Market Moves

After two previous days of tight-range trading, the markets broke lower as large-cap indexes closed 0.5% to 1% lower on the day. This might not have been the case except for some news that broke early in the afternoon eastern time. It's worth noting exactly what the news was because it helps explain, in part, why markets have been so constrained this week: traders are nervous about trade wars

This became apparent when the news broke that the Chinese delegation, scheduled to make a few visits across the U.S. after initial discussions took place in the lead up to trade-war talks on Oct. 1, had cancelled their visits to farm states. The reason for the cancellation was that the delegation had determined that they needed to return to China earlier than planned. The sell-off in stocks immediately following the news seems to presume that this portends more volatility and some kind of impact for investors. 

The chart below shows the brief impact on the markets during the day. The impact on different stocks varied but was unmistakable on these companies: Caterpillar Inc. (CAT), Deere & Company (DE), Conagra Brands, Inc. (CAG), TD Ameritrade Holding Corporation (AMTD), Microsoft Corporation (MSFT), and Amazon.com, Inc. (AMZN). These reactions could be early hints about the impact of the coming talks on these companies.  

Chart showing the performance of select stocks vs. the SPDR S&P 500 ETF (SPY)

Financial Sector Holds Upward Trend

The Fed's rate-cut announcement on Wednesday elicited a brief fluctuation among those participants not prepared for the news, but in the end, it was a generally tepid impact, signifying that the broader market had been expecting this outcome.

Since rate changes hit the financial sector with more impact than any other portion of the economy, it is worth considering whether this sector is showing signs of distress in any way. Though some future fluctuation may be expected, the overall upward trend for the remainder of the year and beyond still seems to be intact. This is easily recognizable from the view of the daily chart of the SPDR S&P Financial Sector ETF (XLF).

Chart showing the performance of the Financial Select Sector SPDR Fund (XLF)

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Interest Rates Could Rise, and These Stocks Will Benefit

Despite where the Fed wants rates to go, there is no guarantee that the market will play along. News last month about the inverted yield curve, and more recently regarding the Fed's use of the repurchase window, signify that the Fed might have to contend with crosswinds as they attempt to influence the economy through monetary policy. 

Should interest rates in the market rise, it would be easy to see by watching the yield on the 10-year note. The chart below compares this index (TNX) and the chemical index (CEX), with some stocks that would likely benefit from a rise in rates for one reason or another: Discover Financial Services (DFS), Principal Financial Group, Inc. (PFG), Capital One Financial Corporation (COF), TD Ameritrade, and Occidental Petroleum Corporation (OXY).  

Chart showing the performance of stocks that could rise when rates rise

The Bottom Line

U.S. stocks sold off when traders heard the news that the diplomatic delegation from China had cut short its visit in the United States, saying they needed to return to China earlier than expected. Some stocks were hit harder than others. The financial sector seems technically strong enough to maintain its course through 2019, but if rates rise, certain stocks are positioned to benefit from that outcome.

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