Stocks retreat from record on growth, earnings

Stocks retreat from record on growth, earnings

After the Dow finally topped 20,000, US stocks retreated Friday as mixed earnings reports and a lower-than-expected report of economic growth dampened investor enthusiasm. A meeting with the UK PM and canceled meeting with Mexico's president made news. 

The White House |
The White House | Getty Images

Investors had both numbers and news to reflect on as they decided whether to follow Thursday's rally with further buying. The UK PM visited new president Donald Trump to discuss beginning a post-Brexit trade deal. It is the first face-to-face meeting by a world leader with the US president. Prime Minister Theresa May expressed hopes that the US and UK could forge an updated version of the "special relationship" that would ensure continued free trade and cooperation. 

The dollar was mixed, while the British pound dropped. May still has the actual exiting part of Brexit to execute, a process expected to take two years. By law, she cannot enter into any new trade agreements until the UK is no longer part of the European Union, so the meeting was intended as a chance for the two leaders to get acquainted and establish a good working relationship in advance of more involved negotiations. 

Meanwhile Mexican President Enrique Pena Nieto canceled his meeting with Pres. Trump after the White House proposed, then retreated from a 20% tax on imports from Mexico to pay for a wall along the border, the wall would fulfill a campaign promise, but the cancellation raised worries about a US-Mexico trade war. The Mexican peso fell after the US president tweeted about the disagreement. 

Then, during a press conference with May, Trump revealed that he had had a "very good talk" by telephone with Pena Nieto to smooth things over. During that talk, the two leaders agreed to stop talking publicly about who would pay for the wall, according to the Mexican president's office. The peso then strengthened even though relations remain far from smooth. 

Such surprises certainly affected investors' willingness to make large investments on the dollar or US stocks or on any hedges or safe havens. Overall, the day was active and indecisive. Treasuries did rise modestly as some investors took positions ahead of the FOMC's Feb 1 meeting. The Fed is not expected to raise rates again so soon after the increase in December, but it is the first Fed meeting of the new administration and will be watched closely for signs of overall sentiment about the economy. The Bank of Japan will also convene at that time. The BOJ has been buying debt to help the yen, but hasn't signaled how much more it will buy. 

The economy itself provided some numbers for investors to chew over. Microsoft and Intel advanced on positive earnings, while Starbucks shares lost after disappointing.sales growth numbers. Facebook and Amazon are up next on the earnings calendar. 

The day's big number was the rise in gross domestic product. US GDP growth was 1.9% for the final quarter of 2016 and of the Obama presidency. It was in line with average of 1.8% growth for the year and close to the average for the entire Obama presidency, which had higher growth than the George W Bush presidency, but lower than that under most modern presidents. That said, GDP growth has been steady, if slow, ever since the recovery from what was nearly a second great depression. Economists will long study this period, where records like 82 months of job growth are tempered by questions about the quality of those jobs and stagnant incomes. 

Meanwhile, investors seemed to take the number in stride. Stocks didn't plummet on the news, but neither did the rally continue. Paul Tudor Jones and others have popularized an old trader's "rule" called the Friday-Monday effect, which says whatever happens on Friday tends to continue into Monday. Whether or not Friday's slump continues next week, we can probably expect ups and downs, like today's peso roller coaster. And maybe even some surprises like angry tweets and canceled meetings followed by friendly phone calls. Quite a Friday. 

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