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| Last Month, Investors Seemed Too Pessimistic. Now, They Seem Prescient. | Last Month, Investors Seemed Too Pessimistic. Now, They Seem Prescient. |
| (35 minutes later) | |
| Maybe the markets were not overreacting. | Maybe the markets were not overreacting. |
| With the United States economy posting solid numbers last year, the alarming signals coming out of stock and bond markets seemed out of whack with the real world. President Trump’s bellicose trade actions were a concern, of course, but hiring was strong and corporate earnings were surging. | With the United States economy posting solid numbers last year, the alarming signals coming out of stock and bond markets seemed out of whack with the real world. President Trump’s bellicose trade actions were a concern, of course, but hiring was strong and corporate earnings were surging. |
| But this week, companies have reported numbers that suggest investors were right to be worried about growth, not just overseas but also in the United States. Apple on Wednesday reduced its revenue expectations for the first time in 16 years, citing weak iPhone sales in China. Delta Air Lines on Thursday said a measure of its revenue would fall short of its forecasts. And the American manufacturing sector slowed sharply last month, according to a closely-watched index. | But this week, companies have reported numbers that suggest investors were right to be worried about growth, not just overseas but also in the United States. Apple on Wednesday reduced its revenue expectations for the first time in 16 years, citing weak iPhone sales in China. Delta Air Lines on Thursday said a measure of its revenue would fall short of its forecasts. And the American manufacturing sector slowed sharply last month, according to a closely-watched index. |
| Selling in the stock market continued. The S&P 500-stock index closed down about 2.5 percent, leaving it more than 16 percent below the high it hit in September. But perhaps the most notable move was in the market for government bonds, where investors park their money in times of stress or when they expect the economy to slow. The yield on the 10-year Treasury note, which moves in the opposite direction to its price, fell to 2.56 percent, the level it was at nearly a year ago. | Selling in the stock market continued. The S&P 500-stock index closed down about 2.5 percent, leaving it more than 16 percent below the high it hit in September. But perhaps the most notable move was in the market for government bonds, where investors park their money in times of stress or when they expect the economy to slow. The yield on the 10-year Treasury note, which moves in the opposite direction to its price, fell to 2.56 percent, the level it was at nearly a year ago. |
| “On days like today people say, ‘Crud, I’ve got to buy tons of bonds,’” said Jim Vogel, a fixed income strategist at FTN Financial. “That’s driven by a large change in sentiment.” | “On days like today people say, ‘Crud, I’ve got to buy tons of bonds,’” said Jim Vogel, a fixed income strategist at FTN Financial. “That’s driven by a large change in sentiment.” |
| Important indicators still show the American economy is growing at a decent clip. A measure of employment in the private sector in December, released Thursday, was higher than expected. And analysts estimated that employers added about 180,000 jobs in December ahead of the Labor Department’s monthly jobs release on Friday. | Important indicators still show the American economy is growing at a decent clip. A measure of employment in the private sector in December, released Thursday, was higher than expected. And analysts estimated that employers added about 180,000 jobs in December ahead of the Labor Department’s monthly jobs release on Friday. |
| Despite that, companies and consumers are facing challenges that could make them more cautious about spending money. If they pull back, the economy will suffer. Apple’s warning provides strong evidence that the trade tensions with China are taking a toll. And if more indicators show the American economy stumbling, investors will become more convinced that the Federal Reserve’s recent interest rate increases are dampening activity. | |
| In the coming weeks, scores of companies will report their fourth-quarter results. The White House appeared to be bracing for a torrent of bad news from corporate America. | In the coming weeks, scores of companies will report their fourth-quarter results. The White House appeared to be bracing for a torrent of bad news from corporate America. |
| Kevin Hassett, the chairman of the White House Council of Economic Advisers, on Thursday said many American companies were likely to post disappointing sales figures until the United States strikes a trade deal with China. “It’s not going to be just Apple,” Mr. Hassett told CNN. “There are a heck of a lot of U.S. companies that have a lot of sales in China that are basically going to be watching their earnings be downgraded next year until we get a deal with China.” | Kevin Hassett, the chairman of the White House Council of Economic Advisers, on Thursday said many American companies were likely to post disappointing sales figures until the United States strikes a trade deal with China. “It’s not going to be just Apple,” Mr. Hassett told CNN. “There are a heck of a lot of U.S. companies that have a lot of sales in China that are basically going to be watching their earnings be downgraded next year until we get a deal with China.” |
