After that dramatic two-day drop, things seem to be stabilizing a bit this morning. Don’t forget that this has been a very resilient market, but also keep in mind that with payrolls looming tomorrow, the big down-move we’ve had, and more jitters about geopolitics, it could still be a bumpy ride to end the week.
The Cboe Volatility Index (VIX) is still above 20 this morning, and 20 is sometimes seen as the level that indicates elevated fear. Gold and bonds also rose slightly in trading before the U.S. open, which could be a sign of continued caution. Many investors fled to those markets yesterday as every S&P 500 sector fell, with most of them down sharply.
Today could be a day of stabilization with volume a little light, partly because payrolls is tomorrow. It wouldn’t be surprising to see volatility come back Friday partly because of payrolls, but also because it’s a Friday, and the end of the week can sometimes be choppy. Also, with a big down-move like we’ve seen, there tends to be more turbulence in the days that follow.
There’s been a lot of debate about the disappointing U.S. manufacturing data that arguably helped set off the selling Tuesday. One thing to think about is that manufacturing represents only about 10% of the U.S. economy, while services represents about 90%. The services side has been expanding, and the latest update on its health comes at 10 a.m. ET today with the ISM non-manufacturing index.
Last time out, the non-manufacturing index reading was 56.4, well above the 50 cut-off for expansion. September’s number, due today, is expected to be 55.4, according to consensus from Briefing.com.
Factory orders, another check on the economy’s health, is also coming out at 10 a.m. ET today. The third-party consensus is for a flat reading after strong growth in the previous month.
After the close come earnings from Costco Wholesale Corporation (NASDAQ: COST), sometimes seen as one of the consumer barometers of the economy (see more below).
Importance of Tomorrow’s Payrolls Data Could Be Overplayed
If you listen to what a lot of people are saying, tomorrow’s September payrolls report is extremely significant. If it shows wage or job growth slowing, the argument goes, it would reinforce the soft manufacturing number early this week and play into the narrative about how the economy is slowing due to trade worries and anemic growth overseas.
Let’s rethink that a little. First of all, there’s no argument that the payrolls report isn’t important, because every payrolls report is. It’s one of the most significant data points we get each month. What’s harder to argue is that this one is especially significant because it comes after a sharp drop in the stock market.
What matters isn’t the data from any one report, but rather what reports tell us over the months. We already know that jobs growth has slowed this year, which isn’t really surprising considering unemployment is already at 50-year lows. If we find out jobs growth continued to slow in September, that would fit the pattern we’re already in. It wouldn’t be a really dramatic development, and it would probably be prudent for investors to take that in context, not as a shock.
Get ready, because what we’re likely to see and hear if the report is negative is more selling and more handwringing over the economy. It seems doubtful that many will see the data as part of a pattern where job growth is slowing because the economy is near full employment and doesn’t need to create as many jobs to keep up with labor supply. Instead, in the current environment, it might be seen as confirmation that there’s more to worry about.
On the other hand, if the report is much better than expected, it doesn’t mean there’s no reason for concern or that the manufacturing number can be ignored. There’s a danger in getting too complacent or too down in the dumps over any one data point.
For those keeping score at home, consensus going into the payrolls report pegs September job growth at 150,000, according to Briefing.com. That would be up from 130,000 in August. Wages are seen rising 0.3% in September, down from 0.4% in August. Consider watching for any changes in the average work week, too, because a drop in hours might get people nervous. It was 34.4 hours in August and consensus is for the same in September.
Why Things Went South Wednesday
Growing economic worries, which got their initial spark on Tuesday from soft U.S. manufacturing data Tuesday, appeared to get worse Wednesday. That was due in part to a World Trade Organization (WTO) decision that raised fears of more trade tension between the U.S. and Europe even as the U.S. grapples over trade relations with China.
The U.S. plans to impose tariffs on $7.5 billion of E.U. imports after the WTO’s ruling, The Wall Street Journal reported. This added to trade trepidation and might have helped pressure the market after it posted some recovery from its lows earlier in the afternoon. By the closing bell, the Dow Jones Industrial Average ($DJI) was down 800 points in just two days. It’s a little like the quick descent we saw back in early August, which was also trade related. However, the tariff news doesn’t really seem to be having much impact Thursday morning.
Transports really put on the brakes Wednesday, with some of the major airlines like United Airline Holdings Inc (NASDAQ: UAL) and Delta Air Lines, Inc. (NYSE: DAL) getting smacked around. Both fell more than 5% by late in the session. Auto manufacturers also had a bad day. On days like that, you’d almost expect to see weakness in more aggressive parts of the market like transports, Technology and Energy, but it was a bit surprising to see Utilities fall 1.25%, Health Care fall 1.5%, and Consumer Staples fall nearly 2%. Those are the places some investors tend to go when things get volatile.
