Stock benchmarks turned lower Monday as concerns about global growth resurfaced following a media report that suggested that the U.S. is about to intensify its trade war with China.
What are major benchmarks doing?
The Dow Jones Industrial Average DJIA, -1.02% shed 98 points, or 0.4%, to 24,589, after jumping by about 350 points at the high, while the S&P 500 index SPX, -0.77% slid 2 points, or 0.1%, to 2,655. The Nasdaq Composite Index COMP, -1.86% dropped 72 points, or 1%, to 7,094.
The market closed sharply lower on Friday with both the S&P and Dow turning negative for the year.
What’s driving the market?
President Donald Trump’s administration is prepared to announce tariffs on remaining Chinese imports if talks next month between Trump and Xi Jinping do not yield results, Bloomberg reported. Such a move is likely to prolong the standoff between the U.S. and China and expected to hurt the global economy.
Analysts are also blaming the stock market’s weakness in October on a variety of factors, including worries that U.S. corporate earnings growth has peaked and fears of a U.S. monetary policy misstep by the Federal Reserve.
Earnings season has seen companies continue to beat earnings and sales expectations, but analysts said weak outlooks from some companies may have undercut performance. Through Friday, 240 S&P 500 companies had reported quarterly results, with 81% topping expectations, according to Jefferies.
However, a Bloomberg report that China is considering cutting a tax on most cars in half was credited with providing a lift to global equities in general and shares of auto makers in particular.
What data are in focus?
Consumer spending rose 0.4% in September, matching the MarketWatch forecast. Incomes rose a smaller 0.2%, the smallest rise in 13 months, while inflationary pressures appeared to slacken. The personal-consumption expenditures inflation index, the Federal Reserve’s favorite price gauge, rose 0.1% in September, while the 12-month rate slipped to 2% from 2.2%.
Chicago Federal Reserve Bank President Charles Evans spoke Monday morning, though he did not address monetary policy or the U.S. economic outlook. His was the last scheduled speech before a blackout period leading up to the central bank’s Nov. 8 meeting, during which Fed officials are barred from commenting publicly.
What are analysts saying?
The weakness among stocks that had, until recently, underpinned the rally is hurting the market, according to Kent Engelke, chief economic strategist at Capitol Securities Management Inc.
“Many times I have commented about the massive ownership of a few names that have created the most imbalanced market in at least a generation. I can envision a period of time when selling in the indices—led by the selling of the FAANG companies—continues while the typical stock advances,” said Engelke.
FAANG is an acronym for megacap stocks such as Facebook Inc. FB, -2.83% Apple Inc. AAPL, -1.46% Amazon.com Inc. AMZN, -7.44% Netflix Inc. NFLX, -5.64% and Alphabet Inc.’s Google GOOGL, -4.97% GOOG, -4.92% which have been credited with fueling the market’s record gains through strong earnings growth. All five names are sharply lower.
Jack Ablin, chief investment officer at Cresset Wealth Advisor, cited fading investors’ enthusiasm specifically for Monday’s trading but elevated valuation, mixed earnings and tightening liquidity as major factors driving market’s action recently.
Michael Arone, chief investment strategist at State Street Global Advisors, argued that earlier gains were due to economic data indicating that “inflation is slower than we thought,” including a print of the PCE inflation index showing that yearly price growth fell from August to September. “This has investors optimistic that the Fed won’t raise rates as aggressively next year as they have been signaling,” he told MarketWatch.
However, “It’s a little too early to call the ‘all clear,’” Arone warned. “Macros issues will continue to pose challenges to stocks over the next few weeks. It would be helpful if we continue to get some data that justifies the decline in rate-hike expectations, or some news that shows thawing in the U.S-China trade conflict.”
What stocks are in focus?
Shares of Red Hat Inc. RHT, +46.20% jumped 45% after International Business Machines Corp. IBM, -3.53% said it would acquire the open-source software company for $190 a share in a cash deal. Shares of IBM were off 3.2%.
Northrop Grumman NOC, -4.28% announced a $1 billion accelerated stock repurchase agreement with Goldman Sachs & Co. GS, +0.82% Nevertheless, shares in the defense contractor were down 3.2%
Shares of Ford Motor Co. F, +3.06% rallied 4% following the report on China’s potential car-tax cut. General Motors Co. GM, +1.41% was also buoyed by the news, up 2.2%. Ford was also boosted after Goldman Sachs raised its rating on the stock to buy from neutral and lifted its price target to $12 a share, up 34% from Friday’s close.
Also boosted by the report on Chinese auto tariffs was Goodyear Tire and Rubber Company, GT, +4.23% which rose 5.1% and many auto parts suppliers, led by Adient PLC ADNT, +5.29%
First Data Corp. FDC, -15.59% shares slumped 15% after the company reduced guidance for full-year 2018 revenue.
Take Two Interactive Software TTWO, -6.97% is among the biggest losers, falling 6.3% after U.K. sales numbers of its flagship game, Red Dead Redemption 2, failed to wow investors.
Only a handful of companies will report Monday, but investors will be keeping an eye on Mondelez International Inc. MDLZ, -0.12% which will announce earnings after the close.
How are other markets trading?
Asian markets were down on the day, as the Shanghai Composite Index SHCOMP, -2.18% Shenzhen Composite Index 399106, -2.02% and Nikkei 225 NIK, -0.16% all fell on concerns over U.S.-China trade relations.
European stocks were surging, with the Stoxx Europe 600 SXXP, +0.90% and U.K. FTSE 100 UKX, +1.25% gaining.
Oil futures CLZ8, -1.07% extended losses after three weeks of declines. Gold GCZ8, -0.44% settled lower, while the U.S. dollar DXY, +0.18% edged up slightly.
—William Watts contributed to this article
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