It’s a fully packed day with earnings from Apple, the start of a Fed meeting, several other major companies reporting, and more concerns about U.S. relations with China.
U.S. stocks had a mixed tone in pre-market trading following a similar pattern in Europe and Asia. A development just after the closing bell yesterday could be a factor, as U.S. prosecutors filed criminal charges against Chinese smartphone maker Huawei Technologies. One thing markets tend to dislike is uncertainty, and this might create even more. Asian markets took some heat Tuesday, and the Chinese government told Reuters the charges were “unfair.”
This new wrinkle comes just as China and the U.S. prepare for more trade talks in coming days. It could raise concerns about the ramifications for those negotiations with the deadline for an agreement just over a month away.
The new worries also followed two major U.S. companies with China exposure—Caterpillar and Nvidia—disappointing investors with their outlooks Monday. Stocks fell sharply on the news, though major indices did recover slightly from their lows before the closing bell.
The two-pronged China news—tensions between the governments and U.S. companies reporting weakness in their businesses across the Pacific—might reinforce impressions that the focus remains squarely on U.S./China relations and China’s economy.
Apple and AMD This Afternoon
Stepping away from China for just a bit, there’s a full schedule of earnings today, with Apple after the close probably in line for much of the attention. Advanced Micro Devices also reports after the closing bell.
Last time out, Apple delivered what many analysts called disappointing guidance. Then earlier this month Apple surprised the market by lowering its quarterly revenue outlook to $84 billion. It cited a number of issues, but emphasized what it called “economic deceleration” in Greater China. Investors should probably consider gearing up to hear any further detail when the company reports. Shares were up just a bit in pre-market trading. Also, Apple has stopped reporting unit sales of its iPhone, which might mean a little less granularity than people were used to.
In earnings news early Monday, Pfizer and 3M reported better than expected earnings and revenue, but Pfizer’s guidance for 2019 was weaker than expected and 3M lowered its 2019 earnings guidance. Verizon also reported, beating analysts’ average earnings estimate but coming in slightly short on revenue compared with third-party consensus expectations.
Taking a closer look at 3M, earnings looked good, but the company forecast slower growth projections in Asia. That’s pretty much what a lot of companies are doing right now. The lower earnings guidance didn’t look too significant, and the stock, which had fallen in pre-market trading, started to plow higher in the hour before the opening bell and appeared to take the rest of the market with it.
Another big report today came from Lockheed Martin, which saw earnings miss third-party consensus expectations of $4.40 a share by one penny. Revenue easily beat expectations, but guidance was below the Street’s expectations and shares fell in pre-market trading. Lockheed Martin competitor Boeing is due with its earnings tomorrow.
Caterpillar, Nvidia Issue Disappointing Outlooks
Going back to yesterday, Caterpillar fell well short of third-party consensus with its Q4 earnings per share. In addition, Caterpillar’s forward guidance for 2019 came in short of the average Wall Street estimate.
The company blamed some of its troubles on a slowing Chinese economy, which shouldn’t be too surprising for anyone who’s been watching the data recently. China’s growth last year was the softest since 1990. In addition, China on Monday reported industrial profits for December falling by 1.9%, the second monthly decline in a row. For all of 2018, the figure rose 10.3%, about half the level seen in 2017.
Think about all those photos you see of construction cranes in places like Shanghai and Beijing. When that construction demand weakens, companies like Caterpillar can suffer. China accounts for 10% to 15% of Caterpillar ’s construction unit revenue, the company has said.
Then there’s Nvidia, which saw shares fall more than 13% Monday as it warned of weaker than expected sales due to China’s economic struggles. Other chip companies took a fall along with Nvidia in apparent sympathy, and info tech was the worst performing U.S. sector of the day, falling about 1.5%.
Beyond the basic impact on Nvidia, Caterpillar, and the tech and industrial sectors, the weak guidance from these two companies might raise concerns about other major industrial and tech names due to report this week. Some of those include Microsoft, Apple, Honeywell, McDonald’s, and General Electric. Apple and Microsoft are two of the four largest U.S. companies in terms of market capitalization, so investors might be concerned about any weakness in their earnings potentially having a reverberating impact.
