Fed In Focus As Investors Await Release Of Minutes From "Policy Shift" Meeting

It’s been said that talk is cheap. But investors seem to not think so when it comes to the ongoing trade negotiations between the United States and China. 

Participants in equities markets around the globe appear to be focused on progress between the world’s two largest economies in resolving the trade war before a March 1 deadline.

After U.S. equities gained ground on Tuesday, Asian and European shares were mostly higher after President Trump seemed to suggest he might consider moving back that deadline. He said it wasn’t a “magical date.”

Investors were probably cheered by that sentiment given that if the U.S. and China don’t reach a deal by March 1, U.S. tariffs on $200 billion in Chinese imports are scheduled to rise from 10% to 25%. 

Still, it seems that negotiators, who were in Beijing last week and who are continuing talks this week, want to get a deal done before then. That’s the assumption the market has been making as it has rallied on that optimism.

The trade war between the U.S. and China has affected billions of dollars in goods and sparked concerns about corporate and economic growth around the globe. 

Airlines Stocks in Descent

One place where concerns about global growth have been reflected is in oil prices, amid worries about global demand taking a hit. But black gold has been rallying for several days, amid the production cut agreed to by OPEC and other major exporters, as well as U.S. sanctions on Iran and Venezuela. That rally is under pressure this morning, however, after the U.S. Energy Information Administration said that U.S. shale production will rise to a record of about 8.4 million barrels a day in March.

In news from the airline industry, which is heavily exposed to the price of crude, this morning Southwest Airlines Co LUV shares were down more than 4% after it said the 35-day partial government shutdown affected sales more than it expected. The discount airline is now expecting to lose $60 million in revenue in Q1 as a result of the closure, which it said caused softness in bookings.

Meanwhile, LUV also took a hit from a downgrade to a sell rating from Goldman Sachs, which warned that LUV’s new Hawaii route may be too costly. And further compounding LUV’s woes was its grappling with a number of grounded planes on Tuesday as 180 aircraft were taken out of service for maintenance, about twice its normal number.

One question is whether we’ll see additional shutdown-related pain in other airlines and a trickle-down effect in hotels and rental cars. So far, several other carriers have already warned that the shutdown will have a negative impact on their sales, including United Continental Holdings UAL, Delta Air Lines, Inc. DAL and American Airlines Group Inc AAL, all of which were down about 1% in pre-market trade.

Fed in Focus

While that headwind continues, the market has seen considerable relief this year on expectations that the Federal Reserve has hit the brakes on interest rate hikes for the time being. 

New York Fed President John Williams in an interview with Reuters published Tuesday reiterated that dovish stance, saying he didn’t think U.S. interest rates would need to be raised unless the economy or inflation unexpectedly shifted higher. 

Investors are scheduled to get another glimpse into the Fed’s thinking later today with the release of the minutes from the central bank’s last meeting. At that meeting, the Fed stood pat on interest rates amid a more dovish stance on monetary policy that comes as it says inflationary pressures have been muted. 

In addition to looking for more clarity on the Fed’s outlook for inflation and monetary policy, investors may also be trying to discern more about the central bank’s thoughts on reducing the bonds it holds on its balance sheet.

The Fed’s bond buying program was designed to stabilize the market during the financial crisis, and an orderly unwinding of those positions points to increased faith in the strength of the economy. But questions remain on the timeline of the selloff and how much the Fed unwinds.

Bright Spots in Retail, Housing

In corporate news that also helped the market Tuesday, Walmart Inc WMT reported better-than-expected earnings, a welcome counterpoint for bulls who had been disappointed in recent weak government retail sales data for December. The retailing giant’s results were helped by e-commerce sales growth of more than 40%. (See more on Walmart below.)

With consumer spending making up the single largest contribution to U.S. gross domestic product, any bullish news on that front can help move the market higher. Recent consumer confidence numbers weren’t so hot, declining more than expected. Recent consumer credit data has also appeared to continue to paint a picture of an American consumer that, while seemingly not down and out, hasn’t been showing as much strength as retailers might want.

Yesterday, the latest National Association of Home Builders/Wells Fargo Housing Market Index showed that builder confidence in the market for newly-built single-family homes rose to 62 in February as mortgage rates that have been falling in recent weeks combined with job market strength to held builder sentiment. The figure was ahead of a Briefing.com consensus expectation of 59.

Other housing market data, out this morning from the Mortgage Bankers Association, showed that the group’s mortgage applications index rose 3.6% last week from the prior week.

The two reports provide some good news for the housing market, which has been a thorn in the side of the U.S. economy amid affordability issues.

Figure 1: That Golden Sheen: The stock market has calmed down considerably since the selloff late last year, yet gold (candlestick chart) is at its highest point since April. Since the yellow metal is often considered a haven in times of market distress, what gives? Well, gold is also sensitive to the dollar, often moving in the opposite direction to the greenback (dollar index shown as purple line). So as the buck has weakened a bit recently, that has helped gold move higher even as stocks also move up. Data Source: ICE Futures US, CME Group Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Checking Out Online: Walmart’s shares closed more than 2.2% higher yesterday after the retailing giant reported better-than-expected earnings. Its profit was driven in part by more-than-40% growth in e-commerce sales. In the general retail industry, as brick-and-mortar sales give way to online clicks, it’s perhaps no surprise, at least in the big scheme of things, that online sales are helping Walmart. But what may be surprising is that, according to a Yahoo Finance article, WMT’s gargantuan footprint of physical stores throughout the United States is an advantage when competing against Amazon.com, Inc. AMZN, which has been ramping up its home-delivery of groceries through its Prime membership and Whole Foods ownership. “As the online e-commerce giant makes its foray into the grocery business, it has to build more physically (sic) locations to support the supply chain,” the article said. “This is where Walmart has an inherent advantage, with its more than 4,700 stores in the U.S. and 90% of Americans living within 10 miles of a store.”

Global Payouts: Growth in dividends paid out by companies around the globe is expected to slow this year after bumper payouts in 2018 despite a rocky finish to the market’s year, says Janus Henderson Group JHG. Global distributions rose 9.3% to hit a record $1.37 trillion last year, with thirteen countries delivering record payouts, including the United States, according to the latest Janus Henderson Global Dividend Index. This year, the asset manager expects payouts to rise more modestly at 3.3% to $1.414 trillion, more than double what companies distributed ten years ago. That forecast may be reassuring to some investors as company outlooks for the year have been tending toward the dismal and worries about global economic growth have ratcheted up. “It is important for investors to distinguish between slower growth in payouts and dividend cuts,” according to Ben Lofthouse, head of global equity income with Janus Henderson Investors. “Even when market volatility reflects investor angst, dividends tend to follow a steadier trajectory.”

Small Caps in Focus: Could 2019 be the year of the small cap? One thing U.S. small cap stocks have going for them is that they’re typically not as exposed to the reverberations of the U.S.-China trade dispute like large multinational companies are. And there are other advantages that small caps have, at least as measured by the S&P SmallCap 600 Index, says investment research firm CFRA. According to Capital IQ consensus estimates, 2019 earnings per share growth for SPX companies is expected at just 3.1% compared with EPS growth expectations of 10% for the S&P SmallCap 600 Index. “Small caps have come back into investor favor, and based on relative price performance, EPS growth projections and discounted relative P/E (price-to-earnings ratio), we think they will outperform their larger-cap siblings in 2019,” CFRA said.