Valentine's Card From The Market: Trade Optimism Continues, Cisco Posts Strong Quarter

Investors got their Valentines from the stock market a bit early this year, with major indices mounting a rally over the last few days that would likely warm the heart of even the most enthusiastic bull.

The rally had initially looked likely to continue early Thursday as investors reacted to news reports that the U.S. might be willing to extend the China trade talks deadline by as much as 60 days, and as shares of Cisco Systems, Inc. CSCO moved higher after reporting solid earnings. Some positive export data out of China didn’t hurt, either. 

However, it looks like the weak markets and government shutdown situation in December might have taken a bite out of consumer spending, as retail sales fell 1.2% that month, the government said. Wall Street had expected a 0.2% rise, according to Briefing.com. Futures prices quickly turned tail after that report, and major indices came under pressure in pre-market trading. Concerns about the consumer might return based on this news.

While the overall market seemed to have a positive reaction to news of a possible trade deadline extension, kicking the can down the road isn’t necessarily a completely positive thing. It would mean more questions for corporations, which would be forced to continue making spending and other strategic decisions without knowing how the trade deal might ultimately play out. For companies, it’s hard to play the game if you don’t know the rules.

Wednesday marked the second straight day of the S&P 500 (SPX) closing above its 200-day moving average of 2743. Unlike Tuesday, when the SPX barely topped the average, it eclipsed that mark Wednesday with room to spare. Sometimes a few closes above key moving averages can help provide momentum, though certainly other factors can drive markets as well. We’ll have to wait and see if the SPX can maintain this technical strength, something it failed to do back in early December when it last crossed the 200-day line.

The SPX also managed to finish above 2750, another level that some technical analysts had been watching. It was the first close above 2750 since Dec. 3, so the market is at nearly two-and-a-half month highs. It’s really pretty remarkable how far things have come since the Christmas Eve lows down around 2350. The SPX is up more than 400 points since then, or 17%, but remains down 6% from the all-time high close of just over 2930 recorded last Sept. 19.

Also, all of the major U.S. indices have emerged from correction (which is down 10% or more from highs). If you recall, the SPX teetered on the edge of a bear market at the end of the day Dec. 24. Post-market trading that evening actually took it down more than 20% from its high, which is the definition of a bear market.

Border Bill, Shutdown Still Not Wrapped Up

Hopes for a trade deal with China and chances to avert a government shutdown both played a big role in the market’s strength so far this week. However, the shutdown situation remains fluid, so investors might want to consider keeping a close eye on things as the week closes, especially with a three-day weekend ahead. The markets are closed next Monday for President’s Day.

It’s possible the weekend could arrive with investors uncertain about the status of the border bill in Congress. The president has until midnight Friday to sign, and that’s hours after the market closes for three days. If there’s a hitch in the process leading to a possible shutdown, it might be worth watching futures market action Monday night to get a sense of how things could go Tuesday morning. A volatility spike can’t be ruled out if things don’t get resolved in Washington.

The benchmark 10-year U.S. Treasury yield climbed back above 2.7% for the first time in about a week Wednesday, possibly a sign of investors getting more positive about the economy. On a less positive note, the U.S. dollar index edged above 97 again, possibly a sign of investor concerns about economic growth overseas. The looming prospect of a no-deal Brexit could be one factor favoring the dollar, and a stronger dollar can often spell trouble for major U.S. multinational companies.

That said, the industrial, energy, and info tech sectors—where many U.S. multinationals live—didn’t show much sign of impending economic concerns. Industrials and energy were among the leading sectors Wednesday, and financials also rose. Of all U.S. sectors, only utilities and communication services walked away in the red Wednesday.

However, the FAANGS—which have often helped drive momentum for the overall market—finished mostly lower. Also, shares of Boeing Co BA and Caterpillar Inc CAT finished lower and just a touch higher, respectively. Both of these companies are often viewed as barometers for U.S./China relations, since they have big businesses in China. BA has been on a roll lately, but CAT shares have struggled since the company turned in earnings per share that fell short of third-party consensus estimates and guidance that disappointed some analysts late last month.

Volatility remains near historic averages as the VIX flirts with the 15 mark. It hasn’t fallen below that level since early October. 

Fresh Batch of Earnings, Data

This morning saw some new data with the release of January producer prices and retail sales. Overall producer prices dropped 0.1% last month, but core prices (which strip out food and energy) rose 0.3%, above expectations. Consumer prices for January released Wednesday appeared pretty benign and didn’t seem to spark much concern about inflation getting a foothold (see more below). 

China’s January exports rose 9.1%, a big turn-around from a decline of more than 4% in December. Still, its imports fell last month, so apparently not everything is well.

CSCO earnings, released late Wednesday, beat analysts’ revenue and earnings per share expectations. Its guidance outpaced analyst projections, too, and the company said business in China is going well despite the trade battle. Shares were up 4% in pre-market trading Thursday.

