The third quarter got off to a good start. Early losses faded, the main indexes finishing up as a tech rally served as the catalyst for gains. With that said, investor sentiment – given the recent spate of Trump’s trade war – is taking its toll. Morgan Stanley was not in the least optimistic, its chief equity strategist predicting that the abovementioned tensions will create waves, so long as the Fed continues to hike rates. In the words of Wilson, we can expect “volatility with several 10 percent corrections in global equity markets at different points.” As for his outlook for the second half of the year, he thinks that trade wars will dent earnings expectations given the effect they’ll have on the economy. That being the case, he recommended placing more emphasis on utilities: “We think this defensive posturing will continue to pay off until the Fed eventually decides to pause its rate hikes, which we expect it will do in September.” Then to cap off the year, he expects mid-term elections to serve as a positive catalyst.
Trading of late has been very rocky, concerns mounting that there won’t be a light at the end of the tunnel vis a vis a resolution of this trade war. With Europe, China and the U.S. going tit for tat, we’ve seen instability in commodity markets, ranging from steel and aluminum to oil. We’ve also seen mixed messages from the U.S. administration about countries buying oil from Iran; it’s still not clear if there will be immediate consequences for countries that gradually phase out their purchases of oil from Iran. And now, Trump has touted global auto tariffs as his elephant gun for winning a trade war.
“You know, the cars are the big one,” he told Fox News in a Sunday interview, adding, “We can talk steel, we talk everything. The big thing is cars.” The rhetoric was clearly aimed at Mexico, Europe and Japan; at the same time, Europe has fired back that were Trump to institute car tariffs, they’d strike back. The EU, in response, has warned that Trump would be putting “a tax on the American people,” noting that the tariffs would be “self-defeating and would weaken the US economy, estimating that some $300 billion in U.S. goods would be hit with countermeasures. To sum up its stance, the EU, in their recent policy paper, wrote, “The European Union would therefore caution the United States against pursuing a process which could result in yet another disregard of international law, which would damage further the reputation of the United States and which the international community cannot and will not accept.”
Market Summary: All of the major indexes ended up, the blue-chip Dow tacking on 0.15%, the tech-leaning NASDAQ up 0.76%. The S&P 500 climbed 0.31%.
It was fascinating to see the dynamic in yesterday’s trading, the divergent paths taken by tech and energy stocks. On the heels of a Trump tweet boasting Saudi Arabia’s willingness to ramp up production, crude prices regresses. With America’s tariffs, the initial anticipation was that world supply would contract given the ostracization of Iran. On the flip side, yesterday’s big winners were tech stocks, Microsoft (MSFT), Facebook (FB) and Apple (AAPL) each up 1% of more, the S&P 500 information technology index trading up 0.99%, its yearly gains now coming to an impressive 11%. As for where tech is heading, Longbow Asset Management CEO noted, “It doesn’t look like tech is going to slow down this year,” adding, “The tech play is here to say.”
One of the stocks seeing active movement yesterday after closing was Herman Miller whose stock soared 11% in late trading. The furniture company did a stellar job beating analyst forecasts. Q4 earnings came out at 66 cents per share, analysts having forecasted 58 cents. The revenue numbers released by the company also firmly beat out expectations; revenue came out at $618 million, $601 million having been analysts’ projection.
As for a market recap this year, it’s been tech stocks that have carried the broader markets. In fact, save technology and a handful of consumer discretionary stocks, the market would be down for the year. The S&P 500 IT sector, as of Friday, represented 102% of the market’s year-to-date gains. Amazon, a consumer discretionary powerhouse, accounts for a whopping 34.6% of the market’s gains. Amazon, whose very name makes retailers shutter, figuratively and literally, is up 45% from the start of the year! And all-in-all, both the IT and consumer discretionary sector are up just about 11% year to date. If you want to know which stocks have been the 5 biggest winners this year, it’s no other than Amazon (AMZN), Microsoft (MSFT), Apple (AAPL), Netflix (NFLX) and Facebook (FB). With everything taken in context, despite the recent woes the market has seen, according to S&P Dow Jones Indices, non-U.S. markets have fallen 6.7% year-to-date, the S&P 500 coming out on top with gains of 2.2%. That means, essentially, that globally speaking, America is expected to come out the winner.
That notwithstanding, with this year’s volatility much higher than last year’s, we see that the bears have been able to capitalize, striking at the market’s core. With trade fears alive and well, growth stocks have continued to be the big winners, representing for large swaths of the investing public a much greater source of stability than predictable, low valuation stocks with high dividends, whose bottom line could be slashed badly by an ongoing trade war.
Hot Stocks: CNC, BBY, ACXM, IPG, MLHR
Volume is expected to be lower today given that markets close early for July 4th.
Trading will be closed tomorrow in honor of July 4th, American Independence Day.
Have a great trading day!