Mike Gibbs, Managing Director of Equity Portfolio & Technical Strategy, discusses the recent equity pullback and increasingly cautious investor sentiment.
Stocks have gone nowhere over the past 30 days as the market continues to consolidate the post‐election rally. We view the consolidation as healthy and just, as stocks had moved too rapidly on the fiscal stimulus theme. Getting major reform through Congress in a hurry is a tall order, even with one party in control.
Mixed economic data reports have coincided with the market’s realization that the political process will be less than smooth. Falling bond yields, which themselves are often a sign of weaker economic conditions, moved from 2.6% on March 13 to 2.18% on April 20. The mixed economic reports along with the backup in bond yields have likely led investors to question underlying economic strength. An increase in geopolitical uncertainty due to the Syrian bombing and tensions with North Korea is yet another catalyst for the consolidation.
As is often the case during consolidation/pullback phases, technical trends have weakened and suggest the market is vulnerable for the near term. At this point, we feel this consolidation can be patiently purchased. Granted, the risk has increased with all the moving parts around the world. But we feel the U.S. and global economies are fine. The data within the mixed headline reports suggests the same. The move in bond yields is likely related to short covering (prices up, yields down) and a move to safe assets due to the geopolitical issues, as opposed to a projection of weaker economic conditions. Any outbreak of military conflict (which we believe is remote) would cause short‐term market weakness, but with history as a guide, such periods of weakness most often create buying opportunities.
With Congress back in session, policy debate is likely to keep market volatility elevated. As healthcare reform failed once and market participants are well aware that tax reform will not happen as quickly as first anticipated, the bar has been lowered. Any positive surprise would be a bullish catalyst for the equity market. Recent reports suggest conservative and moderate Republicans are making progress on healthcare reform. Time will tell. Regardless of near-term developments, we do believe something positive will transpire politically… eventually. Sentiment polls suggest the extreme bullish sentiment has reversed and is now cautious. From a contrarian standpoint, this is bullish.
S&P 500 earnings continue to advance, with 1Q earnings growth expected to reach ~ 9%. For the full year, a similar growth rate is expected. In sum, we think the consolidation and rise in a more cautious stance is healthy and will set the table for the next market advance. Determining the exact opportune moment to buy is a difficult task. For this reason, we believe patient accumulation is warranted during the period just ahead.
Source: FactSet, Raymond James Equity Portfolio & Technical Strategy
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