The Markets This Week

Nine years ago, the market decided it couldn’t go any lower. Now we’re still wondering just how high it can go.

On March 9, 2009, the Standard & Poor’s 500 index closed at 676.53, in what would prove to be the closing low of the financial crisis. And while the index has more than quadrupled since then, it proved that it still has some juice left in its tank.

The S&P 500 gained 3.5%, to 2786.57, last week, while the Dow Jones Industrial Average rose 3.3%, to 25,335.74, and the Nasdaq Composite climbed 4.2%, to 7560.81.

Even more impressive was the way the market earned those gains. We expected it to rise when the Trump administration’s tariffs were watered down to exempt Canada and Mexico. The rally on Friday, when the Dow gained 440.53 points, was another thing altogether. It came after Friday’s blockbuster payrolls report, with 313,000 jobs added to the U.S. economy, well above the 200,000 predicted by economists, and slightly weaker-than-expected wage growth—a combination that implies healthy growth and limited inflation pressures.

You’d expect the market to open higher with a number like that—which it did—but the trend following the 10 strongest reports since 1998 has been for the market to open up, rally a bit, and then give back most of the gains, according to Bespoke Investment Group data. That certainly wasn’t the case this time. And the fact that the data was almost the reverse of the previous month’s, which kick-started a correction with concerns of a more proactive Federal Reserve, didn’t go unnoticed.

“The market was gearing up for the worst, and when it doesn’t happen, you get 400 points in the Dow,” says Paul Hickey, Bespoke’s co-founder.

That doesn’t mean that the market is going straight up from here. Quincy Krosby, chief market strategist at Prudential Financial, notes that the concerns that have lingered over the market—inflation, rate hikes, and rising bond yields, among them—haven’t gone away, and there’s still a lot of data to come that could shake things up again.

The consumer-price index is set to be released next Tuesday, and it will be followed by the producer-price index on Wednesday. And even if wage growth was softer, job growth like February’s will eventually lead to higher wages. “This is a data-dependent market,” she says. “It will continue to feel vulnerable as inflation-related data is released.”

But vulnerable isn’t the same thing as weak. The Nasdaq Composite closed at an all-time high last week, while the S&P 500 and Dow are just 3% and 4.8%, respectively, below their own records. The Nasdaq has been given a lift by its heavy weighting to technology—the sector has gained more than 12% during the past month—and its lack of exposure to the likes of utilities and consumer staples, which have gained less than 1% during that period. But make no mistake, if the Nasdaq can do it, so can the S&P 500 and the Dow. “It’s not like other areas haven’t been moving up,” says Instinet’s Frank Cappelleri. “They just haven’t as quickly.”

Give them time.

(Source: Barrons Online)

The Markets This Week

Stocks ended the week on a strong note as the Dow Jones Industrial Average gained 348 points, or 1.4%, on Friday to finish at 25,310. The Standard & Poor’s 500 index rose 43 points, or 1.6%, in the session to end the week at 2,747, while the Nasdaq Composite was up 1.8% to 7,337.

Equity investors lately have focused on the bond market and the upward move in the 10-year Treasury note yield toward 3%. Higher bond yields—which often reflect expectations of rising inflation—have been viewed negatively, so the drop in the 10-year yield by about 0.05 percentage point on Friday, to 2.87%, provided support to stocks.

For the week, the Dow industrials added about 91 points, or 0.4%, and the S&P 500 rose 0.6%. Both indexes now have recouped more than half of what they lost during the market pullback that ended on Feb. 8. That move had left the S&P 500 about 10% below its peak of 2,873 set on Jan. 26.

(Source: Barrons Online)

The Markets This Week

Last week, the S&P 500 gained 4.3%, to 2732.22, its best showing in more than five years. Not to be left out of the fun, the Dow Jones Industrial Average climbed 1028.48 points, also 4.3%, to 25,219.38, while the Nasdaq Composite jumped 5.3% this week, to 7239.47.

