It was a tense week around the world, but you wouldn’t have known by looking at the S&P 500. It continued its recent surge and closed nearly 1.5% higher on the week. Markets were rattled only momentarily after Iranian missiles crashed into U.S. bases in Iraq, but quickly recovered upon the realization that tensions would deescalate. On the surface, the market is becoming increasingly callus to day-to-day headlines. This is reflected in a put-call ratio that is pushing towards 1 year lows. Sentiment is starting to look a bit stretched over the short-term and the market a tad bit fearless. We still have a solid foundation (Fed, trade, global improvement) and the historical data supports the case for a solid year, but we know that volatility is likely to perk up at some point. A cautious tone over the coming weeks seems appropriate and we’d consider a pullback to the 3100 ballpark to be normal and healthy. We’d view such a pullback opportunistically.
Though a pullback seems probable, the global growth narrative continues to pick up. Trends remain positive, breadth is expanding, credit is strong, and cyclicality is improving around the globe. We are seeing semiconductors making new highs, discretionary outperforming staples, improvement out of European banks and autos, industrials outperforming utilities, commodities rising, yield curves steepening, and so on. Such convergence is notable and a sign that markets are positioning for better growth in the year ahead.
A lot of the cyclical positioning is based on the idea that the Fed is out of the way. Today’s jobs and wage numbers lent further support to this end. Job gains came in below expectation at 145K, but the unemployment rate held at its 50 year low. In the same report, wage growth decelerated to 2.9%. This number is key and signals that any concerns about accelerating inflation are unfounded. We are back to bad news is good news in this regard. Any weakness in employment or inflation translates to a greater probability of the Fed holding rates steady or even pursuing an insurance cut. The market appreciates that sentiment.
Lastly, we look to be pushing ahead with a trade deal. Phase I is set to be signed next week with a Chinese delegation agreeing to come to Washington. This deal certainly won’t fix all that is broken, but is a solid step and should provide some economic cushioning for the year. Earnings are just around the quarter and we’ll be looking to see how companies are interpreting the deal.
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S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.