Driving Higher: Market Keeps Hanging In, On Pace For Another Record-Setting Week

Key Takeaways:

• Stocks on pace to add to weekly gain streaks for major indices
• Nvidia earnings get a mixed review from analysts, investors
• Retail sales rise 0.3% in October, matching analysts’ expectations

Eight and seven. Those are the weekly gain streaks the S&P 500 Index (SPX) and Nasdaq (COMP) appear to be on pace for barring some sort of major setback today.

At least early on, a setback seems unlikely. Indices got an initial boost in pre-market trading after an administration official said negotiations over the first phase of a trade agreement with China were coming down to the final stages, with the two sides in close contact. While that sounds nice, it’s probably not a good idea to get too optimistic yet. These talks go back and forth like a pendulum (see more below).

On the earnings side, the pendulum also swung for Nvidia (NVDA). The stock fluctuated between gains and losses in futures trading after the chipmaker beat analysts’ Q3 earnings and revenue estimates but issued Q4 revenue guidance slightly below Street views. Investors don’t seem to know right away what to make of its results, judging by the stock moves.

Though the company’s outlook appeared to disappoint, it did say it expects strong data center growth ahead. Artificial intelligence (AI) and gaming continue to look good. For what it’s worth, several analysts raised their NVDA stock price targets after the earnings news. It also got downgraded by another analyst. Most analysts did seem cheered by the results, however.

In other earnings news, J.C. Penney (JCP) looked a little more lively, and Applied Materials (AMAT) was another chip company that surprised to the upside. Across the Pacific, Chinese e-commerce company JD.com, a competitor of Alibaba (BABA), swung to gains on solid results. It’s good to see the Chinese consumer looking healthy.

Looking overseas for a moment, the news from Hong Kong didn’t match Friday morning’s mostly positive vibe. Final Hong Kong gross domestic product (GDP) data for the three months ended in September confirmed the economy contracted for the second consecutive quarter—meeting the technical definition of a recession. GDP fell 3.2% on the quarter, the biggest drop since the start of 2009.

While Hong Kong is relatively small, it plays an outsize role in the Asian economy and it’s definitely not good news to see it enter a recession. There’s been major civil unrest there for a while, so maybe that played a role. Stocks in Hong Kong were flat Friday, with mixed results for other Asian markets. In Europe, stocks were solidly lower as of midday over there.

For those of you keeping score at home, retail sales bounced back in October with a 0.3% rise. That was in line with analysts’ expectations and might ease some of the concern that we saw the previous month when the data looked surprisingly weak.

We’re going into the weekend, so it wouldn’t be surprising to see a little caution today as investors position themselves for the time away.

Taking Trade News in Stride

Investors appear to be catching onto the idea that you can’t get too excited or too downhearted about every headline on the trade talks. The news this week hasn’t been as good as earlier this month, but the market continues to hold its ground and the general consensus feeling is that we’re closer to a deal now than we were a month ago.

The SPX eked out a slight gain yesterday and managed another record close despite negative trade headlines, perhaps partly because people have woken up to the fact that negotiations take a long time. We’ve said it before and might have to say it again: There’s nothing to get excited about one way or the other until a deal is signed.

It’s also possible that investors have their eyes more firmly on critical developments like earnings. We’re more than 90% of the way through earnings season, and generally the numbers have been better than most people thought they’d be. A month ago, the fear was, “recession, recession, recession.” Those recession headlines haven’t shown up in nine or 10 trading sessions. Some of that concern appears to have melted away like early November snow.

Bonds rallied this week, possibly reflecting some worries about overseas data. Weak economic news popped up around mid-week from China, Germany, and Japan. This might have gotten some investors afraid of what’s happening elsewhere and sent them back in to buy some bonds. That pushed yields way down from their peak near 2% this week for the 10-year Treasury note, and might also explain why the dollar is holding so firm.

Typically, higher bond prices might suggest dollar weakness, but in the scenario we’re in where the U.S. still looks like the best house on the block, investors might be snapping up whatever U.S. assets they can find. Other “defensive” assets like the Japanese yen and gold have also had a little run lately, and the Chinese stock market has kind of flattened out. Some overseas markets have stayed firm, though, including stocks in Germany and Japan.

Less Time to Celebrate

Black Friday is shaping up as the next possible catalyst for U.S. stocks, even though it’s two weeks away. There’s a lot of talk about the consumer being strong despite business spending looking soft, and Walmart (WMT) results yesterday played into that.

