After The Close - Following a lower open to the holiday-shortened (and historically low-volume) week, the major indexes rebounded in Monday’s final hour of trading. Technology stocks led the afternoon recovery, though the rally was likely capped by looming fears of a trade war spurred by tension between the United States and China. As outlined in our morning report, concerns in this arena have served as a check on the bulls since early March. As the closing bell rang, the NASDAQ managed to carve out the widest advance, with each of the indexes finishing the session in positive territory. Overall, market breadth was essentially even.
Most recently, the trade fears have been stoked by the United States’ potential decision to leave the World Trade Organization. The White House is reportedly interested in a bill that would allow it to raise tariffs without congressional approval, a measure that would add considerable uncertainty to the near-term future of the equity trade. Though the introduced tariffs are, to this point, not drastic enough to meaningfully impact the U.S. economy, the fear of ramped up tensions is likely to remain a concern for the foreseeable future.
Meanwhile, rising output in the OPEC-plus group led to a decline in domestic oil prices today. The elevated drilling abroad offset recent optimism stemming from supply outages in Canada and Libya, as well as forthcoming sanctions from the United States on Iran. These developments drove stateside valuations to three-and-a-half year highs last week, so the modest decline in price is probably a reflection of some profit taking. By the closing bell, the per-barrel value of U.S. crude lowered by $0.21.
Looking ahead to the rest of the week, we do not foresee many other factors influencing trading more than the aforementioned trade concerns. A few weeks from now, Corporate America will begin unveiling their quarterly earnings. Another strong showing could help to reinvigorate the bulls, though geopolitical headwinds may also cloud the guidance of many multinational operators in the months ahead. Stay tuned. – Robert Harrington
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
Before The Bell - The investment community was taken on a rollercoaster ride over the most recent five-day stretch of trading. The market started last week with a difficult session on Monday and then another one on Wednesday, as investors were again worried about the deteriorating trade relations between the world’s two largest economies and the possible negative impact it could have on the global economy. Then, the market steadied on Thursday and put in another constructive session on Friday, with a walk back in some of the trade rhetoric between the United States and China and some strong economic data stateside easing investors’ worries. For the week, all of the major indexes, including the recently hot small-cap Russell 2000, finished in the red.
Once again, the main topic on the minds of investors was the aforementioned growing trade war between the United States and China. Since March 1st, when the Trump Administration placed its first tariffs on basic materials, including aluminum and steel, and China responded with retaliatory measures of its own. Trading, for the most part, has been driven by international trade talk, save for first-quarter earnings season and news from the Federal Reserve. The data on the local economy have proven supportive for stocks in the volatile stretch of late. In general, we have seen a good deal of sector rotation in play, with investors shunning the stocks of the large multinational companies, which would be most affected by global trade tensions, for the more domestically oriented names. Hence, the recent struggles for the Dow 30 and the strong showing, save for last week, for the small-cap Russell 2000.
On Friday, we again saw some sector rotation, but this time it was the reverse, with some buying in the big names and modest profit-taking in the small-cap area. While early in the week the Dow Jones Industrial Average was hurt by a poor showing from its newest memberWalgreens BootsAlliance (WBA – Free Walgreens Stock Report), on the final day of trading it got a big boost from shares of footwear and apparel giant NIKE (NKE – Free NIKE Stock Report). The retailing giant posted strong results in the May period, with investors most encouraged by the return of sales growth in the all-important North American operation. The NIKE performance, along with continued buying of the large-cap energy names, gave a boost to the U.S. equity market on Friday. Overall, advancing issues led decliners on both the New York Stock Exchange and the NASDAQ, and nearly all of the 10 major equity groups finished in positive territory. The leadership came from the energy sector. The only negative on the day was the patch of selling into the closing bell.
Now turning to the week at hand, it will be one abbreviated by the Independence Day holiday on Wednesday. This 4-day trading stretch has been historically light on trading volume, as many traders take their summer vacations. That, along with the fluid situation with regard to international trade worries, could lead to some pronounced moves for the major U.S. equity indexes. The week, though, will bring some important news on the economy, including the latest data on manufacturing and nonmanufacturing activity. We will also get the latest reading on the labor market on Friday. On the earnings front, we are still roughly a fortnight away from the commencement of the second-quarter reporting season.
With less than a half hour to go before the start of the new week on Wall Street and the second half of the trading year, the equity futures are indicating a lower opening for the U.S. market. Year to date, the Dow Jones Industrial Average is down 1.8%, while the S&P 500 Index is up a modest 1.7%. Conversely, the tech-heavy NASDAQ and the small-cap Russell 2000 are 8.8% and 7.0% higher, respectively. Clearly, there was a good deal of sector rotation on display during the first half of 2018, and we are likely to see some more to kick off the second half of the year with concerns about escalating trade wars still on the minds of investors. Stay tuned. - William G. Ferguson