Yesterday's selling is going to persist at the start of trading. The S&P futures are down 19 points and are trading 0.6% below fair value. The Nasdaq 100 futures are down 64 points and are trading 0.7% below fair value. The Dow Jones Industrial Average futures are down 187 points and are trading 0.7% below fair value.
The decidedly negative tone is easy to blame on trade concerns, yet it is rooted more in concerns about the buying interest in the Treasury market, which is seemingly reflecting trade and growth concerns across the yield curve.
Treasury prices are up noticeably again today, which means yields are noticeably lower again today. The 2-yr note yield is down four basis points to 2.08% and the 10-yr yield is down four basis points to 2.23%.
The move catching everyone's eyes, though, is the inversion of the 3-month bill yield (2.35%) and 10-yr note yield (2.23%), which is at its widest since the financial crisis. According to research done by the Federal Reserve Bank of San Francisco, this term spread is the most reliable predictor of recession among the different term spreads.
The latter is simply an observation, not an unmistakable prognostication. Nonetheless, one can interpret the inversion as a reasonable estimation of growth concerns that have seeped into the capital markets and which have manifested themselves this month in the underperformance of the cyclical sectors and the Dow Jones Transportation Average, as well as the sharp downturn in copper and oil prices.
The growth concerns have been compounded of course by the trade squabble between the U.S. and China, which has created some newfangled squawks, and tariff actions, that have seemingly diminished the chances of a deal being struck soon, if at all.
Accordingly, the stock market is retracing some steps it took to price in better earnings growth potential when it assumed a trade deal would be coming soon. Prices are being walked back, earnings growth optimism is being reined in, and P/E multiples are getting compressed.
The good news is that the S&P 500 is still up 11.8% year-to-date, yet there isn't a good feeling per se right now because nothing good is being said on the trade front.
The media's focus this morning is concentrated on a view shared in Chinese state media that suggests China could use rare earth mineral exports as a weapon in any trade war with the U.S. That's not a new claim, yet it is adding to the market's belief that China is ready to dig in rather than succumb to U.S. trade demands.
Retailers Abercrombie & Fitch (ANF) and Canada Goose (GOOS), meanwhile, are going to need to dig out from early losses. Those stocks are both indicated 16% lower after each company provided disappointing earnings results and/or guidance, continuing a string of disappointments out of the retail industry.
Dick's Sporting Goods (DKS) has been an exception in that area. Its stock is up 2.0% after the company topped Q1 estimates and raised its full-year guidance.
These might be story stocks today, yet the real story for the stock market revolves around growth concerns and a plot twist that has involved taking a trade deal many thought was done and undoing it.