(Friday Market Open) Welcome to the last day of trading in U.S. stocks before a long weekend.
From early indications, it seems like the U.S. market is poised to regain at least some of the ground lost in heavy selling yesterday, and the bounce is coming after the S&P 500 Index held an important area of technical support.
There’s a saying to never sell a dull market, so there may be some buying as volume thins out. But at the same time, investors may want to take some risk off the table by squaring up positions to try to not get burned by any trade news over the weekend.
Of course we’ll have to wait and see exactly how the rest of the trading day plays out, but most of the trading could be front loaded into the morning. After noon today, with many having hit the road for vacation plans, market action may be as exciting as watching beige paint dry.
For now, it looks like the SPX is bouncing off the key psychological support level at 2800 that it held above on Thursday. If the index can hold above that level into the weekend, it could potentially portend a larger bounce.
In news on the U.S.-China trade front that seems to be helping the market recover after brutal selling this week, especially in the technology sector, President Trump said that Chinese telecom giant Huawei (SZ:002502), which the U.S. has blacklisted, could be included in part of a broader trade deal between the world’s two largest economies.
And in Brexit news, UK Prime Minister Theresa May said she would step down in June. Her successor is widely seen as likely to take a harder stance on Brexit. Although that may raise the odds of a no-deal Brexit, the market doesn’t seem to be too worried about that at the moment. It could be that investors had enough Brexit-related selling yesterday.
Brexit worries were just a side dish in a smorgasbord for the bears Thursday.
The main course was a hefty helping of trade-related angst. Just a few weeks ago, the market thought it saw light at the end of the tunnel and that the United States and China would soon strike a deal.
But hopes were dashed as the U.S. added to tariffs, the Chinese announced retaliation, and the Trump administration blacklisted Huawei, before giving the Chinese telecom giant a 90-day window to access U.S. technology and buy equipment from U.S. companies.
Now it seems like there isn’t an end in sight to the trade war and a deal may be further off than we think.
Treasuries Set A Tone
As stocks sold off yesterday, demand for government debt rose, pushing the yield on the 10-year and 30-year Treasuries to their lowest points since 2017. The buying in Treasuries came as investors appeared to want to take risk off the table amid the worries about trade.
The extent to which investors and traders flocked to the Treasury market seemed to give Thursday’s negative market sentiment a bit of a different tone than other recent trade-related selloffs, perhaps an indication that some investors are throwing in the towel a bit.
Tariff weariness seems to be setting in. Without a settlement, it seems likely that the path of least resistance for many investors could be to sell stocks and buy bonds until the tariff tiff is resolved. Until then, people may just not have as much faith in equities as they have had for much of this year.
Brexit And Oil
As the bears chowed down, another bit of worry on the market’s plate came from across the pond, where anticipated election results seemed to be favoring European Union-critical party members in the UK.
The market seemed to be worried about a so-called “no-deal” Brexit, where the United Kingdom could end up leaving the European Union without hammering out a deal on the two entities’ future relationship.
While tariffs have been done before, we’ve never seen Britain leave the EU, and the uncertainty about the potential economic fallout seems to be one more thing weighing on the market.
The risk off-mood could also have been exacerbated as traders and investors may have been wanting to square up positions and take some risk off the table ahead of a long weekend.
The gravy for the bears’ feast seemed to come from the oil market, where U.S. crude futures fell 5.7% amid the risk-off sentiment and as prospects of a prolonged trade war dampened expectations for demand.
Oil prices, as well as stocks, also took a hit from IHS Markit purchasing manager data from the U.S. showing “a struggling manufacturing economy was accompanied by a notable downshift in gear in the service sector.”
The Energy sector was by far the worst performing of the day, falling more than 3.1%. Oil prices, like stocks, looked set for a rebound today.
Figure 1: Crude Slips: Oil prices took it on the chin Thursday. Pressure seemed to come from several points at once, but perhaps the main one was worries about demand from a potentially protracted trade war between the U.S. and China. Data Source: CME Group (NASDAQ:CME). Chart source: Thethinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Playing Defense: As might be expected, the best-performing sectors yesterday were defensive plays. Real Estate and Utilities both ended the day in the green. Shelter is a basic need for human life, and people are always going to need homes and apartments regardless of how the economy is doing. Similarly, people will need power to keep the lights on. So Utilities and parts of the Real Estate sector are considered defensive and can catch a bid when investors are selling more cyclical stocks. Another reason the Utilities and Real Estate sectors are considered defensive is that they have a history of paying dividends, which means they can often compete with government debt. As so-called bond proxies they can move inversely with Treasury yields, and it appears that falling yields on Thursday also helped support these two sectors.
A Market Staple: Another defensive sector, Consumer Staples, did relatively well Thursday. And this sector could help continue mitigating some of the downside in the market if pressure from the tariff situation continues. It seems that the U.S. consumer is resilient enough to absorb higher prices, investment research firm CFRA said in a note. “The consumer, which has benefited from increased wages, higher home prices, more job opportunities and increase (sic) productivity, will be relied upon to support the nation’s growth near term by absorbing the higher costs of trade,” the firm said.
New vs. Old: Yesterday, we talked about how the more expensive new home market seems to be gaining some ground while cheaper existing homes aren’t quite there yet. Fresh data on new home sales out after yesterday’s Market Update seem to support this line of thinking. New home sales in April came in at a seasonally adjusted annual rate of 673,000, beating a Briefing.com consensus estimate. New home sales saw a 7% year-on-year growth rate. “The key takeaway from the report is that the year-over-year growth in home sales was led by higher-priced homes ($400,000 and up), which speaks to the reluctance among builders to absorb profit-margin pressure by building lower-priced homes,” Briefing.com said. The new home sales growth compares with data earlier in the week showing existing home sales for April fell short of analyst expectations, down more than 4% from a year ago.
Disclaimer: Charts For illustrative purposes only. Past performance does not guarantee future results.TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.