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Stocks End Losing Week on Downbeat Note
07-Dec-18 16:25 ET
Dow -558.72 at 24388.95, Nasdaq -219.01 at 6969.25, S&P -62.87 at 2633.08

https://www.briefing.com/investor/markets/stock-market-update/2018/12/7/stocks-end-losing-week-on-downbeat-note.htm

[BRIEFING.COM] The S&P 500 lost 2.3% on Friday to close a losing week (-4.6%) on a sour note. The major averages fumbled an early morning rally effort and steadily retreated throughout the day to finish near session lows.

The Dow Jones Industrial Average lost 2.2%, the Nasdaq Composite lost 3.1%, and the Russell 2000 lost 2.0%. For the week, those indices lost 4.5%, 4.9%, and 5.6%, respectively.

The inability to sustain an early rally effort following Thursday's strong rebound, and a generally supportive employment report, raised some concern that the week's down leg had yet to run its course. Volatile price action also undercut investor sentiment and tempered confidence in buy-the-dip efforts.

Within the S&P 500, the information technology (-3.5%), consumer discretionary (-3.1%), and industrial (-2.6%) sectors underperformed the broader market.

Apple's (AAPL 168.49, -6.23, -3.6%) poor performance within the tech space was reflective of the ongoing effort to liquidate/reduce exposure to the market's most heavily-weighted group. The sector's non-response to Broadcom's (AVGO 228.56, +1.32, +0.6%) upbeat earnings report was also indicative of the negative sentiment hanging over the sector. The tech sector lost 5.1% this week and is now down 14.6% this quarter.

Chip stocks also struggled with the Philadelphia Semiconductor Index losing 3.7%. NVIDIA (NVDA 147.61, -10.68) underperformed with a notable loss of 6.8%.

Within the industrial sector, transport stocks were one of the most-heavily hit groups on Friday with the Dow Jones Transportation Average losing 3.9%, as growth concerns and an uptick in oil prices fed selling efforts. American Airlines (AAL 33.57, -3.37) and FedEx (FDX 201.39, -13.02) were notable laggards with steep losses of 9.1% and 6.1%, respectively.

On the other hand, the utilities (+0.4%) group was the only sector to finish in positive territory on Friday. The energy sector (-0.6%) also showed relative strength.

Looking at energy, OPEC+ producers agreed to a production cut of 1.2 million barrels per day to address weakening oil prices. Russia was a party to the proposed production cuts, yet Iran is reportedly exempt from the production cut requirements. WTI crude rose 2.0% to $52.60/bbl, although it gave up a good chunk of its gains.

In earnings, lululemon athletica (LULU 113.87, -17.57) and Ulta Beauty (ULTA 254.47, -38.45) fell 13.4% and 13.1%, respectively, after releasing their earnings reports. Lululemon sold-off despite beating top and bottom line estimates. Ulta tumbled after the company issued Q4 guidance below consensus.

U.S. Treasuries extended their recent climb, pushing yields lower, amid the equity sell-off. Friday's gains were led by the front end, which responded favorably to the November employment report and a contention from St. Louis Fed President Bullard (a 2019 FOMC voter) that the Fed could consider delaying a rate hike at the December FOMC meeting due to the narrowed yield curve.

Specifically, the 2-yr yield fell seven basis points to 2.70%, and the 10-yr yield fell two basis points to 2.85%. For the week, the 2-yr yield dropped 11 basis points, and the 10-yr yield dropped 16 basis points. Meanwhile, the U.S. Dollar Index decreased 0.2% to 96.92 on Friday.

Separately, the CBOE Volatility Index (VIX), which is often referred to as Wall Street's "fear gauge," rose 9.6% to 23.23. For the week, the VIX climbed nearly 30.0%.

Reviewing Friday's economic data, which included the Employment Situation Report for November, the Preliminary Reading for the University of Michigan Index of Consumer Sentiment for December, Wholesale Inventories for October, and Consumer Credit for October:

November nonfarm payroll growth was a little light of expectations, but key for the market was the recognition that average hourly earnings were up 0.2% month-over-month. The latter resulted in a year-over-year increase of 3.1%, which was unchanged for the 12-month period ending in October.
The key takeaway from the report is that the wage acceleration the Federal Reserve has been bracing for was missing. That won't likely keep the Federal Reserve from raising the target range for the fed funds rate at its December FOMC meeting, yet it's the type of data point that could lead the Federal Reserve to be more cautious-minded about raising rates after that.
The preliminary University of Michigan Index of Consumer Sentiment for December checked in at 97.5 (Briefing.com consensus 96.8), unchanged from the final reading for November and in-line with the two-year average from January 2017 to December 2018.
The key takeaway from the report is the observation that consumer attitudes around job and wage prospects are key to the consumer spending outlook and that some caution on that front may now be warranted as consumers recognize the goal of raising interest rates is to slow the pace of economic growth.
Wholesale inventories increased 0.8% in October (Briefing.com consensus 0.7%) on top of an upwardly revised 0.7% increase (from 0.4%) in September. Wholesale sales were down 0.2% following a downwardly revised 0.1% increase (from 0.2%) in September.
The key takeaway from the report is that inventory growth exceeded sales growth, which is a dynamic that could give way to lower pricing.
Total outstanding consumer credit increased by $25.4 billion in October after increasing an upwardly revised $11.6 billion (from $11.0 billion) in September.
The key takeaway from the report is that the healthy expansion in consumer credit is a good portent for consumer spending activity.

