August 2, 2019 – This week, like last week, was loaded with companies reporting their second-quarter earnings. Unlike last week, company earnings were largely overshadowed by the Federal Reserve’s interest rate cuts and update on monetary policy, which were further overshadowed by new developments in the lingering U.S.-China trade war.
So far, 77% of S&P 500 companies have reported earnings for Q2. Of those companies that have reported so far, 76% have reported earnings-per-share results that beat analysts’ estimates, with 59% beating analysts’ revenue expectations. The most anticipated earnings report this week was for Apple (AAPL). AAPL stock jumped 4.5% following the release of company earnings after the bell Tuesday, giving a boost to the Nasdaq. Apple reported a decline in iPhone sales in-line with expectations, but a rise in wearables, services, and home accessories kept revenues apace with growth projections. Apple CEO Tim Cook said wearables had a “blowout quarter”, with wearable and home accessories seeing a 48% increase in revenue this quarter. Apple beat earnings-per-share estimates by $0.08 and issued positive Q4 revenue guidance that came in on the high end of analysts’ expectations.
The most anticipated event of the week was the Federal Reserve’s update on monetary policy. Investors were expecting at 25-basis point cut in interest rates, which was largely already priced into the markets, but traders were looking for hints from Federal Reserve Chairman Jerome Powell regarding future interest rate cuts. As expected, the Fed slashed a quarter point, dropping the federal funds target range to 2% to 2.25%, marking the first reduction in interest rates in over a decade. Powell said that the U.S. economy remains favorable and that the cut is a defensive measure to “insure against downside risks”. Powell attributed the rate cut to “muted” inflation and concerns over a weakening global economy as trade tensions continue to rise. In the end, stocks declined as confusion over the possibility of additional rate cuts grew, with Powell saying, “this is not the beginning of a long series of rate cuts”, but also saying “I didn’t say it’s just one”. The monthly jobs report released Friday morning showed an increase of 164,000 non-farm jobs in June, beating estimates of 160,000. Wages rose 0.3% and unemployment remained unchanged at 3.7%
It was a confusing week as far as trade negotiations with China are concerned. U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin traveled to Beijing Monday to resume in-person trade talks with Chinese officials. This was the first face-to-face meeting since negotiations broke down in May. Expectations were low of any real progress being made, as both sides have been signaling an unwillingness to compromise on outstanding issues. Ahead of the meeting, the White House reported a gesture of goodwill from China, saying the country was willing to increase purchases of American farm products. As the meeting were about to get underway, President Trump issued a series of tweets Tuesday, slamming China for not living up to its previous pledge to purchase additional U.S. agricultural products. After the meetings concluded, the White House reported that trade negotiations between the two countries were “constructive”, reiterating China’s promise to purchase more farm products and saying that trade talks would resume in Washington in September. Markets took a nosedive Thursday afternoon and continued to fall Friday after Trump announced that he will be placing a 10% tariff on $300 billion in Chinese imports starting September 1. These new tariffs are in addition to the $250 billion in Chinese goods that already have 25% duties in place. In an attempt to potentially accelerate a trade deal with China, Trump warned that he would be willing to increase tariffs beyond 25% if negotiations continue to stall. Some observers have hypothesized that China is stalling on a trade deal, trying to postpone an actual deal being made until after the 2020 elections, in hopes that Trump may be voted out of office. It could also be argued that Trump’s twitter storm could be an attempt to increase pressure on Jerome Powell for additional interest rate cuts, which Trump has been advocating for a considerable amount of time.
On the week, the S&P 500 lost -3.05%, the NASDAQ lost -3.92%, and the Dow Jones Industrial Average lost -2.60%.
There was little movement in the S&P 500 early in the week, as many investors were waiting on the Federal Reserve announcement. Following Powell’s press conference, stocks whipsawed and dropped significantly on Wednesday, falling as low as 2,958 before slightly recovering and closing near 2,980. Large swings in the market are common after a Fed announcement and in many cases are completely reversed the following day. Note the large wick on Thursday’s candle, where the S&P nearly reversed the Fed selloff before dropping as low as 2,945 after Trump’s tweets about new tariffs. The support levels near record-highs were no match for such news-driven movement. The S&P was able to find support (dotted lines) Friday around 2,915, where it was able to slightly recover. Technical levels of support are stronger between 2,800-2,900 and should be able to help the S&P if it continues to fall. It also has support from its 50- and 100-day moving averages (green and yellow lines). If the S&P is able to recover, technical resistance (solid lines) is relatively weak in comparison to the strength of support below.