The Markets This Week

Most of us have been asked at some point if we would jump off a bridge if all our friends did. Last week, the market demonstrated what happens when investors answer “yes.”

Stocks were quietly heading toward new highs Friday morning when Apple (ticker: AAPL), Alphabet (GOOGL), Facebook (FB), and other tech names suddenly fell. By the close, each had lost more than 3%, while the tech-heavy Nasdaq Co mposite had dropped 113.85 points, or 1.8%, to 6207.92. Stranger still, the S&P 500 declined by less than 0.1%, to 2431.77, while the Dow Jones Industrial Average rose 89.44 points, or 0.4%, to 21,271.97, a new all-time high. (The three benchmarks finished the week down 1.6%, down 0.3%, and up 0.3%, respectively.)

What sparked the tech wreck? Some market participants pointed to a Goldman Sachs report that circulated Friday highlighting an increase in “mean-reversion risk” for FAAMG stocks—a quintet of highflying names including Facebook, Amazon.com (AMZN), Apple, Microsoft (MSFT), and Google parent Alphabet. Then there was a report from noted short seller Andrew Left, of Citron Research, targeting chip maker Nvidia (NVDA), whose shares have surged 50% this year. Friday, they fell 6.5%, to $149.60.

More likely, the problem was love. Tech stocks have been the object of investors’ ardent affection for much of this year, to the exclusion of much else, and too much love can be a dangerous thing. At the end of May, three of the fourth most “crowded” large-cap industry groups hailed from the information-technology sector, according to Credit Suisse strategist Lori Calvasina, who tracks sell-side stock ratings, stocks overweighted in mutual funds, and hedge fund net exposure to find industries that appear over-owned. While tech stocks have attracted an abundance of buyers for a while, which has pushed prices up, Calvasina says she has noticed a change in the tone of conversations around the group. “People have been getting more concerned” about the stocks’ popularity and valuations, she says.

Calvasina downplays the risk, however, that large-cap tech prices will reach bubble proportions, as happened in the year leading up to the 2000 dot-com crash. The reason: Tech is nowhere near as expensive as it was at the 2000 peak. In fact, it isn’t even as expensive as the health-care sector was in 2015, when she lowered her health-care rating to Sell from Neutral. “You don’t have a valuation problem,” she says of tech.

Even as investors dumped the FAAMGs and their cousins, they were snapping up financial and energy shares, which helps to explain the Dow’s and S&P’s seeming obliviousness to the carnage next door. The S&P 500 Financial Index rose 1.9%, while the S&P 500 Energy Sector climbed 2.5%. Financials and energy have gone begging for love this year; they have been two of the worst performers. “A lot of stocks were being looked over,” says Rhino Trading Partners Chief Strategist Michael Block. “You see how everyone is positioned and go the other way.”

The banks also benefited, following former FBI Director James Comey’s testimony on Thursday, from a sense that President Donald Trump’s policy goals might not be dead on arrival after all, a point driven home when the House of Representatives passed a bill that would roll back many of the financial regulations passed in the wake of the financial crisis, says Jason Ware, chief investment officer at Albion Financial Group. He says that banks would also benefit if longer-term bond yields start to rise relative to short-term rates. This is known as a steepening yield curve.

Whether that happens could have much to do with the Federal Reserve’s decision on interest rates at its monetary-policy meeting this week. Financial stocks are among the bigger beneficiaries of higher interest rates, especially when longer-term Treasury yields rise with them. The Fed is widely expected to raise rates another quarter of a percentage point on Wednesday. If Fed chief Janet Yellen can pull off a hike and convince markets that the U.S. economy is still growing steadily, Friday’s tech wreck could be just a hiccup on the way to higher stock markets.

(Source: Barrons Online)

The Markets This Week

The bull case for stocks took its biggest hit of the year last week, but nothing seems able to prevent this market from reaching new highs.

