foxex: Markets Show Worry As Investors Sell Amazon to Buy Walmart

Chart Advisor | Focus on the Price

Tuesday, September 03, 2019

1. Stressed Investors Choose Safer Stocks

2. Interplay between U.S. Dollar and Gold Echoes Market Stress

3. Can the Markets Predict the Trade War Outcome?

Market Moves

Traders returning from the long U.S. holiday weekend reopened the markets at lower price levels compared to Friday's close. However stocks remained in a relatively tight trading range, with the S&P 500 closing only one-half percent lower. Large cap stocks fared slightly better than small cap stocks, reflecting investor preference for less risky assets.

This preference can be seen in a rather stark comparison between the two retailing giants Amazon (AMZN) and Walmart (WMT). Among the price trends of companies represented on the chart below, notice that the two retailing companies showed a decidedly different price trajectory over the summer. It appears WMT shares are considered by investors to be a safer investment. There is a reason for that: Walmart pays a predictable dividend similar to Proctor & Gamble (PG), Nextera Energy (NEE), McDonald's (MCD) and Duke Power (DUK).

When investors are nervous about prospects in the market, high-dividend stocks seem to be preferred over growth stocks. Such growth stocks tend to attract investors chiefly based on growth of share price. Though Amazon's business ventures are doing quite well, investors see Amazon as a growth stock. Perhaps this is the primary factor pushing investors to funnel money out of AMZN shares and pour money into WMT shares.

Interplay between U.S. Dollar and Gold Echoes Market Stress

Nervous investors continue to look for places to push their money away from the risk they perceive in growth stocks. In addition to the fact that the Russell 2000 index continues to underperform other indexes, an interesting price pattern has emerged in the relationship between the price of gold and the U.S. Dollar index.

When you consider that gold is more frequently priced in U.S. dollars, you realize that the mathematical relationship between the U.S. Dollar index and the price of gold would naturally be an inverse relationship. After all if a dollar is less valuable then it used to be, then it takes more dollars to buy an ounce of gold. So naturally you'd expect the general market price action to show an inverse relationship on a price chart comparing the two assets. But since the pattern seems to have changed recently so as to show a positively correlated price trend, analysts might consider this to be evidence of stressed-out investors. In fact, this dynamic is likely to be a further reflection of the nervousness that investors feel as they accept higher prices for both in their pursuit of ways to hedge their investments (see chart below).

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Can the Markets Predict the Trade War Outcome?

Talk of the latest salvo in the U.S. China trade war is common in headlines nowadays. If the market trades lower on any given day it is almost certain to be attributed to trade war news of any kind. But tariff and trade-war talk has been going on for quite a while now. It isn't something new. Consequently it may be appropriate to question whether such activity has had any discernible impact. The chart below may prove informative.

The first major news about the implementation of tariffs and a resulting trade war was published on or around January 24th 2018, a few months more than a year after the 2016 election. The news centered on newly announced tariffs on washing machines and solar panels. These items had significant impact on not only Chinese Manufacturers but South Korean companies as well. The chart below compares an ETF that tracks large companies, such as Tencent or ICBC, in China (ticker symbol FXI), and an ETF that tracks large companies, such as Samsung and Hyundai, in South Korea (ticker symbol EWY) with the SPY to represent the S&P 500.

The price pattern is unmistakable, but because so many other factors are involved it is unclear whether this chart can be reduced to an investor referendum on the predicted outcome of the trade war. Regardless, the impact of the trade war on the markets cannot be understated over the past 18-months.

The Bottom Line

U.S. stock indexes continue to show nervousness with investors demonstrating a preference for dividend-paying stocks over traditional growth stocks. Gold prices also show the impact of stressed investors who are willing to pay a premium for the metal. The protection investors perceive in holding gold is apparent as gold prices are on the rise even though the U.S. Dollar is trending higher in value also. It's no surprise where the market worries are coming from as trade war headlines dominate each news cycle.

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