Week Starts With Trade Hopes Slightly Improved, But Caution Remains Watchword

The “three horsemen of risk”—bonds, volatility, and gold—all galloped late last week as investors ran for perceived safety. With a new week underway, the question is whether that so-called “flight to safety” will continue.

To monitor how cautious people feel, consider keeping an eye on the bond market. As of early Monday, the 10-year yield was at 1.52%, just a basis point above the two-year yield. Those two had inverted several times late last week and remain in sharp focus. Any move toward inversion or back below 1.5% in the 10-year could color the stock market red. 

Green is the color early Monday on Wall Street as hopes improved for the U.S. and China to get talking again—based on comments from President Trump. Investors still seem ready to jump into stocks on any signs of progress, however slight.

As Friday showed with its 2% losses, any time things turn negative on trade, selloffs can occur. Before the latest comments, stocks in Asia plunged overnight. And though crude oil rallied overnight, it remains a touch below $55 a barrel. This isn’t a market for the meek, so anyone who’s not ready for twists and turns should probably plan entries and exits cautiously. We’re never more than a tweet away from trouble.

Semis Could Be Canary in Coal Mine

Semiconductors got absolutely hammered Friday, plunging about 4%. Technology, which includes semiconductors and has heavy exposure to the Chinese market, dropped 3%. This sector could continue to be on the front lines as trade stays top of mind. But every sector lost ground Friday. Only the “defensive” Real Estate and Utilities sectors fell less than 1.5%. Energy was another big loser as crude prices stepped back amid demand concerns.

Stocks like Apple Inc AAPL, Nvidia Corporation NVDA and others in the Technology sector are particularly attuned to the trade developments, so it wasn’t too surprising to see them get smacked on Friday. Transportation stocks also took a hit, so they’re another area to consider watching as the new week starts. 

By early Monday, CME futures showed about a 95% chance of a 25-basis point rate cut next month, and a 5% chance of a 50-point cut. Some of the Federal Open Market Committee (FOMC) members at Jackson Hole gave conflicting views of what’s needed next. There were a few extremely dovish comments, but also some that expressed a more neutral stance. At the same time, the market does seem pretty confident that rates will drop again in September.

Fed Chairman Jerome Powell’s Jackson Hole speech almost got lost in the shuffle Friday, drowned out by presidential tweets and also by the earlier news of China announcing new tariffs on U.S. goods. Over the weekend, Trump said he regretted not setting tariffs even higher, sooner. He also said he could declare a “national emergency” over the trade situation. Trump’s latest comments about talks continuing  appeared to give traders some hope.

Consumers have been out spending money, retail earnings reports have been incredibly strong, and jobs reports have been good. On the other hand, there’s concern that business leaders might be rattled by the China trade war, something Powell alluded to in his speech Friday (see more below).

From a technical perspective, the August lows near 2825 in the S&P 500 (SPX) aren’t far from Friday’s close and might represent a support point. If that area gets taken out, then 2800 is a big psychological place to consider watching. Although the SPX dipped below that in overnight trading earlier this month, it hasn’t been below 2800 in a day session in nearly three months.

The new week brings a fresh batch of important data. It started early Monday with durable goods orders rising a better than expected 2.1% in July compared with the Briefing.com consensus of 1.2%. June’s number did get revised down a bit, however. This report can offer insight into consumer health.

Later this week, we’ll get an updated Q2 gross domestic product (GDP) estimate (see below), along with the latest readings on the Fed’s favored Personal Consumption Expenditure (PCE) inflation. We’ll preview expectations for that over the next few days. Two readings on consumer confidence also bow in coming days (see more below).

Perspective Time

At moments like these, it can be hard to feel confident as an investor. While it won’t do much for a depleted portfolio, it might help to take a step back and look at the broader market for perspective.

Despite Friday’s losses, the SPX remains in the same relatively narrow range between 2800 and 3000 it’s been in for a while. In addition, the SPX is still well above the month’s lows down near 2825. Also, despite the 10-year yield’s retreat, it stayed above last week’s lows, and by the end of the session was above the 2-year yield.

One surprising performer on Friday was Boeing Co BA, which saw shares get a lift after the Seattle Times reported hopeful developments on the grounded 737 MAX.

Volatility zoomed up amid the trade-centered fears last week. Once again, though, it helps to keep perspective. The VIX didn’t challenge highs of 23 and 24 posted earlier in August, maybe a sign that investors aren’t as fearful as it might seem from the performance of the major indices. It’s back just below 20 this morning.

