Trade Drama Finally Has Competition As Earnings Come Into View
TD Ameritrade | Oct 15, 2019 02:00AM ET
(Monday Market Open) This week, it gets real.
Real in the sense that investors will finally have something solid to trade on and not just the latest back and forth around trade talks with China—like the one that helped spike stocks on Friday and now has them looking softer (see more below). The backbone of the stock market is corporate results, and tomorrow the season starts with a bang as several major banks report Q3 earnings .
Like a lot of sectors going into an earnings season when results are expected to be overall negative, the Financial sector faces challenges—notably the low-rate environment and slowing growth around the world. That said, JP Morgan Chase CEO Jamie Dimon takes the mic tomorrow morning and there’s a lot potentially riding on how he characterizes things.
Dimon had a positive outlook last quarter, and he’s arguably the dean of the group. His confidence is incredibly important, and investors might want to see if he strikes a positive note that a slowdown in Europe and Asia isn’t impacting results.
The lineup for tomorrow morning includes JPMorgan Chase & Co (NYSE:JPM), Citigroup Inc (NYSE:C), Goldman Sachs Group Inc (NYSE:GS), and Wells Fargo & Company (NYSE:WFC). Later this week brings Bank of America Corp (NYSE:BAC) and Morgan Stanley (NYSE:MS). Investors get their first look at a FAANG on Wednesday afternoon when Netflix Inc (NASDAQ:NFLX) streams its results to the world.
Get The News You Want
After spiking Friday on hopes for what the administration called a “phase one” deal with China, stocks suffered a setback in futures trading Monday as doubts crept in. People are re-evaluating what “phase one” might mean. Reports that China might want more talks before putting the initial deal in place appear to have some investors waiting to start celebrating. There’s really no reason to think the S&P 500 can break above 3000 in any significant way until something gets signed.
Another thing to keep in mind about today is that it’s Columbus Day, and banks are closed. The bond market also gets a day off. That might mean seeing some herky-jerky kind of trading with certain products closed and relationships out of line, so it’s important to be careful for anyone trading. It wouldn’t be surprising if volume is thin, especially since we’re in the waiting game for earnings tomorrow.
Another Friday Fiesta
Friday put a big exclamation point on a dramatic week, with excitement building over what the Trump administration called “phase one” of a trade deal with China. It looks like tariffs that were scheduled to rise this week might not, but it’s unclear exactly how this is all going to work.
Any positive news about an initial agreement—if it happens— would arguably be positive for Technology stocks, especially semiconductors. The Philadelphia Semiconductor Index rose more than 2% Friday, partly on hopes that this phase one agreement might mean less U.S./Chinese friction over Chinese telecom giant Huawei Culture Co Ltd (SZ:002502). The administration said last week that it plans to soon issue licenses allowing some American companies to supply non-sensitive goods, according to The New York Times.
It was interesting to see indices roll back some of their biggest gains in the last half hour of Friday’s session. It could have simply been some profit taking heading into the weekend, with the trade situation still unclear as the closing bell rang. Some investors might have been hoping for something more cut and dry as far as a trade agreement, and could have become disappointed when they heard “phase one,” Briefing.com said. That implies there could be many phases to come, and it’s something to consider keeping in mind before getting too excited.
Still, last week saw gains for the S&P 500 Index (SPX) after three consecutive weeks of losses. Another positive note came on the data watch Friday morning as Michigan consumer sentiment rose to 96. That was well above the 89.9 expected and September’s 93.3, implying consumers remain on firm footing so far this month.
Industrial Power
Industrials led the way Friday with a huge gain of more than 2%. One big mover was Fastenal Company (NASDAQ:FAST), which sure seemed to pick the right day for a better-than-expected earnings report. Shares of FAST, a wholesaler of industrial and construction supplies, rocketed more than 17% for the company’s best day in nearly 20 years. The company got a double-boost from strong earnings and the China news. If trade relations smooth out, it could help companies like FAST by loosening up what’s been a real tough barrier for the big Industrial firms for the last 18 months—lack of clarity around the rules of trade (more on that below).
The other thing a trade deal could do is slow rising costs for firms across the Industrial and Information Technology sector. Remember, a lot of them have been struggling with higher supply expenses due to the tariffs. Companies like Boeing Co (NYSE:BA), Caterpillar (NYSE:CAT), and Lockheed Martin (NYSE:LMT) all could benefit. CAT shares rose nearly 5% Friday for the company’s best day in weeks.
