The Dow Jones barely avoided flatlining again on Thursday after miserable economic data indicated a steady slide towards a pronounced slowdown.
Bullish appetite remains intact on hopes of a breakthrough in the trade war, a possible Brexit deal, and a ceasefire in Syria, but concerns that a cyclical slowdown is inevitable continue to drag on the market.
Dow Jones Lacks Sustained Momentum
The Dow Jones Industrial Average was lagging the other major US stock market indices on Thursday, as both the S&P 500 and Nasdaq were able to squeeze out gains of more than 0.40%. At last check, the Dow had climbed 68.36 points or 0.25% to 27,070.34.
Adding to the gravity on the USD, a Brexit deal was announced, sending the pound and euro higher. Potential sticking points emerged in the UK parliament surrounding the DUP, however, which may have been why the Dow Jones failed to find much of a boost from this positive risk-on development.
Further good news came when President Donald Trump announced that Vice President Mike Pence had negotiated a ceasefire on the Syrian border with Turkey, prompting a small rally in stocks.
— Donald J. Trump (@realDonaldTrump) October 17, 2019
This is a great day for civilization. I am proud of the United States for sticking by me in following a necessary, but somewhat unconventional, path. People have been trying to make this “Deal” for many years. Millions of lives will be saved. Congratulations to ALL!
— Donald J. Trump (@realDonaldTrump) October 17, 2019
China is still refusing to budge on a trade deal with the US, demanding the removal of all tariffs to ensure an all-encompassing agreement. The South China Morning Post did still tease that they were open to an interim deal, but this idea is already well priced into the Dow Jones.
An extraordinary comment by one of Trump’s chief economic advisors, Larry Kudlow, shocked market analysts on Thursday. Echoing Trump’s attacks, Kudlow lambasted the politically sacred Fed as the “deep state.”
Outside of Trump, the current administration had previously been careful to stress the independence of the Federal Reserve due to strong bipartisan support in Washington for Chair Jerome Powell. Kudlow’s remarks indicate a notable departure from this policy and could be a threat to the Dow if historical evidence has any merit.
— Andrew Feinberg (@AndrewFeinberg) October 17, 2019
Manufacturing Weakness a Significant Threat to Stock Market
Another miserable set of economic data released on Thursday has investors confident that the Federal Reserve will have to do more to stimulate the economy. Yet again, the recession in US manufacturing is gathering pace as another large miss risks infecting the formerly robust US consumer.
Industrial production was also weak, as this market sector’s declines look to be accelerating amid Trump’s trade war. So far, the Dow Jones has been resilient to this issue, but it is not clear how much longer the stock market can resist these pressures.
Chief International Economist James Knightley at ING believes that analysts have seen enough to feel confident that the Fed will ease aggressively. His view is that a sizable slowdown is coming in the US economy, primarily as the negativity seeps into consumer behavior.
“Given the weakness in manufacturing is seemingly spreading to the service sector and consumer spending based on the recent non-manufacturing ISM and retail sales readings, it looks as though our fears of a major US slowdown are materializing. We are forecasting GDP growth of just 1.3% next year versus the 1.8% consensus forecast and as such look for the Fed to continue responding with rate cuts. We look for moves in October and December, and in January 2020”
So what is the effect likely to be on the Dow from the potential recession? One take supplied to CCN by Sebastien Galy, Senior Macro Strategist at Nordea Asset Management, is that inevitable Fed cuts will see investors seek out value stocks, while also creating some upside for emerging markets.
“The impact on the dollar versus emerging markets and EM hard and local currency fixed income should be positive for these asset classes as it is a transient demand shock in the US as it currently is in China. The impact on equities should be mixed; positive for defensive stocks as it reduces their financing costs such as utilities while the demand shock should hurt cyclicals and growth stocks”
Fed Might Not Be as Dovish as Dow Bulls Hope
Interestingly, despite the relative confidence from Dow bulls that the Federal Reserve will ease monetary policy further, the noises coming from within the Fed are much less committal. The potential for market volatility is naturally high if the bank shocks a stock market that is nearly all-in on a prolonged easing cycle.
Dow Stocks: IBM Craters & Intel Follows
The Dow 30 was slightly higher amid a very mixed picture for the stock market. IBM released some disappointing earnings, and the long-term bearish trend for “Big Blue” looks set to continue after a miserable 5.6% decline. Intel fell in sympathy trading, losing 1.3%.
Apple stock has lost its footing a little over the last few days and continues to tread water, failing to extend its rally.
Disney was a big mover to the upside, rallying 1.5% after Netflix acknowledged that it would face a challenge from their new streaming service. This is good news for shareholders, as CEO Bob Iger appears to be all in on this product as the future of the company.