One thing that could be a challenge for holiday spending, by the way, is the shorter season. Thanksgiving is later than usual this year, falling on Nov. 28 vs. Nov. 22 last year, meaning the holiday shopping period is six days shorter than a year ago. That could be something to keep in mind when comparing sales year-over-year. A straight comparison just wouldn’t reflect reality.

That said, with Christmas music and decorations starting as early as Halloween these days, maybe people got into a shopping mood a little earlier than normal. At least that’s what some analysts who follow the retail sector are saying. WMT’s guidance looked strong for the holiday quarter, but shares lost ground by the end of the day Thursday after setting new record highs earlier. This might reflect some “buy the rumor, sell the fact” trading, and WMT has had a really solid year in the market.

Business Spending Concerns Still Evident

On the less solid side, Cisco (CSCO) shares got crushed Wednesday, falling 7% after the company delivered an outlook that seemed to disappoint investors. CSCO blamed the weak outlook on macro issues like Brexit and trade. One thing to remember is that CSCO’s numbers for the quarter actually looked pretty good, but that kind of got lost in the shuffle.

What’s concerning looking ahead is that the products CSCO sells—like modems, switches, routers, and data centers—tend to be good barometers for business demand. If the company sees weakness in demand for its products, it could reflect more caution among companies planning their capital spending.

In an interview with Barron’s, CSCO’s Chief Financial Officer Kelly Kramer pointed to order weakness “getting worse” in the most recent quarter, with continued softness both from service providers and in emerging markets. Enterprise and commercial orders both weakened, she added. If people were worried about capital spending going into CSCO’s results, they probably didn’t hear much that would have improved their mood afterward.

CSCO’s softness weighed on the Technology sector yesterday, and Energy was another laggard. Better performers included Real Estate, Materials, and Consumer Discretionary.

Going into Friday the SPX had barely moved this week. The other day, the Dow Jones Industrial Average ($DJI) closed at the exact same level as it had the day before, something you don’t see often. Are people leaving early for the holidays? Meanwhile, volatility remains pretty much a non-factor, with the Cboe Volatility Index (VIX) holding just above 13, way below its highs of above 20 last month.

Area 31: The S&P 500 Index (SPX) broke briefly above 3100 earlier this week, but the fact that it couldn’t hold onto those gains might be contributing to some of the selling since then. There was some excitement on breaking 3,100. However, we’ve had such an amazing two weeks, that without any blockbuster news, it was going to be difficult for us to continue higher. Sometimes, too, breaking through a big number and not finding new buyers can be a technically weak signal, eventually attracting sellers who sense the market might not have momentum to continue much higher. What could be the next catalyst for a run at 3100 or higher? Well, Black Friday, traditionally one of the busiest shopping days of the year, is only a couple of weeks away. Expectations are really high for spending. So, does the consumer live up to it? We’ll have to wait and see.

Santa Coming to Town? It’s the time of year when people start thinking about a “Santa Claus” rally, though you never can predict these things ahead of time. One thing maybe in favor of a year-end move like that is the chance of fund managers chasing returns. There’s still money on the sidelines, especially on the retail investor side, and you can’t rule out fund managers putting money to work and trying to get results before the end of the year. However, there’s still a lot of uncertainty, partly because stocks are so high.

A lot of people don’t seem really sure where to put their money, and the Investor Movement Index® ( IMX^SM)—TD Ameritrade’s proprietary, behavior-based index, aggregating Main Street investor positions and activity to measure what investors actually were doing and how they were positioned in the markets—showed that clients were net-sellers of stocks the last two months and buyers of fixed income. This has been a better year than many analysts expected, with Health Care looking strong and Financials plowing ahead vs. big headwinds. Maybe the strength so far in 2019 can provide some end-of-the-year momentum and allow Santa to pay a visit to Wall Street.

WMT Sets the Tone: Looking more closely at WMT’s earnings report, it becomes even clearer how healthy the consumer is even as business spending has gotten softer. “While business confidence has waned lately, consumer confidence/spending has remained resilient and this earnings report is great evidence of that,” Briefing.com noted. “Low unemployment, a positive labor outlook, low interest rates, rising home values, rising stock prices/401(k)s are all helping to provide the needed confidence for consumers to keep spending.” That’s what you like to see heading into the holiday season, especially after holiday shopping last year turned disappointing for some of the biggest companies. WMT is setting the tone for other retailers, Briefing.com added, with Target (TGT), Home Depot (HD), Lowe’s (LOW), Kohl’s (KSS), and Macy’s (M) all coming up to the plate with earnings next week.

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