I’ve frequently noted here how important some economic data points are when it comes to determining price action for equities and there was an ominous reminder of that point today.
Stocks tumbled Tuesday after the ISM gauge of September manufacturing activity tumbled 47.8, the worst reading in a decade and well below economists’ expectations of a reading of 50.1. Readings below 50 indicate contraction and if the market digests too many sub-50 ISM reports on a month-to-month basis, eventually recession fears start getting priced in.
Today’s ISM report comes ahead of the September jobs number, which is due out Friday. In the wake of the slack manufacturing reading, it would be helpful for riskier assets to have the September jobs reading arrive inline or even slightly above expectations.
Traders clearly focused on the ISM number because President Donald Trump today congratulated China on its 70th anniversary, something that would normally be seen as a positive given his often bellicose tone toward the world’s second-largest economy.
That wasn’t the case today as the Nasdaq Composite slid 1.13% while the S&P 500 lost 1.23%. The Dow Jones Industrial Average gave up 1.28% with just four of its 30 components spotted higher in late trading.
Bad News For Brokers
The Dow Jones Industrial Average is home to a handful of financial services stocks, but only Goldman Sachs (NYSE:GS) and JPMorgan Chase (NYSE:JPM) have brokerage exposure. That’s a bad trait to have on a day Charles Schwab (NYSE:SCHW) announces that it’s eliminating commissions for stocks, ETFs, and options listed on U.S. or Canadian exchanges.
Schwab itself plunged on the news, carrying broader brokerage benchmarks lower in the process. While Goldman and JPMorgan typically don’t compete for the same clientele with Schwab, the move to an essentially free model by Schwab puts considerable pressure on other brokers to either match that offering or compel clients into staying by other means.
Some Bright Spots
Although in modest fashion, Apple (NASDAQ:AAPL) was again one of the Dow winners. Evercore ISI Amit Daryanani reiterated an “outperform” rating and $247 price target on Apple stock today.
“Daryanani predicts iPhone average selling prices will be up to $800 this year, compared with $770 last year. That may be reflective of more consumers buying directly from Apple, he notes, though it does imply a ‘modest uptick in pricing,’” reports Barron’s.
Though it was among the Dow Jones losers today, Microsoft (NASDAQ:MSFT) got a bit of good news on a report stating that as more investors allocate to environmental, social and governance (ESG) funds, including exchange traded funds (ETFs), that’s good for Microsoft stock because the name is often a prime holding in many of those funds.
As I’ve previously noted, ESG ETFs are usually overweight tech compared to traditional index funds and the more money that piles into ESG ETFs, the more tech stocks need to be bought to come inline with the funds’ underlying benchmarks.
Out With the Bath Water
Home Depot (NYSE:HD) was one of the names caught up in the Dow Jones calamity today, but to be fair, it was toward the least bad end of the losers roster. If Home Depot shares can cobble together even modest upside over the near-term, those gains could become magnified if weak short hands are flushed out. That’s a possibility amid rising short interest in the stock.
“Short interest has been rising alongside HD shares of late,” according to Schaeffer’s Investment Research. “Specifically a more than 25% rise was seen during the most recent reporting period, signaling that ample sideline cash is available to help keep the wind at the equity’s back. Plus, eight of the 20 covering firms still sport a tepid ‘hold’ rating, meaning there remains plenty of room for upgrades on the stock.”
Bottom Line on the Dow Today
One thing the slack manufacturing report speaks to is a negative impact due to the trade war with China. With many manufacturing hubs located in critical political states, President Trump likely realizes as much and could push for a trade agreement sooner than later, although he has said he doesn’t need one for his 2020 reelection bid.
Another issue to watch for, particularly with earnings season about to get underway, is how often management teams comment about the dollar. Sure, the Federal Reserve lowered interest rates twice in the third quarter, but the dollar still posted solid gains against rival major currencies and that’s a drain on some export-dependent sectors.
Todd Shriber does not own any of the aforementioned securities.