By Mark DeCambre, MarketWatch
Tariffs, Trump and tantrums in the markets
Stock-market investors navigated, virtually unscathed, a
gauntlet of central-bank gatherings, a historic summit
(http://www.marketwatch.com/story/trump-kim-sign-document-to-wrap-up-korean-summit-2018-06-12)
between President Donald Trump and North Korean Kim Jong Un, and
flaring trade tensions.
The S&P 500 indexended the week
(http://www.marketwatch.com/story/dow-futures-tumble-140-points-as-trade-fight-ratchets-up-2018-06-15)
essentially flat, managing the narrowest of weekly gains, up 0.02%
to 2,779.66, while the Dow Jones Industrial Averageposted a weekly
decline of 0.9%. The Nasdaq Composite Indexoutperformed both,
rising 1.3% for the five-day period.
Not too shabby, considering that the Federal Reserve on
Wednesday lifted rates for a second time in 2018
(http://www.marketwatch.com/story/fed-hikes-interest-rates-now-sees-4-moves-this-year-2018-06-13),
signaling, perhaps, two more increases to key interest rates
remaining in the year, while the European Central Bank on Thursday
submitted a road map for unraveling its crisis-era,
multitrillion-euro bond-buying initiative
(http://www.marketwatch.com/story/ecb-aims-to-end-bond-buying-program-by-end-of-2018-2018-06-14),
though at a less aggressive clip than markets had anticipated.
Read: Stock-market investors see China tariffs as a 'buzzkill'
(http://www.marketwatch.com/story/stock-market-investors-see-china-tariffs-as-a-buzzkill-and-are-acting-as-if-a-genuine-trade-war-just-erupted-2018-06-15)
Also:What investors have to look forward to: no recession, but
limited growth
(http://www.marketwatch.com/story/us-stock-futures-in-holding-pattern-as-attention-turns-to-possible-policy-shift-at-ecb-2018-06-14)
Against that backdrop, the stock market appears unbowed, with
signs of an uptrend that could take the Dow and S&P 500, which
have been in correction territory -- typically defined as a drop of
at least 10% from a recent peak -- since February.
Here are a few developments investors may consider as the market
attempts its next move in the coming weeks:
Dow transports eye record
For one, the Dow Jones Transportation Average, which tracks the
performance of companies ranging from railroad operator CSX
Corp.(CSX)to airline giant United Continental Holdings Inc.(UAL) ,
is knocking on the door of an all-time high. The gauge, often
viewed as an indicator of the health of the market because of the
role transportation plays in a vibrant economy, stands just 2.6%
short of its record close set on Jan. 12 and is up 9.4% since
putting in its 2018 nadir in April, according to WSJ Market Data
Group.
The performance of transports is particularly notable because
the threat of a trade war and an uptrend in crude oilshould
otherwise proof a headwind for the group.
Nonetheless, the DJT finished up 0.6% on Friday, even as a trade
spat between China and the U.S. intensified, with Beijing striking
back
(https://www.wsj.com/articles/white-house-announces-tariffs-on-50-billion-of-goods-from-china-1529065534?mod=hp_lead_pos1)
against Trump's decision to implement tariffs of 25% on $50 billion
in Chinese products
(http://www.marketwatch.com/story/trump-announces-china-tariffs-says-us-will-pursue-more-if-china-retaliates-2018-06-15).
So-called Dow theorists see upward momentum in both the Dow
industrials and transports as forming a bullish pattern. There is
still more to work to do for those gauges to trigger an outright
buy signal, however. Currently, the Dow stands about 5.7% from its
Jan. 26 record high, while the S&P 500 is 3.2% shy of its
late-January apex.
