Welcome to the last trading day of the quarter. And what a quarter it’s been. We’ve seen quite a turnaround after the market tanked late last year on worries about global economic growth stemming from the U.S.-China trade war and concerns about a potentially too-aggressive Fed.

One leg of the market’s recovery this quarter has come from increasing optimism that the U.S. and China can get a deal done to normalize trade relations affecting billions of dollars of goods flowing around the globe. That optimism extended into this morning after Treasury Secretary Steven Mnuchin tweeted that talks in Beijing had been “constructive.”

The other major leg of support has been a Fed that has adopted a decidedly dovish stance, helping boost the S&P 500 by more than 12% this year through Thursday’s close. One reason the central bank has given for holding off on more rate hikes has been muted inflation.

The latest inflation data, from this morning, showed the core personal consumption expenditures price index, which strips out volatile food and energy prices and is the Fed’s preferred measure of inflation, increased 0.1% month-over-month in January. That’s a lower reading than a Briefing.com consensus expectation of 0.2% and continues to reinforce what the Fed has been saying about muted inflation.

Meanwhile, ride-hailing service Lyft is hitting public trading this morning, beating its rival Uber to an initial public offering. The company, now valued at about $24 billion, has priced its shares at the top of its range at $72 per share. Shares will trade on the Nasdaq under the ticker “LYFT.”

In other corporate news, CarMax, Inc. (NYSE: KMX) shares were up more than 5.8% this morning after the used-car retailer’s earnings beat expectations. Revenue was below analyst estimates.

Optimism on Trade

After taking a back seat recently, the optimism on the trade front was rekindled on Thursday as Mnuchin and U.S. Trade Representative Robert Lighthizer were in Beijing for a fresh round of talks between the world’s two largest economies.

Reuters reported that China has made unprecedented proposals on issues including forced technology transfer but that there wasn’t a definite timetable for a deal. Another round of negotiations is scheduled for next week in Washington.

This continues a pattern we’ve been seeing where drips of seemingly good news come out and the market reacts positively but continues to be in the dark about the exact nature of where the negotiations are at and what key issues are getting hammered out.

President Trump has already extended a deadline that could have seen the U.S. increase tariffs on Chinese goods, and it remains to be seen how much longer the talks will drag on. It’s possible that investor fatigue about the trade issue has set in, limiting Thursday’s gains.

Pessimism on the Economy

But it also appears that worries about the economy probably put a cap on any upside for Wall Street yesterday as well.

Even as the Fed has adopted a dovish stance and European central bankers have also stood pat on interest rates, keeping relatively easy money flowing to companies, monetary policy makers on both sides of the Atlantic ocean have also reduced their economic forecasts.

In line with the sobering assessments, the U.S. government on Thursday said the economy expanded less than previously thought in the final quarter of last year, with its third estimate of Q4 GDP showing an annualized rate of increase of 2.2% compared with a previous reading of 2.6%. A Briefing.com consensus had expected a reading of 2.5%.

Inversion in the Yield Curve

The worry about economic growth has been tempering some of the enthusiasm on Wall Street recently, with the recent concerns coming from the U.S. Treasury market. As investors don’t expect an interest rate hike from the Fed anytime soon, and indeed have been increasing their bets in the futures markets of a rate decrease, the yield on the benchmark 10-year Treasury has fallen below that of the 3-month Treasury.

This atypical pattern hasn’t happened for the 3-month/10-year spread since 2007 and often precedes recessions. But it’s not a sure bet. Just because we’re seeing an inversion doesn’t necessarily mean we’re headed into a recession. Recessions do happen as a natural part of the business cycle, but an inversion doesn’t mean one is imminent.

And investors did get some respite Thursday as the yield on the 10-year Treasury rose a bit, even though it didn’t pop above the 3-month yield.

The rise in the 10-year yield and the optimism about the trade situation seemed to outweigh the worries about the yield curve inversion and the dismal GDP data to help bring down Wall Street’s main fear gauge lower. The Cboe Volatility Index (VIX) fell below 14.5, markedly lower than its high near 18 earlier in the week.

Because it’s the last day of the quarter, there may be some extra volatility heading into the close as investors and traders may make larger-than-normal trades to adjust their portfolios before the quarter closes.

Taking the Shine Off: Palladium futures have dropped precipitously this week after an industry leader said recent buying had left the metal, used in catalytic converters, in a bubble. However, it appears there is still support for palladium from a tight supply picture. Data Source: CME Group Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

How the Mighty Have Fallen: In the world of commodities, you’ve probably heard of oil, gold, soybeans, and wheat. But consider palladium. The main use for the silvery-white metal is in catalytic converters in the automobile industry. It’s also used in jewelry and electronics. Palladium has been on a tear recently, with spot prices hitting a record above $1,600 an ounce, amid expectations of increased demand because of stricter emissions standards and a potential ban on exports from Russia. But this week is a different story, as investors seem to have decided to book some profits. Spot palladium lost more than 7% Thursday to just over $1,340, after having fallen more than 6% Wednesday in what had been its biggest daily percentage loss in more than two years, Reuters reported, noting selling pressure came as economic concerns and a weak technical picture prompted profit taking. Pressure on the metal also comes after the head of a major mining company said the recent price surge had created a “bubble,” according to the Financial Times.

Biotech M&A: This year so far has been pretty good for biotech companies in terms of merger-and-acquisition activity. Of all the M&A deals announced so far this year, health care companies account for a third of them in terms of dollar value, according to investment research firm CFRA, and the deals aren’t coming cheap for buyers. Targets in biotech M&A deals announced this year are getting an average of a 111% premium to what they were trading at a weak prior to the deal announcement. That’s well over the 35% premium all M&A deals are averaging year to date. “Biotech companies and their drugs have grown in popularity as patient demand for their life-saving therapies continues to rise and pricing power remains intact due to limited competition,” CFRA said. “These companies have become quite attractive takeover targets as free cash flow has improved over the years and valuations contracted.”

A Tale of Two Sectors: The stabilization and slightly higher move in the 10-year Treasury yield Thursday meant different things for different sectors. Financial stocks got some relief, forming the second-best-performing SPX sector of the day, behind Materials. Banks tend to do better when longer-term interest rates are higher as they can charge more for loans. On the other end of the spectrum, the Utilities sector slid 1.25% as the sector is often considered a bond proxy, meaning that when interest rates on less risky government debt rise, those shares often slump because Treasuries become more attractive.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

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