Volatility Returns: Turbulent Day As Markets Retreat Amid China Trade Talk Concerns

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The bearish China news hit the Dow Jones Industrial Average particularly hard, because some of its 30 names have businesses so closely tied to China. This kind of market action shows why many investors keep a closer eye on the broader S&P 500 Index, which has far more components and doesn’t get buffeted around so easily by weakness in a few names.

U.S./ China Meeting News Drags Market

The so-called “three horses” of risk might be reflecting some of these concerns, as both U.S. Treasury notes and the Cboe Volatility Index galloped higher. The 10-year Treasury yield, which falls when bond prices rise, dipped back below 2.75% Tuesday after flirting with 2.8% last week.

Earlier in the day, softness seemed to stem from a double-barreled batch of bad economic news over the long U.S. holiday weekend, including China’s Q4 growth falling to 6.4%, the weakest since 2009. For all of 2018, China’s economy grew 6.6%, the slowest since 1990.

Other than that, however, there’s still the China situation, the global economy, Brexit, and the government shutdown. These are all things investors need to grapple with, making the next six months perhaps as important for the economy as we’ve seen in a long time.

Selling picked up in the afternoon after the negative news on China talks that Kudlow later denied. There’s only about five weeks left for the two countries to make a deal before U.S. tariffs are scheduled to rise. Intellectual property issues might be tying things up, according to a Bloomberg report over the weekend.

The market’s most closely watched fear indicator, the Cboe Volatility Index, spiked back above 20 after a couple weeks when it appeared to be on winter break. As the Cboe Volatility Index climbed and the major stock market indices retreated amid fears of world economic slowing and a possible hitch in China/U. S. trade talks, investors got a reminder that turbulent times could be far from over.

The International Monetary Fund (IMF) said it sees the world economy growing 3.5% in 2019 and 3.6% in 2020, down 0.2 and 0.1 percentage points, respectively, from its previous estimates.

That said, both the S&P 500 and the Nasdaq were down more sharply than the Dow by late Tuesday, a sign that selling was pretty much across the board. At one point, 29 of the 30 Dow names were lower on the day, with only McDonald’s barely poking its head above water. Eventually a few others joined it, so the day wasn’t a complete Dow washout.

Stock markets around the world were already down even before news came at midday of a canceled meeting between U.S. and Chinese trade negotiators. The media said the disagreement was over intellectual property issues. White House economic adviser Larry Kudlow came out right before the close to say the cancellation news was incorrect, and the market got a late lift from that, though futures tracked lower again in post-market trading.

Banks Step Back

The market’s most closely watched fear indicator, the Cboe Volatility Index, spiked back above 20 after a couple weeks when it appeared to be on winter break. As the Cboe Volatility Index climbed and the major stock market indices retreated amid fears of world economic slowing and a possible hitch in China/U. Stock markets around the world were already down even before news came at midday of a canceled meeting between U.S. and Chinese trade negotiators. White House economic adviser Larry Kudlow came out right before the close to say the cancellation news was incorrect, and the market got a late lift from that, though futures tracked lower again in post-market trading.

All that aside, the China situation is probably going to be front and center going into Wednesday, and any sign that more serious background issues potentially threaten negotiations might mean a chance for continued selling.

Financials, which had been showing signs of life so far in 2019, took it on the chin Tuesday. That was especially true for Morgan Stanley, which fell nearly 3% and just hasn’t recovered its mojo since last week’s disappointing earnings report. Other big banks fell, too, which might have had to do in part with the pressure on Treasury yields.

From a sector standpoint, some of the cyclicals that led last week brought up the rear Tuesday. Communication services, energy, consumer discretionary, industrials, and information technology all fell 2% or more. It’s just one day, but that looked like quite a contrast to the “risk-on” kind of trading seen much of last week.

On the data side, there wasn’t much help from the U.S. economy Tuesday as existing home sales for December decreased 6.4% month-over-month to a seasonally adjusted annual rate of 4.99 million. This would seem to add another chapter in the ongoing story of a slowing U.S. housing market, and could play into those fears about the global economy easing.

The markets did rally back a bit from their lows in the final minutes of the session if you’re trying to take any positives out of Tuesday’s retreat. Some analysts said stocks might have gotten over-bought last week, making them ripe for a sell-off. In addition, the S&P 500 managed to close above its 50-day moving average of 2625, a level that could represent technical support.

It’s getting toward the middle of earnings season, but so far, there hasn’t really been a lot of clarity on earnings calls about how executives see the tariff situation potentially affecting their businesses. If executives seem conservative about their next steps, it might stand to reason that investors would feel the same way.

If you’re trying to take any positives out of Tuesday’s retreat, the markets did rally back a bit from their lows in the final minutes of the session.

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