The VIX drop
Meanwhile, one market measure of volatility, the Cboe Volatility
Index , known as the VIX, has been trending decisively lower since
a surge in February. The index, which reflects bullish and bearish
bets on the S&P 500 in the coming 30 days and tends to fall as
stocks rise, points to dimming expectations for an abrupt tumble in
stocks because stocks tend to decline faster than they climb. The
VIX closed at 11.98 on Friday (see chart below), well below a
historic average between 19 and 20 and 68% below its Feb. 5 close
at 37.32. That all suggests that a level of complacency may be
taking hold in the market
(http://www.marketwatch.com/story/wall-streets-fear-index-falls-to-more-than-4-month-low-as-tech-stocks-romp-2018-06-05).
Bumpy trade road ahead
That said, the road ahead for the market looks fraught. Though
tariffs have thus far not resulted in lasting damage, the biggest
threat is that an escalation of tensions could eventually hobble
global economic growth.
"The escalation of trade tensions could prove to have dire
consequences on both economies. We estimate that if the U.S. were
to impose trade restrictions on $150 billion of imports from China,
and China were to retaliate in kind, the hit to each economy could
reach 0.3-0.4%," wrote Gregory Daco, head of U.S. economics at
Oxford Economics, in a Friday research note, referring to the
impact on gross domestic product (see chart below).
Narrowing yield curve
Meanwhile, persistent worries about the possibility of an
inversion of the so-called yield curve, a line plotting the yields
of Treasurys from shortest to longest maturities, have dogged
investors.
Normally, short-dated yields are lower than longer-dated paper
because investors tend to demand richer yields for lending further
into the future. However, because many investors harbor concerns
that the current economic expansion can't last for much longer as
it nears the ninth consecutive year of expansion, investors have
been buying 10-year Treasury notes , pushing yields, which move
inversely to prices, lower. Meanwhile, 2-year Treasurys , more
sensitive to the Fed's rate hikes, have seen some selling off,
nudging yields up.
So-called yield-curve inversions, in which shorter-dated debt
offers a richer yield than longer-dated counterparts, have been
accurate predictors of recessions.
The spread between 2-year paper and 10-year stands at 36.9 basis
points, putting it at its narrowest since around 2007. It hasn't
helped that monetary policies in Europe, Japan and elsewhere
continue to take a less aggressive path, compared with the U.S., a
factor that can drive investors to the relatively richer yields of
Treasurys, adding to rate pressure there.
Still, "there is a difference of opinion among Fed officials of
the significance of the flattening and potential inversion of the
curve," noted Marc Chandler, global head of currency strategy at
Brown Brothers Harriman, with some members expressing the view that
an inversion of the curve doesn't necessarily have to result in a
recession.
Stocks stalling
A big question for markets may center on the impetus for a fresh
rally. Markets have stalled out in recent trade, with the year's
second quarter approaching an end.
Mark Newton, technical analyst and founder of Newton Advisors,
said that "there have been signs now for the last few days of
markets starting to stall out and gradually roll over, with
financials and industrials falling by the wayside and technology
getting up to areas of importance that should cause this sector to
consolidate and pullback."
Chandler said the end of the quarter, when buybacks tend to
taper, may remove a key driver of stock purchases. As the quarter
draws to a close, and the earnings season kicks off, buybacks could
slow, he wrote in a recent blog post
(http://www.marctomarket.com/2018/06/renewed-confidence-in-divergence.html).
"This may be offset by the savings drawn in U.S. equity
market."
OPEC's June 22 meeting
Another event that is likely to be a significant influence to
the broader market is a key meeting of the Organization of the
Petroleum Exporting Countries set for June 22
(http://www.marketwatch.com/story/opec-risks-destroying-its-oil-market-success-2018-06-14).
OPEC, along with 10 big nonmember oil producers led by Russia,
agreed in late 2016 to hold back crude production by about 1.8
million barrels a day beginning in 2017. That pact is set to expire
at the end of this year, and investors will be keenly watching to
see if the cartel agrees to extend the agreement, which has helped
fuel a rise in prices of West Texas Intermediate oil, the U.S.
benchmark, and Brent , the global benchmark.
(END) Dow Jones Newswires
June 17, 2018 18:10 ET (22:10 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.