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Closing Market Summary: S&P 500 Trims Weekly Rally with Focus Shifting Towards G-20 Meeting

The S&P 500 trimmed this week's rally by 0.2% on Thursday with market participants shifting focus to this weekend's G-20 meeting between U.S. President Donald Trump and China President Xi Jinping.

Meanwhile, the Dow Jones Industrial Average lost 0.1%, the Nasdaq Composite lost 0.3%, and the Russell 2000 lost 0.3%.

Though the market succumbed to early profit-taking from Wednesday's Powell-driven rally, stocks gradually climbed from session lows as news wires heated up with U.S.-China trade headlines. Despite the uncertainty surrounding the meeting, The Wall Street Journal report published Thursday is probably as good a preview of what an eventual best-case outcome will be from the G-20 meeting. The Wall Street Journal notes (unnamed) officials on both sides are floating the idea of forestalling any further tariffs through the spring to set the stage for a new round of talks to address changes in China's economic policy.

It would be a small victory for the market if there was an agreement at the G-20 meeting to hold off on such tariff actions, yet it isn't the ultimate solution since it kicks the tariff can down the road without eliminating the threat that further tariffs will be imposed.

In addition, The South China Morning Post reported that Peter Navarro, a well-known China trade hawk, will be attending the dinner meeting between President Trump and President Xi on Saturday. Mr. Navarro's presence at the dinner table briefly unnerved investors. 

Separately, the Federal Open Market Committee (FOMC) released its minutes from its November 7-8 meeting. Though the market crossed into positive territory shortly after its late afternoon release, one should not get too caught up with the minutes.

Some reasons include (1) the fact that Fed Chair Powell had already stated "interest rates... remain just below the broad range of estimates of the level that would be neutral for the economy," and (2) the market has already been handicapping the strong likelihood that the target range for the fed funds rate will be increased to 2.25% to 2.50% at the December 18-19 FOMC meeting. The latest minutes largely echoed Mr. Powell's language and the likelihood of a December rate hike.

Back to stocks, the heavily-weighted information technology (-1.0%) and financial (-0.8%) sectors weighed on the broader market. 

Apple (AAPL 179.55, -1.39, -0.8%) and other tech heavyweights dragged on the group. The sector, though, had risen 6.0% for the week heading into Thursday's session. On the other hand, Qualcomm (QCOM 58.11, +1.46) was a bright spot after the company's former Chairman said in a Bloomberg interview that he is still thinking about taking the company private.

Also, the financial sector was pressured by weak housing data that weighed on investor sentiment. Pending home sales declined 2.6% in October, reported on the heels of a report showing new home sales declined 8.9% in October. The weak reports have fueled concerns about weakening mortgage loan demand, which is a negative for many banks and many of the regional banks in particular. Charles Schwab (SCHW 44.16, -1.50) was a notable financial laggard with a loss of 3.3%.

Conversely, the energy (+0.6%), materials (+0.6%), communication services (+0.4%), and health care (+0.3%) sectors outperformed the broader market.

The oil-sensitive energy group benefited from WTI crude rebounding 2.5% to $51.46/bbl. Crude bounced on the hope that the recent downturn in oil prices will spur OPEC+ producers to agree to a meaningful production cut next week.

FANG stocks Facebook (FB 138.68, +1.92, +1.4%), Netflix (NFLX 288.75, +6.10, +2.2%), and Alphabet (GOOG 1088.30, +2.07, +0.2%) extended gains to lift the communication group.

In earnings, Dollar Tree (DLTR 88.43, +5.11) rose 6.1% after it beat earnings estimates. The discount store company did guide its Q4 earnings and revenues below consensus, however. Also, Abercrombie & Fitch (ANF 20.70, +3.58) spiked 20.9% after a shift in identity helped the clothing retailer beat earnings expectations.

Elsewhere, U.S. Treasuries finished near their unchanged marks with the benchmark 10-yr yield losing one basis point to 3.04%. Also, the U.S. Dollar Index finished flat at 96.76.