Even better, the S&P 500 closed the week on a six-day winning streak, gaining 5.9%. The only problem: After a run like that, the market may not have the juice to push much higher. “This seems like it’s a bit too aggressive,” says MKM Partners strategist Michael Darda. “Anybody with a contrarian eye would say this is too much, too fast.

Market psychology could play a big part in where we go next. Investors who bought stocks on the first day of the year have gained 2.2%, and are probably not too worried. But if they chased stocks out of the gate this year, they could be sitting on losses. Some might hold on in the expectation of further gains, but others might decide to take profits. Either way, the wild ride will make everyone reconsider what they own and why they own it—and whether they still should. “Everyone has to reset,” says Instinet’s Frank Cappelleri.

More volatility would not be a surprise—or out of the ordinary. Consider: In 2017, the S&P 500 had just eight 1% moves in either direction; this year, there have already been 10, Cappelleri says. At this rate there’d be 78 1%-plus moves in 2018. While that seems unlikely, it’s not out of the question, as the rolling 12-month average of 1% moves spiked over 160 by the end of the financial crisis in 2009. “This suggests there’s a high probability that we’ll see more large moves in 2018,” Cappelleri says.

But a pickup in volatility doesn’t have to be a death knell for the bull market, he says. In 1996, a year that followed one that had been as calm and as strong as 2017, the number of 1% moves picked up, but the S&P 500 still gained 20.3%. So don’t be surprised if the market finishes higher this year.

Just don’t expect it to be easy.

(Source: Barrons Online)

The Markets This Week

So that’s what a correction feels like. Yes, it was painful, but there was a curious sensation about this one.

It’s been a long time since we’ve experienced a drop like we did last week. The Dow Jones Industrial Average tumbled 1330.06 points, or 5.2%, to 24,190.90 last week, its worst since Jan. 2016. The Standard & Poor’s 500 index slumped 5.2% to 2619.55. The Nasdaq Composite dropped 5.1% to 6874.49. On Thursday, both the S&P 500 and Dow had dropped more than 10% from their Jan. 26 high, the definition of a correction, though they made back some of those losses in a late-Friday rally.

And what a strange correction it has been. Unlike the past ones since the end of the financial crisis, this correction was caused by fears of too much growth, rather than concerns that there wouldn’t be enough. When the S&P 500 tumbled 13% from Nov. 3, 2015, through Feb. 11, 2016, it was caused by a collapse in oil prices that then spread into high-yield bonds, raising the specter that a recession was looming. Not this time. Economic data continue to come in strong—the Atlanta Fed’s GDPNow indicator estimates 4% growth this quarter—while companies continue to report strong earnings and give upbeat guidance even when the benefits of tax cuts are excluded. Even the high-yield bond market is refusing to act as if a crisis is at hand.

Sure, we can cite a litany of reasons for the correction. The market was overbought and overvalued. Investors had misjudged inflation and miscalculated how high bond yields could go. But really, we were just overdue. Too many traders had bet the market’s calm would last forever. It’s probably the most overused statistic about this market, but the S&P 500 had gone more than a year since its last drop of 5% or more.

So, a correction is what we got—and an uncomfortable one, just like it’s supposed to be. “They should be painful,” says Thomas Digenan, Head of US Intrinsic Value Equities at UBS Asset Management.

Still, the market needs a narrative—and so it’s latched on to whatever’s handy, in this case that the Fed is so far behind the curve that inflation will spike and bond yields will soar. As with many good stories, there’s a kernel of truth to this one. Inflation is picking up, bond yields are heading higher, and the Fed is behind the curve, says Richard Bernstein, chief investment officer at Richard Bernstein Advisors. Many had been reluctant to embrace that idea. Now they may have no choice. “The employment report destroyed the narrative that there would never be inflation again,” says Bernstein, who doesn’t foresee the correction becoming a bear market. “And that caused chaos at this point.”

History suggests that this correction isn’t the end of the bull market, despite the chaos. Part of that has to do with what came before the rally—a long period of what market technicians call consolidation.

From May 19, 2015, through July 11, 2016, a period that included a correction, the Dow went nowhere, explains Randy Watts, chief investment strategist at research shop William O’Neil. The next day, the benchmark hit a new high, and the Dow went on to gain 45% over the next 80 weeks.

