To say last week was an interesting one for investors would be putting it mildly. My repeated insistence on caution in recent notes, as it relates to US equities, was vindicated.
Last week’s sell-off would have been significantly more technically meaningful had equity markets not reversed higher on Friday afternoon. As it is, the Dow Industrials and S&P 500 both lost more than 2% on the week, while the Nasdaq Composite lost greater than 3%. Last week’s price action left the current outlook for equities in “Uptrend Under Pressure” status.
Investors have increasingly assumed that the economic backdrop that has underpinned our expansion and the subsequent US equity bull market run is now a constant as opposed to a variable. Even the calls for an earnings recession that spooked the markets only two months ago have clearly faded. Economic data and corporate earnings have provided confirmation that our long-running bull market is largely on solid footing. However, though there is ample room for an extension of the rally based on those metrics, there are other variables that have increasingly bled into market sentiment and psychology. Among those, one stands out: China.
US/China trade talks, or the lack of progress resulting from them, delivered a wake-up call to investors. Those talks have now, finally, become the dominant directional driver of US equities – fairly or not. In fact, US equities and their directional have become subject to news headlines and tweets. That is not good for markets. Once equity markets decouple from economic data and earnings, there tends to be a greater risk of heightened volatility and downside risk.
With US/China trade negotiations seemingly facing significant headwinds, look for any move higher from here to be tepid. Elevated volume meanwhile will likely be more closely correlated with negative sessions – for the time being. Until the US/China trade negotiations are wrapped up in a mutually constructive way, markets will remain at their mercy.
The economic week ahead –
Though we receive no economic data on Monday, the balance of the week more than makes up for it in terms of both the number of releases and their significance.
Highlights for the week include three important releases on Tuesday. US retail sales figures for the month of April are out at 8:30 am. Econoday consensus is clearly looking for softer results for the month: the consensus is 0.3% versus March’s stronger-than-expected 1.6% reading. Less-autos, April’s reading is expected to be 0.7%. The Federal Reserve publishes its Industrial Production data for April on Tuesday as well. Econoday consensus is flat, 0.0%, versus March’s -0.1%. Capacity utilization is expected to remain a healthy 78.8%. The EIA Petroleum Status Report is out at 10:30 am. Last week we saw modest draws across all three verticals: crude oil -4.0M bbl, gasoline -0.6M bbl, distillates -0.2M bbl.
Housing starts for April are expected to reflect seasonal strength. Econoday consensus for the month is starts level-SAAR: 1.200M, permits-level-SAAR: 1.290M. Weekly jobless claims for the week ending 5/11 are also due out Thursday. The previous week’s report continued to confirm solid employment growth. New claims were 228k, the 4-week moving average-level was 220.25k. Finally, the Philadelphia Federal Reserve Business Outlook Survey is released at 8:30 am. The consensus is calling for a reading of 9.3 versus last month’s 8.5.
From a purely economic viewpoint, the US economy continues to fire on all cylinders, from manufacturing, to employment, to consumer confidence, to GDP expansion. From housing to auto sales nearly every metric of measure speaks to a healthy economy. This week’s economic data releases, with a focus on April, will very likely continue to support that thesis. As a result, I don’t expect to see any economic data-centric volatility introduced into the equity market landscape.
This week’s earnings landscape:
Though Q1 earnings season begins winding down this week, there are still a number of companies yet to report that will likely drive significant investor attention. The earnings focus this week will be decidedly China-centric with Alibaba, NetEase, Bilibili, and Tencent reporting results. Cannabis stocks Tilray and Aurora also report. Macy’s and Walmart kick off the big retail sector report. It should be interesting to get a look at Pinterest’s first quarterly earnings report – due out late Thursday.
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