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Stock Market Remains Near Highs, And Investors Await Fresh Catalyst For Next Move

Key Takeaways:

  • News reports suggest the U.S. could remove some tariffs on Chinese goods
  • ISM non-manufacturing index comes in ahead of forecasts
  • Treasury yields move lower ahead of 10-year note auction

As hump day dawns, investors and traders seem to be looking for a catalyst now that earnings season is mostly behind us, the Fed’s rate cut is in the rear view, and we don’t have much in the way of trade war-related news this morning.

Early indications suggest that the market could have another flattish day today but remain around all-time highs unless headlines spark a move one way or the other.

The Financials sector could get some attention again today as bonds try to make a comeback. Yields are lower after moving higher yesterday, but that doesn’t appear to be because of market nervousness sparking safe-haven buying. Rather it could have to do with covering positions after yesterday’s selloff and some flattening going into today’s 10-year auction.

Tariff Rollback in the Cards?

Yesterday, U.S.-China trade news was in the headlines again, apparently prompting some optimism and helping shares in two of the three main U.S. indices to hit new closing highs.

As the two sides work on hammering out a partial trade deal, the Wall Street Journal reported that officials from the world’s two largest economies have been considering rolling back some tariffs. A story in the Financial Times said the White House was thinking about rolling back duties on more than $1 billion in Chinese goods that went into effect at a 15% rate at the beginning of last month.

While the news helped the Dow Jones Industrial Average ($DJI) and the Nasdaq Composite (COMP) to notch record closes, the S&P 500 Index (SPX) fell slightly. It’s notable that the first two indices were able to close at records even though the $DJI rose just 0.11% and the COMP was up only 0.02%. The SPX dropped 0.12%.

While trading volumes in the COMP and $DJI were around average, volume was on the low side in the SPX. Perhaps some traders and investors took some time away from their screens to go vote.

Looking for a Catalyst

With all three of the indices relatively unchanged yesterday and shaping up that way today, it could be an indicator that investors and traders are taking a breather to consolidate some gains. After so much news last week, it seems that market participants want to see what happens next. 

It’s probably a positive thing that we’re taking a break, and it doesn’t appear to be caused by fear. Rather, it just seems like the market is waiting for the next catalyst now that the earnings season is winding down and the Fed’s rate cut is in the rear view mirror. The central bank’s next meeting isn’t until December, and the futures market indicates most traders and investors are expecting central bankers to stand pat on interest rates. Not exactly fodder for a big market move.

Earnings and the Fed have been big themes helping to propel the market higher. So while optimistic news on the trade front is nice, it will probably take more concrete trade headlines to kindle another round of meaningful moves to the upside.

Still, market participants seem fairly optimistic. Wall Street’s main fear gauge, the Cboe Volatility Index (VIX) finished yesterday around 13. Market participants also sold U.S. government debt and gold, apparently feeling less of a need for the safe-haven investments.

Financials Ride Yields Higher

As investors sold Treasuries, that moved yields higher, which helped the Financials sector turn in the second-best performance of the day. As longer-term yields rise compared to shorter term ones, that means banks can earn more on loan interest than they pay out on deposits.

It also appears that solid news from the U.S. services sector helped to pressure yields on U.S. government debt as well as the price of gold, which also faced headwinds from a rising U.S. dollar. As the greenback rises, dollar-denominated commodities like gold become more expensive for investors using other currencies.

With the decent economic news and the trade headlines stoking optimism, it’s perhaps not surprising that Real Estate and Utilities were yesterday’s worst performers. Even though investors weren’t in enough of a buying mood to send the market rallying sharply, they seemed to feel safe enough to sell some positions in these defensive sectors.

Services Sector Looking Better Than Manufacturing: The decent services sector data we were talking about above came in the form of the ISM’s non-manufacturing index. The measure of the services sector for October registered 54.7% when a consensus had expected a reading of 53.3%. The better-than-expected showing is a welcome development after the previous reading showed slower expansion than had been expected, prompting worry that the malaise in the manufacturing sector and the trade war might be weighing on the consumer-oriented services sector, which represents about 90% of the domestic economy. said the latest numbers reflect “an acceleration of expansion-based activity in October, which is a supportive consideration since the non-manufacturing sector accounts for a significantly larger slice of U.S. economic activity than the manufacturing sector does.”

Low Earnings Expectations, Again: Although earnings have generally been better than expected this season, we still appear to be headed for another earnings contraction. And analysts are projecting more of the same for the next earnings season. As of Nov. 1, a combination of actual and estimated results put this season’s S&P earnings decline at an expected 2.7%. This would mark the first time the SPX saw three consecutive quarters of year-on-year earnings contractions since Q4 2015-Q2 2016, according to FactSet. As of the same date, analysts expected Q4 earnings to decline by 0.4%, compared to expectations of a 5.6% growth rate as of June 30, according to FactSet. “If the index reports a year-over-year decline in earnings in both the third and fourth quarter, it will mark the first time the index will have reported four consecutive quarters of year-over-year earnings declines since Q3 2015 through Q2 2016,” according to FactSet.

Oil Watch: Oil prices could remain under pressure today if a government report on crude oil inventories shows an unexpectedly large build like an industry report did yesterday. In the week ended Nov. 1, the American Petroleum Institute on Tuesday said U.S. crude stocks jumped by more than four million barrels when analysts had been expecting an increase of just 1.5 million barrels, Reuters reported. Despite the indicator suggesting that demand for oil has been weaker than expected, oil prices still were able to finish stronger on Tuesday because of the trade news. But they have since retreated. Government data from the Energy Information Administration is due out a little later this morning. An S&P Global-Platts poll showed analysts expecting the official number to rise by 2.7 million barrels for the week ended Nov. 1, MarketWatch reported.

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

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