Material sector companies also got a boost at the end of the old week, including a sparkling day for mining company Freeport-McMoran Copper & Gold Inc (NYSE:FCX), which climbed 7%. Here’s a sector that could benefit from rising metals prices after commodities stayed under pressure throughout much of this trade battle. Copper Futures are now around $2.61 a pound, still way below highs from 2018. However, if trade relations smooth out, it’s possible commodities like copper, crude oil, and agricultural products could start to rise, with potential benefits for the Materials and Energy sectors. We’ll have to wait and see.
Bonds, which had been under pressure all day Friday, came off their lows by the end of the session, but the 10-Year yield remained near recent highs above 1.7%. That’s about halfway between the longer-term lows just below 1.5% and highs just above 1.9%. So for now, it looks like investors are trying to find some middle ground in bonds.
It’s hard to believe that the CBOE Volatility Index had once traded above 20 early last week, the way it finished Friday well under 16. In like a lion, out like a lamb, as the old saying goes. It’s back above 16 this morning.
One thing worth noting is that the rally Friday stopped well short of the psychological 3000 mark for the S&P 500 Index (SPX) after approaching within seven points of it at its high for the day. The all-time intraday high of around 3027 from late July remains an important point to watch. If we can’t reach 3025 or above at some point soon, it’s possible that the market could fade last week’s rally. That becomes even more likely if there’s a lack of concrete news about this phase one deal.
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FIGURE 1: DONE TREADING WATER? The S&P Industrials sector (IXI-candlestick) and copper futures (/HG-purple line) have been trading water for months, but both got a boost in part from news of trade deal progress Friday. These could be two metrics to continue monitoring if trade optimism continues. Data Sources: S&P Dow Jones Indices, CME Group (NASDAQ:CME).Chart source: The thinkorswim® platform from TD Ameritrade .For illustrative purposes only. Past performance does not guarantee future results.
Chip Sector Demand In Question: Last week’s Goldman Sachs (NYSE:GS) downgrade of Cisco (NASDAQ:CSCO) based on weak enterprise sector spending isn’t just bad news for CSCO. It also could extend to other companies in Technology, including semiconductor firms. Remember, this isn’t the first sign of weakness in the enterprise sector. Back in August, enterprise data services company NetApp Inc (NASDAQ:NTAP)) shares got hammered after the company cut its Q1 sales and profit outlook and lowered its full-year sales growth guidance. NTAP blamed macroeconomic factors, including the trade war.
So first there was NTAP, and now there’s the GS note on CSCO. Does all this trickle through to other parts of the Technology sector, including chip firms?. Chipmakers could be the first place some of this shows up. Semis are near their highs, and these companies provide the chips for data centers. That said, chip companies have been left on the roadside for dead maybe five times this year alone, and they keep performing. You do have artificial intelligence and gaming, two areas that look to continue to be strong and could rescue the sector. Still, some analysts see the chance of a slowdown in gaming. Where do tariffs settle and how do they affect semis—that’s the big question mark. Semiconductor earnings come into focus the week of Oct. 21, when several big names are expected to report.
Infrastructure Watch: Even with the trade winds apparently blowing in the market’s favor as the year winds down, companies are still working without a rulebook until a final deal gets signed. That means infrastructure spending could stay restrained, a potential worry going forward. This might be particularly important in the Industrials sector, which is tied pretty closely to business with China and has been holding up better than many analysts had expected. The concern is that many continue putting off infrastructure spending. It’s hard for them to invest without knowing the rules of the game as far as trade is concerned. When the rules can change at any moment, that makes things difficult. The problem is, if you don’t spend money on infrastructure now, that’s something that can haunt you two or three years down the road. In recent quarters, we haven’t heard many Industrial or other companies talk about their infrastructure spending plans, so it might be something to keep tuned into as this earnings season gets underway. Some of the big Industrial firms like CAT, BA, and LMT are expected to report the week of Oct. 21.
Manufacturing Back in Picture on Tuesday: A weak manufacturing sector survey helped put the brakes on the market earlier this month, and tomorrow brings an important regional indicator with the Empire State Manufacturing survey. Last time out, the headline number still showed expansion, but just barely. The index edged down to just 2.0 in early September, with new orders looking weak. Shipments fell to their lowest level in three years. More weakness in this report could signal additional challenges for the manufacturing economy. Other key data this week include September retail sales on Wednesday and September housing starts on Thursday.
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