Stocks trying to hold early-morning rebound. After the S&P 500 Index’s nearly 3 percent decline yesterday, stocks are trying to regain their footing this morning amid another flurry of trade headlines and yield curve inversion concerns (please see yesterday’s LPL Research blog). After threatening retaliation overnight, China used the phrase “meet halfway,” which turned stock futures positive.
This doesn’t feel like normal volatility. The S&P 500 typically experiences at least one 10% correction per year, even in positive years, and the latest drawdown for the index through Wednesday’s close is just 6%. Stocks have also generally performed well after the last four yield curve inversions dating back to 1988, and after the Federal Reserve (Fed) started rate cuts outside of recession (still our base case). More on volatility can be found here.
China warns of retaliation. Chinese leaders expressed displeasure with President Trump’s latest tariff increase and announced it would retaliate, without providing specifics. Unfortunately, more economic pain is likely to be inflicted on both sides before any kind of resolution can be reached. That pain, which was reflected in weaker Chinese data for July (retail sales, industrial output), and Trump’s latest tariff reprieve should keep the two sides talking. However, prospects for a timely resolution have become remote, introducing more risk to economic growth and corporate profits over the next several quarters.
Corporate disruption increasing. A U.S. Chamber of Commerce survey indicated that 40% of companies are either considering relocating manufacturing out of China or already have. The number of companies citing the word “tariffs” on their second quarter earnings calls (128 out of 438) has increased 40% from the first quarter to the second, according to FactSet. Pressure from the corporate lobby is another reason we expect the two sides to continue talking.
Sound economic data. U.S. economic data this morning was sound, providing investors with good news amid a wave of conflicting headlines. Retail sales increased for a fifth straight month in July, the longest streak since the end of 2017, as a strong labor market and rising personal incomes propelled consumer spending. Retail sales (excluding automobiles and gas) rose 0.9% month over month, the biggest gain since March. A separate report showed nonfarm productivity climbed 2.3% in the second quarter, higher than estimates for a 1.4% gain. Nonfarm productivity growth shows that U.S. companies are getting more output per employee, an important development in a late-cycle economy as productivity lifts gross domestic product (GDP) growth and keeps employer costs contained.
Key technical levels to watch. The S&P 500 closed Wednesday at 2,840, near where we lowered our equities view to market weight back in late March. Key support levels we are watching should the selloff go further include: 1) 2,822. August 5 intraday low; 2) 2796. 200-day moving average; and 3) 2740. Lows tested in March and June nearly eclipsing the 10% correction threshold. We’ve shared our technical analysis insights in today’s LPL Research blog post.
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