Stocks - Slight Rally Despite Trade Woes
Many the stock market is overbought. The logic to buying stocks took a hit on Thursday, but they still rallied modestly. S&P 500 was up 0.14%, the Nasdaq was up 0.68%, and the Russell 2000 was up 0.7%.
VIX’s 3.23% decline helped push the CNN fear and greed index to 58 which is greed. It was at 2 last month. Stocks were oversold dramatically then, and stocks are overbought now.
Stocks - Trade War Is Heating Up Again
Logic to buying stocks took a hit because Commerce Secretary Wilbur Ross stated America and China are miles and miles away from a trade agreement.
The stock market has rallied this year because stocks were oversold starting the year, because the Fed has gone dovish, and because a trade deal was looking more likely.
The third part of that is no longer true. These comments come after the White House canceled a meeting with China because of intellectual property differences. Likelihood of a trade deal by March has fallen.
I wouldn’t be surprised if the two nations kick the can down the road by extending the deadline to make a deal by a couple months.
If the deadline isn’t extended and the new 25% tariffs go into effect, it will be another hit to the American and Chinese economies. The Chinese economy certainly doesn’t need this as 2018 GDP growth was the lowest since 1990. It’s tougher to say how America is doing because of the government shutdown.
Stocks - 35 Day Shutdown
The government shutdown is now up to 35 days which is 14 days longer than the previous record long shutdown. Wilbur Ross also commented on the government shutdown. His dismissal of the impact of the shutdown on government workers and on the economy suggests the White House is fine with the shutdown lasting another few weeks.
In Ross’s interview he stated, "You're talking about 800,000 workers and while I feel sorry for the individuals that have hardship cases, 800,000 workers, if they never got their pay — which is not the case, they will eventually get it, but if they never got it, you're talking about a third of a percent on GDP so it's not like it's a gigantic number overall."
It's true that the permanent effect of the shutdown on economic growth will be minimal. However, the effect on Q1 will be large. According to a Reuters poll of 50 economists, about 60% said it would have a significant impact. The rest said it would have an insignificant impact.
Stocks - No one said the shutdown would have zero impact.
The average expectation is for it to take 0.3% off GDP growth. The biggest issue with these estimates is that they are projecting the impact if the shutdown ended today. If it lasts a few weeks longer, the impact will be much larger.
As you can see from the chart below, the shutdown is predicted to impact GDP growth by about 0.3% if it lasts until the end of January, 0.5% if it lasts through February, and about 1.2% if it lasts all quarter. The point Oxford Economics makes is that the shutdown’s impact isn’t linear. The effect grows as the shutdown gets longer.
If you look at this on an individual basis, the longer a person doesn’t get paid, the more they will drain their savings. If a person has 3 months of savings, this shutdown will be a disaster if it lasts until the end of the quarter.
We’ve already seen some workers getting food assistance after missing just one paycheck.
This ties into a Pew Research poll which showed 51% of respondents stated their individual financial situation was great or good and 48% stated their situation was fair or poor. Even though the consumer is doing well because there has been real wage growth, the consumer has deleveraged, and the labor market is nearly filled, many people are still living paycheck to paycheck.
About half of Americans don’t own stock which means they don’t have extra capital to invest.
Stocks - Intel Signals Cloud Is Weakening
Two big earnings reports this week were Intel and Starbucks. Intel reported EPS of $1.28 which beat estimates for $1.22. It’s never a surprise when a company beats on EPS. The firm missed on revenues as sales were $18.66 billion instead of $19.01 billion. They were up 9% year over year.
Revenues missed because the Client Computing Group, which includes PC chips, had $9.82 billion in revenue instead of $10.01 billion.
The Data Center Group had $6.07 billion in revenues which missed estimates sharply for $6.35 billion. Growth from the cloud fell sequentially from 50% to just 24%.
This cloud weakness was also expressed by Western Digital. If Microsoft and Amazon see similar cloud weakness, their stocks will be crucified. Intel had a huge guidance miss as EPS is expected to be 87 cents instead of $1.01 and revenue will be $16 billion instead of $17.35 billion. This explains why the stock fell 7.11% after hours. That's a major problem for the tech sector.
Stocks - Starbucks Beats Estimates
It’s no surprise Starbucks beat estimates because the consumer remains strong. EPS was 68 cents which beat estimates by 3 cents. Revenues were $6.63 billion which beat estimates for $6.49 billion.
Traffic was flat but the 3% check size bump pushed U.S. same store sales growth to 4%. That beat estimates for 3.2% growth. Cold beverages and trimming the holiday drink menu helped drive these great results.
Even though China is a big worry, same store sales growth in the China/Asia Pacific region was 3% which beat estimates for 1.6% growth. Overall same store sales growth was 4% instead of 2.8%. Guidance was solid because the firm expects fiscal same store sales growth between 3% and 4%.
At its investor conference in December, it said growth would be at the low end between 3% and 5%. This report pushed the stock up 1.95% after hours. This report was a modest positive while the Intel report was a major negative.