Reviewing Thursday's economic data, which included PCE Price Index for October, Personal Income and Spending for October, Pending Home Sales for October, and weekly Initial and Continuing Claims:

• Personal income increased 0.5% in October (consensus +0.4%) while personal spending jumped 0.6% (consensus +0.4%). Real PCE, which is the component that factors into Q4 GDP forecasts, was up a solid 0.4%. The PCE Price Index was up 0.2% and the core PCE Price Index, which exclude food and energy, was up 0.1% (consensus +0.2%).
  • The tame inflation readings are the key takeaway from the report since they are supportive of the Federal Reserve taking a more deliberate approach to raising the fed funds rate.
• Pending Home Sales decreased 2.6% in October (consensus +0.7%). Today's reading follows a revised 0.7% increase in September (from +0.5%).
• Initial claims for the week ending November 24 increased by 10,000 to 234,000 (consensus 218,000) while continuing claims for the week ending November 17 increased by 50,000 to 1.710 million.
  • The key takeaway from the report is that it is apt to contribute to assertions that the bottom for the trend in initial and continuing claims may have been reached in this cycle.

Looking ahead, investors will receive the Chicago PMI for November on Friday.

• Nasdaq Composite +5.4% YTD
• Dow Jones Industrial Average +2.5% YTD
• S&P 500 +2.4% YTD
• Russell 2000 -0.7% YTD

FOMC Minutes: Key Excerpts

• Consistent with their judgment that a gradual approach to policy normalization remained appropriate, almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations. However, a few participants, while viewing further gradual increases in the target range of the federal funds rate as likely to be appropriate, expressed uncertainty about the timing of such increases. A couple of participants noted that the federal funds rate might currently be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity and put downward pressure on inflation and inflation expectations.
• Investors pointed to a number of uncertainties in the global outlook that may have contributed to the decline in stock prices, including ongoing trade tensions between the United States and China, growing concerns about the fiscal position of the Italian government and its broader implications for financial markets and institutions, and some worries about the outcome of the Brexit negotiations.
• The volatility in equity markets was accompanied by a rise in risk spreads on corporate debt, although the widening in risk spreads was not as notable as in some past stock market downturns.
• Over the intermeeting period, global investors focused on changes in U.S. equity prices and interest rates, ongoing trade tensions between the United States and China, and uncertainty regarding budget negotiations between the Italian government and the European Union.
• On the upside, household spending and business investment could expand faster than the staff projected, supported in part by the tax cuts enacted last year. On the downside, trade policies and foreign economic developments could move in directions that have significant negative effects on U.S. economic growth. Risks to the inflation projection also were seen as balanced.
• Participants observed that growth in business fixed investment slowed in the third quarter following several quarters of rapid growth. Some participants pointed to anecdotal evidence regarding higher tariffs and uncertainty about trade policy, slowing global demand, rising input costs, or higher interest rates as possible factors contributing to the slowdown.
• Participants commented on a number of risks and uncertainties associated with their outlook for economic activity, the labor market, and inflation over the medium term. A few participants indicated that uncertainty had increased recently, pointing to the high levels of uncertainty regarding the effects of fiscal and trade policies on economic activity and inflation. Some participants viewed economic and financial developments abroad, including the possibility of further appreciation of the U.S. dollar, as posing downside risks for domestic economic growth and inflation. A couple of participants expressed the concern that measures of inflation expectations would remain low, particularly if economic growth slowed more than expected. Several participants were concerned that the high level of debt in the nonfinancial business sector, and especially the high level of leveraged loans, made the economy more vulnerable to a sharp pullback in credit availability, which could exacerbate the effects of a negative shock on economic activity. The potential for an escalation in tariffs or trade tensions was also cited as a factor that could slow economic growth more than expected.
• Foreign economic growth appeared to pick up in the third quarter, as a strong rebound in economic activity in several emerging market economies (EMEs) more than offset a slowdown in China and most advanced foreign economies (AFEs).

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