Closing Market Summary: Stocks Slide on Trade Concerns, but Recoup Heavy Losses
The S&P 500 lost 0.2%, but was able to fight back after being down as much as 2.9% earlier in the session. The Dow Jones Industrial Average lost 0.3% after being down as many as 785 points or 3.1%. The Nasdaq Composite added 0.4%, yet it had been down as many as 174 points or 2.4%.
The major indices suffered steep losses in the early going after news of the arrest of Huawei Technologies' CFO fueled concerns about U.S.-China trade negotiations. Investor sentiment reversed course after European markets closed, however, and kicked into overdrive late in the day following a Wall Street Journal report that suggested the Federal Reserve might be more cautious-minded about raising interest rates following its December FOMC meeting.
News surfaced Wednesday that Huawei CFO Meng Wanzhou was arrested in Canada Dec. 1 amid allegations the company violated U.S. trade sanctions on Iran. Ms. Meng is expected to be extradited to the U.S. to face the charges. Her arrest invited worries about potential retaliation against U.S. companies doing business in/with China. In a broader context, the sense that there might not be a trade deal fueled global growth concerns.
Those concerns, and the sharp selling in the stock market off the open, fueled a flight-to-safety in the Treasury market that pushed yields noticeably lower across the curve. The 2-yr yield dropped three basis points to 2.77% after hitting 2.68% intraday. The 10-yr yield dropped five basis points to 2.87% after hitting 2.82% intraday. The backtracking in the Treasury market also coincided with the close of European markets and the rebound effort in the stock market.
On a related note, Atlanta Fed President Bostic (FOMC voter) said he thinks the fed funds rate is within shouting distance of neutral, which followed previous remarks from Dallas Fed President Kaplan (non-FOMC voter) who suggested the fed funds rate is a little bit below neutral.
In other developments, JPMorgan Chase (JPM 105.19, -2.04, -1.9%) CEO Jamie Dimon shared some typically practical viewpoints in a CNBC interview that helped provide a measure of support for an oversold stock market. Mr. Dimon said he realizes the China trade issue is the main source of market volatility right now, but believes there could be enough progress in trade talks in the next 90 days to create, or push out, another deadline. He did acknowledge, though, that the trade uncertainty is not a good thing.
Regarding interest rates, Mr. Dimon believes the world is better off with the U.S. growing and rates going up because of that growth than it is with the U.S. being in a recession and rates going down because of it. He thinks if there is a bubble anywhere it is in U.S. government bonds.
Within the S&P 500, the energy (-1.8%), financials (-1.5%), materials (-1.4%), and industrial (-0.6%) sectors underperformed the broader market.
The oil-sensitive energy group fell in tandem with oil prices. WTI crude fell 3.0% to $51.56/bbl amid reports that Saudi Arabia is floating an idea for OPEC to cut production less than the market expected.
WTI crude was able to finish off session lows, though, as the weekly crude inventory report from the Energy Information Administration showed a decline in crude stockpiles for the first time since September. Crude oil inventories had a draw of 7.3 million barrels. Also, Saudi Arabia is reportedly waiting to hear from Russia before advancing any formal production cut agreement. An official communique from OPEC is expected sometime on Friday.
Financial stocks were set back amid the continued decline in U.S. Treasury yields, but like most stocks today, they were able to recoup major losses. Citigroup (C 60.06, -2.20, -3.5%) was an influential drag after its CFO said the bank no longer expects year-over-year revenue growth for its markets business in the fourth quarter. In addition, Citigroup expects to fall slightly short of its stated goal of achieving 100 basis points of improvement in year-over-year operating efficiency.
Conversely, the real estate (+2.7%), communication services (+1.0%), consumer discretionary (+0.6%), and information technology (+0.2%) sectors all finished in the green on Thursday.
Strong finishes from many of the FAANG stocks helped lift the broader market, which rallied sharply into the close on broad-based buying interest. Facebook (FB 139.63, +1.70), Netflix (NFLX 282.88, +7.55), Alphabet (GOOG 1068.73, +17.91), and Amazon (AMZN 1699.19, +30.79) all rose between 1.2% and 2.7%, Meanwhile, Apple (AAPL 174.72, -1.97) traded lower with a loss of 1.1%, but was able to close near its session high.
In earnings news, Hewlett Packard Enterprise (HPE 16.02, +0.97, +6.5%) was one of the top-performing stocks in the S&P 500 after it beat top and bottom line estimates.
Reviewing Thursday's economic data, which included the Trade Balance for October, Q3 Nonfarm Productivity and Unit Labor Costs, weekly Initial and Continuing Claims, Factory Orders for October, and ISM Services for November, and the ADP Employment Change Report for November:
- The U.S. trade deficit was $55.5 billion in October (consensus -$54.7 billion) versus a downwardly revised $54.6 billion (from -$54.0 billion) in September.
- The key takeaway from the report is that it doesn't reflect any improvement in the U.S trade deficit despite the tariff actions. The goods and services deficit has increased by $51.3 billion year-to-date, or 11.4%, from the same period in 2017.
- Nonfarm business sector labor productivity for the third quarter was revised to 2.3% (consensus 2.2%) from 2.2%. Unit labor cost growth was revised to 0.9% (consensus 1.2%) from 1.2%.
- The key takeaway from the report is that it points to fairly subdued labor costs in the third quarter, which could contribute to a willingness on the part of the Federal Reserve to be more gradual on its rate-hike path.
- Initial jobless claims for the week ending December 1 decreased by 4,000 to 231,000 (consensus 225,000). Continuing claims for the week ending Nov. 24 decreased by 74,000 to 1.631 million.
- The key takeaway from the report is that initial claims, while down in the latest week, are starting to pick up in a move that suggests the low for this cycle has been reached.
- Factory orders declined 2.1% in October ( consensus -2.0%) following a downwardly revised 0.2% increase (from 0.7%) in September. Excluding transportation, orders were up 0.3%.
- The key takeaway from the report is that it shows a surprising lack of business investment in the face of business-friendly fiscal stimulus measures.
- The ISM Non-Manufacturing Index rose to 60.7% in November (consensus 59.0%) from 60.3% in October. The November reading was the second-highest reading this year.
- The key takeaway from the report is that the services-providing sector, which accounts for a much larger slice of economic activity than the manufacturing sector does, remains in a healthy and fairly vibrant state.
- According to the ISM, the past relationship between the Non-Manufacturing PMI and the overall economy indicates the November reading corresponds to a 4.3% increase in real GDP on an annualized basis.
- The ADP National Employment Report showed an increase of 179,000 in November (consensus 192,000), and the October reading was revised to 225,000 (from 227,000).
Looking ahead, investors will receive the Employment Situation Report for November, the Preliminary Reading for the University of Michigan Index of Consumer Sentiment for December, Wholesale Inventories for October, and Consumer Credit for October on Friday.
- Nasdaq Composite +4.1% YTD
- Dow Jones Industrial Average +0.9% YTD
- S&P 500 +0.8% YTD
- Russell 2000 -3.9% YTD