Watts sees more similarities to a breakout that occurred in 1995. It occurred well into a bull market—just like the current one—and gains have been similar at the same period of time. And each of those initial rallies came with no hiccups—neither had even a 5% drop before their first correction. That bull market ended up running for 255 weeks, with the Dow nearly tripling during the same period. If the Dow follows that pattern, there could be more upside ahead.

Trading action suggests that the market could be close to finding a bottom. After hitting a new all-time high on Jan. 26, the S&P 500 had tumbled through its 20-day moving average a week later, and then through its 50-day on Monday. When the S&P 500 ticked below its 200-day moving average early Friday afternoon, it looked like that wouldn’t hold either. Instead, a furious rally ignited and the index finished up 1.5%. “At least it respected one technical level,” says Fundstrat technical analyst Robert Sluymer.

That doesn’t mean that the 200-day will hold again on Monday, but there’s no reason to call the end of the bull market just yet. Even Stifel Head of Institutional Equity Strategy Barry Bannister, who correctly called the correction last month, doesn’t foresee it becoming a bear for the simple reasons there’s no recession in sight.

Does that mean it’s time to rush in and buy everything in sight? No. Bannister expects a bottoming process, not a V-shaped bounce. And it might take a higher inflation print—the consumer price index is being reported on Wednesday—and a 3% yield before investors feel that the worst is over. “It could be a capitulatory moment for the stock market,” Bannister says.  Unless we’ve already had it.

(Source: Barrons Online)

The Markets This Week

Now that was a bad week—and don’t be surprised if it gets worse before it gets better.  The Dow Jones Industrial Average tumbled 1,095.75 points, or 4.1%, to 25,520.96 last week, its largest percentage decline in more than two years. The Standard & Poor’s 500 index dropped 3.9%, to 2762.13, while the Nasdaq Composite fell 3.5%, to 7240.95. Let’s just accept it—we’re in the midst of a correction, and one that was quite overdue. Don’t be surprised if the market’s major indexes decline by double digits from peaks hit just one week ago, as fear of missing out gives way to fear of staying in.

Ultimately, though, we’re betting that the pullback ends up being one to be bought, not sold—and it all goes back to economic data. For now, there’s no sign of a recession—the one thing almost guaranteed to cause a bear market—says Jason Pride, director of investment strategy at Glenmede. He notes that companies have been predicting solid earnings and sales for the rest of the year, something that should eventually support the market, too.

The selloff started last Monday, as bond yields began to rise, and kicked into high gear when (ticker: AMZN), JPMorgan Chase (JPM), and Berkshire Hathaway (BRK.A) announced plans to create a health-care company devoted to lowering costs. That news hit stocks across the health-care sector.

Then, on Friday, a better-than-expected payrolls report—one that contained signs of wage inflation—led to a 665.75-point decline in the Dow, as the 10-year Treasury yield rose to 2.852%, its highest since Jan. 22, 2014.

Based on recent trends, the market was desperately in need of a rest. The S&P 500 had gained 7.5% in just 18 trading days in 2018, putting it on pace to gain 158% this year. The index had gone 99 days without a drop of 0.6% or more before falling 0.7% on Tuesday. “This kind of thing was long overdue,” says Michael Darda, chief economist at MKM Partners.

Even great data aren’t enough to sustain stocks when the good news is already baked into prices. The Citigroup U.S. Economic Surprise Index—a metric designed to measure the extent to which economic data have been beating or missing expectations—had begun declining a few weeks ago from its recent peak. At the same time, momentum indicators such as the National Federation of Independent Business’ survey of small-business optimism have gotten so positive that they can’t get much better. Darda says. “It’s a bit foolhardy to jump on this very modest pullback as an immediate buying opportunity.”

Even after this past week’s decline, the S&P 500 has gone 404 days without a 5% pullback from its all-time high, says Chris Verrone, technical strategist at Strategas Research Partners. Such a drop would only put the index near its 50-day moving average at 2715.15. A 12% drop from the high would put the S&P 500 near its 200-day moving average, at 2532.41. “Put your thumb between those, and you get to where this shakes out,” says Veronne, who expects the pullback to be “unpleasant.”