Flying Back into Bonds, Gold
Instead, it looks like people fled Wednesday away from equities, and into bonds and gold. The U.S. 10-year Treasury yield fell back below 1.6%. For reference, it was briefly above 1.9% in mid-September. One point to potentially watch is 1.42%, which is around the three-year low that the 10-year yield posted back in early September. Some analysts think that barring a re-test of that, the market won’t necessarily fall out of bed.
Gold climbed 1% yesterday to back above $1,500 an ounce. That’s still below the early September highs up around $1,560, which could be another level worth watching if you’re tracking investor sentiment.
The VIX rang up some gains Tuesday and Wednesday to move above 20 for the first time since early August. Still, it’s stayed below the August highs thus far. That might bear watching, especially if it goes above 22 or 23. A move like that could potentially signal more concern and possibly more market turbulence ahead, because that’s pretty much where things topped out in August.
The Earnings Beat
In corporate news, Tesla Inc. (NASDAQ: TSLA) shares fell 4% in pre-market trading Thursday after the company said it had record deliveries of 97,000 vehicles in Q3. It seems like their deliveries might have disappointed some investors who’d been hoping for a nice round number of 100,000. Also, some analysts are worried about a deceleration in luxury vehicle sales.
Also, PepsiCo, Inc. (NASDAQ: PEP) shares got a little fizz early Thursday on news that PEP beat third-party consensus for earnings per share and revenue. The company did cite a tough foreign currency picture, something that might be an issue for a lot of multinationals getting ready to report in coming weeks.
One thing that’s been clear in recent months—despite economic headwinds—is that the U.S. consumer has shown remarkable resilience. So, as some investors worry about a potential slowdown, it might be prudent to keep an eye on consumer behavior. We’ll get another snapshot this afternoon when retail giant Costco reports. The consensus estimate is $2.55 per share, according to third-party analysts, on revenue of $47.5 billion.
What may be just as important in light of recent economic data is what executives might have to say about the coming quarter. Holiday buying sentiment could tell us a lot about the state of the consumer.
FIGURE 1: STOCK VOLATILITY AND CRUDE WEAKNESS. The Cboe Volatility Index (VIX - candlestick) rocketed above 20 Wednesday amid weakness in the manufacturing sector and concerns trade dynamics might be taking their toll on the economy. One place this tends to manifest itself is in crude oil prices (/CL - purple line). Note that crude, which has fallen about $10 a barrel in the last couple weeks, has seen several sharply lower moves concurrent with sharply higher moves in the so-called fear index. Data sources: S&P Dow Jones Indices, Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
A Reason to Hope: Here’s a market trend that might be worth considering as we lick our wounds after the last two days: October’s sloppy start continues a 2019 pattern where weakness shows up at the open of each new month. In eight of the nine months so far this year, the S&P 500 Index (SPX) made its intraday monthly low before the 9th calendar day. The only month when that didn’t happen was May. In six of the eight other months, it’s registered a low within the first five days.
Just because that’s how it played out year-to-date doesn’t necessarily tell you anything about October, but it might not be random, either. It could be part of the market’s psychology. As Barron’s noted over the weekend, bull markets “climb a wall of worry.” Each month as this long bull market and long economic recovery stretch out to near-record lengths, investors face the new calendar page with trepidation, wondering if this might be the month when the bull loses its fight as geopolitical and economic concerns persist. So far, the bull has gone ahead to fight another day, with data, earnings, and consumer health propelling things forward.
Shelter in a Storm? Though no sector escaped the selloff this week, the housing sector, and homebuilding stocks in particular could be as close as we get. Bucking yesterday's weakness trend, after blowing away consensus earnings and revenue estimates, Lennar Corporation (NYSE: LEN) rose nearly 4%. If the global economy is slowing down, and if consumers are in danger of retrenching, you wouldn't know it from looking at housing. Last month, housing starts were up 3.4% year-over-year and building permits rose 4.5% year-over-year. Both numbers have been trending up since spring. Though a slowdown could certainly take some wind out of the housing market's sails, the real story might be about consumers' purchasing power. This week's pullbacks in crude oil—a major determinant of prices at the pump—and in Treasury yields—which often mean lower mortgage rates—could indirectly help the housing market.
On to the Next Support: With the SPX falling below its 50- and 100-day moving average (MA), the next key support level to watch for would be around the 2830 level, not just because that’s where the 200-day MA support level could be but also because the SPX tested just below that level a few times in August. The last time SPX broke below its 200-day MA support level was in June. It went below it and a couple of days later bounced back up, rallied above the 100- and 50-day MA and continued its upward trend. Investors may want to closely watch the 2830 level and see if the index might once again find some support at the 2830 level or break through to the downside.
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