Day Traders Diary

1/3/19

The S&P 500 dropped 2.5% on Thursday, as a revenue warning from Apple (AAPL 142.19, -15.73, -10.0%) and weak manufacturing data stoked worries about a slowdown in global economic growth. The Dow Jones Industrial Average lost 2.8%, the Nasdaq Composite lost 3.0%, and the Russell 2000 lost 1.8%.

Nine of the 11 S&P 500 sectors finished in the red. The heavily-weighted information technology sector led the retreat with a loss of 5.1%, as Apple dragged on the group with a steep loss of 10.0%, which sent the stock to a level not seen since mid-2017. The industrials (-3.0%) and materials (-2.8%) sectors also underperformed the broader market. 

Apple rattled the market when it lowered its revenue guidance for the first time since 2002. CEO Tim Cook attributed the lower outlook to weaker demand in China, where the economy has been decelerating notably.

Selling accelerated after the ISM Manufacturing Index for December (Briefing.com consensus 57.8) came in below consensus at 54.1, falling from 59.3 in November.

While growth concerns are not new, Thursday's setbacks exacerbated fears that economic growth might be slowing more quickly than anticipated, which would present a headwind to corporate earnings.

Delta Air Lines (DAL 45.61, -4.48), for its part, fell 8.9% after its pre-announced fourth quarter results included softer than expected unit revenue. 

Fears over growth and corporate earnings had investors flocking to risk-free U.S. Treasuries. Consequently, the 2-yr yield and 10-yr yield fell 11 basis points each, to 2.38% and 2.55%, respectively. The rally in Treasuries took place amid building expectations for a rate cut by the end of the year. The fed funds futures market now sees a 46.1% implied likelihood of a rate cut in December, up sharply from yesterday's implied probability of just 9.6%. The U.S. Dollar Index lost 0.6% to 96.23.

The drop in interest rates did benefit some companies within the S&P 500. Namely those within the utilities (+0.1%) and real estate (+0.5%) spaces.

Reviewing Thursday's economic data, which included the ISM Manufacturing Index for December; the ADP Employment Change report for December; the weekly MBA Mortgage Applications Index; and the weekly Initial and Continuing Claims report:

• The ISM Manufacturing Index for December decreased to 54.1% (Briefing.com consensus 57.8%) from 59.3% in November.
  • The key takeaway from the report is that the December decrease was fueled by a sharp pullback in the New Orders component, which is the same element that lifted the November ISM Manufacturing Index into the neighborhood of its high from 2018.
  • According to the ISM, the past relationship between the PMI and overall economy indicates the December reading corresponds to a 3.4% increase in real GDP on an annualized basis.
• The ADP National Employment Report showed an increase of 271,000 in December (Briefing.com consensus 170,000), and the November reading was revised to 157,000 (from 179,000).
• The weekly MBA Mortgage Applications Index decreased 8.5%, which is lower than the decrease of 5.8% from two weeks ago.
• Initial claims for the week ending December 29 increased by 10,000 to 231,000 (Briefing.com consensus 220,000) from last week's revised reading of 221,000 (from 216,000). Continuing claims for the week ending December 22 increased by 32,000 to 1.740 million from last week's revised reading of 1.708 million (from 1.701 million).
  • The key takeaway from the report is that claims continue hovering within a sideways range that has been maintained since mid-2018.

• Looking ahead, investors will receive the Employment Situation Report for December on Friday.

• Russell 2000 -1.3% YTD
• S&P 500 -2.4% YTD
• Nasdaq Composite -2.6% YTD
• Dow Jones Industrial Average -2.8% YTD
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  • Headlines provided by Briefing.com