After Friday’s drop, the S&P 500 still trades at 17.7 times forward earnings. A further drop “would reset the base for equities,” says Glenmede’s Pride. “A pullback like this is healthy.”

Even if it doesn’t feel like it right now.

(Source: Barrons Online)

The Markets This Week

The market is having a feel-good moment—maybe a little too good.

The Dow Jones Industrial Average gained 544.99 points, or 2.1%, to 26,616.71 last week, while the Standard & Poor’s 500 index rose 2.2%, to 2872.87. And the Nasdaq Composite climbed 2.3%, to 7505.77. All three indexes closed at all-time highs Friday. For the S&P 500, it was the 14th record high of the year, setting a record for the number of new highs in January.

And why shouldn’t the market feel good? Credit sparkling results from the likes of Intel (ticker: INTC) and Caterpillar (CAT). Fourth-quarter economic growth was lighter than expected, but strong enough, especially given that tax cuts could provide a boost in the quarters ahead. The Davos elite came away feeling relieved after President Donald J. Trump loudly proclaimed that “America is open for business,” and his administration is said to be readying a $1.7 trillion infrastructure plan that could be revealed next week. Party on, right?

That very well could be.

But there’s also a point where feeling good leads to bad behavior. U.S. gross domestic product rose at an annual rate of 2.6% during the fourth quarter, missing economists’ forecasts of 2.9%. But dig into the numbers and you see one area of major strength—consumer spending.  Not everyone is celebrating. Gluskin Sheff’s chief economist, David Rosenberg, notes that rising markets have made Americans feel wealthier, so they’ve been spending more and saving less. “This is a classic late-cycle development,” he says.

Consumers aren’t just spending money on clothes, cars, and whatever else catches their eye—they’re also buying stocks. Investors have put $24 billion into equities during each of the two most recent weeks, notes Bernstein strategist Inigo Fraser-Jenkins, a big change from 2017, when they withdrew $9 billion during the last six months of the year. That’s not worrisome—yet—but if investors buy stocks at just half that rate in the next four weeks, it would be. “We are not saying that will happen, but it quantifies how sentiment can change,” Fraser-Jenkins says.

(Source: Barrons Online)

The Markets This Week

Like a magician who uses misdirection to distract the audience from what really matters, the possibility of a government shutdown—still to be determined as of press time—took investors’ attention away from the slow rise in Treasury yields.

That’s too bad, because the latter might ultimately matter more for the stock market than the former.

Not that you’d know anything serious happened last week simply by looking at the benchmark returns. The Dow Jones Industrial Average gained 268.53 points, or 1.04%, to 26,071.72—just another all-time high—while the Standard & Poor’s 500 index rose 0.9%, to a record 2810.30. And the Nasdaq Composite climbed 1%, to 7336.38, also an all-time high. The S&P 500 has now closed at a record level 10 times this month, just one short of the record of 11 set in January 1964—with eight trading days to go.

Do you know what else rose to a new high, though not a record one? The 10-year Treasury yield, which closed at 2.639% Friday, its highest since July 2014. The stock market didn’t mind—obviously—and there are many who believe that yields can just keep heading higher without dinging equities, as long as increases are driven by growth and inflation. Others contend that it’s the speed of the move that will determine whether stocks rise or fall, if the 10-year yield does indeed break higher. “The market doesn’t like quick moves,” says Quincy Krosby, chief market strategist at Prudential Financial. “That gives it the jitters.”

Not everyone is so sure. Jim Paulsen, Leuthold Group’s chief investment strategist, notes that bond yields have been trending lower for the past 38 years, and have remained within one standard deviation—a measure of the dispersion of readings from the average—for 72% of that time. Why is this important? The 10-year’s 2.64% yield is now above the current one-standard-deviation mark of around 2.44%, he says. That’s occurred just 12.6% of the time since 1980, but when it did, equity returns were markedly lower than when yields were in the range: The S&P 500 has advanced an average of 2.7% during the 12 months following such an instance, versus an average of more than 10% when yields remain contained within the bands. “The perception of normal rates has come down so much that it might not take a lot to hurt stocks a bit,” Paulsen says.

