ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Sue Herera and Bill Griffeth.
BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Market selloff. Stocks fall sharply the second straight day, marking a rocky two-day start for the quarter, which is testing investor confidence.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Tonight, we`ll try and answer some key questions. Why the sudden reversal, what might happen next, and where long-term investors can find opportunity.
GRIFFETH: All that and more tonight on NIGHTLY BUSINESS REPORT for this Wednesday, October 2nd.
HERERA: Good evening, everyone, and welcome.
The ugly start to October got even uglier. The stock market selloff intensified for a second straight day, making an historically volatile period for the market even more so, as concerns over economic growth rattled investors.
The Dow Jones Industrial Average dropped about 500 points. Some of the reasons are familiar. But some are new. And we`ll explore all of them tonight.
But first, the closing numbers. The Dow was down 494 points to close just above 26,000. The Nasdaq off 123 and the S&P 500 slid 52.
GRIFFETH: Now, today`s losses add to yesterday`s decline, obviously. In the past two days, the Dow has lost more than 800 points. One analyst described the selloff as a gut check for investors. That may be the case, but according to Bespoke Investment Group, a bad start to October does not necessarily mean the month will end that way.
A couple of examples. Look at the second line here, 1935 during the depths of the Great Depression, the market started the month lower but as you can see, it finished higher. Same thing the line below that, in 2009 during the Great Recession, and by the way, the market finished higher for the quarter in both of those years as well. We`ll see what happens.
As for today`s action, Bob Pisani starts us off tonight from the New York Stock Exchange.
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BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Dow plunged nearly 600 points at the lowest point before ending well off the level. Today address drop all three average more than erased the September gains in the first two days of October. October, of course, is infamous for being a scary and volatile month for the stock market. And keep in mind, during pre-election years, the S&P has been flat back in October going all the way back to 1950.
Right now, the markets are still grappling with concerns of a prospect of a recession. Following yesterday`s weak manufacturing data, the Dow broke below technical support levels today, but managed to hold above 26,000. And just the concerns were centered around growth once again, we saw cyclical names fall there. So, industrial names, Boeing (NYSE:BA), Caterpillar (NYSE:CAT), materials like Dow, oil names like Chevron
(NYSE:CVX), retailers, transport stocks all weaker. Banks were also under pressure because bond yields continued to sink today.
So, it boils down to what side of the recession debate you`re on for 2020. Weak manufacturing isn`t sending the economy down by itself but a weaker consumer might. Remember the U.S. consumer is the engine of global growth but there`s really not much sign of a consumer slowdown yet.
One early sign, watch the big consumer stocks that have done well this year. The Costcos, the Home Depots, Starbucks (NASDAQ:SBUX), Nike (NYSE:NKE), McDonald`s (NYSE:MCD), they`re all still strong. There are a little bit of cracks to show. Starbucks (NASDAQ:SBUX), for example, has been weaker in the last month but given how big it is in China, maybe that`s understandable overall.
Now, even defensive stocks like consumer staples were down today. Names like Coke, and Procter & Gamble (NYSE:PG), and Pepsi and General Mills (NYSE:GIS) and Kimberly Clark, for example.
For NIGHTLY BUSINESS REPORT, I`m Bob Pisani at the New York Stock Exchange.
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HERERA: As Bob just mentioned, and as we reported yesterday, part of the concern in the market is the decline in manufacturing activity. And a large part of that may be coming from the energy industry.
Here is Brian Sullivan.
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BRIAN SULLIVAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here is a look at shipments by manufacturers to the oil and gas industry year over year.
You can see not only have shipments, which is the yellow line, come down from a year ago, new orders, future shipments, the white line, they have fallen as well. In fact, total shipments are down 2.5 percent from last year. I get it, 2.5 percent may not sound like a lot, but when you`re talking about hundreds of millions or billions of dollars in big, heavy equipment orders and manufacturing, it does matter.