| Corporate profits — and stock prices — are highly sensitive to global economic weakness. Foreign sales accounted for 45 percent of the revenues of companies in the S&P 500 stock index over the last five years. | Corporate profits — and stock prices — are highly sensitive to global economic weakness. Foreign sales accounted for 45 percent of the revenues of companies in the S&P 500 stock index over the last five years. |
| There are signs of Mr. Trump’s policies beginning to weigh on domestic demand, too. The Institute for Supply Management said Thursday that its index of manufacturing activity fell sharply in December, the largest one-month drop since the last recession. | There are signs of Mr. Trump’s policies beginning to weigh on domestic demand, too. The Institute for Supply Management said Thursday that its index of manufacturing activity fell sharply in December, the largest one-month drop since the last recession. |
| The manufacturing index remained at 54.1 percent, a healthy level consistent with other economic data generally showing that the economy remains in good shape. But the downward trend in manufacturing contributed to a growing sense of unease on Wall Street about the future of the long-running expansion. | The manufacturing index remained at 54.1 percent, a healthy level consistent with other economic data generally showing that the economy remains in good shape. But the downward trend in manufacturing contributed to a growing sense of unease on Wall Street about the future of the long-running expansion. |
| “When it has seeped into the survey it probably means it’s three to five weeks old,” Mr. Vogel said. | “When it has seeped into the survey it probably means it’s three to five weeks old,” Mr. Vogel said. |
| Indeed, investors are so convinced trouble is coming that they are betting the Federal Reserve will abandon its plans to raise interest rates in 2019. | Indeed, investors are so convinced trouble is coming that they are betting the Federal Reserve will abandon its plans to raise interest rates in 2019. |
| A more important indication of the Fed’s views could come Friday morning, when the Fed’s chairman, Jerome H. Powell, is scheduled to answer questions at a public appearance with his two immediate predecessors, Janet Yellen and Ben S. Bernanke. | A more important indication of the Fed’s views could come Friday morning, when the Fed’s chairman, Jerome H. Powell, is scheduled to answer questions at a public appearance with his two immediate predecessors, Janet Yellen and Ben S. Bernanke. |
| “There’s a belief he’s willing to back off, but we haven’t seen that yet,” Mark Haefele, global chief investment officer at UBS Wealth Management, said, referring to Mr. Powell. “If the Fed hikes rates in March, it’ll be a mess.” | “There’s a belief he’s willing to back off, but we haven’t seen that yet,” Mark Haefele, global chief investment officer at UBS Wealth Management, said, referring to Mr. Powell. “If the Fed hikes rates in March, it’ll be a mess.” |
| Investors and corporate executives have experience with slowdowns in large overseas economies but they have not at the same time had to grapple with the effects of a trade war. In explaining Apple’s lowered sales forecast, the company’s chief executive, Tim Cook, said “the contraction in Greater China’s smartphone market has been particularly sharp.” Apple’s stock plunged nearly 10 percent on Thursday, taking its market value down to around $675 billion, well below the $1.1 trillion it reached last year. | Investors and corporate executives have experience with slowdowns in large overseas economies but they have not at the same time had to grapple with the effects of a trade war. In explaining Apple’s lowered sales forecast, the company’s chief executive, Tim Cook, said “the contraction in Greater China’s smartphone market has been particularly sharp.” Apple’s stock plunged nearly 10 percent on Thursday, taking its market value down to around $675 billion, well below the $1.1 trillion it reached last year. |
| Delta’s stock finished the day down about 9 percent. | Delta’s stock finished the day down about 9 percent. |
| And on Thursday an ominous event occurred in the government bond market. The yield on the 5-year Treasury note fell below that on the 3-month Treasury bill. When moves like this have happened in recent decades, and stayed in place for a while, a recession has followed. | And on Thursday an ominous event occurred in the government bond market. The yield on the 5-year Treasury note fell below that on the 3-month Treasury bill. When moves like this have happened in recent decades, and stayed in place for a while, a recession has followed. |