Trouble on the Street
Stock prices plunged last week amid a barrage of headline news. As a result, the S&P 500 Index fell nearly 2.5% on Thursday and another 2.1% on Friday, dropping the Index near the recent lows of February 8.
What’s Happening Here?
Unlike February’s technical sell off, sentiment is ostensibly driving this weakness. Underlying economic fundamentals and market pricing have diverged, as investors digest a news storm that included initial salvos in a potential trade war, higher interest rate expectations from Federal Open Market Committee (FOMC) members, Facebook data privacy concerns, and a reshuffling of White House personnel.
We agree some caution is warranted, but only to an extent. Recent tariffs will have minimal impact on an otherwise vibrant economy. Should this prove to be little more than a negotiating tactic, then the sell-off is likely to prove grossly overdone. Conversely, if we are witnessing a fundamental shift in U.S. policy and the global trade regime, then the impact on economic growth and financial markets will be significant. Recent stock price moves appear to be discounting the possibility of the latter.
Sit Tight – Don’t Buy, Don’t Sell
Investors experienced an aggressive sell off to trend ($2532) earlier this year on February 9. We believed this was a solid buying opportunity. Markets subsequently bounced off those trend levels, but the recent memory of a sharp correction continues to weigh on the upside market strength.
S&P 500 Index (SPX): 240 Days, 60 Minutes
Source: Bloomberg, as of 3/26/18. Past performance is no guarantee of future results, which will vary. It is not possible to invest directly in an index.
If trade anxiety doesn’t escalate further, we suspect stocks will again look very attractive. But, if Assistant to the President, Peter Navarro, and his protectionist comrades are driving the trade policy ship, this could yet get uglier still. So, we wait. We wait until there’s some sense as to where things go from here. The S&P has retested February lows and saw prices fall further. Lifted by solid domestic economic underpinnings, we believe the market will find the strength to reach new highs later this year.
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