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What you need to know in markets on Wednesday

Heidi Chung

Stocks got no reprieve on Tuesday.

Apple (AAPL) was the biggest drag on the Dow (^DJI), as the index plummeted 551 points sending it into the red on the year. The S&P 500 (^GSPC) fell 1.82% on Tuesday and erased all of its year-to-date gains. The Nasdaq (^IXIC) tumbled 1.7%, or 119.65 points and is down nearly 15% from its all-time highs.

Retail giant Target (TGT) reported weaker-than-expected earnings for Q3 and sank more than 10% during Tuesday’s trading session. Same-store sales, a key metric for retailers, also came in lighter than anticipated. Home improvement chain Lowe’s (LOW) and big-box retailer Best Buy (BBY) also tanked following their earnings.

Crude oil (CL=F) joined the broader selloff in equities and plunged more than 6% to more than one-year lows and snapped a four-day winning streak. The commodity has been under pressure lately as global supply surplus concerns weigh on prices. Oil has fallen 30% from the four-year highs it hit in early October.

Economic calendar and earnings

With the Thanksgiving holiday on Thursday, earnings remain light on Wednesday and for the remainder of the week.

Retailers Foot Locker (FL) and Gap (GPS) both reported better-than-expected earnings after the bell on Tuesday. Despite beats on both the top and bottom lines the stocks moved in opposite directions after hours. Foot Locker shares soared 12%, while Gap shares fell 1%.

Deere (DE) is set to report Q3 financial results before market open on Wednesday.

On the back of the housing starts and building permit data released on Tuesday, existing home sales and mortgage application data will be released on Wednesday morning. Economists polled by Bloomberg are expecting existing home sales to have grown 1% in October to a seasonally adjusted annual rate of 5.20 million units. The housing market has been in focus lately as rising rates and higher costs have been hammering demand. Confidence in U.S. homebuilders is at its lowest level in two years.

Market commentary

Here’s what caught markets correspondent Myles Udland’s eye

It’s time to take a deep breath.

The stock market on Tuesday dropped sharply for a second day with the Dow and S&P 500 both in red figures for the year while the Nasdaq is just barely holding onto gains. The small-cap Russell 2000 is now down more than 5% for the year.

And in recent days we’ve noted that investor confidence is fading, so too is executive confidence, while some consumer data painted a mixed picture ahead of the crucial holiday shopping season. Meanwhile, the White House on Tuesday trotted out Larry Kudlow, President Trump’s chief economic advisor, to assure markets that there is continued optimism on potential trade talks with China in a few weeks.

Right now, markets are presenting a situation that is very unsettled and portends what could be a stressful year in 2019. But though the market’s recent stress may reflect an anticipated downturn in the economy by some investors, it does not really reflect an actual downturn in economic data, as at least one political reporter has claimed we are seeing.

In October, the economy created 250,000 new jobs and wages grew at the fastest pace in over nine years. In the third quarter, the economy grew at an annualized pace of 3.5%; the back-to-back quarters of growth in the middle of 2018 were the best stretch for the economy since 2014.

And consumers remain in good shape.

Renaissance Macro economist Neil Dutta noted Tuesday that Redbook’s weekly same-store sales, which tracks changes in same-store sales for about 9,000 large merchandisers, were up 6.2% last week. These Redbook figures are right around the best numbers we’ve seen since before the financial crisis. And comparing Redbook’s data to recent government data suggests that retail sales will rise in the months ahead.

Same-store sales at some of the biggest retailers in the country are near their best levels since the financial crisis, indicating consumers are still in good shape. (Source: Renaissance Macro)

Other data on spending also suggests consumers will continue to power the economy. Data from research firm eMarketer published earlier this month said this holiday shopping season will likely see Americans increase spending by 5.5% over last year with total spending topping $1 trillion for the first time. The first estimate of third quarter GDP also showed that personal consumption rose at an annualized rate of 4% in the third quarter.

And with consumer spending accounting for around 70% of GDP growth, it isn’t likely that we’re going to see an outright contraction in GDP growth until consumers roll over. The data does not suggest this is in the cards.

Household debt payments as a percent of disposable income also remain near historic lows, while the personal savings rate is well above where it stood during the booming years of the mid-00s that preceded the financial crisis.

Economists across Wall Street have, however, been indicating that economic growth — and consumer spending — will likely grow at a slower pace in 2019 as the benefits of the tax cuts wears off. Slowing growth, of course, is not a contraction in economic activity nor does it  necessarily portend recession. (A recession is loosely defined as two-straight quarters of falling GDP growth.)

Jan Hatzius and the economics team at Goldman Sachs said Monday that global real GDP growth will likely slow to 3.5% from 3.8% next year with U.S. growth slowing to 2.5% from 2.9%. The firm adds that the main risk for the U.S. economy remains an overheating economy, not recession.

Michael Feroli and the economics group at JP Morgan also expect growth to slow next year — calling for the annualized pace of real GDP growth to hit  just 1.5% in the fourth quarter of next year — but see a strong labor market keeping the economic expansion alive.

“We’d agree that recession risks are indeed rising,” the firm writes. “The evidence continues to accumulate that the economy is operating beyond its sustainable long-run capacity, and thus that the Fed can’t pause just yet. Even so, we feel that the risk of a downturn in 2019 should not be overstated.”

And while financial markets will almost always be more sensitive to potential dangers than economic forecasts which move at the relatively glacial pace of monthly and quarterly data releases, just because investors are starting to act like the economy is more imperiled than economists and policymakers suggest doesn’t make it so.

And when evaluating the economy as it is — not the economy implied by prices in financial market prices — we all must remain, as the Federal Reserve would say, data dependent. And the data right now are still saying things are good in the U.S. economy.

Heidi Chung is a reporter at Yahoo Finance. Follow her on Twitter: @heidi_chung.

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