Yesterday, it would have seemed like a recipe for disaster, with 2 large headwinds. Firstly, the placement of U.S. tariffs against China is set to go into effect today, as are China’s retaliatory tariffs. And secondly, the Fed noted a trade war as something that could place a damper on U.S. growth – and yet markets rallied. There were hopes that a trade war could be averted between the U.S. and the EU, a U.S. official reportedly offering a compromise in the form of a zero-tariff policy vis a vis cars imported to the continental bloc. American carmakers rallied, but the big movement was really seen in tech stocks, which seemed to regain their footing.
Market Summary: The blue-chip Dow rose 0.8%, the S&P 500 tacking on 0.9%. The tech-leaning NASDAQ tacked on 1.2%. On the Dow, 28 of the 30 member stocks rose, the S&P 500 also seeing wide gains with 10 of its 11 primary sectors ending higher. Tech was up 1.5% on the day, its biggest daily gains since June 1. There was strong movement all around, health care, real estate, consumer staples and materials all tacking up 1% or more. Energy fell for the day, albeit marginally, with losses of 0.2%.
As for the Fed minutes, the central bank didn’t tuck anything under the rug, noting that risk factors “had intensified.” The Fed, though, didn’t seem to be cowed, noting that there was ongoing support for continual, moderate increases. At the bank’s June meeting, it raised rates by a quarter of a percentage point to a 1.75%-2% range, the Fed dot plot pointing to 2 more hikes this year.
Who were the biggest winners? As noted, car companies rocked the house, Fiat Chrysler Automobiles (FCAU) soaring 6%, GM up 1.3%, and Ford (F) tacking on 0.6%.
The auto industry is most certainly in the limelight. On the one hand, Trump has boasted that it’s his biggest bargaining chip; on the other, in any all out trade war, U.S. car companies, which Trump promised to help, could fire back, laying off workers and moving operations abroad. And all of this in the middle of an election year, Trump now certainly has a lot on his plate. Add to that that China is playing hardball, boasting that the U.S. has a lot to lose and that its tariffs will backfire, and we’ve got a perfect storm.
Now, right before the earnings season kicks off, it’s anyone’s guess how things will play out. Will we be able to pop open a bottle of champagne? The war could go on for years, and alternatively, we could see a truce sooner rather than later. Obviously, each side will jockey for posture, claiming victory, but we’re really uncertain if any of that is anywhere in the near future. Trading will be very very lively, and you have to keep your eyes peeled for any and every development. A tweet, an announcement from the Oval Office, a press party, all of these things are moving the market more than anything else at this point.
E*Trade Investment Strategy VP, Mike Loewengart, noted, “It’s clear the Fed isn’t all that shaken by trade drama or recent volatility,” expounding, “This is not the dovish Fed we knew only a couple of years ago. But to keep things in perspective, more increases only bring us closer to a normalized rate environment. The Fed is looking beyond the recent market volatility and regardless of if it’s one or two more hikes, clearly they feel we are on solid footing.”
Be primed today to see movement in the semiconductor sector, which rebound yesterday after more clarification about Micron (MU). Facebook (FB) also regained its footing, after a very positive analyst forecast giving it a lot of upside.
According to Barron’s, “The American Association of Individual Investors survey shows the percentage of optimistic investors falling to its lowest level since April 11.” By the same token, the Institute for Supply Management’s services survey climbed to 59.1% in June, up from May’s 58.6% reading. Given the gulf between investor and business sentiment, this tug of war could come to a fore when the earnings season kicks off this coming week. Far and wide, the focus will be on company forecasts, as well as commentary on the effect the trade war, tariffs and levies are having.
Lastly, for a word of optimism, Stephen Todd of Todd Market Forecast, stated, “There are tariffs on Chinese goods set to take effect on Friday, but this situation has probably been discounted,” adding, “if some agreement could be reached beforehand, the stock market would probably explode.”
Economic Calendar: At 8:30 today, we’ll be getting four economic readings: first and foremost, nonfarm payrolls – along with the unemployment rate, average hourly earnings and foreign trade in goods and services.
Hot Stocks: DLR, CCI, FLR, PSMT, QRVO, FB
Have a great trading day!