After Three Consecutive Lower Closes, Can Market Recover On Slow News Day?

Markets enter the session struggling to recover from yesterday’s swoon, which took place as investors absorbed disappointing retail sales data. The S&P 500 (SPX) has dropped each day this week after last Friday’s jobs report-inspired rally.

Some of the buzz around Wall Street early Thursday centered on President Trump’s appointment of Larry Kudlow as National Economic Council director. Kudlow is known as a free markets and free trade advocate, so the thinking is he might push back on the idea of a trade war. That remains to be seen, but it appears to be giving markets a bit of optimism going into the day.

There’s not a lot of big data today, and earnings season is long over. The Fed meets next week. It looks like a pretty quiet day, news-wise.

As the broader market sank late Wednesday, one area saw continued strength: The so-called “FAANG” stocks. Of these five names FB, Apple Inc AAPL, Amazon.com, Inc. AMZN, Netflix, Inc. NFLX, and Alphabet Inc GOOG GOOGL, four traded higher even as general weakness pervaded. Many investors now seem to have more trust in the FAANG stocks than in traditional blue-chip names, and we tend to see it play out as the market goes down.

Consider the correction last month when the S&P 500 (SPX) briefly sank 11%. The FAANG stocks fell, too, but not as much, losing about 8% of their value during that stretch before quickly perking back up. FAANG stocks are now viewed by a lot of people the way Exxon Mobil Corporation XOM, General Electric Company GE, and IBM IBM were seen 15 years ago. When things go down, people tend to put their trust in these FAANG names to come back.

This doesn’t mean we’re suggesting people put all their money into these names or tech in general, nor does it mean FAANG stocks are immune from a potential swoon. It’s just an interesting trend worth watching and one that might continue to play out. Also, it looks like a lot of money is rotating out of consumer staple names, which were strong earlier this year, and into tech. Walmart Inc WMT and other big food distributor stocks have had some problems. With this sort of rotation going on, investors should consider being careful about the staples space.

Also on the sector watch, it looks like dividend stocks in utilities and telecom that were getting some love a few weeks ago are now falling a bit out of favor, with big money shifting back into bonds. Utilities were one sector that actually posted decent gains Wednesday, but the question is whether strength in the dividend payers can continue if bond strength returns. The shift toward bonds could make it less safe for investors to seek shelter in utilities and telecom in coming weeks, so consider exercising care.

Speaking of care, fixed income investors also might want to be cautious. Bond futures expiration is Friday, so there may be some gamesmanship.

Wednesday’s disappointing retail sales report, the third decline in a row, could have broader economic implications. The Atlanta Fed’s GDP Now indicator for Q1 fell to just 1.9% Wednesday in response to the tepid retail sales and weak consumer price index (CPI) reports over the last two days. Earlier this year, the GDP Now indicator (which forecasts gross domestic product) stood at 5.4%.

Wall Street banks also are cutting back their GDP forecasts, CNBC reported. J.P. Morgan cut its forecast from 2.5% to 2%, while Goldman Sachs reduced its call from 2% to 1.8%. These pullbacks on GDP, if they turn out to be accurate, could really help put a new spin on economic performance. Going into the year, the economy had just rattled off consecutive quarters of 3% or better GDP growth, with some analysts predicting similar results for Q4 and Q1. Since then, Q4 GDP estimates from the government have fallen below 3%, and these new Q1 forecasts look even more bearish. The government’s third and final GDP estimate for Q4 is due March 28.

It’s little puzzling how so much positive data, including last week’s robust jobs report, can co-exist with these drooping economic growth forecasts. There’s a conundrum here as we see weak inflation, wage, and retail sales growth even as the job situation keeps improving.

However you interpret things, it seems likely that amid the poor retail sales performance and declining GDP estimates, the case for a fourth Fed rate hike this year might get dialed back. As of early Thursday, chances of a fourth hike had eased to around 30%, from near 34% earlier in the week, according to Fed funds futures. On the other hand, the futures market puts chances of a hike next week at 88%, about where it’s been for a while now.

The Fed’s statement and press conference next Wednesday might be helpful for investors trying to get a sense of these conflicting data points, as well as the outlook on inflation. The bond market seems to be taking down inflation odds, with benchmark 10-year yields sliding to around 2.82% early Thursday, near the bottom of their recent range.

Crude oil stayed near $61 a barrel, also near the low end of its recent range. One bearish factor might have been a report from the U.S. Energy Information Administration (EIA) that predicts drillers in the seven U.S. shale regions would pump 6.95 million barrels a day in April, up more than 25% from a year ago. U.S. oil production is already at record highs, thanks partly to booming shale output. In addition, weekly U.S. stockpiles of crude rose 5 million barrels, the EIA said Wednesday, but a sharp drop in gasoline supplies might balance out the fundamental picture.

FIGURE 1: TECH TAKES HANDOFF. It looks like we’re seeing a big sector rotation out of consumer staples (purple line) and into info tech (candlestick) over the last month or so, as this year-to-date chart tracks. Weak retail sales, as well as many investors’ growing confidence in “FAANG” stocks could be playing a part. Data source: Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Defense Plays Defense

Not too long ago, the defense sector was arguably the darling of the market, with names like Boeing Co BA and Lockheed Martin Corporation LMT rocketing higher thanks in part to expectations of increased defense spending under a Republican administration. Lately, however, the bloom has come off the rose a little. BA and LMT were among the defense names taking a blow Wednesday amid concerns of a possible trade war with China. BA, especially, seems to have a target on its back since it sells 80% of its commercial aircraft abroad and China is a huge customer.

While caution could be warranted, talk of a “trade war” potentially shooting down BA might be exaggerated. Remember, China depends a lot on BA aircraft, so if it took out its anger on the company, it might be a situation of cutting off its nose to spite its face. “If China decides to retaliate, it hurts their airlines and their burgeoning aerospace industry,” said Scott Hamilton, managing director at the Leeham Company, an aviation consulting firm, in an interview with The New York Times. “Why would you do that?” As for the the recent slide in BA shares, It’s possible some investors might see the tariff jitters as an opportunity to take a little money off the table. BA is up 82% over the last year, even including the sharp losses Wednesday.

Retail Head-Scratcher

It’s a bit of a mystery why retail sales have fallen three months in a row in an economy that’s roaring in so many ways. The 0.1% decline in February retail sales reported Wednesday followed a similar drop in January and weakness in the holiday month of December as well. The three declining months came after retail sales drove much higher in the September-through-November timeframe.

It’s easy to look at the February report and dismiss the headline number as simply a function of a weak automobile market, which sometimes marches to its own drummer. If you strip out automobiles, retail sales actually rose 0.2% in February. But even that was below Wall Street analysts’ estimates, and seems a little tepid. Looking deeper into the report, there were drops in sales of general merchandise, furniture, and food. On the other hand, building material sales jumped, perhaps a sign of strength in the housing and home renovation market. Another thing to consider: Retail sales were pretty flat early last year, and then rebounded. We’ll see if a repeat could be in the cards.

Housing Up Next

Some of the key data this week have already surfaced, but housing numbers due Friday might be some of the most important to watch. With the economy rolling along at a nice clip, housing starts and building permits data before the bell could help reinforce impressions that people are capitalizing on the stability of the job market by snapping up new homes. That certainly seemed to be the case in January, when housing starts moved up by 9.7% to a seasonally-adjusted rate of 1.326 million. That was one of the best months for this particular data point since late 2016. For February, consensus among analysts is for a pullback to 1.283 million housing starts, according to Briefing.com. Building permits are expected to retreat to 1.33 million from 1.396 million on January, according to analysts’ consensus view.

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