foxex: Trade Turbulence

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Friday's Headlines

1. Another trade war looms across the Atlantic

Markets Close

Dow
25,106.33 -0.25%

S&P
2,707.88 +0.07%

Nasdaq
7,298.20 +0.14%

VIX
15.72 -3.97%

INV Anxiety Index
102.1 Neutral

US 10-Yr Yield
2.632 -0.75%

Year-to-Date

Dow
25,106.33 +8.86%

S&P
2,707.88 +8.94%

Nasdaq
7,298.20 +10.84%

Russell 2000
1,506.39 +12.59%

Crude Oil
52.71 +15.06%

US 10-Yr Yield
2.632 -3.80%

The Trade Fade

More trade concerns weighed down stocks today as the DJIA fell 0.25%, making it three days in a row of declines for the Industrials. The Dow Jones Industrial Average is just 30 stocks, which used to represent the biggest U.S. based industrial companies when Charles Dow and Edward Jones created the Index in 1896. Today, Apple, Disney and Nike are in there, which are not industrial companies, per se. Still, all globalized companies are impacted by trade, and ladies and gentlemen...we have a trade problem.

The March 1st deadline for the U.S. and China to reach a trade deal is three weeks away and the WSJ is reporting that representatives from both sides don't have a draft of an agreement yet and they don't plan on meeting again before the deadline.

That doesn't mean it won't happen - but the signs of progress that appeared in the first 5 weeks of the year have dissipated for the time being. And then, there's Europe.

Another Trade War Brewing

As if Europe doesn't have enough to worry about, the U.S. Commerce Dept. is expected to release a report on February 17th on auto imports and national security. Reuters reports that the Commerce Dept. will recommend adding tariffs on European made automobiles to the tune of 25%. This would impact companies like Volkswagen, BMW, Daimler, and others - most of which have manufacturing plants in the U.S., and count on U.S. consumers for a big chunk of their sales.

Why it Matters:

These tariff wars have both a psychological and economic impact on manufacturers and investors. We've discussed how trade uncertainty has been the dominant theme among companies during this earnings season. 2019 revenue and profit forecasts have been reduced by several companies who just can't forecast their financials with any level of accuracy. The potential increased tariffs on European automakers. An alliance of European automakers which includes the companies mentioned above says..."imposing 25 percent tariffs would raise cumulative prices for U.S. vehicles by $83 billion annually and cost hundreds of thousands of jobs." They estimate that it would raise the price of a European car by as much as $6,000 on average in the U.S., if passed. Even if they are overestimating that figure by 50%, its still a massive increase.

Shutdown Alert

Oh yeah...the February 15th deadline for Congress and the President to come to an agreement to avert yet another shutdown is a week away. The last shutdown - the longest in history - was politically damaging to everyone involved and didn't accomplish anything despite its $11 billion price tag. We don't have any particular insight as to how the negotiations are going this time around, but the WSJ reports that lawmakers are hard at work on an agreement. Let's hope they are right.

Earnings

Next week 63 companies representing 8.0% of the S&P 500 will report results, including Cisco, CBS, Occidental Petroleum, NVDIA, Applied Materials, Deere and Kraft Heinz. We've written a lot about the chipmakers and their recent break out since the beginning of the year. While that has been the case, by and large, Nvidia(NVDA), which was the golden child of chip stocks during the cryptocurrency boom of 2017, has fallen way out of favor. They do make chips for video game consoles as well, but that sector has also been unplugged for months. AMD(AMD), on the other hand, which supplies chips to mobile phone makers and server companies, has been on an absolute tear. Here's a comparison chart over the past year.

Profit Pause

As we have noted, declining corporate earnings has been a concern hanging over investors since last Fall. We knew earnings, aka profits, would be lower as the benefits of the tax cuts faded and global growth began to slow. Now that roughly two thirds of the S&P 500 has reported earnings for the prior quarter and provided guidance for 2019, we have a much cleared picture of what the decline in profits will look like this year. It looks like this:

The chart, courtesy of Morgan Stanley, shows earnings growth falling to nearly zero in the first quarter, and then slowly rebounding through the end of the year. This does not take into account the impact of an escalating trade war with China, or Europe, for that matter. This is just companies forecasting their own earnings growth given the way they see the world today.

Could things change? Absolutely. Tariff troubles could be resolved, the U.K. will have a smooth exit from the E.U., China will get its growth mo-jo back and political discord will give way to pure harmony in the U.S. and around the world.

I know this note has been a wall of worry today - my apologies. I'll leave you with a little video from rapper/entertainer Cardi B, who breaks down just how hard it is to support her career and her family when the bills run up to $300,000 per month. Please excuse the foul language... it's Cardi!

Finance by Cardi B @ChicksInTheOff pic.twitter.com/5XXWjwBrqI
— Barstool Sports (@barstoolsports) February 5, 2019

Chart of the Day: S&P 500's 200-Day Moving Average Holds Strong

The 200-day moving average is a staple among investors, market-watchers and the media. It's also one of the tools utilized most heavily by technical analysts. For the uninitiated, the 200-day moving average is just the running average (mean) of the daily closing prices for the past 200 trading days. It's an unassuming-enough indicator that looks like a squiggly line and doesn't really seem like it would be very helpful in forecasting market price changes. But uncannily, it often is.

A quick look at any historical chart shows how major market turns often occur at or near the 200-day moving average. In recent history, since mid-2016, the S&P 500 has touched and risen off its 200-day average (as support) at least five times. And this past week, the opposite happened. From the underside of the 200-day, the S&P 500 rose to touch the moving average on Tuesday before turning back to the downside starting on Wednesday. This represented a classic retreat after a prolonged rally, where the 200-day moving average served as resistance instead of support.

Now, the S&P 500 is in technical limbo between its 200-day moving average to the upside and its 50-day moving average to the down side. This has usually proven to be a fleeting position for the S&P 500, as it invariably results in a swift break out in one direction or the other. Current market pressures now and in the near-term future revolve primarily around fears of U.S. trade conflicts. In the weeks ahead, the S&P 500's direction of breakout will primarily be determined by trade developments between the U.S. and China.