Now the slide has been going on for a while. As of August, manufacturing data to the energy industry down nine of the past 12 months. A big part of that slowdown is the big drop in new drilling activity.
Last year at this time, there were 863 oil rigs drilling for oil in the United States, according to Baker Hughes (NYSE:BHI). Last week, just 713. And much that drop is coming from Texas. In fact, according to Baker Hughes (NYSE:BHI), drilling rigs in Texas have fallen by 111 from a year ago.
Remember, each drilling rig is a big, heavy pipe-filled piece of machinery. They use many vendors on the drilling sites, from actual rig companies, to generator companies, to truckers, sand haulers, you name it.
And here`s the most important I think on a macro level to remember. In 2008, oil and gas nearly single-handedly kept the American economy from falling into an even worst recession or depression. For about two years, energy was the only industry adding jobs.
And each drilling rig represents maybe 75 to 100 workers both directly and indirectly. So, if we keep seeing a slowdown in drilling, we may start to see a big slowdown on the big daddy of all economic numbers. And that is the monthly jobs report.
Just something to think about with manufacturing data, oil and gas, stocks down, but that drilling activity could be tweaking the national numbers lower as well.
For NIGHTLY BUSINESS REPORT, I`m Brian Sullivan.
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GRIFFETH: Meanwhile, the U.S. finds itself in another tariff tiff, but this one`s not with China. It`s with Europe. Late today, the U.S. trade representative said it`s going to impose tariffs on billions of dollars of imports from the European Union. The World Trade Organization authorized those tariffs earlier in the day after it ruled that the E.U. unfairly subsidizes aircraft giant Airbus.
Kayla Tausche has details.
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KAYLA TAUSCHE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The U.S. will place new tariffs on $7.5 billion in European goods beginning October 18th after winning a long-running legal dispute at the World Trade Organization. Aircraft will be charged a new 10 percent tariff while agricultural and industrial products will see a 25 percent tariff, those include items from scotch whiskies to sweaters and sweet biscuits in addition to wine, cheese and olives.
A statement from Delta Airlines (NYSE:DAL) said planes are purchased well in advance and that imposing tariffs on aircraft that U.S. companies have already committed to will inflict serious harm on U.S. airlines, the millions of Americans they employ, and the traveling public.
Washington and Brussels have been fighting for more than a decade over whether Boeing (NYSE:BA) or Airbus receives more government subsidies. The WTO sided with the U.S. and said the E.U. government has given Boeing`s French competitor an unfair leg up.
Because of that ruling, U.S. officials believe the E.U. has no right to retaliate even though it`s prepared a list of new tariffs on its own just in case.
The two sides are planning a meeting October 14th — just days before the new tariffs would take effect, but it`s unclear what if anything those negotiations will yield.
For NIGHTLY BUSINESS REPORT, I`m Kayla Tausche in Washington.
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HERERA: The new tariffs come at a fragile time for the European economy and potentially deepens the rift in the Trump administration`s trade fight.
Willem Marx is in Brussels for us tonight.
So, Willem, could this escalate further with a European response.
WILLEM MARX, NIGHTLY BUSINESS REPORT CORRESPONDENT: So, that`s a definite possibility, European Commission officials telling me tonight this was no great surprise, more or less what they expected and they do anticipate that the U.S. will move ahead with imposing tariffs as soon as possible. Mid- October is the earliest they can become enforceable under WTO rules and the possibility at that point is that the Europeans will not seek to retaliate by using the allowances they might get from a future Boeing (NYSE:BA) ruling for the WTO. That could be a similar level of tariffs left open to them, but that may not happen till early next year.
Before then though, an indication last night from the European Commission for Trade, Cecilia Malmstrom, was that they try and use previous old settled rulings from the WTO that gave them an ability to enforce tariffs they didn`t take in the past. They`d use those allowances again to try and show that they were being firm.
Bruno Le Maire, the French finance minister, this afternoon talking about this being an error that is both economic and political if the U.S. are to seek sanctions and the Commissioner Cecilia Malmstrom saying today as well, she thought they were both counterproductive and unhelpful.
