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Continued US-China Trade Concerns Pushed Stocks Lower To End A Wild Week


To close out a wild week for stocks, uncertainties surrounding the possibility of a longer-term detente in the U.S.-China trade war seemed to outweigh a bit of optimism on the inflation-and-economic front after a Goldilocks jobs report.

The Dow Jones Industrial Average  fell more than 500 points to erase the year’s gains. The Nasdaq Composite breezed through the psychologically significant 7000 level to close at 6969, a 3% down move on the day, although it settled well off its recent low from last month. From a technical standpoint, today’s close in the S&P 500, 2633, was exactly one point above the closing low on November 23. While some traders may see that as a positive sign, it might be little consolation for bulls on a day when the index was down more than 2%

The week’s collapse in stocks and continued elevated volatility seemed to serve as reminders of the tectonic shift we’ve been seeing in stock market and fixed income valuations, but even the bears might have gotten surprised by the extent of this selloff. Meanwhile, for the bulls, buying the dip doesn’t seem to have worked.

Amid the selling, technology shares haven’t been able to provide the upside buoyancy we saw earlier in the year as the overhang from the U.S.-China trade war seems to be too great. Tech giant Apple has also been plagued by worries about its iPhone sales. Meanwhile, the financial sector hasn’t been able to provide upside momentum as Treasury yields have pulled back. So at the moment it’s hard to see what might be the spark plug to get this sputtering engine revving again.

That doesn’t mean that the world is ending, especially as we see continued strong performance from the U.S. economy, despite all the noise from overseas.

Solid Jobs Report Seems to Get Cold Shoulder

Although news from a government report showing that the economy added 155,000 non-farm jobs in November was less than the 189,000 expected in a consensus, it was still a solid showing indicating a growing economy. At the same time, the report showed yearly wage growth of 3.1% was the same as the 12 months ended in in October, a development not likely to stoke additional inflation fears.

Although November was the second month in a row with a “3” as the first number after a decade of pay growth below that, it’s still arguable that the reading on wages was relatively tame given the economic expansion we’ve been seeing lately. And the wage data sets the stage for two important gauges of inflation due out in coming days — a government reading on producer prices on Tuesday and one on consumer prices on Wednesday.

With a rate hike widely expected in December but the Fed’s trajectory seemingly more murky next year, more readings that point to less inflationary pressure could arguably give the market a bit of optimism that the U.S. central bank may adopt a more dovish stance.

Hopes Continue Rising For Fed Pause Amid Dovish Signals

This comes against a backdrop of other signs of potential Fed dovishness. On Thursday, the Wall Street Journal reported that Fed officials are considering whether to signal a new wait-and-see mentality after a likely interest-rate increase later this month, which could help to slow down the pace of rate increases next year. On the same day, two Fed speakers made comments that might have reassured investors who’ve  been worried that the Fed could be hiking into a slowing economy. Those comments followed dovish talk by Fed Chair Jerome Powell and Fed Vice Chair Richard Clarida, who both expressed thoughts about rates now being near neutral.

Despite the arguably positive nature of the jobs report when looked at from a point of view focusing on inflation, the headline number showed weaker-than-expected jobs growth. So it may be that some market participants were focusing on that side of the coin and adding pressure to the market worries about ongoing trade tensions between the United States and China.

Trade Worries Weigh

On the trade front, a report by the Wall Street Journal that federal prosecutors are expected to bring charges against Chinese government-linked hackers seemed to help fuel negative sentiment. As did comments on CNN by White House trade adviser Peter Navarro on the potential for raised tariffs if a trade agreement isn’t reached during the three-month truce. Even so, White House economic adviser Larry Kudlow told CNBC that the trade talks are “extremely promising.”

During the week, market optimism about a truce announced following a meeting between President Trump and his Chinese counterpart at the G-20 summit quickly waned after an executive with Chinese telecom giant Huawei Technologies was arrested in Canada and faced extradition to the United States.

That seemed to raise concerns over the world’s two largest economies striking a longer-term deal that could end a trade dispute that has been hanging over Wall Street for much of this year and helped to  spark worries about global economic growth.

Brexit, Italian Woes Add To Pressure

In addition to watching the headlines for developments on the trade front, investors may also be paying attention to the upcoming United Kingdom vote on a proposed plan to leave the European Union. Meanwhile, contentious budget negotiations between the European Union and the Italian government continue.

Closer to home, Friday’s U.S. stock-market trading pushed every S&P 500 sector into the red with the exception of utilities, which are often considered defensive plays.

Shares of information technology and consumer discretionary companies took the biggest hits. For tech, that’s probably reflective of the sector’s strong links to China. For consumer discretionary stocks, there still may be some lingering worry about an economic slowdown after portions of the Treasury yield curve inverted this week.

On Friday, although energy stocks lost some ground, they did relatively well as oil prices were helped by news of an agreement involving OPEC and Russia to cut output next year by 1.2 million barrels a day. Oil prices have gotten hammered recently on worries about global oversupply and the potential for decreased demand for black gold. While this week’s agreement could end up helping on the supply side, global demand remains a question mark, especially as the U.S.-China trade war continues to loom.

A Shinier Look: Gold prices, as shown in the candlestick chart, have been on an upswing lately. Part of that arguably has to do with moves lower in the U.S. dollar, as shown by the purple line. But those have been relatively muted, and it seems the dollar may just be stabilizing. Other help may be coming to gold from its role as a perceived safe haven, amid marked declines in the stock market, as represented by the blue line showing the S&P 500. Data Source: CME Group, ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.thinkorswim

Number of Marginally Attached Workers Rises: With the market focused on the headline numbers out of Friday’s jobs report, some investors might have missed a lesser-looked-for wrinkle in the data. According to the report, the number of so-called marginally attached workers rose by 197,000 year-on-year to 1.7 million people in November. The government defines these people as wanting to work, available to do so, having looked for a job sometime in the past year, but still not in the labor force. Yet, they aren’t considered unemployed because the hadn’t looked for work in the four weeks before the survey. At the same time, the number of “discouraged workers” among the marginally attached is nearly unchanged versus the same time last year. Discouraged workers, according to the government’s definition, aren’t looking for work because they don’t think any jobs are available for them. According to the government, the marginally attached portion of people who weren’t discouraged workers hadn’t searched for work because of reasons like school attendance or family responsibilities.

Swinging From the Rough: Sometimes it might seem relatively straightforward to be a long-term investor. The period from mid-2016 through January of 2018 comes to mind. Volatility was calm, interest rates stayed historically low and stocks basically got on an elevator that took them to new all-time highs again and again and again. Wash, rinse, repeat. Then there’s times like now, when long-term investors might feel like they’re swimming against the tide. A slew of negatives have ganged up to put stocks in the red, the world economy appears to be slowing, and volatility keeps rising.

At times like these, it’s not necessarily best to put your head in the sand and hope it all goes away. Instead, the end of the year might be a good time to consider taking a good look at your allocations to make sure what you have still fits your long-term plans. With all the buffeting this year, is your allocation of stocks to fixed income still where you’d planned? Has anything major changed in your life that might cause you to-rethink how you invest? Are you parked in the right sectors considering your risk tolerance? Now could be a good time to start thinking about that, while doing your best not to let day-to-day volatility take you off your game.


TD Ameritrade® commentary for educational purposes only. Member SIPC.

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