Weekly market update
For the first time since January, all the major averages finished the month in positive territory, but it was not without drama.
You’ll recall the markets began their decent in late January and early February on the heels of what was perceived as wage inflation. But, after falling into correction territory for the Dow and S&P 500, we quickly reversed course and gained back most of what was lost from early February’s decline. The “synchronized global growth” story was still intact and we were heading into what many believed would be the best earnings season in years.
That’s about the time the President announced massive tariffs and the fear of trade wars, or the debate surrounding trade wars ensued. But, hey, we’re going into earnings season and things were supposed to be all roses – and we got off to a great start in earnings season, and currently, of the companies in the S&P 500 who have reported results, about 80% of those have topped analyst profit expectations. On average, earnings per share in those companies have grown by about 23% from a year ago and revenue growth also returned, but investors were in a “Ready! Fire! Aim!” mode. Despite good earnings, stocks sold off, but if you missed expectations, your stock got its clock cleaned – I mean it was ugly…
And then, somewhere amidst the great earnings, the bullish narrative started to change and we all of a sudden had some issues:
- Earnings were strong – BUT – were they already priced in?
- Rates going higher – we hit 3% on the 10-year U.S. Treasury – not since 2014.
- Global growth – although still strong, it is weakening.
- Inflation – like it or not, it is starting to pick up.
This is a very tricky moment. The stakes are a lot higher now than when the market dropped in February. Like I said, the markets dropped over concerns about higher inflation. The “peak earnings” and “slower growth” argument did not even exist to any great extent at that time.
Since then, not only have the fundamental arguments deteriorated, but the technical condition of the market has deteriorated as well.
So, May could be the month we resolve the debate and that will be especially important as earnings season winds down and the markets look for the next catalysts.
And, let’s not forget we have the FED meeting this week, and although widely expected they won’t raise rates at this meeting, we’ll be reading the tea leaves for how many more hikes to expect.
And, let’s not forget the geopolitical landscape – North Korea has softened their tone, but we still have trouble in the Middle East.
And, let’s not forget that May kicks off the worst six months for stocks (Sell in May and Go Away).
So, stay tuned and we’ll keep you posted.
Todd Day, Portfolio Manager
Horizon Financial Services, LLC
May 3, 2018