HERERA: Willem Marx, thank you so much for joining us tonight, Willem.
GRIFFETH: So, what could all of this mean for the market this month and the rest of the year?
Joining us now, Alicia Levine is the chief strategist to BNY Mellon.
Alicia, good to see you. Thanks for joining us tonight.
ALICIA LEVINE, BNY MELLON CHIEF STRATEGIST: Thanks for having me again, Bill.
GRIFFETH: I mean, we`ve got so many crosscurrents going on right now. These trade wars, you know, the negotiations with China coming up. We got more reports on the economy — tomorrow, services, the jobs report on Friday. Do you expect more volatility he asked naively?
LEVINE: So, the U.S. has joined the rest of the world in the manufacturing slowdown, which as you pointed out is the reason for the selloff over the last two days. And the big question out there is whether it has affected the service sector and the consumer because the consumer is 70 percent of U.S. GDP and services are likewise about 70 percent of the economy.
So, the reads that we get tomorrow, Thursday morning, and Friday morning are going to have an outsized importance compared to the past and how the market is going to interpret all the data. So, a good read to help support markets but if there`s any weakness at all, it will continue the story of a U.S. slowdown and fears of a recession.
HERERA: But to be clear, you do not foresee a recession. Is that still correct?
LEVINE: Our base case is that there is no recession in 2020, that the U.S. consumer does in fact continue to drive the U.S. economy and in fact drive the global economy.
Having said that, we do see a slowdown and we do see that the risks are rising from markets as well as the global economy.
GRIFFETH: Is this the reason the Fed cut rates the last couple of times? Is this the insurance policy that they were taking out? Or do you foresee even more cuts down the road?
LEVINE: So, the reason the Fed cut rates twice already this year is for several reasons. The first of which was that the U.S. monetary policy had much higher rates than the rest of the world and that can be damaging to the U.S. economy if the U.S. Federal Reserve is much tighter than other central banks.
We do think the Fed will cut another basis points by the end of the year, which is actually what the market is pricing in so that would be a benign event for the market and we do think that it will help the housing market for example.
HERERA: So what do you do as an investor as we enter this month of October? Do you anticipate it will be as it has been in the past in some cases an upside month or not?
LEVINE: So, the data at the beginning of your segment was really interesting because they show, as you point out, that October is historically a higher month after a few days of sell-off. This is a very interesting market because it`s a market where macroeconomic events can really shape the direction of corporate earnings and markets.
And the truth of the matter is, is that if there is a trade deal sometime in the next month or two or signals thereof, then the market should move higher. But to the extent that is just more talk and that there is not any kind of conclusion to the trade fight with China, we actually expect the markets move lower.
GRIFFETH: All right. We will see what happens this interesting month. Alicia Levine with BNY Mellon — again, thanks for joining us tonight.
LEVINE: Thanks for having me again.
HERERA: Still ahead, a stock market roadmap. Two longtime market watchers lay out the bull case for stocks and the bear case.
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GRIFFETH: Wall Street is also trying to figure out what if any impact impeachment developments in Washington are going to have on the market.
Ylan Mui has the latest for us on the drama in D.C.
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YLAN MUI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The battle over impeachment intensified today in Washington, threatening the legislative agenda that was already a long shot.
Congressional committees received an urgent briefing this afternoon from the inspector general of the State Department after Secretary Mike Pompeo acknowledged that he was on the July 25th phone call between President Trump and the leader of Ukraine. In a letter, Democrats threatened to subpoena the White House if it doesn`t turn over documents by Friday related to that call.
House Intelligence Chairman Adam Schiff said failure to produce the information will be considered evidence of obstruction of justice.
REP. ADAM SCHIFF (D-CA (NASDAQ:CA)): We are proceeding deliberately, but at the same time, we feel a real sense of urgency here that this work needs to get done.
