Trade Concerns Continue To Push Stock Market Lower

It may be a new week, but the same uncertainties that led to a 4% plunge culminating in Friday’s 500-point decline haven’t necessarily gone away. The market is still licking its wounds, and concerns about the next chapter in the U.S.-China trade war, Brexit, and possible slowing economic growth all could continue to weigh on sentiment as the year winds down.

The Dow Jones Industrial Average ($DJI) fell more than 500 points Friday to erase its 2018 gains. Meanwhile, the S&P 500 Index (SPX) ended the old week at 2633, exactly one point above the closing low on Nov. 23. While some traders could view the close as a positive sign from a technical perspective, it probably came as little consolation for bulls on a day when the index was down more than 2% and in a week that was the worst since March for the major indices.

More bearish news came over the weekend when China reported November export data that fell short of expectations and could potentially raise concerns about demand from global importers. Exports to the European Union, South Korea and the U.S. from China all rose less than expected, with exports to the U.S. up 9.8% in November from a year ago but down from 13.2% in October. Import growth of 3% was the slowest in two years. Asian stocks were down early Monday.

In Europe, concerns about a possible delay in the U.K. parliament’s vote on Prime Minister Theresa May’s Brexit plan are front and center this week. According to media reports, May’s plan is under attack from all sides of the political spectrum, and if it fails, the U.K. might have to re-enter negotiations with the European Union. The pound fell Monday to 19-month lows vs. the dollar.

Still, pre-market trading saw U.S. indices turn positive, maybe a sign that some investors think the market might have gotten oversold last week. We’ll see if the early green numbers can possibly stay that way. Key technical support appears to be near the 2600 level for the SPX, which is down around the late October intraday low.

Tectonic Shift Underway as “Buy the Dip” No Longer Working

Last week’s plunge and continued volatility could serve as reminders of the tectonic shift we’re seeing in stock market and fixed income valuations, but even the bears might have gotten surprised by the extent of the Friday selloff.

Meanwhile, for the bulls, buying the dip doesn’t seem to have worked. Instead, many investors appear to be opting for “risk-off” vehicles like Treasury notes, utility stocks, and gold. Others might be holding on to their equity positions but not not adding to them, perhaps hoping to batten down the hatches as the headwinds keep blowing. Volume was relatively light on Friday, a possible sign of investors not wanting to be too active in this market. Consider keeping an eye on volume this week, especially with the holidays closing in.

The difference between now and, say, a year ago, is back then investors could often rely on FAANGs or financials to come through and pull the market out of any skid. Today, it’s hard to see what kind of spark could send things higher. The world isn’t ending, but we might need to see some sector or other stick its head up and be the one to help lead us out of here. It’s unlikely to be utilities, by the way, a traditionally “defensive” area and the one sector to gain Friday as investors embraced “risk-off” trades.

Positive Catalysts on Horizon?

For things to get brighter, it would likely take some sort of positive news from either U.S. trade negotiations with China, the ongoing Brexit saga, or some of the inflation data coming tomorrow and Wednesday. The November producer price index (PPI) early Tuesday and the consumer price index (CPI) early Wednesday could be the next pieces in the puzzle helping investors get a sense of where the Fed might decide to go with rates in 2019.

While no single report is going to determine the Fed’s strategy, PPI might be one to consider watching. If the 3% wage growth seen in last Friday’s jobs report is starting to permeate other parts of the economy, PPI might be the report to show it. The October PPI, if you remember, showed a surprisingly high 0.6% jump, though other inflation reports since then haven’t shown much evidence of prices inching higher. Also, core PPI—which strips out energy and food—rose just 0.1% in October. Wall Street analysts look for flat PPI growth in November, according to Briefing.com. Weak crude prices might play into that.

Aside from inflation data, another highlight this week is Fed Chair Jerome Powell’s congressional testimony Wednesday. This follows last week’s Wall Street Journal report that the Fed might be ready to signal some sort of pause in rate hikes following what’s widely expected to be the fourth hike of the year later this month.

December Rate Hike Still Seems Likely

The week begins with futures prices showing about a 72% chance for a hike when the Fed concludes its meeting Dec. 19. That’s not necessarily a slam dunk, but historically, when futures prices indicated this high a chance, hikes have typically followed. Some analysts note that if the Fed decided not to hike in December that could actually cause more fear in the market because it might be interpreted as the Fed seeing clear signs of economic erosion. At this point, it seems very likely that rates will go up.

After December, the next step is a little less clear. Odds of a March hike now stand at 25%, according to futures, down from above 50% a few weeks ago.

If there’s one thing that really helps tell you how downtrodden this market is, it’s arguably the Dow Jones Transportation Average. That metric, which some analysts see as a useful tool to measure market sentiment, fell more than 8% last week, the worst of any major market indicator. Other so-called “cyclical” parts of the market that tend to thrive in positive times did almost as poorly, with S&P 500 industrials falling 6.3% and S&P 500 financials crumbling 7%.

