Stocks Decline On Trade Jitters

Stocks Decline - End A Great Week On A Bad Note

The stock market sold off sharply on Friday as the S&P 500 fell 0.92%. Nasdaq fell 1.65%, and the Russell 2000 fell 1.82%. VIX was up 3.83% to 17.36. CNN Fear and Greed index fell from 29 to 18 which is extreme fear.

This makes me bullish on stocks in the short term again. In particular, this index helped me avoid going bullish into this selloff.

I think the selloff on Friday was partially because stocks had rallied too much too quickly. And also partially because of the statements on trade made by President Trump’s trade adviser.

With negative news on trade coming out, traders didn’t want to go into the weekend-long the market. News on trade will continue to come out in the next few weeks. So get used to this volatility. I’d rather hear some news than no news. It means work is being done on a deal.

Stocks Decline - The negative statement from trade adviser Peter Navarro sent stocks lower. 

Peter has long been a hawk on trade, so his comments aren’t surprising. However, investors hope some sort of progress on a deal with China is being made. So whenever he splashes cold water on that idea, stocks fall.

Specifically, he said "As part of the Chinese government influence operations, globalist billionaires are putting a full-court press on the White House in advance of the G-20 in Argentina. The mission of these unregistered foreign agents … is to pressure this president into some kind of a deal. How do you have a deal with somebody if they don’t even acknowledge your concerns”.

I don’t ever expect Peter Navarro to change his hawkish tone. But I do expect a deal to get done early next year. This statement doesn’t change my view.

Both countries will be hurt by the trade war. Also, both economies are slowing. Therefore, there will be extreme pressure on both sides to get something done.

As you can see from the chart below, 138 firms have mentioned tariffs on their conference calls through November 7th. This is slightly less than the 157 mentions through August 7th in Q2. I wouldn’t take this modest decline as a positive signal.

Tariffs are going to affect firms regardless of which ones mention it.

Stocks Decline - Chinese Trade Data Beats Estimates In A Bad Way

It’s rare for good numbers to be a bad signal. But that’s the case with China’s October trade data. Increase in exports was businesses front-running the increase in the tariff rate from 10% to 25% starting next year.

Once the tariff rate is raised, there will be a sharp decline in trade. It will cause both the Chinese and American economies to slump in Q1. Specifically, China had a $31.78 billion surplus with America. Overall, its surplus was $34.01 billion which missed estimates for $35 billion.

Exports were up 15.6% which beat estimates for 11% growth. September exports were up 14.5%. Import growth increased from 14.3% to 21.4% in October. This beat estimates for 14% growth.

China’s 6.5% GDP growth in Q3 is its weakest pace since Q1 2009. It’s not like the economy is improving to justify that spike in trade growth. Even if a trade deal is done before the end of the year, there will probably be a bit of weakness in Q1. That's due this front-running activity.

The chart below shows the expected declines in the Chinese Yuan in relation to the dollar tied to the timeline of tariffs.

The worst case scenario would be a 25% tariff on all goods China exports to America. It could weaken the Yuan to 7.8 versus the dollar. The current exchange rate is 6.96 yuan for $1.

Stocks Decline - Consumer Staples Outperform & Oil Craters

Most sectors were down as Friday was a red day. Worst 2 sectors were technology and consumer discretionary. They fell 1.66% and 1.5%, respectively.

After rallying 14.71% from October 30th to November 8th, Amazon stock fell 2.42%. Facebook continued its underperformance as it fell 1.97%. It is just $5.93 away from its 52 week low of $139.03.

Surprisingly, even though oil has cratered, the energy sector only fell 0.37%. Best sectors were real estate and consumer staples which increased by 0.14% and 0.51%.

The star of the consumer staples sector was Colgate which increased 4.76%. After underperforming for 5 years, there is speculation of some sort of M&A deal occurring soon.

Oil, however, has been in complete free fall in November.

As you can see from the chart below, the current 10-day losing streak is the worst in over 34 years. Oil is down 5 straight weeks. Producers are increasing their output. They are also slowing global growth signals waning demand.

This will be a big boost to the American consumer just in time for the holiday season. But it will hurt the energy sector’s earnings.

WTI fell 48 cents to $60.19. That low of $59.26 is its weakest level in 9 months. The big negative catalyst is still that America lifted the sanctions on Iranian exports for 8 countries.

Stocks Decline - Sharp Rally In Treasuries

I have been wondering how long real rates can continue soaring given the declining expectations for economic growth. The decline in oil prices should push down breakeven rates.

If real rates falter at all, the 10-year yield will plummet. It fell 6 basis points on Friday to 3.18%. The 10-year yield has been range-bound since early October. As a huge bull on the long bond due to weakening growth, I have been surprised at how high it has gotten.

The 2-year yield fell 4 basis points to 2.92%. Since it fell less than the 10-year yield, the curve flattened.

Difference between the 2 yields is only 26 basis points. An inversion can happen quickly if the Fed sticks with its hawkishness.

There is a 75.8% chance of a rate hike at the December meeting. Also, there are expected hikes in 2019.

So the Fed has some wiggle room to become more dovish to extend this cycle if it wants.