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Growth Hits the Wall

I know impeachment gossip is supposed to monopolize our attention week, but the market is beginning to fall victim to some unpleasant trade war consequences.

Stocks started off on the right foot Tuesday morning — until ugly manufacturing data kicked the rally to the curb.

The major averages immediately retreated into the red after the ISM factory index dropped to its lowest level since 2009, Bloomberg reports, “posting the weakest reading since the end of the last recession as a global slowdown and the U.S.-China trade war increasingly weigh on the sector.”

Flailing Factories

By the closing bell, the Dow had shed more than 340 points. The Nasdaq and S&P closed on the lows, both more than 1% in the red. It was the worst start to the fourth quarter in five years, according to Bespoke Investment Group.

Trade-war reverberations are also tearing through the Midwest — an important region containing a major chunk of Trump’s base. It’s a situation that could quickly spread to the national economy, according to some experts.

“One heartbeat of the Midwestern economy, farming, has been under serious pressure throughout the spring and summer. Agricultural exports to China have plummeted over the past two years, particularly soybeans,” The Wall Street Journal reports. “While a wet planting season kept crop yields in check, the lack of crop buyers has kept prices for soybeans and corn under pressure, too, which has been a double whammy for farmers.”

Of course, Trump is having none of this. He immediately took to Twitter following the release of the ISM data to pass the buck to the Federal Reserve:

trump tweet

We’ll see soon enough if weaker manufacturing — and some prodding from the president — are enough incentive for the Fed to cut again before the end of the year.

Even as the trade situation continues to unravel, it’s important to note that the averages remain parked just below all-time highs. Despite the fear popping up throughout the market right now, stocks continue to hold up relatively well as chaos spreads.

While stocks slipped on weak manufacturing data on Tuesday, gold enjoyed a brief reprieve from its recent breakdown.

Gold gained more than $16 Tuesday to settle just about $10 below $1,500. But yesterday’s solid session didn’t quite make up from Monday’s big breakdown.

The precious metals trade started to fall apart late last month as gold retreated toward $1,500 after failing to top $1,550 during its most recent rally. Gold falling short of its early September highs was the first clue that its three-month rally was seriously running out of steam. And Monday’s drop of more than 2% was the all the confirmation we needed that the bulls were overextended.

gold

I suspect gold will retreat toward the $1,425 neighborhood, which was a price that acted as resistance in July just before the final leg of rally that shot gold to new six-year highs.

Don’t get me wrong — I’m not expecting gold to re-enter a nasty bear market right now. Hard resets and shakeouts are typical characteristics of powerful comeback moves like the one we’ve witnessed so far this year. Let’s see where gold shakes out and we’ll come up with a plan to trade it once the dust settles.

Finally, online brokerages continue their race to zero as another major player scraps commissions.

Charles Schwab Corp. (NYSE: SCHW) is doing away with commissions and investors aren’t too happy.

Schwab announced on Tuesday that it would drop commissions on stocks, options, and ETFs, effective Oct. 7, reports MarketWatch. Shares fell nearly 10% on the news.

The announcement triggered a wave of selling throughout the industry. E*Trade Financial Corp. (NASDAQ:ETFC) fell more than 16% to close at new two-year lows, TD Ameritrade Holding Corp. (NASDAQ: AMTD) plummeted more than 25% on the day (TD followed Schwab’s lead last night by also announcing free commissions).

This move might have further closed the gap between older traditional firms like Charles Schwab and newer free-er services like RobinHood. While the news is good for investors (assuming free commissions don’t encourage over-trading or other bad behavior), I suspect the traditional brokers will continue to struggle.

But these stocks were already locked in downtrends well before yesterday’s news broke. There was no reason to own them in the first place…

Sincerely,

Greg Guenthner

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Greg Guenthner

Greg Guenthner, CMT, is the editor of Rude Awakening PRO and Seven Figure Signals. He has been with Agora Financial/Seven Figure Publishing for 13 years. In 2018, Greg’s Rude Awakening PRO portfolio beat the S&P 500 by 14%.

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