It is a safe bet that our furry friends in the bear camp figured the combination of Hurricane Harvey and increasing tensions with North Korea would get the party going to the downside. However, a funny thing happened on the way to the debacle; stocks decided to reverse course and rally instead.
Yep, that’s right; with the S&P 500 only a stone’s throw from breaking important technical support on Tuesday morning, a reversal began. So, instead of a move that would create problems on the charts – problems that would have likely led to the algos piling on to the downside – the blue chip indices now find themselves smack in the middle of what looks like another sideways consolidation phase.
What gives, you ask? With seasonality favoring the bears for at least another month, valuations at sky high levels, and central bankers looking to get things back to normal, why have stocks rallied instead of sinking?
In my humble opinion, there are a handful of issues at work here.
First and foremost is the fact that the big economic data this week has come in above expectations. And the poster child on this front was yesterday’s GDP report, which was well above the consensus estimate. Instead of the economy growing at a 2.7% annualized clip as the herd had expected, the government’s second look at GDP showed growth to be 3.0% in Q2. Not bad, not bad at all.
Next up, the August ADP report suggested the economy enjoyed another strong month of job gains in the private sector as the change in Nonfarm Private Employment grew for a third consecutive month. While the correlation isn’t always spot on, a strong private sector report tends to bode well for the Big Kahuna of economic reports, the monthly jobs update from the labor department.
And then there is the political situation. Although the market’s focus appears to have moved away from Trump’s Twitter account over time and returned to the fundamentals such as the economy and earnings, the fact that the President has begun his tax reform promotion tour wasn’t lost on traders yesterday.
To be sure, tax reform is a good thing as far as the stock market is concerned – for a myriad of reasons. And the fact that the plan President Trump began promoting yesterday (which is so far woefully short on details) looks very different from the plan that candidate Trump was pitching during the election doesn’t seem to matter. The bottom line is a major focal point in Trump’s plan is lower tax rates on corporations. Lower taxes for U.S. companies obviously means higher profits. And if there is one thing the stock market likes, it’s rising earnings.
And finally, let’s not forget about the “buy the dips” trading mentality that has been prevalent in this market since the spring of 2016. From my seat, the idea that traders continue to put money to work in stocks after each and every decline – regardless of the magnitude – in and of itself has helped stocks remain on an upward path.
So, where does this leave us heading into the long holiday weekend? In a sideways consolidation mode, that’s what. My take is that stocks will have to either break above S&P 2490 or below 2400 in a meaningful and sustained fashion in order to end the current sideways trend. Oh, and traders will likely need a catalyst to make either move happen.
So, until this year’s vacation season comes to a close the week after Labor Day, we can probably expect more of the same. Good times.
Thought For The Day:
Do what you can, with what you have, where you are. -Theodore Roosevelt
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of the Tax Reform
2. The State of the Economic/Earnings Growth (Fast enough to justify valuations?)
3. The State of Geopolitics
4. The State of Fed Policy