The Dow Jones Industrial Average advanced 12.01 points, or 0.6%, to close at 21,206.29, while the Standard & Poor’s 500 rose to 2439.07. The Nasdaq Composite gained 1.5% to 6305.80. All three indexes closed the week at record highs.

This comes despite economic data that cast shade on what has kept many an investor bullish on stocks this year. Despite the death of the so-called Trump trade—the idea that stocks would get a boost from tax cuts, fiscal spending, and deregulation—optimistic investors could always point to a potential pickup in economic growth, even without policy action. Friday’s payrolls report, which showed that a mere 138,000 U.S. jobs had been created in May, wasn’t exactly fatal for that view, but it certainly presents a quandary.

“This is more worrisome than the twist and turns of politics,” says Morgan Stanley Investment Management portfolio manager Andrew Slimmon.

Still, the Federal Reserve Bank of Atlanta’s closely watched GDPNow forecast model is predicting second-quarter economic growth of 3.4%—none too shabby, unless compared to the 4% growth it was predicting the day before the payrolls data were released. Slimmon says he’ll be watching closely to see if that number rises or falls as new data are released in the coming weeks. “We need data that validate 3% GDP growth, or the market will go nowhere,” says Slimmon, who remains optimistic about future gains.

What alternative do investors have? The 10-year Treasury note yields just 2.16%. With payouts that meager, stocks still possess their charms, especially when the U.S. economy continues to grow modestly and the rest of the world looks stronger, says Manning & Napier senior analyst Greg Woodard. “Equities seem to be a reasonable investment,” he says. “The path of least resistance” is for stocks to go higher.

That may be less worrisome than it sounds. Doug Ramsey, chief investment officer at the Leuthold Group, notes that the market’s rally is quite broad, despite concerns that too many of the recent gains have come from giants like Apple (ticker: AAPL) and Amazon.com (AMZN). He notes that it’s not just the Dow industrials, the S&P 500, and the Nasdaq Composite that are hitting new all-time highs, but that the Dow Jones Composite Average and the Dow Jones Utilities Average are as well, while the Dow Jones Transportation Average and the small-company Russell 2000 are within a stone’s throw of theirs.

Even the advance/decline line, a measure of advancing stocks versus declining ones, is sitting at a record high, something that has historically meant that a bull market has at least another three to six months to go. Ramsey says he wouldn’t be surprised if the S&P 500 hit 2,600 before the end of the summer, even if he can’t offer a reason why.

“I tend to like rallies that are somewhat mysterious,” he says. “It means that the market is [anticipating] good news that we’ll read about weeks or months down the road.”

It’s just a question of what that good news will be.

(Source: Barrons Online)

The Markets This Week

If a scandal breaks out in Washington, and the market doesn’t react, did it really happen?

The scandal, of course, was the abrupt firing of FBI Director James Comey last week, which provoked an outcry from Democrats—and even a few Republicans—but was dismissed by President Donald Trump as the removal of a “showboat.” The headlines continued throughout the week—some even drew comparisons to Richard Nixon—but stocks couldn’t be bothered to respond one way or the other. “The market is telling you it’s background noise,” says TD Ameritrade strategist JJ Kinahan.

It certainly was another yawner despite the pyrotechnics in Washington. The Dow Jones Industrial Average fell 110.33 points, or 0.5%, to 20,896.61 last week, while the Standard & Poor’s 500 index declined to 2390.90. The Nasdaq Composite rose 0.3% to 6121.23. The CBOE Volatility Index, or VIX, closed at 10.41 after falling into the single digits earlier in the week.

It wasn’t all quiet. Retailers such as Macy’s (ticker: M), Nordstrom (JWN), and J.C. Penney (JCP) suffered double-digit losses after releasing earnings, but warns Daniel Chung, CEO of asset manager Alger, don’t blame their disappointing sales on consumer weakness. “It’s the internet, not [a lack of] consumer strength,” he says. As if to serve as confirmation, retail sales grew at a 0.4% clip last month, weaker than the 0.6% that economists had predicted, but not low enough to worry.

