After The Close - The stock market opened dramatically lower this morning, and was unable to meaningfully reverse direction in the afternoon. In fact, few bargain hunters seemed willing to step in and support stocks, suggesting sentiment has turned cautious. Clearly, investors have become worried that trade relations between the U.S. and China are rapidly eroding. Late last week, President Trump, upset that a trade deal was not being reached fast enough, chose to boost tariffs on goods coming from China. This week, China retaliated by imposing measures on U.S. products. Clearly, the situation is getting challenging, and many investors on Wall Street fear that the global economy could fall into a recession, as a result. It does not help matters that both sides seem to be digging in their heels for a protracted dispute. At the end of trading today, the major averages were deep in negative territory. The Dow Jones Industrial Average was down roughly 617 points; the S&P 500 Index was off 70 points; and the NASDAQ was lower by 270 points.
Market breadth showed widespread selling today, as declining issues outnumbered advancers by an overwhelming margin on the NYSE. Almost all of the major market sectors lost ground, with pronounced losses in the technology and industrial issues. Of note, these types of companies do a considerable amount of business with China and are sensitive to any change in outlook. Meanwhile, the defensive utility stocks, which offer stable dividends, displayed some relative strength, as investors looked for safe havens in a challenging market.
There were few economic reports released today. Tomorrow will be a relatively light day, as well. However, a report on import and export prices will be posted. Looking ahead to Wednesday, the pace will pick up significantly, as numerous issuances are due out. It should be noted, that above all else, traders will be following the developments taking place overseas.
Elsewhere, in the corporate arena, many companies have already posted their first-quarter results. In summation, the performance was respectable, and somewhat better than had been anticipated. However, Wall Street tends to look forward and clearly the outlook for the next six months is becoming cloudy.
Technically, the stock market has pulled back over the past week, or so. Today’s selling puts the broader S&P 500 Index below its 50-day moving average, located around the 2,860 level. For some perspective, the recent pullback has erased the gains logged in April. But the market is still nicely higher for the year. Hopefully, some solution to the trade dispute will present itself soon, and that will provide an upside catalyst for the market. - Adam Rosner
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
12:00 PM EDT - After last week's fireworks brought about by the back-and-forth between the United States and China over trade, the stock market was braced for even more volatility this morning. And it is getting it. But, regrettably for the bulls, the action is all to the downside. Indeed, as we reach the noon hour in New York, the major indexes are getting pummeled.
Specifically, after the United States went ahead and upped tariffs on $200 billion in goods shipped out of China, that nation has promised to levy increased tariffs on $60 billion in goods coming into China from the United States beginning on June 1st. So, stocks are getting hit hard and the selling is now across the board. In all, as we near noon, the Dow Jones Industrial Average is off just over 630 points.
And it is not just the Dow, which is seeing a number of large internationally focused corporations doing business with China getting hit hard, in some cases to the tune of more than 5%, but the other composites, as well. These include the S&P 500 Index (off 70 points), the NASDAQ (down 258 points), and the small-cap Russell 2000 (lower by 44 points).
In the recent past, the market has fallen in the morning only the rebound in the afternoon. This time, given the magnitude of the early declines, it might be asking too much for a replay. But we shall see. Stay tuned. - 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 major equity averages spent the majority of last week under selling pressure. After several weeks where the intraday movements were mostly positive, but still rather contained, the volatility picked up in a big way last week. For months, equities were helped by growing sentiment that the United States and China were moving closer to ending their dispute. But that changed before trading began last week when President Trump tweeted that he was going to impose more tariffs on the Asian powerhouse for backing out on negotiated terms of a pending trade deal. The threat of the tariffs early last week, the subsequent implementation of them on Friday, and still no trade deal has casted a cloud of uncertainty over the equity market, and investors did what they normally do when uncertainty abounds, and that is look to sell their riskier holdings.
For the five-day stretch, which made for a rollercoaster ride with increased selling, met with patches of buying (last Thursday the market made a comeback after President Trump said he and China’s President Xi have a great relationship), the Dow Jones Industrial Average, the NASDAQ, and the broader S&P 500 Index were down 2.1%, 3.0%, and 2.2%, respectively. Among the large-cap indexes, the NASDAQ was the big laggard, hurt by the performance of the technology sector. The technology companies are likely to suffer the most from the increased tariffs on China and subsequent retaliatory measures. China remains an important and growing technology market for companies like Apple (AAPL – Free Apple Stock Report), so the escalating trade tensions last week had a negative impact, even after the technology giant reported strong fiscal second-quarter results in the prior week. Our sense is that if the trade talks between U.S. and China are at an impasse, the technology companies are going to suffer the biggest losses. A trade war also is not a good scenario for the multinational companies, a number of which are members of the Dow 30.
The trade news was front-and-center on the minds of traders during each of last week’s five trading days. There was little in the way of earnings and economic news to draw the investment community attention from the trade talks. Indeed, first-quarter earnings season, save for the upcoming reports from the April-period ending retailers, is winding down and the only notable data from the business beat came in the form of producer and consumer prices. That will change a bit on the latter front, as we will get some important reports, including the latest data on retail sales, industrial Production, and housing starts this week. The U.S. economic data of late, including strong reports on first-quarter GDP and April unemployment, have been encouraging and supportive for the U.S. equity market. We think that strength of the U.S. economy may be a big reason why the selloff during the five-day stretch on trade fears was not as severe as it was looking early in the week.
On Friday, it was another rollercoaster ride for those long equities. The major averages started the session well in the red after additional tariffs went into effect at 12:00 A.M. (EDT). But as the session moved into the afternoon portion, the indexes reversed course. The comeback took place after Treasury Secretary Steven Mnuchin said the trade negotiations that took place between the world’s two-largest economies were constructive, even after the 25% rate on Chinese goods took effect earlier in the day. Our sense is that the direction of trading is going to hinge on the ongoing sentiment about the trade negotiations. In general, investors are clearly worried that an extended period of additional bickering will not be good for the global economy.
With less than an hour to go before the start of the new trading week stateside, the equity indexes are indicating a markedly lower opening for the U.S. stock market. So far overseas, the main indexes in Asia finished notably lower overnight (China’s Hang Seng market was closed), while the major European bourses are in negative territory as trading moves into the second half of the session on the Continent. Given the light earnings and economic schedule today, trade is likely to draw the lion’s share of the investment community’s attention. On point, China’s government said it will not surrender to external pressures to get a trade deal done with the United States. That sentiment, and a likely forthcoming retaliatory response to the Trump Administration’s latest round of tariffs is weighing on the major international equity indexes, and will trigger the lower opening stateside. As noted above, the technology sector is likely to feel the brunt of the investment community’s worries this morning. Stay tuned. – William G. Ferguson