Trade Concerns, Earnings Could Put 8-Day Dow Win Streak in Jeopardy

It appears Wall Street may have trouble hanging on to a string of gains as a big home improvement retailer reported mixed earnings and trade worries seemed to flare up again.

Home Depot Inc HD reported earnings that came in ahead of Wall Street expectations but revenue and same-store sales missed forecasts. The home improvement retailer’s CEO said it had “a slow start to the spring selling season.” That stumble comes against a backdrop of a strengthening U.S. economy, tight labor market and recent tax reform, which have been some of the tailwinds the company has highlighted in recent quarters.

However, despite some wintry weather, U.S. retail sales in April rose 0.3%, in line with expectations. It was a smaller jump than the previous month, when retail sales climbed a solid 0.6% and ended a streak of three down months in a row. Still, two consecutive months of growth seem to indicate that American consumer spending, the biggest component of the economy, is OK.

Meanwhile, news that Piper Jaffray downgraded Ford Motor Company F apparently also was weighing on sentiment. The investment bank and asset manager said the automaker isn’t yet a leader in the autonomous ride market even as U.S. vehicle sales slowly decline, according to media reports.

Shifting Trade Winds

Trade worries also seemed to cause investors some heartburn this morning after Reuters reported that the U.S. ambassador  to China said the two countries remain “very far apart” on settling trade issues.

That comes after President Trump appeared more conciliatory on trade. The semiconductor sub-sector of info tech on Monday seemed to benefit from an easing in trade tensions between the U.S. and China. It’s a bit of a tangled web, but Trump’s tweet over the weekend offering to work with the Commerce Department to help Chinese smartphone and telecommunications maker ZTE (ZTCOF) could mark a change in tone. The Commerce Department last month had banned U.S. companies from selling parts or services to ZTE. Semiconductor stocks rose more than 1% Monday, and arguably the Trump announcement gave some support to the overall market as well.

Stronger Dollar; Sluggish Emerging-Market Bonds

Also yesterday, the U.S. dollar managed to gain a touch for the first time in four sessions. The dollar had pared back recent gains last week, in part due to relatively soft readings on inflation from the U.S. government that might have helped ease concerns about the Fed getting more aggressive.

Dollar weakness early this year appeared to help some U.S. companies with their overseas sales, but if the dollar continues to gain (see figure 1 below) it could start to look like a headwind in coming quarters because it can make U.S. products more expensive for international buyers. Another thing investors might want to consider watching is the stronger dollar’s possible impact on overseas bond markets. The Wall Street Journal reported over the weekend that emerging market bonds had started to slump due to the rising dollar, as a stronger dollar can make it harder for countries to pay back dollar-denominated debt and import goods.

Fed Talk

Yesterday, investors appeared to get a little jittery on comments by Cleveland Fed President Loretta Mester about increasing rates. But overall the market shrugged. Participants could have been considering that there are other Fed speakers this week and that Mester is already considered to be more hawkish, so her comments may have been somewhat expected.

The Dow Jones Industrial Average ($DJI) has now had eight consecutive closes in the green. That may indicate some selling pressure could be just some old-fashioned profit-taking.

FIGURE 1: BUCK UP? After touching a high above 103 in early 2017, the U.S. Dollar Index ($DXY) declined steadily through the year, touching a low of 88 in early 2018. Lately, however, the greenback has made a resurgence against a basket of foreign currencies. Data source: Intercontinental Exchange. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Another Housing-Market Gauge

With Home Depot earnings out of the way, investors will get a look at a couple other barometers of the housing market later this week. Housing starts and building permits for April are due out on Wednesday morning before the market opens. It might be interesting to see whether higher mortgages and rising home prices are causing consumers to think twice about buying new homes at the moment. Investors might also be watching the numbers for multi-unit dwellings versus single-family homes. Economists polled by Briefing.com are expecting April housing starts at 1.325 million units and building permits at 1.350 million units. 

Going Abroad

Even though the dollar has been strong lately relative to the euro, yen and pound, that doesn’t necessarily mean investors should eschew international stocks. As rising interest rates in the U.S. help strengthen the dollar and put pressure on emerging market stocks, investment research firm CFRA says that international developed-market stocks could offer better investment opportunities in coming months. These equities could prove attractive because of estimated earnings growth, historically low price-to-earnings ratios and dividend yields that are handily topping their domestic peers, the research firm said.

Trade Bigger Than a Tweet

Although Trump’s tweet on ZTCOF seemed to strike a conciliatory note and ease investor fears about trade tensions between the United States and China,  the trade dispute between the world’s largest economy and the world’s most populous nation probably won’t go away overnight. There’s likely still a lot of negotiating over the next weeks and months, but the fact that President Trump showed some willingness to compromise appeared to spark enthusiasm among some investors even as his Tweet sparked pushback from Congress, including Florida Republican Sen. Marco Rubio, according to media reports. We’ll have to wait and see if the positive tone continues.

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.