(Source: Barrons Online)

The Markets This Week

Taxes got the attention last week, but it was the alchemy of earnings and elections that spurred stocks to their best week in months.

The week got off to a rocking start, with the Dow leaping 216 points on Monday following the relatively benign results in the French presidential election—benign because only one radical anti-European candidate made it through to the second round. That, says Marketfield Asset Management CEO Michael Shaoul, allowed the market to capture gains that probably would have come earlier if it weren’t for the risk that something really bad would happen. “In a world without the French elections, we would be where we are today, just more smoothly,” Shaoul says.

But the good news didn’t stop there, as corporate earnings continued to shine. It wasn’t just that companies like McDonald’s (ticker: MCD) and Ingersoll-Rand (IR) have been reporting better-than-expected profits, but that guidance is better as well. Bank of America Merrill Lynch strategist Dan Suzuki notes that for a second month in a row more companies have offered above-consensus guidance than disappointing forecasts; historically, the reverse has been true. Still, it wasn’t that the week was without its downers. Donald Trump’s tax plan lacked details, and failed to get the market moving, while first-quarter gross domestic product data was even worse than expected: The U.S. economy grew just 0.7%, below economist forecasts of 1%. In a note to clients, Strategas Research Partners’ Daniel Clifton called the sluggish growth “the U.S. economy’s warning shot to the Republicans,” who need to move past the infighting that scuttled health-care reform and pass their tax plan if they hope to get the economy growing at a rate faster than 2%—and retain their majority in Congress. “If the squabbling continues, growth remains restrained, and, in a lower voter turnout midterm election, the Republican majority will be lost,” Clifton explains.

If Republicans can push something through, it will probably mean a further boost for corporate earnings, especially if the border-adjusted tax remains sidelined. That could ultimately make all the difference for a bull market that’s already long in the tooth. “If you’re buying the market here at the highs, you have to be confident that you get almost everything that’s been promised,” says Ian Winer, head of equities at Wedbush Securities.

Or at least almost everything.

Source: Barrons Online

The Markets This Week

Stocks fell 1% last week in quiet trading, with many market participants out for religious observances. Worries about the war in Syria, North Korean saber-rattling, and the coming French elections had investors reining in riskier positions and heading for safe havens.

Real estate, utilities, and consumer-staples stocks were the only sectors that rose last week. Financials—and banks in particular—fell, despite strong earnings reports from the industry’s big kahunas.

Tech stocks, which are out of favor lately, fell 1.4%. The Standard & Poor’s 500 Information Technology Index has finished lower 10 days in a row, only the fourth such streak since 1989, when daily data on the sector was first posted, according to Bespoke Investment Group. Tech stocks rallied in the three months following the three prior pullbacks, all deeper, BIG wrote in a recent report. Tech is down only 2% from its recent highs, and hasn’t yet surpassed the peak set in 2000 during the dot-com boom.

The Dow Jones Industrial Average declined 203 points, or 1%, to 20,453.25 over the four-day span. (The market was closed Friday in observance of Good Friday.) The Nasdaq Composite dropped 1.2%, to 5,805.15.  Steve Sosnick, senior trader at broker-dealer Timber Hill, notes that much of the damage came in the afternoon Thursday, as traders squared positions ahead of the three-day weekend. “Some people didn’t want to hold positions ahead of a long weekend,” given geopolitical concerns, he says.

(Source: Barrons Online)

The Markets This Week

It was the quarter the Trump trade died…and the market didn’t seem to mind.

Yes, the Dow Jones Industrial Average rose 4.6% to 20,663.22 during the first three months of 2017, its sixth straight quarter of gains, while the Standard & Poor’s 500 index gained 5.5% to 2,362.72, and the Nasdaq Composite climbed 9.8% to 5,911.74, its best quarter since 2013.

