Mike Gibbs, Managing Director of Equity Portfolio & Technical Strategy, discusses markets’ reactions to recent negative headlines.
The bulls remain firmly in control as the S&P 500 refuses to succumb to headlines that, in other times, might have caused bouts of prolonged weakness. Despite the 1.8% selloff last week, sparked by headlines that suggested the President may have meddled in an FBI investigation, investor optimism remains high. This is due in part to an improving global economic backdrop, better-than-expected earnings, and the possibility of political reform (tax cuts, repatriation of foreign earnings, etc.) We believe these factors helped equities quickly shake off last week’s fears, which were sparked by political uncertainty.
Fundamentally, earnings and economic activity are much more important drivers of stock market returns than political developments. Therefore, until evidence builds that tampering did take place, the positive winds behind the equity market are likely to prevail, and pullbacks are expected to remain modest.
We interpret the market’s steadfastness in the face of adverse political headlines as a sign of strength. At the same time, we believe the market is also unlikely to sprint too far above its recent high. Elevated valuation, the various political issues of the day and the possibility of some softer economic data will likely keep rallies in check for the near term. For these reasons, we expect the market to continue to trace out a basing pattern between the low 2300s and low 2400s throughout the summer, as future earnings catch up with the market’s strong price action to this point.
If equities stumble and the market undercuts the low end of its current base, we believe the bullish sentiment recently witnessed will remain in place, and investors will likely continue to buy pullbacks. For this reason, we look for various technical support levels between 2300 and 2233 to hold, containing pullbacks. And at this point, we see the worst case scenario implying a normal 6–7% draw‐down.
As the year develops, if political momentum to advance the Republican agenda builds, the FBI/President issue fades, and the economy does indeed achieve growth in the 2–2.5% projected range, we think the market is likely to push higher. At the same time, if disappointments in one or more of these areas develop, the odds will increase that the market will test its 200‐day moving average uptrend, currently about 6% below its recent high.
Currently, we remain more optimistic. We look for the market to eventually push higher and for any pullbacks that develop to remain shallow in nature.
Opinions expressed are those of the author and are subject to change. Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or any forecasts will occur. Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision. The S&P 500 is an unmanaged index of 500 widely held stocks. Investors cannot invest directly in this index.