Stocks End Week Lower on new Trade Worries

September 20, 2019 – Stocks ended the week on a down note after Chinese officials abruptly canceled a scheduled trip to a Montana farm and headed back to China sooner than anticipated. 

That news came after President Trump said he was uninterested in a “partial deal” with China on trade, adding that he doesn’t think voters will punish him if the trade war drags on past the election. These new developments come on the heels of the U.S. and China adding some amount of each other’s goods to tariff exemption lists and generally seeming like they were willing to work together on a deal.

Political ramifications aren’t our bailiwick, but this late-week trade action falls in line with a pattern we’ve observed a number of times, which is that trade talks seem to make progress until stocks are at or near new highs, at which point they tend to break down. Correlation is not causation, and we have no way of knowing if Trump rejecting the idea of a short-term or partial deal had anything to do with the Chinese delegation going home early, but new tariffs and several other escalations have happened with stocks near highs, while talks tend to be resumed and reconciliatory gestures made when stocks start to look a bit more precarious. 

Prior to Friday’s trade news, the Federal Reserve dominated headlines. Even before the central bank’s Wednesday monetary policy announcement, the Fed was forced to intervene in the overnight repurchase (repo) market. This was a regular occurrence prior to the financial crisis, but hasn’t been necessary since due to structural changes in short-term funding markets. While it is true that a broken repo market did cause some of the most severe issues in 2008, this situation is not at all similar and, so far at least, seems to be temporary and nothing to worry about for people who don’t have a lot of long-term assets and short-term liabilities.

As for the monetary policy decision, the Fed cut short-term rates by 25 basis points. Which is what pretty much everyone expected. Chairman Jerome Powell echoed his predecessors in saying the Fed will be “data dependent” when it comes to setting rates going forward. That was about the best he could do in terms of providing forward guidance as there were dissents against the 25 bps cut on either side, both for a bigger cut and for a hold. With a generally strong economy, particularly on the consumer side, and rising, but still below-target inflation, there isn’t an obvious course of action for the central bank. 

The third quarter ends in ten days, so we’ll start to get inundated with earnings reports in about three weeks. FedEx reported this week, and neither the results, nor the company’s outlook were particularly bright. As a transportation company that reports off-cycle, FedEx’s earnings get a lot of attention, and these results could signal a slowing of the global economy. That said, FedEx is one company. It is never easy to tell if one company’s poor quarter is a story about that company or something larger, so while investors shouldn’t necessarily ignore the results, it seems too early to build an investment thesis around this particular earnings report. 

Indices

On the week, the S&P 500 lost 0.51%, the NASDAQ fell 0.72%, and the Dow Jones Industrial Average lost 1.05%.

S&P 500

The S&P 500’s 8-day moving average (red line) served the index well this week, keeping the S&P within striking distance of new highs after gapping down at the open Monday. The large wick on Wednesday’s candle that followed the Fed’s press conference is quite normal. Generally, after a Fed announcement, there can be a volatile move in the markets, which typically gets reversed either later that afternoon or the next morning. The Fed announcement dropped the S&P down to the 2,980 level of support (dotted line) before the index bounced and continued higher. As attention focuses back to the upcoming trade negotiations with China in October, we could likely see the markets run sideways as developments continue. Any negative news on the lingering trade war will likely send the markets sharply lower, which is what happened Friday afternoon. Unless a deal is reached, bad news will likely hurt the market more than good news will help it.

6 Months

 

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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