But the market produced those gains without much help from the sectors that surged following the November presidential election—the ones that were supposed to benefit the most from the policies proposed by President Donald J. Trump. The S&P 500 Industrials index, which was supposed to benefit from increased infrastructure spending, rose 4%; financials, which would benefit from scaled-back regulation, advanced just 2.1%; and energy tumbled 7.3%. Instead it was the anti-Trump stocks that led the way higher, with technology gaining a whopping 12%. “Tech was left for dead after the election,” says Rhino Trading Partners’ Michael Block. In 2017, it has been the market’s best performer.

The rotation out of what had worked and into what hadn’t has removed a lot of the excesses from the market. The S&P 500 dipped 0.04% during March, and Block notes that as of Thursday night, 50 of the 997 stocks in the Russell 1000 index (yes, 997) were overbought based on the 14-day Relative Strength Index, which measures the speed of price movements, while just 11 were oversold. “That leaves the overwhelming majority in the middle,” Block says. “We are banging around in a range here.”

And it isn’t just stocks that have been doused with a bucket of cold water. The latest American Association of Individual Investors survey shows the percentage of bullish respondents fell to 30.2%, 16 points lower than the start of the year, while bearish sentiment rose to 37.4%, 12.2 points higher. “The market got ahead of itself and was due for a pause,” says SunTrust strategist Keith Lerner. “The good news is that a lot of the sentiment measures have cooled off.”

And why shouldn’t they? Just over a week ago, Trump’s health-care plan died in Congress, and investors were worried it meant the remainder of the administration’s pro-growth agenda could hit roadblocks on the way to becoming law—or not. Those concerns caused the S&P 500 to drop 1.2% on March 21, only the second move of 1% or more in either direction this quarter, the fewest such moves since 1995. That alone was enough to worry investors in the AAII survey: 43% said the lack of downward volatility made them more bearish.

You wouldn’t know it from looking at the market last week, however, as stocks bounced back from the previous week’s losses. The Dow Jones Industrial Average advanced 0.4% last week, while the Standard & Poor’s 500 index rose 0.8%, and the Nasdaq Composite gained 1.4%. Natixis Global Asset Management strategist David Lafferty attributes the rebound to Trump’s ability to pivot away from the health-care disappointment to talk about tax cuts. “The market changes its narrative when Trump changes his mind,” he says.

But maybe the rally has less to do with Trump and more to do with the fact that global economic data has been consistently strong. Last week, the final reading of fourth-quarter gross domestic product showed growth of 2.1%, above forecasts for 2%. The Conference Board’s measure of consumer confidence surged to its highest level since 2000, and that was just in the U.S. SunTrust’s Lerner notes that 84% of countries have been showing expanding manufacturing activity, the best level since 2014. “A solid synchronized global recovery has been in place that goes beyond the winner of the U.S. election,” he says.

The Trump trade is dead. Long live the Trump trade.

(Source: Barrons Online)

The Markets This Week

Late Friday, Republican leaders pulled their health-care bill before it could be voted on. That hasn’t pulled the rug out from under the bull market, however.

Sure, the Dow Jones Industrial Average dropped 317.90 points, or 1.5%, to close at 20,596.72 last week, its largest weekly tumble since September 2016. The Standard & Poor’s 500 index fell to 2343.98, while the Nasdaq Composite slipped 1.2%, to 5828.74.

And that loss would seem to justify the talk on the Street that the failure to repeal Obamacare jeopardizes the Trump administration’s tax and infrastructure plans—and could cause the market to crater. The fact that the worst-performing stock in the S&P 500 on Friday was Martin Marietta Materials (ticker: MLM), which supplies the gravel and stones used in roads and other infrastructure projects, would only seem to add to the evidence.

Yet Friday’s drop was muted. The Dow, which was the biggest loser among the major averages, fell just 59.86 points, or 0.3%, while the Nasdaq rose 0.2%. “Markets breathed a sigh of relief on the notion that if Republicans can agree to [put the ACA aside] and move on towards tax reform and deregulation, then this is bullish,” says Jason Ware, chief investment officer at Albion Financial Group.

