After The Close - The major large-cap indexes struggled for most of Wednesday, as yesterday’s report that chief economic advisor Gary Cohn was leaving the White House set the stage for a broad-based selloff that persisted through mid-afternoon. While there were pockets of optimism, specifically in the relatively insulated healthcare and technology sectors that would not be overly impacted by tariff implementation, most mid- and large-cap equities remained in the red by the ringing of the closing bell. An upturn in smaller issues helped to keep market breadth even, as well as lift the Russell 2000 by about 14 points.
Looming concerns over the fallout from President Trump’s plans to impose steel and aluminum tariffs were the primary cause for Mr. Cohn’s resignation and of today’s volatility. But while most of the averages had fallen considerably in value by lunchtime in New York, a generally favorable Beige Book economic summation (more below) helped to offset some of the trade-related anxiety after 2:00 PM (EST). Also, while the President is expected to a sign the order this week, reports from Washington suggest that key trade partners Mexico and Canada may be exempt from the tariffs.
As reported in our mid-afternoon report, the Federal Reserve’s Beige Book supported a mostly buoyant economic outlook. The modest-to-moderate rate of growth was felt in nearly all of the dozen Districts, though the anecdotal report did reveal some pricing concerns. Higher steel prices and an ever-tightening labor market will help to alleviate these pressures and lift prices.
Meanwhile, the prospect of a trade war also dragged U.S. crude prices 2.3% lower. The 2.4 million barrel increase in domestic inventories, per the Energy Information Administration, as well as the record-high 10.4 million barrel-per-day rate of production, also weighed on trading. Accordingly, the energy sector was the worst performer on Wednesday.
While Cohn’s absence could linger over the coming few days, as he was perceived as a driving force behind the President’s ostensibly business-friendly policies, it appears the market’s fears were slightly allayed by the Beige Book. The NASDAQ spent most of the final hour in positive territory, while the S&P finished the day near its breakeven line. The Dow, once more-than 300 points in the red, lowered its deficit to 75 points for the volatile midweek session. We believe tariffs will again be the dominant topic of speculation when trading resumes in the morning. Stay tuned. – Robert Harrington
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
2:40 PM EST - Blame it on Gary Cohn, the President's soon-to-be-departing chief economic advisor. On point, his announced resignation, issued last evening and likely to be effective later this month, shook up Wall Street somewhat today, with the Dow Jones Industrial Average falling more than 300 points earlier this afternoon. This wave of selling was occasioned by fears that his moderating influence on the President would now be lost, and that a hardline stance on policy would be forthcoming.
The major impact of his departure figures to be on international trade, where his globalist leanings had meant an active opposition to the President's recently announced intent to apply tariffs major on steel and aluminum. So, the market fell notably from the opening bell. But it was not a massive selling, such as we have seen at times in recent weeks, but rather a fairly steady move lower. This downturn in prices continued into the early-to-mid-afternoon, at which time the Federal Reserve's Beige Book was issued.
The Beige Book report signaled that economic activity was continuing to increase at a modest-to-moderate pace across nearly all of the 12 Federal Reserve Districts. The lone area of stubborn weakness was the auto sector, where demand was flat to lower. Meanwhile, one concern was pricing. Heretofore, prices had been increasing at below the Fed's desirable 2% threshold. Now, though, tightening labor markets and higher metals prices, namely in steel, are lifting prices at a more aggressive pace.
It would seem from the foregoing that the impact of the tariffs is already being felt, as companies jump the gun with price increases ahead of the actual imposition of the aforementioned tariffs. As to the market, the impact from the Beige Book was mildly positive, as the Dow's 245-point deficit at 2:00 PM (EST) as the economic report was issued has been pared back to just about 200 points. - Harvey S. Katz, CFA
At the time of this article's writing, the author did not have positions in any of the companies mentioned.
