Ping-Pong Markets

Ping-Pong Markets

  • Trade-War Fears Fade
  • Consumers Are Confident and Spending
  • Looking Ahead

The first quarter of 2018 began with a “melt up,” yet as we head into the closing bell, it’s likely that the S&P 500 index will end the period with a small loss. We do not think that the first down quarter in nine is a harbinger of a market meltdown. But our focus on ways to better manage what we have always expected to be a more volatile marketplace in 2018 is showing its benefits.

After 2017’s placid market waters, this year’s first three months may feel like something different and new, but in fact they are more the norm than a departure from it. And while we appreciate that market dips can be emotionally taxing, they also present opportunities. So long as fundamentals support domestic and global expansion rather than recession, and so long as the U.S. consumer is fully employed, confident and not overextending their borrowing in relation to their income and savings, we’ll remain optimistic about the prospects for safeguarding and growing long-term gains.

For the year through Wednesday, the Dow Jones Industrial Average has declined 3.0%, while the broader S&P 500 index is down 2.1%. The MSCI EAFE index, a measure of developed international stock markets, has dropped 1.7%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.14% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has declined 1.7% for the year.

Trade-War Fears Fade

Last week’s fear-driven “tariff tantrum” selling turned around this week as traders took a more reasonable view. Based on credible reports, negotiators for the U.S. and China are in discussions about how to strike a better trade balance rather than trigger an onerous trade war. The “blanket tariffs” on steel and aluminum imports didn’t cover as much ground as was initially surmised—temporary exemptions have been given to Argentina, Australia, Brazil, Canada, the E.U., Mexico and South Korea. This suggests to us that there is a potential for similarly level heads to prevail in the negotiations with China. We are watching this and other policy issues for signs of their economic and market impact, but in light of the factors we mentioned above, we continue to hold a favorable view of the economic and investment environment.

Consumers Are Confident and Spending

Consumer confidence dipped slightly in March from the 18-year high registered in February, though it remains at an elevated level—particularly regarding the job market. Only 14.9% of respondents to the Conference Board’s monthly survey thought that jobs were hard to get. Consumers have soured slightly on the stock market amid recent volatility, but are more optimistic about business conditions and the availability of jobs than they were in February.

Of course, we care more about what consumers are doing than what they’re saying. February retail sales rose slightly, year-over-year, after accounting for inflation. The gains are good to see, but we’re also pleased to see incomes continue to rise faster than inflation.

Consumer emotions and behaviors have yet to show any meaningful downturn despite the myriad domestic and geopolitical concerns weighing on our collective consciousness. And while we don’t expect such issues to trump the positive momentum that full employment and rising wages create, the question of how many more worrisome straws the investor-confidence camel can carry upon its back remains.

Looking Ahead

Next week, we’ll be looking closely at reports on manufacturing, construction spending, car sales, the service sector, consumer credit and the labor market, including March’s unemployment rate.

If you'd like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com.

Please note: This update was prepared on Thursday, March 29, 2018, prior to the market’s close.

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