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The Dow Plunges 559 Points Because No Good News Is Bad News – Barron's



Michael Haddad

Back on the Floor. This is the worst start to a December since 2008 for all three major U.S. indexes, which had another wreck of a day. The Nasdaq Composite, laden with tech stocks, bore the brunt of the selloff. The S&P 500 is now back to where it started at the end of October. In today’s After the Bell, we…

  • …learn how not to panic easily;
  • …cheer at one good news on oil price;
  • …and explain why China might be worth considering for 2019.

Nowhere to Hide

Friday’s economic data showed steady. Unemployment remains low, wage level didn’t move much, and consumer confidence stays high. But uncertainty around U.S. and China trade, an inverted yield curve, and concerns of peak earnings continue to bring volatilities to the market.

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The Dow Plunges 559 Points Because No Good News Is Bad News

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The
Dow Jones Industrial Average
tumbled 558.72 points, or 2.2%, to 24,388.95. The
S&P 500
lost 62.87 points, or 2.3%, to 2633.08, and the
Nasdaq Composite
plunged 219.01 points, or 3.1%, to 6969.25.

Torsten Slok of Deutsche Bank wrote in a Thursday research report, “We need a story, and markets get anxious if there are too many unquantifiable signals and no clear signs of a consistent narrative.”

Instead of finding comfort in some “simple stories” such as the yield curve, Slok suggests investors follow the Fed’s steps–looking for logic in the economic data. “The incoming data continue to be good, and the consensus continues to expect solid GDP and earnings growth for the coming six quarters,” writes Slock, “If you look at the economic data, we see a clear story: We will not have a recession anytime soon.”

As Washington-Beijing relations teeter, Chinese tech titan Huawei’s chief financial officer has been arrested in Canada and faces extradition to the U.S. But Meng Wanzhou, aka Sabrina Meng, isn’t your garden-variety executive; she’s the company founder’s daughter. Photo: EPA

At least one corner of the market looked brighter on Friday. The Organization of the Petroleum Exporting Countries and its allies led by Russia have reached an agreement to cut production by 1.2 million barrels a day, which will curb the global oil supply glut and help lift the price in 2019. Brent crude jumped as much as 5.2% to $63.11 a barrel on the news.

The correlation between stocks and bonds in the U.S. has started to trend upward, writes Jan van Eck, CEO and director of Van Eck Associates, in a Friday note. “This means that using long-duration bonds as a shock absorber or hedge in a portfolio may become more difficult. Investors may need to look elsewhere for defensive positioning against equity risk.”

The Chinese market might be one place to go, according to van Eck, despite its consistent decline this year. Looking beyond all the talks about trade tensions and politics, he thinks the underperformance of Chinese stocks in 2018 was largely driven by its central bank deleveraging the economy that started about a year or two ago.

Things might start picking up, however, as China started its fiscal stimulus this summer and cut the short-term interest rates by 200 basis points, writes van Eck. As the effect of such policy usually kicks in after about six to 12 months, he expects a boost to the Chinese economy in either the first or second quarter of next year.

The Hot Stock

PPL

(PPL) climbed to the top of the S&P 500 on a day when utilities were one of the few places of safety.

PPL gained 85 cents, or 2.8%, to $31.09.

On another brutal day, there were few safe havens, but utilities were one. The
Utilities Select Sector SPDR
ETF (XLU) rose 0.4%. PPL rode that wave as well, although much of the rest of the top 10 in the S&P 500 were dominated by energy names, helped by the OPEC-Russia agreement.

Year to date, PPL is up 0.5%.

The Biggest Loser

Ulta Beauty

(ULTA) sank to the bottom of the index, touching a five-week low at one point, after reporting third-quarter earnings.

Ulta Beauty lost $38.45, or 13.1%, to $254.47.

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The cosmetics retailer earned $2.18 a share on revenue of $1.56 billion, while analysts were looking for EPS of $2.16 on revenue of $1.56 billion. However, investors were more focused on its light fourth-quarter outlook. Ulta sees EPS of $3.50 to $3.55 on revenue of $2.085 billion to $2.013 billion. Consensus had called for EPS of $3.62 on revenue of $2.12 billion.

Nomura Instinet’s Simeon Siegel reiterated a Buy rating and $305 price target on Ulta, writing that he understands investor concern about how conservative Ulta’s forecast may be. The company “remains an industry comp leader with further room to grow…however, we left the call more reticent on gross margin trajectory than we started.”

Year to date, Ulta is up 13.9%.

Teresa Rivas

Write to Evie Liu at evie.liu@barrons.com

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