One step forward, two steps back
03/05/18

You didn’t think bouncing back from a correction was going to be boring, did you?

Entering the first full week of March, the stock market is still digesting its first down month since March 2017, its worst month since January 2016—and worries about potential trade wars.

What started out as a bullish week—the market broke out of the previous week’s consolidation and the Nasdaq 100 (NDX) came close to matching its record high—gave way to a modest pullback that turned much more bearish last Thursday as the White House announced its intentions to impose stiff import tariffs on steel and aluminum. The S&P 500 (SPX) closed down 1.35%, and selling spilled over into Friday morning before the market rallied (with small-cap stocks leading the charge) to close up on the day, if not for the week.

S&P 500 (SPX), 12/29/17 – 3/22/18

Source: OptionsHouse

As of Friday, the administration had not released any specifics, and it remained to be seen whether criticism from within Republican ranks would prompt a reassessment of the policy.1 At least one firm, though, argued the Street was overreacting to the news, and that the proposed tariffs would have a minimal impact on the economy—as long as they don’t “trigger an all-out trade war.”2

That, of course, is the big “if.” Most economists believe tariffs are a negative for the US (and global) economy precisely because of the potential for retaliation from other countries, and also because such measures are essentially a tax on consumers to subsidize domestic production.3

Here’s how the major US indexes fared last week:

Index Comparison

Source: OptionsHouse

Sector performance last week was essentially a matter of which areas weathered the storm the best—all major S&P 500 groups ended the week in the red. The top performers were Telecom Services (-0.9%), Information Technology (-1.1%), and Consumer Staples (-1.6%). The worst-performing S&P sectors were Materials (-4%), Industrials (-3.3%), and Utilities (-3.1%).

In Telecom, Arista Networks (ANET) and Palo Alto Networks (PANW) were among the stocks that posted big gains last week. On the downside, McDonald’s (MCD) almost singlehandedly kept the Dow in the red on Friday by dropping nearly 5% on an unfavorable research note.4

In the futures space, crude oil followed equities to the downside, with the April contract (CLJ8) dropping to nearly $60/barrel on Friday before recovering, and grain futures (especially wheat) building on their biggest rally in more than a year.

Economic numbers released last week were mixed, with GDP coming in on target (2.5%) and manufacturing generally strong, but some weakness in certain housing numbers (new home sales, pending home sales), durable goods orders, and construction spending. Inflation readings were within expectations.

Barring extreme surprises (especially to Factory Orders, on Tuesday), this week’s numbers will likely be a prelude to Friday’s jobs report. And more so than most of the scheduled reports, the tariff issue has the potential to dominate the week’s econ discussions. Here’s the lineup:

Monday: PMI Services Index, ISM Non-Manufacturing Index

Tuesday: Factory Orders

Wednesday: ADP Employment Report, International Trade, Productivity and Costs, Beige Book, Consumer Credit

Thursday: Chain Store Sales

Friday: Employment Situation, Wholesale Trade

Futures contracts expiring this week:

Wednesday: March cotton (CTH8)

Friday: March orange juice (OJH8).

The meat of earnings season may be over, but there are still plenty of numbers on tap this week. Here’s a sample:

Monday: Burlington Stores (BURL), YY (YY)

Tuesday: Target (TGT), Autodesk (ADSK), Ross Stores (ROST)

Wednesday: Dollar Tree (DLTR), Costco (COST), Overstock.com (OSTK)

Thursday: Genesco (GCO), International Game Tech. PLC (IGT), Kroger (KR), National Beverage (FIZZ), AnaptysBio (ANAB), CRISPR Therapeutics (CRSP), KMG Chemicals (KMG), Upland Software (UPLD)

Friday: American Woodmark (AMWD), Big Lots (BIG)

Go to the E*TRADE market calendar (login required) for a complete list of earnings and other market events.

In terms of the weather, a March that comes in like a lion is supposed to go out as a lamb. Maybe a market that comes in like a bear will go out like a bull.

 

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1 CNN.com. GOP senators blast Trump's tariffs announcement. 3/2/18.

2 CNBC.com. Wall Street is overreacting to the tariff news, Barclays economists say. 3/1/18.

3 Forbes. 100% Of Economists Asked Said Import Tariffs Were Not A Good Idea. 12/23/16.

4 Marketwatch. Dow trades off its lows, but McDonald's stock tracking worst skid since 2008 exacts a nearly 50-point toll. 3/2/18.