In fact, the major damage was done on Tuesday, when the S&P 500 fell 1.2%, ending its 160-day streak without a 1% drop. And while that decline provided ammunition for those predicting an imminent collapse, it was simply one bad day. “It is, of course, natural,” says Daniel Chung, CEO of asset manager Alger. “Things literally can’t go up forever.”

That hasn’t stopped the bears from looking for danger in every piece of data. Bank lending, for instance, has slowed since the election, and some observers have pointed to that fact as a sign that the animal spirits that were supposed to juice the economy have been a mirage. Deutsche Bank economist Torsten Sløk, however, notes that bank lending is a lagging indicator, and that it usually follows the ISM Manufacturing survey with a delay. The fact that the ISM data has been rising—it recently hit its highest level in two years—suggests that bank lending could increase in the months ahead. “It’s a red herring,” Sløk says.

(Source: Barrons Online)

The Markets This Week

Late Friday, Republican leaders pulled their health-care bill before it could be voted on. That hasn’t pulled the rug out from under the bull market, however.

Sure, the Dow Jones Industrial Average dropped 317.90 points, or 1.5%, to close at 20,596.72 last week, its largest weekly tumble since September 2016. The Standard & Poor’s 500 index fell to 2343.98, while the Nasdaq Composite slipped 1.2%, to 5828.74.

And that loss would seem to justify the talk on the Street that the failure to repeal Obamacare jeopardizes the Trump administration’s tax and infrastructure plans—and could cause the market to crater. The fact that the worst-performing stock in the S&P 500 on Friday was Martin Marietta Materials (ticker: MLM), which supplies the gravel and stones used in roads and other infrastructure projects, would only seem to add to the evidence.

Yet Friday’s drop was muted. The Dow, which was the biggest loser among the major averages, fell just 59.86 points, or 0.3%, while the Nasdaq rose 0.2%. “Markets breathed a sigh of relief on the notion that if Republicans can agree to [put the ACA aside] and move on towards tax reform and deregulation, then this is bullish,” says Jason Ware, chief investment officer at Albion Financial Group.

In fact, the major damage was done on Tuesday, when the S&P 500 fell 1.2%, ending its 160-day streak without a 1% drop. And while that decline provided ammunition for those predicting an imminent collapse, it was simply one bad day. “It is, of course, natural,” says Daniel Chung, CEO of asset manager Alger. “Things literally can’t go up forever.”

That hasn’t stopped the bears from looking for danger in every piece of data. Bank lending, for instance, has slowed since the election, and some observers have pointed to that fact as a sign that the animal spirits that were supposed to juice the economy have been a mirage. Deutsche Bank economist Torsten Sløk, however, notes that bank lending is a lagging indicator, and that it usually follows the ISM Manufacturing survey with a delay. The fact that the ISM data has been rising—it recently hit its highest level in two years—suggests that bank lending could increase in the months ahead. “It’s a red herring,” Sløk says.

(Source: Barrons Online)

The Markets This Week

The Standard & Poor’s 500 index ended a six-week winning streak as tumbling oil prices and a looming Federal Reserve rate hike caused stocks to stumble.

The S&P 500 fell to 2,372.60 last week, while the Dow Jones Industrial Average dropped 102.73 points, or 0.5%, to 20,902.98, their largest declines so far this year. The Nasdaq Composite dipped 0.2% to 5,861.73, its first weekly decline in seven weeks.

It’s a wonder the losses weren’t any bigger. The week started with the release of the widely criticized Republican plan to repeal and replace Obamacare, finished with a jobs report that virtually guarantees a rate hike at next week’s Federal Open Market Committee meeting, and saw oil drop below $50 a barrel. The downward pressure on the market, however, was limited.

That was, in part, because of the strength of the employment data, which was neither too hot nor too cold. The U.S. economy added 235,000 jobs in February, beating economist forecasts for 200,000, but not the blowout number that could have forced the Fed to raise rates by more than a quarter percentage point. If anything, the data just confirm what we’ve known for a while now: The economy is growing, and one rate hike is unlikely to do much damage, says MKM Partners strategist Michael Darda, who called the March Fed meeting “largely irrelevant.”