David Ader, chief macro strategist at Informa Financial Intelligence, takes it a step further: He wonders if you can be bearish on Treasuries—bond prices fall as yields rise—and still be bullish on stocks. He notes that the difference between the 10-year yield and the S&P 500’s dividend yield has widened to about 0.6 of a percentage point in favor of Treasuries. The wider that gap grows, the more enticing bonds will become to investors who still need yield. “My target is 2.85% to 3%,” Ader says. “If we reach that, the equity market will go the other way.”

(Source: Barrons Online)

The Markets This Week

The perfect year is over, even if it ended on a note of imperfection.

The Dow Jones Industrial Average fell 34.84 points, or 0.1%, to 24,719.22 last week, not big deal. But the Standard & Poor’s 500 index fell 0.4%, to 2673.61, and the Nasdaq Composite dropped 0.8%, to 6903.39, their largest weekly declines since Sept. 8.

Despite ending on a sour note, it’s hard to argue that the year could have gone much better. The Nasdaq finished up 28% in 2017, while the Dow gained 25%, and the S&P 500 rose 19%. And the S&P 500 even managed to finish in positive territory each month on a total return basis—the first time that has ever happened. “You don’t get an easier year than that,” says Michael Shaoul, CEO of Marketfield Asset Management. As we said: perfect.

Following perfection is rarely easy, though the market has been pretty good at responding to big gains with more of the same. Including reinvested dividends, the S&P 500 has returned 20% or more 26 times since 1943, and followed that up with another positive year 20 times, says Sadoff Investment Management. The average return following a 20% gain has been 12%. But four of the six down years—1962, 1981, 1990, and 2000—had one thing in common: The Federal Reserve was “dramatically tightening credit,” Sadoff says.

While no one would describe the Fed’s current tightening as “dramatic,” it has been raising interest rates and would like to raise them a few times more next year. The market isn’t buying it yet, especially as inflation remains so low. But some assets are close to levels that may force investors to rethink their expectations, says Jim Paulsen, Leuthold Group chief investment strategist. He notes that the U.S. Dollar Index is approaching a three-year low—it closed down 9.7% in 2017 after declining 1.1% last week—while the 10-year Treasury yield closed the year at 2.41%, just 0.2 percentage point away from a three-year high of its own.

Even oil managed to close the year at its highest level in 2½ years. If they all break out, especially if they do so simultaneously, more inflation could be building than the market expects, and that would force investors to reconsider whether they want to pay 18 times forward earnings for the S&P 500, Paulsen says. “This year felt like a sweet spot,” he continues. “The question is whether that sweet spot can persist.”

What should we hope for? Not another 2017, says Jason Pride, director of investment strategy at Glenmede. With valuations as high as they are, another year of big gains could stretch them even more, even to levels that trigger a selloff. “We’d prefer to see 2018 be tamer for the market,” he says.

As if we have a choice in the matter.

The Markets This Week

It wasn’t as if there was no news to get the market moving. We learned last Friday that new-home sales had surged in November, and that consumers are spending more and saving less. Congress passed its tax bill, which was then signed into law by President Donald Trump, and it also agreed on a stop-gap budget measure to keep the government funded through the middle of January.

Who could ask for anything more?  The market, it seems. The Dow Jones Industrial Average gained 102.32 points, or 0.4%, to 24,754.06 last week, while the Standard & Poor’s 500 index advanced 0.3%, to 2683.34, and the Nasdaq Composite rose 0.3%, to 6959.96. It was something of a yawn, and trading even reflected it: Friday’s volume was the lowest for a full day this year.

