US Stock Market: Trade Deal Worries Offset by Low Rates, Decent Earnings, Resilient Economy

U.S. stock market bulls took a breather last week, finishing lower for the first time in six weeks. Volatility and volume remained extremely low, signaling to some analysts that investors had turned complacent. However, it’s more likely that they’re as optimistic about a trade deal between the United States and China as they were in May.

This may not necessarily be a good thing if they’re buying because they don’t want to miss a post-trade deal rally. I don’t want to call it complacency, but rather single-vision thinking. Are they “all in” on trade deal? We don’t know. Low interest rates, decent earnings and a resilient U.S. economy are also factors contributing to the market’s strength.

It’s not like investors aren’t taking protection either. Last week, we saw dramatic closing price reversal tops on the stock index daily charts, which tend to indicate profit taking and position-trimming. Money also moved into the safe-haven Japanese Yen and U.S. Treasury markets.

In the cash market last week, the benchmark S&P 500 Index settled at 3110.29, down 0.30%. The blue chip Dow Jones Industrial Average closed at 27875.62, down 0.50% and the technology-based NASDAQ Composite Index finished at 8519.88, down 0.20%.

Trade Deal Headlines:  ‘Unnamed Sources’ versus Credible Officials

There was evidence last week that investors were following the U.S.-China headlines. Although the indexes hit record highs early in the week, bullish investors started to shut it down after President Trump threated to raise tariffs, and Reuters reported negotiations had hit a snag over the rollback of tariffs. There were also headlines saying a trade deal would be delayed into early 2020, and concerns that China would be upset by U.S. legislation supporting the pro-democracy protesters in Hong Kong.

The negative headlines created by “unnamed sources” were seemingly put to bed on Thursday after Gao Feng, China’s Ministry of Commerce spokesman said, “external rumors” about trade talks are not accurate, and noted the two trade delegations remain in close communication.

Shortly afterwards, there was a report that China invited the U.S. trade delegation to Beijing for face-to-face talks. President Trump then told Fox News both sides were “very close,” and Chinese President Xi Jinping told a visiting U.S. business delegation that China holds a “positive attitude” toward the trade talks.

Stock Market Takes a Hit

Retailer earnings were at the forefront last week with some saying a big sales miss by Home Depot gave investors an excuse to book profits after the S&P 500 Index and Dow hit record highs on November 19. This was followed by a plunge in Boeing and Kohl’s.

Home Depot shares slid 5.44% after the company reported same-store sales that disappointed investors. Boeing dropped 0.67% after the National Transportation Safety Board recommended the airplane maker needs to resign a flawed engine casing after a deadly accident on Southwest Airlines flight 1380 last year. Kohl’s shares plummeted 19.49% after the retailer posted quarterly results that disappointed investors.

On a positive note, shares of discount brokerages Charles Schwab and TD Ameritrade surged 7% and 17%, respectively, after a source told CNBC’s Becky Quick that Schwab was in talks to buy its competitor.

Nordstrom, Inc reported better-than-expected earnings and sales for third-quarter fiscal 2019.

Little Reaction to Fed Minutes

The minutes of the U.S. Federal Reserve’s last policy meeting showed an increasingly divided Federal Open Market Committee that decided to hit pause in its easing cycle following a rate cut at its October 29-30 meeting. The minutes also offered little guidance on what would cause policymakers to change their minutes on the outlook.

“Uncertainties associated with trade tensions as well as geopolitical risks had eased somewhat, though they remained elevated,” said the minutes, adding “the risk that a global growth slowdown could further weigh on the domestic economy remained prominent.”

Following the meeting, Fed chair Jerome Powell indicated the Fed was effectively on hold with interest rates and said that would only change if there was a “material” change in the U.S. economic outlook.

U.S. financial markets were little changed following the release of the minutes as investors focused on the elusive U.S.-China trade deal.

Resilient US Economy

On the data front, stocks were supported late in the week after a report on consumer sentiment for November came in better than expected. The index rose to 96.8 from 96.5 in October. IHS Markit’s gauges for the U.S. services and manufacturing sectors also rose.