Things weren’t looking quite as robust over at The Coca-Cola Co KO, which met Wall Street’s earnings expectations and beat revenue estimates but appeared to disappoint some investors with its outlook. Shares fell 2% in pre-market trading.

Nvidia (NVDA) is due to report after the close today, and Deere & Co DE and PepsiCo, Inc. PEP are tomorrow morning.

Unpack Your Bags

A couple of travel sector names opened their earnings suitcases Wednesday, and the response was particularly good for Hilton Hotels HLT. Shares rose nearly 7% Wednesday as HLT easily surpassed third-party consensus earnings per share projections and delivered a forecast that, while not judged spectacular by analysts, also was a bit better than many on Wall Street had expected.

Like other companies this earnings season, HLT noted in its call that there’s been a bit of a slowdown in some areas. While business travel continues to look strong, executives said, leisure is where things have slowed a bit, particularly in China. HLT’s CEO said on the call that every economy has its ups and downs, and that while China might be down, HLT doesn’t see that as long lasting. Judging from how the stock reacted, the Street seemed to like that statement.

Still, when you look at HLT’s hotels, they’re catering to the middle- to upper-middle kind of customer, not the top of the food chain. So its struggles in China could mean the middle class in China is suffering more than we think.

HLT also took some market share during the quarter, perhaps putting some pressure on competitors like Hyatt Hotels Corporation H, which reported later Wednesday, and Marriott International Inc. MAR, which reports later this month. Market share seems to be the measure everyone is getting measured on, if you will, more than the expense of gaining market share. Also, hotels like HLT are finding every possible way to eke more revenue out of each room.

Figure 1: “TWO C’s” OF RISK: Copper futures (candlestick) and crude futures (purple line) are both up solidly since hitting recent lows in late December. Both of these commodities often see investor demand in times of economic growth amid ideas that demand could rise. Data Source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Reining in the Horsemen: When economic tides crash against the shore, we often talk about the so-called “horsemen” of risk, namely VIX (volatility), gold, the dollar, and U.S. Treasury bonds. These holdings all tend to see investor interest when there’s a move toward “safe havens,” though no investment can truly be called “safe.” When the tides retreat a little, as they seemed to this week, many of the horsemen get reined in, and instead investors often gravitate toward areas that typically do better when economic conditions improve.

At this juncture, some of that seems evident, with sectors like energy and industrials leading the charge higher. Copper—often seen as an indicator of economic activity because it’s used in so many industrial applications—has also bounced from December lows, and crude is up about 20% since diving under $50 a barrel late last year. Other areas that sometimes signal investor optimism also are enjoying nice runs, including U.S. small- and mid-cap stocks, along with transports. All of these are places investors might want to consider watching for further indication of market sentiment in coming weeks, but it’s also noteworthy that the U.S. dollar continues to trade near recent highs, gold hasn’t eased much, and Treasury yields remain quite low. These could be signs that at least some investors don’t see hard times being truly over.

Eat Your Veggies: If you feel like you’ve been paying a bit more for restaurant meals, or if a new home purchase left your wallet light, it’s probably not just your imagination. Yesterday’s consumer price index (CPI) for January showed a 2.8% year-over-year jump in prices for food bought outside the home, and a 3.2% rise in shelter costs. Home heating costs also rose well above the overall 1.6% headline inflation increase since a year ago, the Labor Department said. Higher food costs in January weren’t evenly spread, with beef among the biggest price gainers while fruit and vegetable prices fell. Even if you avoid restaurants and try to eat at home, you could get hit by higher food costs, depending on where you shop. Major media outlets reported this week that Amazon.com, Inc. AMZN has increased prices at its Whole Foods stores. Perhaps investors might want to tune in to Walmart, Inc WMT earnings call next week and also look at Kroger Co KR earnings early next month to get a better sense of where grocery prices might be going.

Looking Overseas: A trade deal with China presumably would get a nice reaction from U.S. stocks, judging from the way things have gone lately just on rumors of possible progress. However, some analysts say any trade deal might benefit international stock markets more than those in the U.S., in part because of China’s vast demand for goods that’s been clipped a bit by the trade war, and because U.S. stocks might already have built in a good portion of the optimism around a possible resolution. 

Assuming Chinese demand for goods like food, automobiles, and energy tick up, that would have a chance to help many European companies. Some of the biggest beneficiaries might be those that make automobiles and chemicals, or supply raw materials or other manufactured goods. These were among the products China imported most from Europe in recent years, according to the European Commission. Canada, too, might benefit, as it exports billions of dollars worth of commodity and natural resource products to China, according to Stats Canada. So far this year, European stocks are up about 8%, while Canada’s main stock index is up 9%. By comparison, the S&P 500 Index (SPX) is up nearly 10% year to date, while the Nasdaq (COMP) is up almost 12%.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.