Before The Bell - The stock market, sharply lower for much of last week on interest rate and global trade fears, came storming back to start the new week on Monday, with the Dow Jones Industrial Average surging by 336 points. That upturn then extended somewhat further into the morning yesterday, with the Dow, the S&P 500 Index, and the NASDAQ all making modest headway in the first part of the session, on hopes that the worst fears on the trade front might not be realized. That was especially so after Dallas Federal Reserve President Robert Kaplan said that current U.S. trade negotiations have not changed his economic forecast.
As for the trade situation, the threat of a global trade war took hold last week after the President threatened to impose steep tariffs on steel and aluminum. He since has made some qualifying statements that have somewhat eased the worst fears on that front. But unless there are revisions to the NAFTA agreement on trade, as the President wants, he has indicated he would proceed with his plans. And that had Wall Street still on edge in the latest session. As to the market, the Dow stayed mostly in the green following the modest strides made during the first hour; the other indexes remained in the plus column, as well, showing more aggregate strength than the Dow.
However, the market's orderly uptrend could not be sustained after the first hour, as the Dow, followed by the S&P 500 fell into the red by 11:00 (EST), with the former pushing down by 100 points, while the NASDAQ followed shortly thereafter. Renewed concerns about a possible trade war as the President seems to be hanging tough on tariffs sparked the late-morning selling. On the other hand, the bulls were sustained, to a degree, by comments from North Korea that it might be open to denuclearization if conditions were right. A nuclear North Korea has been an ongoing fear on Wall Street.
The stock market then proceeded to head even lower as the morning wound down, with a resumption of fears that the President's chief economic advisor, Gary Cohn, might soon be leaving the Administration over his opposition to the plan to impost high tariffs. Mr. Cohn has been, according to reports, close to resigning before, but has stayed on in the interest of stability. Now, the Street feared, correctly as it would turn out, that this time will be different. So, the market's drift was lower, with the Dow off by about 110 points as the noon hour was reached in New York.
The market then got its second wind as the afternoon moved along, so that as we moved inside the final two-and-a-half hours of the trading session, all of the indexes were in the black, led by the tech-heavy NASDAQ, among the large-cap composites. Even the Dow had come back, although its gain was proportionately smaller. Boosting the Dow were solid gains in industrial heavyweights, Caterpillar (CAT – Free Caterpillar Stock Report) and DowDuPont (DWDP – Free DowDuPont Stock Report). Holding that composite back was a drop in UnitedHealthGroup (UNH – Free UnitedHealth Stock Report) shares. On balance, it was an undistinguished session at that point.
Stocks then trended higher through the rest of the afternoon, with the lone index occasionally entering the minus column being the Dow. It would seem that for all of the present concerns, the case for additional bull market support remains strong. As to the final minutes of trading, which can be a turning point, or at least signal additional volatility, yesterday provided neither, as the market's day concluded with nary a whimper. In all, the Dow, helped by a touch of last-minute buying closed up by nine points, which somewhat more solid gains were secured by the S&P 500, the S&P 400, and the NASDAQ.,
Then, after the market's close, the aforementioned Gary Cohn finally did resign. And the impact was immediate, as the Dow futures tumbled by some 400 points shortly after the resignation announcement. No replacement has yet been named. His resignation will now clearly spark additional fears of a trade war.
Now, following that mildly constructive session, which was followed by the Cohn resignation, stocks in Asia posted fairly sharp losses in overnight trading; in Europe, meanwhile, the leading bourses are little worse than mixed following the announced Cohn departure in dealings thus far this morning. Elsewhere, Treasury note yields, slightly lower yesterday, are passing hands at 2.85%, which is off nominally so far today, while oil prices are down a bit, as well, on trade war fears. Finally, U.S. equity futures are posting early losses, although they are off of their worst levels of last evening, suggesting that we will see a weaker start, but perhaps not a major reversal, when trading resumes later this morning in snowy New York City. - Harvey S. Katz, CFA