Equity prices regain their swagger

Though Friday’s equity markets performance was mixed, last week was a good week for investors. For the week, equity prices moved smartly higher – fueled in large part by strong Q1 earnings, encouraging Korea-centric news and relative stability in US Treasury markets. The week’s move was to a large extent a follow-through from the previous week’s reversal higher, as all three major US equity indices pulled away from their respective 200 DMA. In the process, as indicated by the Nasdaq Composite chart below, the market has managed to claw back to within striking distance of record highs (-3%). The S&P 500 closed 5% below its record high on Friday. The Dow Industrials are 7% below its record high established in the early going of 2018. Our triple test of the trend line, demarked by the blue dots, has proven to compress valuations, reset investor expectations and take a degree of risk off the table for investors.

That risk mitigation function has come despite an enormous amount of geo-political resetting – fueled in large part by President Trump. Between the announcement of the US withdrawal from the Iranian nuclear treaty and the fallout registered by allies over the Trump administration decision, concern over the outcome of the NAFTA agreement and no apparent transparency into the state of negotiations between Chinese and US officials on trade, there has been no shortage of potentially disruptive themes in the landscape.

Much of Friday’s softness was attributed to President Trump’s announced program aimed at curbing rising drug prices by introducing more competition into the market.

The drug and drug distributor sectors have been underperforming the broader market for weeks – as if in anticipation of the announcement. However, after a brief pullback by names in the sector immediately following the announcement, prices largely closed positive on the session.

This week is another busy week for Q1 corporate results. Highlights include Monday’s scheduled release of Agilent Technologies (A) results. On Tuesday, Home Depot (HD) reports. Wednesday, Cisco Systems (CSCO) and NetEase (NTES). Thursday, Applied Materials (AMAT) and Walmart (WMT). Friday, AstraZeneca (AZN), Campbell Soup (CPB) and Deere (DE) report.

This week’s economic calendar is light on activity. On Tuesday, Retail Sales, Business Inventories (c. 0.3%) and the Housing Market Index (c. 70) take top billing. Housing Starts (c. 1.325 M), Industrial Production M/M (0.6%), and the weekly release of the EIA Petroleum Status Report will drive the economic narrative on Wednesday. In the case of the petroleum report, the recent trend has reflected draws across all three verticals – crude inventories, gasoline, and distillates. Those draws in concert with seasonal usage and supply constraint on the part of OPEC have all supported the continued trend higher in prices.
Thursday, we receive Weekly Jobless Claims (c. 217K), the Philadelphia Fed Business Outlook Survey and Leading Indicators (c. 0.3%). Friday’s lone economic data release is, as always, the Baker-Hughes Rig Count report.

It appears as though a degree of stability has returned to equity markets in recent weeks as prices have moved measuredly higher. Earnings and economic data continue to support the market. We may well spend the early stage of this week digesting our recent run-up in prices but any weakness will be met with a bid.
Flickr Photo: PhotoAtelier

Kenny’s Commentary subscribers receive the note in their inbox Monday’s before the open Subscribe