Happy Cyber Monday and welcome to the final month of 2019.
Major stock indices are on pace to post their biggest yearly gains since 2013 after November’s impressive performance, but there’s still plenty to plough through before the clock strikes midnight on Jan. 1. It does seem highly unlikely, however, that the market would turn into a pumpkin by then.
This week brings retail results from Cyber Monday after early signs of an impressive Black Friday. We’re also getting a key report on manufacturing (see more below), along with an OPEC meeting, and, at the end of the week, a fresh look at the U.S. employment situation. Time to push aside those Thanksgiving leftovers and get back to work.
Initially, markets looked ready to rebound slightly on Monday from Friday’s losses, but the overnight rally faded a bit amid news that President Trump is reinstating tariffs on steel from Brazil and Argentina. Some key stocks to consider watching this Cyber Monday include Walmart Inc. (NYSE: WMT), Amazon.com, Inc. (NASDAQ: AMZN), and Target Corporation (NYSE: TGT) as sales news starts to flow in later today. Black Friday was the second-largest online shopping day ever.
Some great data from China popped up to start the new month and might have given stocks a pre-market boost before the steel tariff news took some of the shine off. The Caixin/Markit Manufacturing Purchasing Managers’ Index rose to a three-year high in November. That’s the good news. The bad news is that it sounds like China might be demanding a tariff cancellation to sign a phase one trade deal, at least according to an article in the media there. New month, same drama.
November ended with a bit of a fizzle last Friday as stocks stepped back in thin trade during a holiday-shortened session. Volume should return to full strength this week as people return from their breaks, but could thin out as the month continues and the final weeks of the year approach.
Last year, December saw some indices fall into bear-market territory as rate fears pressed Wall Street. The situation could hardly be more different as we enter this December, with rates down more than 100 basis points since then and the Fed funds level taking a 75-basis point drop since July as the Fed loosens policy. That’s arguably a big reason why stocks remain near record highs despite negative earnings growth the last two quarters and analysts forecasting gross domestic product (GDP) to barely grow in Q4.
Remember, stocks tend to look forward, not back. Many economists look for earnings to rise in the mid-to-high single digits for S&P 500 companies in 2020, and for GDP to climb about 2% year over year. Those aren’t the kind of numbers that bring back memories of the roaring 1990s, but they do look better than the current situation. Hope springs eternal in baseball and in the markets, so that could explain today’s relatively high stock valuations in the face of the current economic climate.
Also, keep in mind that quarterly earnings continue to come in better than analysts initially expected, and that was no different in Q3. Instead of falling 4%, the tally wasn’t far below even. Healthy consumers keep coming to the economy’s rescue, and we saw that again last Friday.
Online sales on Black Friday reached $7.4 billion, up 43% from a year ago, according to Adobe Analytics, which tracks activity on thousands of websites, media outlets reported. About 39% of those purchases were made on mobile devices, up from 34% a year ago, Adobe said.
Black Friday will probably be eclipsed by Cyber Monday, according to Adobe, when it forecasts sales will reach $9.4 billion. That Cyber Monday figure would be up nearly 19% from last year.
Oxford Economics expects holiday sales overall to climb more than 4% in 2019, compared to about 2% last year. It’s stuff like this that helps keep stocks underpinned, though people may have a bad taste in their mouths after Friday’s disappointing performance.
Even with the losses Friday, all the major indices ended higher on the week. Consumer Discretionary got slammed Friday amid signs of slower store sales on Thanksgiving and Black Friday, but keep in mind that online sales look like they could more than make up for that. Also, Energy shares took another hit as some traders appeared worried OPEC might not agree to deepen production cuts when it meets later this week. Trade media have been saying Russia might be reluctant to keep tightening the production screws.
Treasuries did move a little lower early Monday, with the benchmark 10-year yield scooting up to 1.83%. That was despite some trade-related concerns after President Trump signed legislation supporting the Hong Kong protesters, which seems to have angered Beijing. It’s actually a little bit of a head scratcher why the yield is moving up, unless it’s a sign of optimism around the Chinese data and trade talks.
New Month, Same Focus On Trade Talks, Earnings
Trade headlines could keep swirling as the week continues, but investors probably shouldn’t put too much focus into all the daily noise. The key is getting pen to paper on an agreement, which would likely give U.S. companies a rulebook they could follow for trade going forward. Once they have that, it’s far more probable they’d feel more comfortable making new investments, though there aren’t any guarantees.
