is also under pressure as the global economy softens. Although global payouts rose 2.8% to a new third-quarter record of $355.3 billion, that was below the 4.4% pace of Q3 2018, according to the Janus Henderson Global Dividend Index. The slowdown was sharp in North America, where dividends rose 4.3% in Q3, down from 8.6% in the prior-year period. Meanwhile, a growing proportion of U.S. companies kept their dividends flat. “We have been cautioning investors all year that the rapid dividend growth they have enjoyed in the last couple of years was set to return to more normal levels,” according to Jane Shoemake, investment director of global equity income at Janus Henderson Investors. “For next year, slower profit growth will impact dividends, but with interest rates at their current low levels, equities will continue to provide a valuable source of income for investors, even if the rate of dividend growth is less eye-catching than in the recent past.”

Confidence Building: This week is relatively light on data, but it is peppered with housing-related numbers. In addition to the HD results and housing starts and building permits figures from this morning, this week also holds LOW earnings, a weekly mortgage applications index, and data on existing home sales. Next week, we’re scheduled to get a reading on new home sales for October. Fresh figures from the new-home front this week have been encouraging. Although the National Association of Home Builders/Wells Fargo Housing Market Index ticked down one point in November, the 70 mark for the latest number stands with October’s figure of 71 as the highest sentiment levels this year. Low mortgage rates and continued job growth are helping boost builder confidence in the market for new homes, the NAHB said Monday.

Good Trading

Written By: TD Ameritrade