There’s still a strong likelihood of some sort of economic stimulus plan from the Trump administration sometime this year. Yes, it might be delayed by wrangling over the Republican proposal to repeal and replace the Affordable Care Act, which was met with derision from Democrats, moderate Republicans, and hardcore conservatives. But the fact that tax cuts and infrastructure projects are even being considered at a time when the U.S. economy is adding 200,000-plus jobs a month is “unprecedented,” says Richard Bernstein, chief investment officer at Richard Bernstein Advisors. “We’re going to add more stimulus on top of this.”

Still, a sense of unease hangs over the market, especially after the price of oil fell 9.1% last week, sinking to its lowest level since November. And the market is certainly overdue for a selloff. The S&P 500 generally drops 3% to 5% every two to three months, says Binky Chadha, chief global strategist at Deutsche Bank. The index has now gone more than four months without such a decline. Tumbles of 5% or more, meanwhile, have historically occurred every five to six months, Chadha says, something that hasn’t occurred since the Brexit vote eight months ago.

But just because the market is due for a correction doesn’t mean it will get one. While sentiment has played a big part in the rally, so has the fact that investors didn’t appreciate recent economic strength, says Chadha. As long as that continues, bouts of weakness should remain relatively muted. “Consensus forecasts have underestimated the recent rebound in growth and remain subdued, suggesting positive surprises are likely to continue in the very near term, so we don’t expect a pullback,” he says.

Never mind the unease.

(Source: Barrons Online)

The Markets This Week

Like an English major wading through James Joyce’s Ulysses, the market last week was trying to make sense of overlapping narratives. That didn’t stop it from extending its weekly winning streak.

The Dow Jones Industrial Average breached the 21,000 mark for the first time, gaining 183.95, or 0.9%, to close the week at 21,005.71—its fourth straight weekly gain. The Standard & Poor’s 500 index rose to 2383.12, and the Nasdaq Composite advanced 0.4%, to 5870.75; both have been up for six straight weeks.

Much of the action was compressed into one day. After barely moving last Monday and Tuesday, the Dow surged more than 300 points on Wednesday, its largest one-day point gain since Nov. 7, just before the election that swept Donald Trump into office. That the big gain followed Trump’s speech to Congress Tuesday night wasn’t lost on many observers, who noted its conciliatory tone. “Trump became presidential,” Strategas Research Partners Dan Clifton wrote in a note to clients last week. The market appeared to agree, even if some of the enthusiasm was tamped down by the need for Attorney General Jeff Sessions to recuse himself over his unacknowledged contact with Russia’s ambassador during the presidential campaign.

But it was more than just a speech that got the market’s juices flowing. Barclays strategist Keith Parker points to the slew of economic data that was released in the hours following the address. A survey of Chinese manufacturing activity rose for the eighth month, while a similar measure in the U.S. hits its highest reading in nearly three years. “You have synchronized developed-market and emerging-market growth,” Parker says. “That’s a big driver of the rally.”

Is sentiment getting too frothy? The big gains have prompted strategists to lift their S&P 500 projections, with Bank of America Merrill Lynch taking its target to 2450, from 2350, and Stifel taking its to 2500, from 2400. And then there’s Snap (ticker: SNAP). Its initial public offering went off without a hitch after all, as the stock soared 44% on its first day of trading, from the offering price of $17 to a closing price of $24.48. The move meant that Snap left $1.5 billion on the table, the fourth largest amount ever, according to data from University of Florida finance professor Jay Ritter.

Yet Snap, at this point, remains something of a one-off, as others remain reluctant to go public. And Merrill Lynch’s Sell Side Indicator, a measure of Wall Street’s bullishness, still sits in neutral territory despite hitting its highest level in 16 months, a level that in the past has preceded an average gain of 17% over the following 12 months.

Yes, the market narrative has many strands. But for now, they’re pointing to a happy ending.

(Source: Barrons Online)