Looking ahead, investors will receive the JOLTS - Job Openings and Labor Turnover Survey on Monday.

Nasdaq Composite +1.0% YTD
Dow Jones Industrial Average -1.3% YTD
S&P 500 -1.5% YTD
Russell 2000 -5.7% YTD

Week in Review: Global Growth Concerns Pull Stocks Lower

The S&P 500 fell 4.6% this week, as global growth concerns were exacerbated by negative developments regarding U.S-China trade negotiations and the continued flattening of the U.S. Treasury yield curve. The Dow Jones Industrial Average lost 4.5%, the Nasdaq Composite lost 4.9%, and the Russell 2000 lost 5.6%.

Investors breathed a fleeting sigh relief that trade relations between the U.S. and China did not worsen over the weekend after the two countries agreed to suspend further tariff actions for 90 days to allow more time for trade discussions. Despite President Trump's optimism, the market's optimism quickly waned on the supposition that a March 1 deadline to resolve major trading issues won't be sufficient time to work out major trade issues that have been in place for years. Furthermore, the specter of increasing the tariff rate to 25% (from 10%) on $200 billion of Chinese goods should an acceptable deal not be reached weighed on investors' minds.

In addition, the news of the arrest of Huawei Technologies' CFO Meng Wanzhou heightened these burgeoning trade concerns. Ms. Meng was arrested Dec. 1 in Canada amid allegations that the company violated U.S. trade sanctions on Iran. Her arrest invited worries about trade negotiations going awry in the 90-day window and potential retaliation against U.S. companies doing business in/with China.

Economic growth concerns were cast into the spotlight by a decisive curve-flattening trade in the Treasury market that featured some inversions on the short end. The 2-yr yield (2.70%) and 3-yr yield (2.71%) closed higher than the yield on the 5-yr Treasury note (2.69%) this week.

Also, the difference between the 2-yr and 10-yr yields narrowed to its slimmest margin since 2007. Specifically, the 2-yr yield lost 11 basis points to 2.70%, and the 10-yr yield lost 16 basis points to 2.85%. Those moves were exacerbated by a "pain trade," as short sellers expecting higher rates were compelled to cover their bearish bets.

In a broader context, concerns over future economic growth drove concerns about future earnings growth. That fueled some of this week's selling interest, which completely unwound the 4.9% gain for the S&P 500 from the prior week at Friday's low.

Notably, that was the case despite there being one less day of trading. The market was closed Wednesday in recognition of the national day of mourning for President George H.W. Bush.

The worst-performing sectors this week were the financials (-7.1%), industrials (-6.3%), materials (-5.2%), information technology (-5.1%), and health care (-4.6%) sectors. The only two sectors that escaped the week with a gain were the utilities (+1.3%) and real estate (+0.3%) sectors.

The rate-sensitive financial sector was undermined by the flattening yield curve, which raised concerns about a compression in net interest margins. Regional banks were notable laggards as worries about lower mortgage loan demand stemmed from home builder Toll Brothers (TOL) acknowledging that it saw a moderation in demand in its fiscal fourth quarter ended Oct. 31 and that it saw the market soften further in November. The SPDR S&P Regional Bank ETF (KRE) fell 7.2% this week.

Transport stocks, in particular, weighed on the trade-sensitive industrial sector. The Dow Jones Transportation Average dropped 8.0% this week. American Airlines (AAL) struggled with a steep 16.4% loss this week.

Apple (AAPL) conceded more losses this week, as it dragged on the tech space. Apple has retreated over 20.0% since releasing its quarterly report in October and has remained a signpost of the ongoing effort to liquidate/reduce exposure to this widely-owned sector, which is still the market's most heavily-weighted sector.

The energy sector (-3.1%) was down for the week, yet it outperformed the broader market, helped by a 3.1% bump in oil prices to $52.52 per barrel.

Energy stocks pared gains on Friday after OPEC+ producers agreed to a production cut of 1.2 million barrels per day to address weakening oil prices. Russia was a party to the proposed production cuts; meanwhile, Iran will reportedly be exempt from the production cut requirements.

On a related note, Qatar, in a surprise move, announced plans to withdraw from OPEC to focus on gas production. Qatar has been a member of OPEC since 1961.

Separately, Atlanta Fed President Bostic (FOMC voter) said he thinks the fed funds rate is within shouting distance of neutral, which followed previous remarks from Dallas Fed President Kaplan (non-FOMC voter) who also suggested the fed funds rate is a little bit below neutral. A Wall Street Journal report also suggested that the Federal Reserve might be more cautious-minded about raising interest rates following its December FOMC meeting.

The November Employment Situation Report on Friday seemingly helped substantiate that view. It showed nonfarm payrolls increasing a weaker than expected 155,000 and average hourly earnings increasing 0.2%, which left them up 3.1% year-over-year, unchanged from October. In other words, the wage growth acceleration the Federal Reserve has been bracing for was missing.

Overseas, global markets finished the week with large losses as well. Germany's DAX (-4.2%) led the European retreat and Japan's Nikkei (-3.0%) led the decline in Asia.