Market Closes Lower, But Losses Seemed Checked As Fed Remains Dovish

U.S. stocks snapped a 5-day winning streak on Friday as worries about Chinese economic growth and a continuation of a partial government shutdown seemed to add to doubts about further positive momentum for the moment.

Still, losses in each of the main three U.S. indices were relatively muted as the selling didn’t appear to pick up momentum, and overall the indices ended the week higher.

Market participants appeared to be selling their protection in the options market going into the weekend, perhaps a sign that they’re not as concerned about headline risk in the market. One indicator of that appeared to be the falling Cboe Volatility Index even on a day when stocks were lower.

In a bright spot that didn’t seem to have quite enough oomph to move the market higher, General Motors raised its earnings guidance for 2018 and predicted strong performance this year. An interesting step from the company is that it said Cadillac would be its lead electric vehicle brand.

Buoyed By the Fed

For much of the week, the market has been supported by dovish commentary from Federal Reserve officials that has helped bolster reassurances to market participants. Recently, many investors seemed to have been worried that the Fed might make a mistake and raise interest rates too much even though inflation hasn’t been problematic. (See more below.)

The latest data on that front, in the form of the consumer price index, came in as expected and seemed to show that the Fed does indeed have room to be patient in its plans for monetary policy, perhaps without the need to be as hawkish as the market was thinking going into the end of last year.

The market had also been riding some optimistic sentiment about the potential for a resolution to the U.S.-China trade war amid talks in China. But few details were forthcoming, and news of a potential high-level meeting in the U.S. later this month apparently received a “meh” from market participants.

Perhaps that’s because any optimism that was left concerning a trade deal got squashed after Reuters reported that China plans to lower its economic growth target this year amid U.S. tariffs and slackening domestic demand.

Recent data from China have shown sluggish consumer and producer prices, compounding worries about slowing growth in the world’s second largest economy. Data have also shown a weakening of the Chinese manufacturing sector, adding to evidence that the trade war, which according to media reports has disrupted the flow of hundreds of billions of dollars worth of goods, is taking a bite out of global growth.

It also seems that the continuing partial U.S. government shutdown is beginning to weigh more on investors’ minds. While it’s been an issue for as long as it’s been going on, Friday tied the current shutdown with the longest gap in funding in United States history. The last 21-day shutdown was during the Clinton administration. Meanwhile, hundreds of thousands of federal employees are temporarily out of work, and the shutdown is disrupting the flow of economic data.

Bank Earnings on Tap

The S&P 500 closed above what some analysts see as a key technical support level at 2584, despite spending time below that during the session. That could prove to be a bullish sign going into next week as the earnings season kicks off in earnest.

The coming days are scheduled to be filled with a bevy of financial company earnings reports, including from JP Morgan, Citigroup, Wells Fargo, Bank of America, Goldman Sachs, and Morgan Stanley. The deluge starts Monday morning with Citigroup, followed by JP Morgan and Wells Fargo on Tuesday morning. Buckle up.

Beyond whether the banks beat, meet, or miss projections, it could be interesting to tune in to see whether their executives discuss their outlook for interest rates. The yield on the 10-year Treasury has pulled back to well under the key 3% rate as investors have sought the relative safety of U.S. government debt. At the same time, there have been worries about the potential inversion of the yield curve, an out-of-the-ordinary formation that has preceded recessions in the past.

Also, the airline sector—which has come under pressure in the market lately as some companies are taking a hit to revenue—climbs into view early next week with earnings from Delta and United Continental on Tuesday. Low fuel costs have led to lower fares, hurting revenue for some carriers.

In the communications services sector, Netflix is scheduled to report on Jan. 17. The stock has been rallying in part on an announcement of a bumper audience for its hit movie Bird Box. But that raises a question of whether it might face pressure from analysts and journalists about releasing figures for other shows. Netflix shares rose on Friday after Raymond James and UBS analysts upgraded the company.

Defensive Communications: Looking at the communications services sector, much attention is often paid to growth stocks such as Alphabet, Facebook, and Netflix. But recent performance within the sector can serve as a reminder that not all of companies in communications services are created equal. Take Verizon, for instance. The multinational telecom conglomerate is a different animal than the other three, and its shares are reflecting that. While the former are all down, along with the entire sector, over the past six months, Verizon is up markedly. (See chart above.) It seems likely that investors in search of yield are viewing Verizon as a sort of defensive play within the sector because of its dividend history.

Inflation Indeed Muted: Closely watched inflation data on Friday dovetailed with the dovish tone emanating from the Federal Reserve of late. The Labor Department said consumer prices in December fell 0.1% month over month, in line with a Briefing.com consensus estimate. The core consumer price index, which strips out food and energy, rose an as-expected 0.2% and helps show that inflation isn’t rising at a problematic rate. The data are in line with what Fed Vice Chair Richard Clarida on Thursday called “muted” inflation. He and Chairman Jerome Powell have reiterated that the central bank can be patient on rates. Because there isn’t much inflationary pressure, the Fed seems to have room to not be as hawkish as the market was thinking just a few weeks ago. The consumer price data “supports the Fed’s born-again belief that it can be patient with its policy approach given that the core inflation trend is stable around the longer-run target at a time when data here and abroad is revealing some softening in economic activity,” Briefing.com said.

A (Partial) Look At Retail Sales: On Jan 16, investors were scheduled to get a look at the latest retail sales data from the Census Bureau. But it doesn’t look like that report will be forthcoming because of the partial government shutdown. That’s because the Census Bureau is affected by the lack of funding, as opposed to the Labor Department, which is funded. The lack of retail sales data comes at a sensitive time because the report’s December time frame covers much of the holiday shopping season. For more of an anecdotal recap, consider that Mastercard SpendingPulse data from late December showed that holiday sales increased 5.1% year over year to more than $850 billion this year, and Amazon said it had a record holiday season. But Kohl’s, Macy’s and L Brands have reported holiday sales figures that seem to have disappointed investors. Meanwhile, Target and Costco reported more robust holiday sales.

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