This doesn’t mean all is well. We said going into last week that tariffs remained the major theme, and Friday offered more proof that even when you think the trade issue is temporarily out of the spotlight, it can pop back quickly to haunt Wall Street.

Recent volatility might seem tempting for short-term traders, but it’s important to keep prudent during this sort of whipsaw action. Staying away from big positions might be a good idea until the volatility eases.

For long-term investors, it’s probably not necessary to watch all the minute-by-minute developments. Doing that can raise anxiety and maybe cause you to trade from a position of fear—something that’s probably not helpful in the long run. That said, you don’t necessarily have to stay on the sidelines. It could be worth checking your allocations of fixed income to stocks and seeing if it’s in a place you’re comfortable with over the long-term considering the way the trade war keeps thundering along. Hopes for a quick resolution seem to be fading, with both sides apparently digging in deeper.

Many investors appear to be gravitating toward what they might see as “safer” parts of the market like fixed income and dividend stocks. The Utilities sector is already up nearly 17% year-to-date, and is crushing the SPX over the last year. Some analysts wonder how much farther the “defensive” sectors can climb, saying they’re already priced pretty high. The same could probably be said for Treasuries, but with trillions of dollars in global debt now at negative yields, U.S. 10-year notes could still seem attractive to some investors at 1.5%, meaning more potential room to the upside for bonds. We’ll have to wait and see.

FIGURE 1: SUNDAY NIGHT WHIPSAW. Though futures on the S&P 500 Index (/ES - candlestick) rallied a bit after the close Friday, futures opened Sunday night down more than 1% below the index close at 2847 (red line). Overnight signs of a thaw in trade tensions sent /ES back above the unchanged line, but well below levels touched before Friday's selloff. Chart source: CME Group.The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Economic Growth Seen Steady in Q3 - For Now: By the end of last week, both the Atlanta Fed’s GDP Now and the New York Fed’s Nowcast had estimates for Q3 gross domestic product (GDP) in a range not far from the 2.1% growth recorded in Q2. The Nowcast was at 1.8% and GDP Now was at 2.2%. However, GDP Now gets updated today and it might be interesting to see where it lands. It wouldn’t be surprising to see little change there, because there just wasn’t much data last week to move the needle. While 2% growth isn’t exceptional, it’s still far from a recession. Many analysts and investors seem to think a recession is around the corner, but so far the numbers just haven’t told us that. The government is scheduled to unveil a second Q2 GDP estimate this coming Thursday, but that’s a backward-looking number and people are focusing more on the current quarter. One thing to consider is that even without a recession, some economists believe the trade war could subtract from economic growth in coming quarters.

Confidence Clash: As we’ve been saying over and over, consumer health is keeping the economy going. Retail earnings provided more evidence of that, with Walmart Inc WMT, Amazon.com, Inc. AMZN, and Target Corporation TGT all hitting the ball out of the park in their respective quarters. As long as consumers stay strong and joblessness remains low, it’s hard to imagine the economy really getting too rocky. The wild card is still tariffs, and last week’s late flare-up in the U.S. trade war raises questions about how long consumers can go out shopping without starting to have some fear. A long-term trade war that starts threatening jobs, for instance, would be the kind of thing that might get people to stay home and watch TV instead of go out to their local big-box store (or to their favorite shopping website).

This week brings two reports on the health of the consumer: August consumer confidence tomorrow and the University of Michigan’s August consumer sentiment report on Friday. Last time out, the consumer confidence measure surged to its highest level since November 2018 and the third highest since October 2000. The University of Michigan’s last report wasn’t so good, with sentiment slipping amid apprehension about the economic outlook. By this time next week, we may have a better sense of how consumers view the trade war’s impact.

Powell Worried About Business Investment: Consumer confidence is key, but so is business confidence. “Trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States,” Fed Chair Jerome Powell said in his Jackson Hole speech. The Chicago Purchasing Managers Index (PMI) for August due later this week might provide more insight into how businesses are being affected by uncertainty over trade. The report looked very weak in July, showing the business barometer at 44.4, the lowest in more than three years and well under the level of 50 that signals expansion.

Another business barometer to watch could be ISM manufacturing scheduled for release the week of Labor Day. Keep in mind that most data over the last few weeks has looked relatively good, but these business barometers remain important to watch because businesses tend to plan their capital spending around demand. If capital spending is off, that could mean problems on the demand side that start to point at possible declining consumer sentiment. It also could start to have an impact on the job market. There’ve been some layoff announcements in manufacturing over the last week.

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.

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