Stock Market Rally Flattened by Slowing Global Economy, Renewed Trade Deal Worries

The stock market hit resistance and profit-taking ensued after the European Commission cut its forecasts. Investors began to trim exposure to risk and seek shelter in safe-haven assets as news hit the market that the U.S and China were still far apart in negotiations despite recent optimistic comments from President Trump. Selling pressure increased after it was reported that Trump will not be meeting with China’s President Xi before the March 2 deadline.
James Hyerczyk
Stock Market Worries

The major U.S. equity markets finished relatively flat last week. The markets started the week in a strong position to continue the more than month-long rally. The early strength was fueled by carryover buying in response to the previous week’s robust U.S. Non-Farm Payrolls report and stronger-than-expected ISM Manufacturing PMI data. Optimism over a possible U.S.-China trade agreement before the March 2 deadline also underpinned the markets along with a handful of better-than-expected earnings data.

For the week in the cash market, the benchmark S&P 500 Index settled at 2707.88, unchanged. For the year, the index is up 8.0%. The blue chip Dow Jones Industrial Average closed at 25106.33, up 0.20%. It’s up 7.6% for the year. The tech-based NASDAQ Composite finished at 7298.20, up 0.50%. In 2019, it’s up 10.0%.

The stock market hit resistance and profit-taking ensued after the European Commission cut its forecasts. Investors began to trim exposure to risk and seek shelter in safe-haven assets as news hit the market that the U.S and China were still far apart in negotiations despite recent optimistic comments from President Trump. Selling pressure increased after it was reported that Trump will not be meeting with China’s President Xi before the March 2 deadline.

Global Economic Slowdown, U.S.-China Trade Worries

The European Commission sharply cut its forecasts for Euro Zone economic growth this year and next on expectations the bloc’s largest countries will be held back by global grade tensions and domestic challenges. The Commission said Euro Zone growth will slow to 1.3 percent this year from 1.9 percent in 2018, before rebounding in 2020 to 1.6 percent.

White House economic advisor Larry Kudlow said that the Trump administration is hoping for a timely trade deal with China, but both parties remain far apart.

“The president has indicated that he’s optimistic with respect to a potential trade deal,” Kudlow, director of the National Economic Council, said on Fox Business. “But we’ve got a pretty sizable distance to go here.”

When asked whether he would meet the Chinese leader, Trump said:  “Not yet.” Pressed further on whether he would meet Xi before the March deadline, Trump said “no” and shook his head.

A White House official, who requested anonymity, citing a lack of authorization to speak publicly about the talks said Trump and Xi may still meet “shortly thereafter” March 2.

As a result of worries over slowing global economic growth and renewed concerns over U.S.-China trade relations, stocks fell, the dollar climbed and crude oil retreated.

Future Earnings Concerns Raised

Earnings continued to influence the price action as the reporting season neared its close. “With two-thirds of the S&P 500 companies having already reported earnings, approximately 72% of them have beaten earnings per share expectations, which is better than feared and in line with the historical averages,” according to investment advisors Edward Jones.

Looking forward, however, the earnings picture is a little cloudy which could slow down the rally in the future.

“Earnings for the first quarter of 2019 are expected to contract by more than 1 percent,” according to data from FactSet. “If earnings do fall, it will be the first profit contraction for the S&P 500 since the second quarter of 2016, when they fell 2.52 percent.”

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