Investors Steer Away From Risk
As we’ve often seen recently, bad news from China seemed to send some investors scurrying toward so-called “defensive” parts of the market. Treasury notes rose on Monday, with the 10-year yield dipping back below 2.75%. Consumer staples and utilities were two of the best performing stock sectors. Gold scooted back up above $1,300 an ounce and continued higher early Tuesday.
Meanwhile, the market’s most closely watched “fear indicator,” the Cboe Volatility Index, jumped sharply to above 19, after falling below 18 last week. See chart below. The Cboe Volatility Index eased back under 19 by Tuesday morning.
As the Fed starts its meeting, one school of thought suggests that softness in China and other economies could keep the Fed from evolving away from the dovish stance many Fed officials have taken in recent weeks. Futures trading indicates virtually no chance of a rate change. Looking further out, chances for a hike even by June are around 18%, according to CME Group futures.
Could Fed Meeting Stir Up Volatility? Some Fed meetings used to be run of the mill affairs, especially when there was no press conference scheduled and no expectations in the market for a rate change. While futures prices point to virtually no chance of a rate move tomorrow, that doesn’t mean the meeting this week is necessarily a non-event for the market. In fact, volatility might be something to consider watching as Fed Chair Jerome Powell takes the podium afterward. He’s going to be holding press conferences after this and every Fed meeting from now on.
If you remember, Powell’s press conference after the December meeting arguably helped set off a major drop in stock prices. That doesn’t mean the same thing necessarily would happen again, but it does seem like Powell’s remarks often get a bearish view from investors. Anyone trading actively should probably consider treading carefully in the hour or two after this week’s Fed meeting ends Wednesday afternoon. One thing to watch is for any words from Powell that the market might interpret as slightly hawkish, because in the recent past, such utterances from the Fed chair have seemed to really weigh on stocks quite quickly. The Fed is still the Fed and its potential impact is something that can’t be ignored.
Cold Weather’s Potential Bite: Much of the Midwest and upper Great Lakes are experiencing the most intense cold wave to hit the region in more than two decades. Temperatures are forecast to plunge well below negative 20 Fahrenheit today and tomorrow in cities like Minneapolis, Chicago, and Milwaukee. Temperatures could fall to zero or colder in Detroit and Cleveland, as well. When the mercury hits these kind of levels, the first temptation is often to simply stay inside. That’s a good way to stay warm, but it’s not necessarily good for the economy. In the last few years, cold and snowy winters across much of the U.S. have bitten into Q1 economic growth. It could be interesting to see if Q1 gross domestic product and company earnings suffer at all from the weather. We won’t get a sense of that until April when the first estimate for Q1 GDP comes out and companies start reporting Q1 earnings. By then, the robins will likely be chirping and flowers blooming, but Q1 numbers could potentially remind investors of a bitter winter.
Crude Hits Wall: The crude market looks like it’s come up against a barrier once again at around $53 a barrel for U.S. WTI futures. It’s climbed to $52 or above a few times recently, but seems to always meet resistance. The price fell 4% by midday Monday back below $52 as investors fretted about possible economic softness in Asia after Caterpillar and Nvidia both reported Asian weakness affecting their businesses. Any sign of a hiccup in China, or a sense that U.S./China trade talks aren’t progressing, has tended to weigh on crude prices in recent months. Another factor could be a rise last week in the number of active U.S. rigs. As of mid-January, 112 more rigs were active than a year earlier, according to Baker Hughes. That’s despite crude prices actually falling slightly over that time period. Some oil industry analysts have pointed out that U.S. operators in places like the Permian Basin are actually able to make profits at oil prices even lower than the ones we’re seeing, so it’s unclear if the continued weak crude market would cut much into U.S. output.
TD Ameritrade® commentary for educational purposes only. Member SIPC.