U.S. stocks closed lower as new signs of slowing global growth continue to emerge.
Tuesday’s session kicks off a holiday-shortened week for equities, as the U.S. stock market was closed Monday in observance of Martin Luther King Jr. holiday. Meanwhile, world leaders are gathered this week in Davos in Switzerland through Friday for the annual World Economic Forum.
On Monday, China reported that its economy expanded by 6.6% last year, the slowest pace of growth for the country since 1990. This comes as data for China’s consumer spending, factory activity and car sales all sagged for the fourth quarter of 2018.
President Donald Trump, who canceled his delegation’s trip to the WEF due to the partial government shutdown, commented on China’s bruised growth data in a Twitter post earlier this week.
“China posts slowest economic numbers since 1990 due to U.S. trade tensions and new policies. Makes so much sense for China to finally do a Real Deal, and stop playing around!” Trump wrote on Twitter.
Fang Xinghai, vice chairman of China’s Securities Regulatory Commission, told a seminar in Davos that he expects economic growth will slow further to 6% in 2019 due to trade tensions with the United States and a cooling housing market.
Fang’s forecast falls just below the International Monetary Fund’s growth outlook for 2019. The IMF, in its updated World Economic Outlook report released earlier this week, said it expects China’s economy will slow to a 6.2% pace of growth in both 2019 and 2020. This is unchanged from the IMF’s previously reported outlook from October 2018.
The dreary outlook for the world’s second-largest economy dragged oil prices lower on concerns of lower demand for fuel. West Texas Intermediate crude prices (CL=F) fell 2.3% to settle at $52.57 per barrel, while Brent crude prices (BZ=F), declined about 1.9% to $61.54 per barrel around 2:30 p.m. ET.
While China’s economic troubles continue to dominate headlines, similar slowdown concerns weigh on other emerging and developed economies alike. The IMF lowered its expectations for total global growth to 3.5% in 2019 and 3.6% in 2020. This represents a reduction of 0.2 and 0.1 percentage points from its October forecast and is the IMF’s second downward revision in three months. The IMF’s previous October reduction to its worldwide growth forecast was due primarily to escalating trade tariffs between China and the United States. The IMF reiterated this point in its latest revision and added weakness in German auto manufacturers due to new fuel emission standards, tepid domestic demand in Italy and the prospects of a “no-deal” Brexit to its list of global concerns.
The IMF expects that U.S. growth will slow to 2.5% in 2019 and 1.8% in 2020 from an estimated expected final pace of 2.9% last year. These figures are unchanged from the October 2018 projections. However, the IMF in its most recent report cited the ongoing U.S. government shutdown – which began in mid-December – as a newly introduced perturbation to domestic markets, noting that the shutdown “further weighed on financial sector sentiment toward year-end.”
The government shutdown, now in its 32nd day, could well pose a meaningful risk to first quarter U.S. GDP, according to estimates by a range of analysts. Brett Ryan, a senior U.S. economist at Deutsche Bank, wrote in a note last week that the partial government shutdown had already created an at least 0.3 percentage point drag on real GDP growth. Michael Feroli, an analyst with JPMorgan, lowered his projection for first-quarter annualized real GDP growth to 2% from 2.25% due to the shutdown. And the White House said in its own estimate that each week of the government shutdown will cause a 0.13 percentage point decline in U.S. growth.
Other firms have noted that the protracted shutdown – now the longest ever in the U.S. – poses risks to equity markets.
“Historically, the market has shrugged off shutdowns (median S&P 500 return of +0.3% during government shutdowns since 1981), and has been up following the shutdown (median return of +2.1% the month after),” analysts from Bank of America Merrill Lynch wrote in a note. “But we’re now off the grid, and risks to both the U.S. economy and the market are rising the longer the current shutdown drags on.”
The analysts noted that the direct impact from the shutdown on GDP would have “negligible impact” on S&P 500 first-quarter 2019 earnings per share, but companies with large federal government exposure could be at risk. Furthermore, companies within the Consumer Discretionary sector could also be hurt by lower and delayed consumption, and Tech and Industrials companies could be impacted as capital expenditure stagnates due to uncertainty with the closures.
ECONOMY: Existing home sales slid in December
Existing home sales tumbled 6.4% month-over-month in December to 4.99 million, the lowest level in three years. The headline reading from the National Association of Realtors came in sharply below estimates of a 1.5% monthly decline, according to Bloomberg data, and November’s upwardly revised 2.1% month-over-month increase. December sales for previously owned homes were down 10.3% from a year ago, and existing home sales have now decreased year-over-year for four consecutive months.
The median existing-home price was $253,600 in December, a 2.9% increase over last year, or the smallest increase since early 2012.
Higher interest rates during much of 2018 were largely to blame for the weak existing home sales, NAR’s chief economist Lawrence Yun said in a statement.
“The housing market is obviously very sensitive to mortgage rates. Softer sales in December reflected consumer search processes and contract signing activity in previous months when mortgage rates were higher than today,” Yun said. “Now, with mortgage rates lower, some revival in home sales is expected going into spring.”
STOCKS: Johnson & Johnson sees slower sales in 2019
Johnson & Johnson (JNJ) topped expectations for fourth-quarter 2018 results but said it foresees slower sales growth in 2019. The health-care conglomerate reported adjusted earnings of $1.97 per share on revenue of $20.4 billion for the final three months of fiscal 2018. This came in ahead of estimates for adjusted earnings of $1.95 per share on revenue of $20.2 billion, according to Bloomberg data. However, the company said it sees full-year 2019 sales between $80.4 billion to $81.2 billion, falling short of consensus estimates of $82.7 billion. Shares of J&J declined 1.37% to $128.90 each as of market close.
Activist investors are pushing eBay (EBAY) to consider spinning off its StubHub ticketing and classified ads businesses. Elliott Management Corp. on Tuesday disclosed it holds a more than 4% stake in eBay representing about $1.4 billion in market value. The firm urged eBay to separate its StubHub and Classifieds properties, which it said “represent high-value, strategic assets that are worth meaningfully more than the value currently being ascribed to them” as part of the e-commerce platform. Separately, a Wall Street Journal article citing an unnamed person familiar with the matter reported that hedge fund Starboard Value, which has a less than 4% stake in eBay, has also spoken with the online marketplace about this strategy. Shares of eBay advanced 6.13% to $32.90 each as of market close.
Arconic (ARNC) said on Tuesday it is abandoning a transaction with private-equity firm Apollo Global Management. The deal would have been valued at more than $10 billion and clocked in as one of the largest leveraged buyouts since the financial crisis, according to Bloomberg. Arconic chairman John C. Plant said in a statement explaining the decision, “We did not receive a proposal for a full-company transaction that we believe would be in the best interests of Arconic’s shareholders and other stakeholders.” Shares of Arconic declined 15.98% to $17.09 each as of market close.
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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