MUI: Trump quickly came out swinging, calling on Schiff to resign and blaming the impeachment nonsense for driving down the stock market and 401ks. He also accused Democrats of abandoning issues like drug prices and trade.
DONALD TRUMP, PRESIDENT OF THE UNITED STATES: We have to go back to building our country because 99 percent of Nancy Pelosi`s time is spent on this. She should worry about lowering the price of drugs which I`ve done, but it`s hard to do without the help of Congress.
MUI: The speaker of the House has insisted that her party can both legislate and investigate. She said she welcomes cooperation on prescription drugs and gun violence, and she`s encouraged by progress on the USMCA trade deal.
REP. NANCY PELOSI (D-CA (NASDAQ:CA)): So, is the president saying, if you — if you question my actions, I can`t agree on any subject, then the ball is in his court.
For NIGHTLY BUSINESS REPORT, I`m Ylan Mui in Washington.
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HERERA: The labor market may still be historically strong, but it is showing signs of slowing, something investors are watching. Private payroll company ADP said today that companies added 135,000 jobs in September. It was slightly better than expected, but last year at this time, monthly job gains averaged more than 200,000. Economists have been concerned that the trade tensions which have pressured manufacturing could eventually start to take their toll on the labor market.
GRIFFETH: And the latest car sales reports produced a mixed picture of the auto industry. General Motors (NYSE:GM) reported third quarter sales were up more than 6 percent. That`s an indication the labor strike is not yet taking a toll on that company.
But Ford sales were down, about 5 percent, because of softness in its SUV market. Fiat Chrysler sales, they were basically flat.
HERERA: Those mixed auto sales and concerns the U.S. economy is slowing is part of the reason for the recent market sell-off. But will things get worse before they get better or is the worst over?
Barry Knapp joins us, managing director at Ironsides Macroeconomics. He says things could get worse.
Michael Farr is with us as well, president of Farr, Miller and Washington. He says the bull market is still strong.
Gentlemen, welcome. Nice to have you both with us.
MICHAEL FARR, PRESIDENT, FARR, MILLER & WASHINGTON: Thank you.
HERERA: Barry —
BARRY KNAPP, IRONSIDES MACROECONOMICS MANAGING DIRECTOR: Thank you.
HERERA: — we`ve had a rough start obviously to October, but you think things could get worse. Why?
KNAPP: Well, first of all, all growth is not created equal. So what actually matters significantly for corporate revenues and corporate earnings is — it`s not just the manufacturing sector, it`s the spending on capital equipment and how that affects the inflationary aspect or implications or impulse if you will from growth. So, a year ago, capital investment was quite strong, revenues were strong and earnings were strong. This year, we`ve had a significant decelerating — deceleration in that capital investment part of the economy.
Plenty of recessions have actually started this way. It was quite commonplace in the `50s, for example, or 2001 when we had a tech bubble.
GRIFFETH: Right.
KNAPP: There`s no bubble today, but that deceleration in the capital spending part of the economy has put significant downside pressure on earnings and revenues.
It can be traced directly back to the trade war through business confidence, and that hasn`t played all the way through the economy.
HERERA: Yes.
KNAPP: The final piece is going to be the labor market. Growth has already slowed as you noted, Sue. It`s only growing at 1.3 percent. That`s the labor force year-on-year versus 1.9 a year ago.
GRIFFETH: OK.
KNAPP: And so, we think there`s a little bit more to be seen in those numbers and the market is not yet fully reflected that. At 2,800 or 2,750 in the S&P, that would probably be reasonably fairly reflected in my view.
GRIFFETH: Michael, there you are. I mean, manufacturing has slowed. It may even be contracting at this point. The labor market is starting to slow here as well. Why are you still bullish?
FARR: Bill, we`re still I believe in a secular bull market that`s been going on for ten years. We`ve had a number of corrections and, you know, we had a 6 percent correction during the month of May. Mid-July to mid- August, we had a six and a half percent correction.
At all of these times, you know, you hear folks wailing and gnashing teeth and saying, here it is, here`s the big bear market — the market has something of a cold. You have to pay attention, but I think that planning the funeral is a little bit premature at this point.
