Lowered Expectations On Trade: Markets Act Like Someone's Cancelled Christmas

On Wednesday, the market was in rally mode all session. However, some of the bloom came off the rose into the close after Reuters reported Chinese officials said Beijing has lowered expectations for negotiations, as talks transitioned to top representatives for each side. Still, it was a solid session that saw all S&P sectors rally higher.

The standout was Technology, but the action in the Materials sector was compelling as well. 

Still, after the close, equity futures began diving with the Dow Jones Industrial Average off 300 points by 6:30 PM.

I like lowered expectations on trade as opposed to unbridled optimism; and yet, I’m surprised the market is reacting as if someone canceled Christmas.  At this moment, I think there is still a chance tariffs scheduled to kick in on October 15, and December 15 will be pushed out into 2020.

Toggling the 50-Day Moving Average

Major indices continue to toggle their respective 50-day moving averages in a decidedly trading range, going back to June.

The Dow has a perfect chart to learn the two most important chart formations.

The index hit and failed at a double top last month leading, which triggered selling. Meanwhile, there has been a series of higher lows.

Mighty American Consumer

On Monday, when consumer credit for August was released by the Federal Reserve, some media outlets called the number weak as revolving credit (credit cards) declined $2.0 billion. However, the overall increase in consumer credit of +$17.9 billion was more than anticipated (consensus +$15.0 billion), driven by the $19.9 billion increase in non-revolving credit (student and auto loans) since august 2016.

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I don’t see the decline in the use of credit alarming. On the contrary, I’ve said for years that we are dealing with a new kind of consumer. The new kind of consumer is flushed and confident but determined not to get over their skis. Consequently, revolving debt isn’t much higher than it was at its peak in May 2008 (see chart below):

• $1,019,630,000,000: May 2008
• $1,078,640,000,000: August 2019

Wiser & More Prudent

Consumer credit has been trending higher, but it’s not because of credit card abuse.

After the Close

Costco (COST) posted September’s comparable-store sales:

• U.S. Comparable sales: 5.7% (estimate 5.2%)
• Total Comparable sales: 5.6%
• e- Commerce: +18.5%

Bed Bath & Beyond (BBBY)

Bed Bath & Beyond (BBBY) announced the appointment of Mark J. Tritton as President and Chief Executive Officer and a member of its Board of Directors effective November 4, 2019. Tritton has a 30-year resume that includes Executive Vice President and Chief Merchandising Officer at Target, where he helped craft their very successive omnichannel shopping experience. He also worked at other iconic American retailers. Tritton has street cred in the retail space with investors, which bid up shares of BBBY 22% in after-hours trading.  

Portfolio Approach

Today’s Session

It has been a case of whiplash in overnight trading, with Dow futures down as much as 300 points.  Now, while still down, futures are well off the lows as more information circulates regarding the trade talks.  There are several reasons for the massive swings. 

First, there was a report last night that high-level talks would end a day early and that Chinese Vice Premier Liu He and the Chinese delegation would leave tonight instead of tomorrow.  Then, the White House said that report was inaccurate and there was no plan to end the talks early.  For now, the delegation has arrived, and the trade talks are resuming this morning, however when they will depart is still up in the air.

Then, a Bloomberg report was released that the White House was considering a currency pact with China in lieu increasing the tariff’s next week.  The accord had been previously agreed to prior to the trade talks breaking down earlier this year.  This would be the first part of a trade agreement, which would be followed by additional negotiations on key items such as intellectual property and forced technology transfers.

According to Chang Shu and David Qu, “An agreement on exchange rates could be a practical, face-saving way for both sides to reach a mini-deal that helps de-escalate trade tensions. In practice, though, it would probably have limited implications on China’s exchange rate policy -- barring an (unlikely) Plaza Accord type of commitment.”

Futures improved after a report from the New York Times said the President Trump agreed to allow a few American firms to have a license to sell some non-sensitive supplies to Huawei. This could help ease trade tensions. 

Let’s see how the market trades as the negotiations continue.