Stocks Fall On Weak ISM Manufacturing PMI, Despite Strong Black Friday

Stocks Start December With A Bust?

The stock market fell on Monday which isn’t a surprise because it was very overbought heading into the week. S&P 500’s 0.86% decline was its worst decline to start a December since 2008. That’s “nice to know”, but not a stat you can make trades based on. 

Stocks rallied the first day last December and it ended terribly. The stock market declined because of the ISM manufacturing report even though the Markit report was ok. This reaction isn’t unusual as stocks always seem to follow the ISM report and ignore the Markit one. Even though the Markit report is wider in scope. ISM report measures large companies. While the Markit report measures small, medium, and large firms. It surveys more firms as well.

The stock market might also be jittery because phase 1 of the trade deal hasn’t been finalized. December 15th is the soft deadline because that’s when the next round of tariffs on Chinese goods goes into effect. It’s a soft deadline, because it probably will be pushed back by a few weeks. Especially if the 2 sides are very close, but not ready to make a deal before then. 

It’s tough to measure news flow because it seems like there is bad news before progress is made. Even still, stocks will be reacting to whatever reports come out. They will be highlighted by the impending soft deadline.

As you can see from the chart below, the number of Bloomberg stories mentioning tariffs is very low. That should spike with the December 15th deadline approaching. If there is a phase 1 deal, the number of stories spiking won’t be bad news for once.

Good Black Friday & Small Business Saturday For Online Retailers

It seems like Black Friday was a success for online retailers, but not for brick and mortar stores. On Black Friday, brick and mortar sales fell 6.2% as you can see from the chart below. Sales were more impressive on Thanksgiving (up 2.3%) as total yearly growth in the 2 days combined was -3%. 

Most of the biggest shopping days of the year haven’t happened yet, but things look good for online retailers. Consumers spent $7.4 billion online on Black Friday. That’s the 2nd biggest day for online sales ever. Biggest day was last Cyber Monday’s $7.9 billion which will be surpassed this Cyber Monday.

According to Adobe Analytics, the average order online was $168 which is up 6% from last year and a record high. Adobe tracks 80 of the top 100 online retailers. Small business Saturday was strong for online retailers as well. There were $3.6 billion in online sales which is 18% yearly growth. 

Total growth in online sales in November was 14.9% to $68.2 billion. Cyber Monday is expected to have 18.9% yearly growth as sales could be $9.4 billion.

Since the consumer is looking strong, I’d argue that stocks should have risen on Monday as the manufacturing sector is bottoming. However, that’s on a fundamental basis. You can argue the recent runup in stocks already priced in good news which explains the drop on Monday. Many have been calling for a correction recently; this might be the start of one.

Specifics Of Monday’s Action

Nasdaq fell 1.12% and the Russell 2000 fell 1.04%. It was an all around bad day for stocks. Despite the decline, the VIX was just able to stay below 15, maintaining its streak. It increased 2.29 to 14.91. It was above 15 during parts of the session, but just closed below it. 

CNN fear and greed index fell 7 points to 72 which signals greed. Consumer discretionary sector fell 0.76% despite the good news about Black Friday. Spider retail sector ETF fell 1.07%. L Brands stock fell 5.12%. But that’s nothing new for this stock. It has been hurt by consumers turning away from Victoria’s Secret. Also, the sector could have been hurt by heightened expectations or the decline in brick and mortar stocks.

Only energy and consumer staples were up as they increased 0.03% and 0.26%. 2 worst sectors were real estate and industrials which fell 1.75% and 1.61%. Decline in industrials was related to the weakness in the ISM PMI. 

Keep in mind that stocks actually do better when the ISM PMI is below 50. On the other hand, stocks do well because investors are expecting a turnaround. Without the turnaround, stocks won’t rally. Traders already priced in a turnaround in 2020. So if it doesn’t happen, stocks will need to give up a lot of 2019’s gains.

It’s surprising to see the 10 year yield up in the past few days given the recent 2 day decline in stocks. After bottoming in the end of November at 1.74%, the 10 year yield is now at 1.82%. Its closing peak in early/mid November was 1.94%. It would be a big positive for the 10 year yield to keep increasing as it would support the stock market’s rally this fall. 

2 year yield is at 1.61%. It can’t increase much because the Fed has staunchly gone against rate hikes unless inflation increases sharply. Inflation has been decreasing lately. A cut is more likely in 2020. If the economy weakens, that will happen. But a weak ISM PMI isn’t enough to change the odds. It’s very likely the Fed does nothing in the first half of 2020.

Conclusion

This 2 day decline is worse than the 3 day decline in late November. This still isn’t enough to be called a correction yet. It would be ironic to see stocks fall if strong data from Cyber Monday comes out. That’s not impossible because stocks already priced in a strong consumer with the rally this fall. 

If the trade talks go poorly in the next couple of weeks, we could see a further decline. It won’t be a repeat of 2018, but I could see a 5% decline from peak to trough. Further stocks decline, the better the returns in 2020 will be. 

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