Market Strategy 3/11/2019
- March 11, 2019
Hang on Sloopy
Some disappointing economic data and concerns about trade negotiations paused the bull market
Key Takeaways
- News from the front on trade negotiations will capture an increasingly large portion of investors’ attention as the quarter winds down.
- Investors will peruse both stateside and international economic data to judge the increasing effects of the trade fracas on economic growth.
- Last week’s equity market pullback reflected reaction to a disappointing nonfarm payrolls gain and a widening in the trade deficit.
- More encouraging economic data appeared to be ignored by investors wanting to take some profits without FOMO.
In the week ahead investors are likely to keep an ear to the ground for news developments coming out of the ongoing trade negotiations between the US and China. With the end of the first quarter growing nearer by the day the market appears to be exhibiting some nervousness about whether or not a deal will be arrived at in time to avert another round of tariff hikes by the US and another series of retaliatory moves by China.
We continue to believe that a deal will be arrived at in principal by the end of the first quarter or shortly thereafter.
With both sides showing some signs of exhaustion at the market level after powerful rallies that began in the US and Chinese equity markets from the start of the last week in December into the end of February, and signs of challenges to economic growth around the world, it would seem to us to be highly impractical for either side to extend or ramp up the trade hostilities. As of this weekend news coming out of the trade negotiations was guardedly optimistic with both sides referencing progress while denoting that some differences still remain to be resolved. We feel that patience will continue to be required of investors as an elevated sense of drama gets played out leading up to the end of the month.
In the interim economic data both domestic and international will be perused diligently by investors to determine the pressure the trade war is placing on the economies of the world and how much time will pass before the trade landscape can return to some sense of normalcy.
We remain optimistic for a resolution to the trade/tariff dispute between the US and China and prospects for higher stock prices stateside and in the international realm when global trade is restored.
The S&P 500 fell 2.2% over the course of last week giving back some of its gains from the start of the year. Considering that the benchmark was up 11.84% at the beginning of last week, we’d say it’s important to judge last week’s “give back” in context of the extent of the rally thus far this year. The S&P 500 is starting this week up 9.42% year to date notwithstanding the pullback through last Friday.
The Pause the Refreshes?
From our perspective on the market radar screen we see last week’s retracement as a healthy pause in the broad equity market, which since December 24th appeared locked in “rally mode.” Recent market action/reaction suggests to us that much of last week’s decline had to do with some investors finding a number of catalysts that provided opportunity for some profit taking without having to experience the dreaded FOMO (fear of missing out) which often strikes investors in a bull market rally when the market posts sequential gains day after day and week after week.
Considering that the S&P 500 has posted gains for 9 out of the last 11 weeks it should come as no surprise that a number of disappointing pieces of economic data released last week were able to push stocks lower.
Among those items we’d include:
- Friday’s lower than expected non-farm payroll gain (20,000 versus a Bloomberg survey of economists that showed an average of 180,000 jobs expected to be added in February);
- A larger than expected trade deficit released earlier in the week (the US trade gap widened to $621 billion in 2018—the widest trade deficit since 2008);
- Worries returning about the outcome of trade talks underway between the US and China;
- A sharply reduced growth forecast for Europe from the European Central Bank;
- A sundry list of “usual suspect” worries that loiter around the market currently—including whether or not the Fed will grow too hawkish or too dovish and “make a mistake” in monetary policy.
Curiously several “good news” items gained much less attention last week among market participants than one might have expected. These include:
- The ISM Non-Manufacturing index at a level of 59.7 (versus expectations of 57.4);
- a jump in housing starts;
- a decline in the headline unemployment rate to 3.8% from 4.0%;
- A drop in the underemployment rate (the U-6) to 7.3% from 8.1% (for perspective: in 2009 it was at 17.1%).
By the end of the week it looked to us that some investors had simply found reason enough to take some profits and a little risk off the table.
We remain optimistic for a resolution to the trade/tariff dispute between the US and China and prospects for higher stock prices stateside and in the international realm when global trade is restored.
John Stoltzfus
Title:Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
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