Stock Market Update: Holiday trading conditions appear to have started early this year, as stocks notched mild losses on Wednesday in very, very quiet trade. The S&P 500 slid 0.25%.
Stocks were slightly lower from the outset yesterday thanks mainly to light profit taking. There were some news catalysts, including decent NKE earnings (although guidance was soft) and weak FDX earnings, but they mostly paired each other off.
Europe also was lower following a negative ruling for Spanish banks from the European Court of Justice (although the ruling is just revenue/profit negative, not solvency negative).
So, with those the only influences on stocks yesterday morning, markets opened fractionally lower and spent virtually the entire day drifting sideways.
A good Existing Home Sales number didn’t elicit much market reaction, and after that the newswires quieted and markets continued to drift sideways until the final hour of trade, at which point politics elicited a slight market movement.
Specifically, Trump’s transition team announced that Peter Navarro would head a new National Trade Council. Navarro is not a fan of the current US-China trade arrangement, and as such the chances of some sort of trade incident between the two countries ticked higher yesterday. Also late last night CNN reported Trump’s transition team is investigating how to use executive action to impose import tariffs, so this is an issue that isn’t going away in 2017.
That caused a slight dip in stocks yesterday as the markets closed on the lows, but in an absolute sense, the declines were minimal.
The internals reflected the fact that yesterday was a very quiet day. The major indices all finished with very mild losses except for the Russell 2000, which continues to outperform on up days and underperform on down days (so yesterday it underperformed, down 0.60%.)
Looking at sector trading, none of the nine SPDRs we track daily moved close to 1%. Healthcare was the laggard (XLV down 0.50%) on a few mentions of potential price caps on legacy pharmaceutical drugs, but that’s peripheral news at best and not a major negative for the industry. I say that because the proposals are more aimed at making sure no one pulls a repeat of what Martin Shkreli did with Turing Pharma when he all of a sudden jacked up the price of a decades-old drug with no real competitor.
Earnings did move markets a bit yesterday as transports dropped nearly 1% on the FDX earnings, which were a miss combined with somewhat soft guidance. NKE posted good numbers, and despite some shaky guidance, the stock rallied 1% (although it finished well off the highs). But that wasn’t enough to push the retail or discretionary space higher.
Overall, excluding the Navarro/China news, it was a very quiet, holiday-like trading session. As long as core PCE Price Index doesn’t contain any surprises, I’d expect more of the same today.
Today’s Core PCE Price Index is really the last notable event of 2016, so given the lack of any potential narrative disrupting catalysts, the path of least resistance in stocks remains higher into year-end (and potentially into Inauguration Day).
That said, I think it’s also apparent that the market has lost a bit of upside momentum over the past week or so, as the knee-jerk euphoria of a pro-growth government is starting to collide with specifics, and the reality of getting policy changed (i.e. we are starting to consider the details of how these pro-growth policies will actually get passed, and the details are complicated).
So, while the band plays on with regards to increased growth expectations, there are some of us starting to look around and wonder how bad the bill might be!
Or, as Muhammed El-Erian (a man far wiser and more eloquent than I) put it yesterday, when explaining why he was raising cash for tactical accounts, he said, “The markets have priced in no policy mistakes.”
So, from a risk/reward standpoint, beyond the next two-to-four weeks, the risk/reward outlook isn’t that great. On one hand, there is the growing risk of policy disappointment as fiscal policy expectations are very high. On the other, further reward in the market will likely only come with positive, concrete details about how a lot of these pro-growth proposals will actually be implemented.
By no means am I advocating getting short or materially reducing stock holdings, but on the margin, taking some cash off the table to re-deploy if we get a “buy the president-elect/sell the Inauguration” move in stocks does make sense here, especially if you’ve been in the “Trump winners” sector basket we provided before the election (banks, infrastructure stocks, defense, biotech, energy).