China continues affecting global markets in a variety of ways. Today, long-running protests in Hong Kong are being viewed as one of the reasons for another glum performance by U.S. equities.
Here’s some backstory: Protests have been running for over 10 consecutive weeks in Hong Kong and stem from legislation on mainland China that would provide for the extradition of criminals captured in Hong Kong to China where they would face stiffer punishment. On Monday, protests lead to the cancellation of flights in and out of Hong Kong’s airport, one of the busiest in the Asia-Pacific region.
For investors in the U.S., the Hong Kong protests are relevant because they are against the backdrop of the U.S.-China imbroglio. China is likely to focus more on cleaning up its own backyard over the near-term than making nice with the U.S. That is concerning for riskier assets.
“With Hong Kong protests challenging Beijing’s authority and President Xi Jinping’s focus, China might not back down in the trade battle when it wants to project strength,” according to Barron’s. “In a note on Monday, Goldman Sachs says the equity market has priced in a likelihood of a U.S.-China deal at just 13%, down from nearly 80% in April (before talks were scuttled in May). Goldman economists don’t expect a trade agreement before the November 2020 U.S. presidential election.”
And thus, the Nasdaq Composite slid by 1.20% today while the S&P 500 lost 1.23%. The Dow Jones Industrial Average gave up 1.49% to start the week.
Earnings season is mostly in the rear view mirror, but there are some Dow components reporting this week and those names were sinking along with the broader market Monday.
For example, Walmart (NYSE:WMT), the largest U.S. retailer, lost 2.07% ahead of its Aug. 15 earning report. Analysts are expecting the company to earn $1.21 per share for its most recently completed fiscal quarter, down from $1.29 a share a year earlier.
In theory, Walmart should be a valid shelter from the storm play because it’s classified as a consumer staples stock, a highly defensive sector. However, the stock is lower by 7% this month because retailers, no matter how large, have significant tariff exposure and they will be forced to pass those higher costs onto shoppers.
Shares of Cisco Systems (NASDAQ:CSCO) lost 1.86% today, extending the month-to-date slide to over 8%. The networking gear giant reports earnings on Wednesday, Aug. 14 with Wall Street expecting EPS of 75 cents, up from 65 cents a year earlier.
Earlier today, J.P. Morgan analyst Samik Chatterjee reiterated an “overweight” rating and $62 price target on Cisco. The analyst “says Cisco’s ‘accelerating top-line momentum’—driven by product cycles in campus switching and security—as well as a coming product tailwind in Wi-Fi equipment, ‘will allow the firm to offset macro headwinds,’” reports Barron’s.
Pfizer Failure Hurts Dow
Shares of Pfizer (NYSE:PFE), the largest U.S. pharmaceuticals stock, slid 2.64%, ranking as the fourth worst-performing member of the Dow today. Pfizer is down more than 15% month-to-date, belying its normally defensive reputation. There are reasons for long-term investors to like Pfizer stock. Actually, lots of reasons. The yield of almost 4% is hard to ignore in this environment, but Pfizer’s chart is a mess, indicating better pricing could be available soon.
Bottom Line on Dow Jones Today
The following factoids are brief, but are revealing about the current state of affairs for equities. It is only slight hyperbole to say everyone is piling into gold and gold ETFs and it is no exaggeration to say major banks are raising price targets on bullion.
And while stocks with the low volatility designation (real estate, utilities, etc.) are looking expensive, data suggest investors don’t care. Over the past 90 days, the Invesco S&P 500 Low Volatility ETF (NYSEARCA:SPLV) has taken in $1.02 billion in new assets, nearly quadruple the amount of the issuer’s second-best ETF over that same period.
Todd Shriber does not own any of the aforementioned securities.