The U.S. stock market is set to see sharp losses at the start of today's trading. There are various explanations for why that is, yet the headline causality today is only part of the problem. The manner in which the U.S. stock market traded on Monday is the other part.
The financial stocks acted horribly on Monday; the deep-cyclical materials and industrials sectors continued to sag; and the high-growth information technology sector had a laborsome recovery run.
It looked like a limp market, which was disappointing to a lot of participants who were expecting it to show more vitality. Alas, the market limped into yesterday's close, leaving it vulnerable to getting tripped up easily this morning -- and tripped up it is.
The S&P 500 futures are down 38 points and are trading 1.4% below fair value. The Nasdaq 100 futures are down 114 points and are trading 1.7% below fair value. The Dow Jones Industrial Average futures are down 385 points and are trading 1.6% below fair value.
That negative disposition is being attributed to the following items:
- Turkish president Erdogan expressing his view that Saudi Arabia planned the murder of Washington Post columnist Jamal Khashoggi.
- Renewed selling interest in Asian stock markets, highlighted by a 2.3% drop in China's Shanghai Composite and a 2.7% drop in Japan's Nikkei.
- Japan's finance minister said Japan is moving ahead with a planned increase in the sales tax to 10% from 8% next October and that it is expected to cause some disruptions (that view isn't helping placate worries surrounding the "peak growth" narrative).
- Germany reported a 3.2% year-over-year increase in its Producer Price Index, sparking concerns about inflation pressures.
- The uncertainty surrounding the EU response to Italy's budget plan, which is expected today.
- China is digging in its heels with the U.S. on trade matters, seemingly unconcerned by any negative ramifications related to the tariffs.
- Disappointing earnings results from 3M (MMM), which came up well short of consensus estimates. Shares of MMM are indicated 6.6% lower.
- The lack of a material upside surprise from Caterpillar (CAT) and an affirmation of its FY18 EPS outlook of $11.00-12.00, the midpoint of which is below analysts' average estimate. Caterpillar also called attention to higher material and freight costs, including tariffs. Shares of CAT are indicated 6.8% lower.
It is important to note that the bulk of the losses in the futures market were established before 3M and Caterpillar reported their results, underscoring the negative mindset that pervaded global markets following Wall Street's close on Monday and exacerbated by the Mr. Erdogan's damaging remarks about Saudi Arabia.
The real gist of trading matters, however, is that this market is caught up again with peak-growth concerns, which is why it is not responding more favorably to third quarter earnings results that have been quite good in aggregate.
Diplomatic rancor... sinking equity markets... higher operating costs... the underperformance of economically-sensitive sectors... rising interest rates... a strong dollar -- these are all part of the equation for why market participants are questioning the earnings growth outlook.
In turn, they are considerations that have stood in the way of more concerted buy-the-dip efforts.
The price action itself, though, has been the real deterrent. Sectors that used to lead are now lagging; moreover, there is an effective leadership void that continues to hold things back.
That's where we stand this morning. Stocks are being held back, because market participants are holding back their confidence in the growth outlook.