April 20, 2018.
The market took a hit yesterday, geopolitical issues mounting with corporate earnings lackluster in so far as expectations go. On the face of it, earnings may seem stunning, but given that expectations are so high – and that valuations are more a function of what’s been price in and what hasn’t – the market did little more than yawn, while pushing the companies that fell short. There were winners but overall, the market has been unforgiving. With the bar set so high, large swaths of companies haven’t had the mettle to outperform, giving their stocks a lashing. To compound matters, Treasuries saw a sell-off, pushing the 10-year note’s yield to a 2018 high, making bonds more attractive in the constant faceoff between bonds and stocks. The one development that was really favorable for the market was the release that Trump wasn’t the subject of Special Counsel Mueller’s probe into election collusion, which gave stocks a tailwind going into the closing bell.
The yield on the 10-year T-note rose to 2.93%, nearing the 3% we signified as one that could signal trouble for the market. February’s high was 2.957%. If the yield on the note ends above that level, it could be a sign of harder times to come for stocks.
Daily Summary: All of the major indexes ended off, the Dow shedding 0.34%, the S&P 500 slipping 0.57%, with the NASDAQ facing the biggest headwinds with losses of 0.78%. Only two sectors on the S&P 500 ended up, financials, with gains of 0.18%, and the utility sector, with gains of 0.07%. Tech stock weighed heavily on the market. Overall, there were 9 losing sectors on the index, consumer staples tumbling 1.61% and health care stocks shedding 0.96%. The utilities sector is now up 1.90% over the last 5 days. Both the Dow and the S&P 500 were able to remain afloat above their 50-day moving averages, despite having fallen beneath during intraday trading. The 50-day moving average signifies short-term momentum trends in asset prices. Global Markets Advisory Group’s senior market strategist, Peter Kenny, noted, “There’s a growing fear that the good news we’ve seen over the past years is coming to an end, that we’re closer to a meaningful downturn in the economy than we had previously been expecting.”
Today, even though there’s no major economic data points, be primed for a number of Fed speaker. After all, it’s been hawkish Fed speakers this past week who have sent interest rates higher. Chicago Fed President Charles Evans, normally dovish, has recently stated that he thinks rates should be raised in the face of an uptick in inflation. Federal Board Governor, Lael Brainard pointed to “some signs of financial imbalances in the economy,” noting business leverage levels and asset valuations.
The 2-year yield, more sensitive than any other to the central bank’s policies, rose to 2.43%. On the job front, initial claims fell 1,000 to 232 thousand last week, claims still near a 45-year low.
Tech stocks traded broadly lower, chip stocks facing particular weakness. Taiwan Semiconductor Manufacturing (TSM) which plunged 5.74% after releasing an outlook beneath the consensus, casting doubts on the sector in its entirety. In other market news, Facebook (FB) announced its plan to start designing chips, creating another hurdle for the sector. The VanEck Vectors Semiconductor ETF (SMH) toppled 4.4%. Advanced Micro Devices (AMD) plunged 2.4%, Nvidia toppling 3.1%.
Tobacco giant, Philip Morris (PM) toppled 15% after releasing weaker than expected revenue numbers, despite the fact that adjusted profits were stronger than expected. Since being spun off from the Altria Group back in ’08, PM had never seen such a horrendous trading day. Altria Group (MO) slipped 6%. Apple (AAPL) fell after analysts warned that we might be seeing a downtick in iPhone sales. The stock ended off 2.83% on the day.
Amazon (AMZN) traded up 1.9% after Jeff Bezos announced that Prime had surpassed the 100 million subscriber threshold. Another winner was American Express (AXP) which rose 7.6% after releasing better than expected results. Bank of New York Mellon Corp (BK) saw revenue and earnings beats, boosting the financial sector with its gains of 5.7% on the day. Alcoa (AA) also rose 1.4% on the day, the market liking its results.
One of the things to watch today is rhetoric from the Oval Office and top Chinese officials about the mounting trade war. China, having announced retaliatory tariffs of its own, is now raising the stakes by refusing – for the time being – to allow Qualcomm (QCOM) to go ahead with its takeover of NXP Semiconductors (NXPI), potentially the second-largest tech deal ever. China is flexing its muscles now, the same way the U.S. did earlier when blocking Singapore-based Broadcom (AVGO) from buying Qualcomm. At that point, Trump – in his Executive Order – stated that it could undermine the U.S. in giving China an edge in the 5G technology race. Just yesterday, China’s Ministry of Commerce stated that Qualcomm, to receive its approval, would have to ensure it’s not getting an unfair advantage over rivals, noting that the company’s proposed measures “can hardly solve relevant market competition issues.”
The battle has gotten fierce, the U.S. blocking one of China’s powerhouse tech companies, ZTE, from buying American companies’ parts. The U.S. Commerce Dept. has accused ZTE of lying about violating sanctions it was supposed to have enforced in so far as a U.S.-imposed ban on conducting dealings with North Korea and Iran. The U.S. argued that company executives received bonuses despite the company’s violations. With the U.S. threatening to levy tariffs as high as $150 billion, China and the U.S. are now engaged in a bareknuckle fight, retaliation, threats, and vendettas high on traders’ minds. To trade this market effectively, you have to not only look at fundamentals but follow the hairpin turns in the no-holds-barred geopolitical fight playing out between these last two world powers!
Friday’s Hot Stocks: ETFC, PF, TEAM, MAT, SKX
Have a great trading day!