I called Jim Iuorio before I came on with you guys. Iuorio said, I think that the risk here is being under invested.
I called my friend Jack Bouroudjian. Jack said, you know, these pullbacks I think will create a buying opportunity. Jack further pointed out — and I agree with this — you know, the Fed is an easing mode here. The Fed is accommodating markets. You don`t want to fight the Fed.
And I think when you look at these unemployment numbers, you say, well, we`re 3.7 percent unemployment. That means that we`re 96.3 percent employed.
HERERA: Uh-huh.
FARR: I mean, you`re going to have a slowdown when you reach full employment. So, be careful. This could go down tomorrow on the services number a little more. But overall, I think you`ve got to be opportunistic, take a look at what you own, and don`t call an end of this bull yet.
HERERA: Let me turn to Barry.
Quickly, Barry, you know the adage is don`t fight the Fed, but I guess the key question is — in your opinion, can the Fed cut enough to keep us either out of recession or get the economy turned around a little bit?
KNAPP: No, the Fed — the Fed is trying to cut to stabilize business confidence to get capital spending restarted. I don`t think that they can totally offset that. What could offset that to be clear is a trade deal or some type of trade detente to be sure.
So, I`m not calling for a cataclysmic sell-off here. I`m not calling for 20 percent. But I think 10 percent is in the cards.
And, by the way, for most investors, when you`re looking to put money to work, those are the opportunities, I agree. So, down 10 percent at the level I cited, I`d be a buyer, but not yet.
GRIFFETH: Very quickly, Michael, what`s going to take us higher here in your view? Which sector do you like best?
FARR: I think you take a look still at the earnings numbers when they come out. They continue to grow a little bit. I think that you see wage gains and the consumer remains the key. Sectors I like continue to be those more defensive, a shift away from the high-risk, so the consumer staples. Health care I continue to like, and you know the banks have just gotten killed at some point, you`ve got to buy them.
HERERA: Barry Knapp with Ironsides Macroeconomics, Michael Farr with Farr, Miller & Washington — gentlemen, thank you both.
KNAPP: Thank you.
FARR: Thank you.
GRIFFETH: TD Ameritrade (NASDAQ:AMTD) and ETRADE become the latest to drop their commissions and that`s where we begin tonight`s “Market Focus”, with both online brokerages saying today that they`re going to eliminate commissions for stocks and ETF trading the day after Charles Schwab`s announcement. Shares of both TD Ameritrade (NASDAQ:AMTD) and ETRADE were off more than three percent in today`s sell-off.
Johnson & Johnson (NYSE:JNJ) has settled lawsuits with two Ohio counties for about $20 million. This allows the company to avoid an upcoming federal trial in that state against a group of healthcare-related companies accused of being responsible for the country`s opioid epidemic. J&J rose more than 1.5 percent to $132 even.
And homebuilder Lennar (NYSE:LEN) topped analyst forecast today, thanks to higher demand for its homes. The company also said new orders rose 9 percent compared to a year ago and there are signs that the housing market continues to improve. The stock was up nearly 4 percent today to $57.82.
HERERA: Delta says it sees third quarter revenue below its previous guidance because of higher than forecast costs, including employee wage increases and maintenance. Shares fell more than 4.5 percent to $54.35.
Acuity Brands (NYSE:AYI) which sells lighting products missed on sales in part due to the continued trade war with China. The company`s CEO called the overall demand for lighting products, quote, sluggish because of tariffs. The stock dropped more than 11 percent to $114.97.
GRIFFETH: And coming up, the number one rule for long term investors after a sell-off like this one.
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GRIFFETH: So the month of October has arrived and after just two days, the Dow is down roughly 800 points. Short-term traders love this kind of volatility, but what about long-term investors? What should they do with this?
Joining us now with her thoughts, Jenny Harrington is the CEO and portfolio manager of Gilman Hill Asset Management.
