(Monday Market Close) Though U.S. consumers continue to look healthy, concerns about an economy thousands of miles across the Pacific seem to have Wall Street on a nervous footing. Major indices took a step back Monday after two major U.S. companies with China exposure—Caterpillar (NYSE:CAT) and NVIDIA Corporation (NASDAQ:NVDA)—disappointed investors with their outlooks.
Beyond the basic impact on NVDA, CAT, and the tech and industrial sectors, the weak guidance from these two companies today might raise concerns about other major industrial and tech names due to report later this week. Some of those include Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Lockheed Martin (NYSE:LMT), 3M (NYSE:MMM), Honeywell (NYSE:HON), McDonald’s (NYSE:MCD), and General Electric (NYSE:GE), which could help explain why the contagion seemed to spread through the market. AAPL and MSFT are two of the four largest U.S. companies in terms of market capitalization, so investors might be concerned about any weakness in their earnings potentially having a reverberating impact.
Perhaps with that in mind, many investors appeared to steer away from some of the more risky regions of the market Monday. Treasury yields fell, and gold and volatility both rose (see more below).
Caterpillar and Nvidia Issue Disappointing Outlooks
CAT, which reported earnings early Monday and is often seen as a bellwether for the global economy because of its construction equipment sales, fell well short of third-party consensus with its Q4 earnings per share. In addition, CAT’s forward guidance for 2019 earnings per share of between $11.75 and $12.75 came in short of the average Wall Street estimate.
The company blamed some of its troubles on a slowing Chinese economy, which shouldn’t be too surprising for anyone who’s been watching the data recently. China’s growth last year was the softest since 1990. In addition, China on Monday reported industrial profits for December falling by 1.9%, the second monthly decline in a row. For all of 2018, the figure rose 10.3%, about half the level seen in 2017.
Think about all those photos you see of construction cranes in places like Shanghai and Beijing. When that construction demand weakens, companies like CAT can suffer. China accounts for 10% to 15% of CAT’s construction unit revenue, the company has said.
Then there’s NVDA, which saw shares fall more than 13% Monday as it warned of weaker than expected sales due to China’s economic struggles. Other chip companies took a fall along with NVDA in apparent sympathy, and info tech was the worst performing U.S. sector of the day, falling about 1.5%.
Looking beyond the economic statistics, there’s still the matter of the trade war between China and the U.S. There were mixed signals last week from the U.S. government about progress with those, and we have just about five weeks until the March 1 deadline for a deal. Having the tariff situation in a gray zone probably isn’t helping matters for many companies. The two countries have more talks scheduled later this week.
Just after the close, U.S. prosecutors filed criminal charges against Chinese smartphone maker Huawei Technologies, Bloomberg reported. That late-breaking news could raise the question of whether additional China worries might hit the market Tuesday. One thing markets tend to dislike is uncertainty, and this might create even more.
All this is going on as geopolitics here in the Western Hemisphere also show signs of flaring up. On Monday, the U.S. announced sanctions against Venezuela’s state-owned oil company. The Trump administration is supporting an opposition leader there, and there’s been turmoil. However, none of this seems to be helping crude prices, which fell sharply on Monday amid China worries and growing U.S. supplies.
Investors Steer Away From Risk
As we’ve often seen recently, bad news from China seemed to send some investors scurrying toward so-called “defensive” parts of the market. Treasury notes rose on Monday, with the 10-year yield dipping back below 2.75%. Consumer staples and utilities were two of the best performing stock sectors. Gold scooted back up above $1,300 an ounce.
Meanwhile, the market’s most closely watched “fear indicator,” the VIX, jumped sharply to above 19, after falling below 18 last week. See chart below.
The dollar index stayed pretty steady, however, at around 95.75. One school of thought suggests that softness in China and other economies could keep the Fed from evolving away from the dovish stance many Fed officials have taken in recent weeks. The Fed meeting starts Tuesday, and futures trading indicates virtually no chance of a rate change. Looking further out, chances for a hike even by June are at just above 17%, according to CME Group (NASDAQ:CME) futures.
Despite all the red on Monday, some investors might take heart in the fact that major indices had a decent recovery from their lows by the time of the closing bell.
Figure 1: Figure 1: VIX BRIEFLY BACK ABOVE 20. The Cboe Volatility Index (VIX) spent most of January drifting downward after a spike around the holidays. Since bottoming at 17 earlier this month, the fear gauge pierced the 20 level on two occasions, most recently Monday morning. Data source: Cboe Global Markets. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.
Disclaimer: Charts For illustrative purposes only. Past performance does not guarantee future results.TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.