Amid the selling, technology shares haven’t been able to provide the upside buoyancy we saw earlier in the year as the overhang from the U.S.-China trade war seems to be too great. Tech giant Apple Inc AAPL has also been plagued by worries about its iPhone sales. Meanwhile, the financial sector hasn’t been able to provide upside momentum as Treasury yields have pulled back. So at the moment it’s hard to see what might be the spark plug to get this this sputtering engine revving again.

Hopes Continue Rising For Fed Pause Amid Dovish Signals

This comes against a backdrop of other signs of potential Fed dovishness. On Thursday, the Wall Street Journal reported that Fed officials are considering whether to signal a new wait-and-see mentality after a likely interest-rate increase later this month, which could slow down the pace of rate increases next year. On the same day, two Fed speakers made comments that might have reassured investors who’d been worried that the Fed could be hiking into a slowing economy. Those comments followed dovish talk by Fed Chair Jerome Powell and Fed Vice Chair Richard Clarida, who both expressed thoughts about rates now being near neutral.

Despite the arguably positive nature of Friday’s jobs report when looked at from a point of view focusing on inflation, the headline number did show weaker-than-expected jobs growth. So it may be that some market participants were focusing on that side of the coin and adding pressure to the market already worried worries about ongoing trade tensions between the United States and China.

Trade Worries Weigh

On the trade front, there were comments Friday by White House trade adviser Peter Navarro on the potential for raised tariffs if a trade agreement isn’t reached during the three-month truce. Even so, White House economic adviser Larry Kudlow told CNBC that the trade talks are “extremely promising.”

Last week, market optimism about a truce announced following a meeting between President Trump and his Chinese counterpart at the G-20 summit quickly waned after an executive with Chinese telecom giant Huawei Technologies was arrested in Canada and faced extradition to the United States.

That raised concerns over the world’s two largest economies striking a longer-term deal that could end a trade dispute that has been hanging over Wall Street for much of this year and sparked worries about global economic growth.

Brexit, Italian Woes Add To Pressure

In addition to watching the headlines for developments on the trade front, investors may also be paying attention to the upcoming United Kingdom vote on a proposed plan to leave the European Union. Meanwhile, contentious budget negotiations between the European Union and the Italian government continue.

Shares of information technology and consumer discretionary companies took the biggest hits. For tech, that’s probably reflective of the sector’s strong links to China. For consumer discretionary stocks, there still may be some lingering worry about an economic slowdown after portions of the Treasury yield curve inverted this week.

On Friday, although energy stocks lost some ground, oil prices were helped by news of an agreement involving OPEC and Russia to cut output next year by 1.2 million barrels a day. Oil prices have gotten hammered recently on worries about global oversupply and the potential for decreased demand for black gold. While this week’s agreement could end up helping on the supply side, global demand remains a question mark, especially as the U.S.-China trade war continues to loom. By early Monday, crude was trading back below $52 a barrel, not seeming to get much more momentum from the production cut.

Figure 1: A Shinier Look: Gold prices (/GC), as shown in the candlestick chart, have been on an upswing lately. Part of that arguably has to do with moves lower in the U.S. dollar ($DXY), as shown by the purple line. But those have been relatively muted, and it seems the dollar may just be stabilizing. Other help may be coming to gold from its role as a perceived safe haven, amid marked declines in the stock market, as represented by the blue line showing the S&P 500 (SPX). Data Source: CME Group, ICE, S&P Dow Jones Indices.Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Number of Marginally Attached Workers Rises: With the market focused on the headline numbers out of Friday’s jobs report, some investors might have missed a lesser-looked-for wrinkle in the data. According to the report, the number of so-called marginally attached workers rose by 197,000 year-on-year to 1.7 million people in November. The government defines these people as wanting to work, available to do so, having looked for a job sometime in the past year, but still not in the labor force. Yet, they aren’t considered unemployed because the hadn’t looked for work in the four weeks before the survey. At the same time, the number of "discouraged workers" among the marginally attached is nearly unchanged versus the same time last year. Discouraged workers, according to the government’s definition, aren’t looking for work because they don’t think any jobs are available for them. According to the government, the marginally attached portion of people who weren’t discouraged workers hadn’t searched for work because of reasons like school attendance or family responsibilities.

Swinging From the Rough: Sometimes it might seem relatively straightforward to be a long-term investor. The period from mid-2016 through January of 2018 comes to mind. Volatility was calm, interest rates stayed historically low and stocks basically got on an elevator that took them to new all-time highs again and again and again. Wash, rinse, repeat. Then there’s times like now, when long-term investors might feel like they’re swimming against the tide. A slew of negatives have ganged up to put stocks in the red, the world economy appears to be slowing, and volatility keeps rising.

At times like these, it’s not necessarily best to put your head in the sand and hope it all goes away. Instead, the end of the year might be a good time to consider taking a good look at your allocations to make sure what you have still fits your long-term plans. With all the buffeting this year, is your allocation of stocks to fixed income still where you’d planned? Has anything major changed in your life that might cause you to-rethink how you invest? Are you parked in the right sectors considering your risk tolerance? Now could be a good time to start thinking about that, while doing your best not to let day-to-day volatility take you off your game.

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