Jenny, good to see you tonight.
JENNY HARRINGTON, GILMAN HILL ASSET MANAGEMENT CEO & PORTFOLIO MANAGER: Thanks for having me, Bill. Hi, Sue.
GRIFFETH: You`re a long-term investor.
HARRINGTON: I am.
GRIFFETH: What do you make of this volatility this month so far?
HARRINGTON: I don`t make anything of it. To me, it`s just a blip, since over the past 10 years, we`ve had something like 65 different versions of panic attacks where the markets moved up down and scared the daylights out of people. And I don`t think right now that this is anything different. I don`t think it`s the beginning of something nefarious.
HERERA: So, as a long-term investor, Jenny, do you just ignore all the headline risk that`s out there? Or do you take a look at maybe opportunity?
HARRINGTON: I think you — I mean, you`re always looking for opportunity and I have this goofy bumper sticker in my office that says “I love volatility” because volatility creates opportunity.
But I think you always stand back, look at your portfolio and say, has it done what I intended it to do, was it set up strategically for what I need it for, you know, two years ago, five years ago, ten years ago? Is it doing that and is it position to do that going forward?
If it`s not, then maybe you want to make changes, but don`t make changes just because we`re down 5 percent over the last five days. Make changes because it`s always a good time to think thoughtfully and maybe make a change.
GRIFFETH: But here`s what I always think about — when does long-term investment thinking become complacency? You`re down 5 percent, maybe you go down 10 percent and you say, well, I`m a long-term investor I`m going to ride this thing out?
HARRINGTON: I think, OK, so I think you can always ride it out, right, and you can take a step back and say, over the past 10 years, we`ve had the market down 18 percent or so in 2013, and 16 percent in `11, I might be off a little on that. But we`ve ridden through all of those, and that to — and the annualized return over the past years is 13-1/2 percent.
So, if you can ride those out, if you can ride the 18 — down 18 percent and down 16 percent out, you know what you get in the end? You get an annualized return of 13-1/2 percent, which is really solid.
And I`m going to say that I`m — I don`t have a crystal ball, so I would never know exactly what to get in and when to get out. So, I`d rather ride those out and be just very thoughtful and very diligent and know that I`m positioned for anything that comes my way.
HERERA: So given that, as you manage money for clients and look at the market, is the economic data a little bit more important overall than the day-to-day activities in the market?
HARRINGTON: The economic data is definitely more important than the day- to-day, for sure, and then more important than that even as each company that we`re invested in is what`s at the corporate level and what`s happening at the corporate level there, and will that company be able to ride out whatever storm comes your way.
GRIFFETH: Having said that, what do you like right now?
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HARRINGTON: Good question. OK, so that`s loaded from me, right? I always like dividend stocks, because I`m a dividend investor. I like dividend stocks.
But that`s not — I`m a little joking. I like stocks with really high free cash flow yields and some of those stocks are going to choose to pay it back in a dividend and some are going to buy back shares or improve their businesses, but I love things with that high free cash flow yield. And we actually manage two portfolios, one is a dividend stock portfolio and one is a disciplined growth portfolio, but the hurdle is a high free cash flow yield.
GRIFFETH: Yes.
HARRINGTON: These are the companies pumping out high free cash flow, they can actually skate through 2008, 2009. And I don`t mean the share price skate through, but the business skate through.
GRIFFETH: Very good. Jenny Harrington with Gilman Hill Asset Management, good to see you again. Thanks for joining us.
HARRINGTON: Thanks for having me.
GRIFFETH: You bet.
HARRINGTON: Good night.
HERERA: Here`s a look at the day`s final numbers on Wall Street. It wasn`t pretty. The Dow was down for 494 to close just above 26,000, Nasdaq was off 123, and the S&P 500 slid 52.
That is NIGHTLY BUSINESS REPORT tonight. I`m Sue Herera. Thanks for joining us.
GRIFFETH: I`m Bill Griffith. Have a great evening. See you tomorrow.
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