The earnings calendar this week looks a bit light, which isn’t too surprising this time of year. Some of the standouts include retailers Kroger Co (NYSE: KR) and Dollar General Corp. (NYSE: DG), both expected to report Thursday. Also, software company Salesforce, Inc. (NYSE: CRM) is scheduled to report tomorrow after the close. The company has spent a lot on acquisitions recently, and the question might continue to be how do those new arrivals affect profits and outlook.
There’s also a big initial public offering (IPO) underway this week as Saudi Arabia sells shares of state oil giant Aramco. The share sale closes Wednesday, and is expected to be the biggest ever, according to media reports. It’s not being marketed to investors in the U.S., Japan, or Europe.
Looking back, the month of November was pretty triumphant for the markets. The SPX climbed 3.4% to notch its biggest one-month gain since June, when it rallied more than 6%. The Dow Jones Industrial Average ($DJI) and Nasdaq (COMP) gained 3.7% and 4.5%, respectively, while the Russell 2000 (RUT) gained 4%. Friday’s losses looked like some investors simply taking a bit of money off the table to end the month.
CHART OF THE DAY: ANOTHER ONE IN THE BOOKS: The month of November was another winning calendar page for the major U.S. indices, as this one-month chart of the S&P 500 (SPX-candlestick) and Nasdaq (COMP-purple line) demonstrate. Semiconductor strength contributed to COMP outpacing SPX in November. Data Sources: S&P Dow Jones Indices, Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
From The Factory Floor: The month begins with a bang as investors brace for several key data points just around the corner. First on the list, and arguably among the most important, is the monthly ISM Manufacturing report right ahead this morning. Two months ago, a weak reading helped lead to a pretty substantial market hiccup, if you remember back to early October. Manufacturing may not be the core of the U.S. economy as it once was, but signs of contraction—which the last two reports have indicated—aren’t really a welcome indicator. Last time out, the headline reading of 48.3% was a bit better than the previous outing, but still under the 50% level.
A reading of 50% or higher indicates expansion. One thing to consider is that the trade war so far has had a bigger impact on some of the major industrial and materials companies than on the economy as a whole, so weakness in ISM might weigh more on those sectors than some others as investors assess the potential impact of trade strife on those businesses. Analysts expect a slight improvement to 49.2% in November, Briefing.com said.
Crude Prelude: A lot of the news this week is likely to be trade- and data-related, but don’t forget to keep an eye on a meeting starting this Thursday that could help determine what millions of us pay at the pump. Yep, it’s December again, so OPEC is gathering.
Last time it got together, back in July, members agreed to a nine-month extension of its production cuts (or as OPEC referred to them in its press release, “voluntary production adjustments”). You might say this decision came under duress as OPEC pointed toward signs of slowing demand growth even while non-OPEC supply (its word for the huge U.S. shale production) continued to grow, “at a robust pace.”
That was all five months ago, and you could argue that OPEC got the job done, at least if that’s measured by prices. No, they’re not up. With the 4% plunge on Friday and today’s partial rebound included, U.S. crude starts the week at $56 per barrel, pretty much where it was the last time OPEC met. But at least OPEC members can feel good about keeping the price above $50, and U.S. shale producers appear to have pulled back output in a major way as the low prices might be sapping some of their enthusiasm.
The question now is whether OPEC decides on further extensions of the production cut and whether that can keep supporting the price. We’ll talk more about this and possible ramifications for the crude market (and Energy stocks) as the week continues.
Across The Water: Anyone hoping that the pain might end soon for key U.S. trading partners across the Atlantic and Pacific got a cold splash of water when they woke up the morning after Thanksgiving. That’s when two more reports showed that economic lethargy lingers. Japan posted a 4.2% monthly decline in industrial production in October—the largest drop since the start of 2018—and Germany reported a 1.9% monthly decline in retail sales in October.
Chalk it up to two more signals of how negative interest rates in both economies don’t appear to be helping much. That said, stocks in Europe aren’t suffering, with the pan-European Stoxx 600 up more than 20% so far this year (compared with 25% for the SPX). Meanwhile, Japan’s Nikkei stock index lags behind a bit, up 16% for the year but a nice rebound from a poor performance in 2018. Even so, U.S. markets continue to lead most of the pack.
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