Trade, Interest Rates Send Stocks on Wild Ride

 

August 16, 2019 – This was another exciting week in the stock market. Sadly, the final result wasn’t a positive number, but considering how things looked at various points this week, it almost feels like we got off easy. 

Trade and interest rates remain the drivers of the market and it seems like it is going to be that way for some time. Monday saw a decline as markets continued to react to President Trump’s Friday announcement that trade talks with China in September may not happen. Tuesday’s rally was sparked largely by the announcement that tariffs on more than half of the $300 billion in Chinese imports set to be hit with new duties on Sept. 1 would be postponed to Dec. 1. This includes a lot of consumer goods such as toys, clothing and electronics. Wednesday, stocks noticed the action over in the bond market, where the spread between 2-year yields and 10-year yields briefly inverted, which is frequently a recession indicator. Thursday got a boost from Walmart earnings and a better-than-expected retail sales number for July. Friday saw another up day as the trade war didn’t escalate further and there were reports that Germany was prepared to run deficits if the country falls into a recession.

There’s a lot going on in the preceding paragraph, but really only two big themes: the trade war and interest rates.

The trade war continues, at best, to cause a lot of anxiety, but it is hard to image taxes ranging from 10% to 25% aren’t actually reducing the amount of goods being exchanged. The Trump Administration’s statements about the reasons for the delay acknowledged that it is in fact U.S. consumers who pay for tariffs, which represents a change from their rhetoric up until now. It does now seem like September talks are back on, but the two sides seem to remain pretty far apart, so a deal next month, or even by the end of the year still seems unlikely. 

The bond market certainly doesn’t seem to be expecting a deal any time soon. There are now trillions of dollars worth of government debt that trade with negative yields. U.S. Treasuries have yet to cross that barrier, but rates across the yield curve fell this week. The yield on 30-year notes hit a record low before finishing out the week at about 2%. 

The drop in rates, and the fact that longer-term rates have fallen further than short-term rates are a sign that people with money to invest are more worried about safety than return. Buying a 30-year bond at an interest rate below 2% suggests that you believe you may not be able to make, on average, more than that through other investments during that time. That’s not a particularly rosy outlook behind the investment of trillions of dollars in low-yielding U.S. Treasuries or negative-yielding debt abroad.

Economic health is, in large part, about confidence. Business leaders who are confident in the outlook for their companies, invest in their businesses. Consumers who are confident in their financial situation spend more freely. Those spending decisions feed back into the economy in a virtuous cycle.  

The same thing can happen to the downside though. Money spent on safe investments (Treasuries are considered basically risk free) isn’t being spent on new equipment, salaries or even at restaurants. 

We’ve frequently pointed out in this space that underlying economic data is relatively strong, particularly when it comes to the consumer. That was reinforced this week by both data about retail sales in July and Walmart’s earnings report. Today’s consumer confidence number though came in both below expectations and below last month’s number. This may be a blip, but if consumers start to put the brakes on their spending, things could start to turn south. 

Indices

On the week, the S&P 500 lost -1.03%, the NASDAQ lost -0.79%, and the Dow Jones Industrial Average lost -1.53%.

S&P 500

The past three weeks have been filled with large gaps, big reversals, and huge intraday swings. With the trade war, concerns of a possible recession, and fears over a weakening global economy driving the current state of the market, technical analysis can be less relevant as a trading tool. The levels of technical support (dotted lines) become stronger at 2,820 and below. Should the S&P fall from its current level, 2,800 will be a key level to watch. Over the past two years, the 2,800 level has served as both strong support and strong resistance, where when encountered. On most occasions, when the 2,800 level was tested, it sent the index sharply lower. With the convergence of its 200-day moving average (purple line), the 2,800 level should serve as strong support, but if the S&P falls below this level, things could go from bad to worse very quickly. Should the S&P rise from its current level, levels of technical resistance (solid lines) are far weaker that support below, but it will have to deal with its 8, 20, 50, and 100-day moving averages, which intersect near levels of technical resistance. Under normal market conditions, we could see the index maintain a sideways trend as it bounces between these levels of support and resistance.

3-years

 

6-Month Chart 

Bobby Raines

Bobby Raines

Bobby Raines is the Managing Editor of the Market Intelligence Center. He has degrees in Mass Communications and History from Emory & Henry College. Bobby worked at a mid-sized daily newspaper before making a switch to covering the financial industry full time in the years leading up to the financial crisis. He has been a member of the Fresh Brewed Media team since 2011 and has served as a writer and analyst. You can write to him at braines@marketintelligencecenter.com or follow him on Twitter: @BRatMICenter.

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