Despite more speculation that recession clouds are gathering, stocks cobbled together impressive gains to close another wild week. I mentioned earlier this week that some of the more important European economies, including Germany, are on the cusp of economic contractions and that are likely to spur the European Central Bank (ECB) into action.
That was one catalyst for today’s rally: talk that the ECB won’t be sitting on the sidelines much longer and will attempt something with monetary policy aimed at perking up the region’s sagging economies.
Here in the U.S., it still seems like a stretch to say that a recession is imminent, but the University of Michigan Consumer Sentiment Index reading out today could be cause for concern for fans of President Donald Trump. That survey indicates independent and republican voters are growing concerned about the economy and could be apt to rein in spending. That data point was revealed just a day after the president spoke glowingly about the economy and the strength of the American consumer.
Even with all the recession chatter, the Nasdaq Composite rallied 1.67% while the S&P 500 climbed 1.44%. The Dow Jones Industrial Average closed the week with a gain of 1.20%. Fun fact, at least for day traders or those that like volatility: the S&P 500 has had intraday moves of at least 1% for nearly three straight trading weeks.
These days, it’s almost possible to discuss stocks, particularly many of the Dow members, with talking about tariffs. Plenty of stocks are more tariff-sensitive than others, and JPMorgan was talking about a few of those names today.
Remember that while President Trump backed off some of the tariffs on Chinese goods set to go into effect on Sept. 1, he did not back off all of those levies. And the ones not going into effect next month were not eliminated. Those were merely delayed until mid-December.
As for companies likely to be affected by the Sept.1 tariffs, those names include Dow components Dow (NYSE:DOW) and Caterpillar (NYSE:CAT). Somehow, Dow, the chemicals maker, was the second-best performer in the Dow today while industrial machinery maker Caterpillar was a solid gainer as well, adding 0.97%.
Regarding Dow members that could be pinched by the December tariffs, assuming those penalties go into effect, JPMorgan includes Apple (NASDAQ:AAPL) and Nike (NYSE:NKE) on that list. However, both stocks closed higher today.
The Home Depot (NYSE:HD) has been receiving elevated trade-related mentions, according to JPMorgan. Still, Home Depot is a heavily domestic company and the shares added 0.92% today ahead of next Tuesday’s earnings report.
Bad Bank Stocks on the Dow
Each of the Dow’s financial services components, including JPMorgan Chase (NYSE:JPM), the largest U.S. bank, closed higher today. I mention this because, yes, banks are being drilled by declining net interest margin expectations at the hands of lower interest rates, but also because recent price action in the sector confirms investors can be confounded by analyst chatter.
Just last week, a Wells Fargo analyst said valuations on bank stocks are attractive, but today the same analyst said “there is no way to sugar coat the negative impact of lower interest rates” on banks’ net interest margins and per share earnings.
As I pointed out a couple of times during financial services earnings season, the net interest margin issued was raised on a slew of bank earnings calls and at this point, should be baked into these stocks.
Dow Jones Bottom Line
With all the aforementioned recession chatter swirling, the good news is that the Federal Reserve will not take that talk lightly and it is becoming increasingly likely that there could be another two rate cuts before the end of this year.
While that may be good news, the risk is that with rates already so low by historical standards, the effectiveness of more rate reductions may not be up to investors’ current expectations. Time will tell on that front, but the near-term path of least resistance would be for trade wars to cease.
Todd Shriber does not own any of the aforementioned securities.