Most of the easy money has already been made in the tax trade. When it became clear in mid-November that getting tax cuts passed by Christmas had become a real possibility, the S&P 500 rallied 4.6%. Stocks set to get a big earnings boost outperformed the overall market. “Much—but not all—of the tax-related benefits to earnings are likely reflected in stock prices already,” explains Credit Suisse strategist Jonathan Golub. He isn’t worried, however, because he believes earnings growth and higher valuations can push the S&P 500 up to his year-end target of 3,000.

Maybe so. But there’s no denying that everything is about to get a lot more complicated—including those earnings. Until last week, analysts had been reluctant to change their estimates to account for tax cuts because they didn’t know what a final bill would look like. Now they do, so they are tweaking their numbers, even if much of what we know at this point is still guesswork.

That could make for more turbulence during the first part of the year, as investors wait to see what the real impact of tax reform is, says JJ Kinahan, chief market strategist at TD Ameritrade. “I don’t know if the market will react as positively to the first couple quarters of earnings because people will be adjusting to what they mean,” he says.

And that’s not the only adjustment we’ll have to make. We’ve been on the lookout for signs of excess—a boom in mergers and acquisitions, a spike in capital spending—as a possible indicator that the market was peaking. But it’s the excesses that are fading away that could create the real problems in 2018, says Leuthold Group Chief Investment Officer Doug Ramsey.

One is the economy’s excess capacity, which, Ramsey notes, has closed, according to Congressional Budget Office estimates. That means there’s less potential for economic growth. The Federal Reserve’s quantitative-easing program also created excess liquidity in the market, with all the extra cash likely going into financial assets. But liquidity—as measured by growth in the money supply minus growth in industrial production—has also started to dry up recently, according to Ramsey. “The landscape is changing under our feet,” he says.

None of this points to an imminent end to the bull market. But it suggests that next year may be no holiday.

(Source: Barrons Online)

The Markets This Week

It’s the most wonderful time of the year, or so the song goes. And while those who hate the snow might disagree, for the stock market, December really can be wonderful.

For a moment there, though, it didn’t feel that way. The Standard & Poor’s 500 index started the week where it had left off the previous one—with a small decline—and just kept on dipping. By Wednesday, it had dropped four days in a row. But as Nomura Instinet technical analyst Frank Cappelleri noted, the benchmark hadn’t dropped for five or more days in a row since November 2016, and it wasn’t about to suffer one now. The market rallied for the rest of the week.

All told, the S&P 500 advanced 0.4% to 2651.50 last week, an all-time high, while the Dow Jones Industrial Average rose 97.57 points, or 0.4%, to 24,329.16, also a record. The Nasdaq Composite finished down, but only just: It declined 0.1%, to 6840.08.

If I were a betting man, I’d place my wager on more gains from here. During the past 20 years, just five Decembers have finished in negative territory, for an average loss of 1.8%, a number exacerbated by a 6% tumble in 2002. The rest of the time, December has delivered gains—often quite good ones: The average December rise has been 2.6%.

Enjoy This Market While It Lasts

The odds of a big spike in volatility are even lower. Nicholas Colas, co-founder of DataTrek Research, notes that since 1990, the CBOE Volatility Index, or VIX, has tended to peak in January, August, or October, while its troughs have occurred most often in July or December. This year, the VIX hit its low of 9.1 in November, a month that has rarely marked the bottom for the measure. The upshot: “Markets are much more likely to resemble Santa than Scrooge during the holiday season,” Colas says. For the record, the VIX closed at 9.58 on Friday.

There’s not much to scare the market between now and year end. Congress has extended the budget deadline until Dec. 22, avoiding a government shutdown, and if they can do it once, they can probably do it again. Tax reform is making progress, and there’s even a chance that a bill reaches President Donald Trump’s desk for signing by Christmas. And it’s not as if the market needs tax reform to keep chugging along. As we saw on Friday, U.S. payrolls are still growing at a healthy clip—the economy added 228,000 new jobs in November—while the unemployment rate remained at 4.1%.

MKM Partners strategist Michael Darda calls it the best-case scenario for markets. “Growth momentum remains above recovery averages, but not so fast as to create an inflation panic at the Fed,” he explains. “Enjoy it while it lasts.”

(Source: Barrons Online)