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Volatility Continues, but Last Week's Reversal is a Good Sign

by Fortem Financial April 2, 2018

We are hearing more investors comment that the market makes no sense, at least for now.  Today's selloff erasing Friday's gains only reinforces this idea for many.  We would contend the market does make sense, and what we've experienced over the last couple of months reaffirms the market's sensibility. 

As January came to a close, Amazon, JP Morgan, and Berkshire Hathaway announced they were going to get into the healthcare business.  This introduced a level of uncertainty in the markets.  The healthcare sector began selling off on the news.  The market does NOT like uncertainty, and its response to the announcement (selling off) shows sensibility and order in the market.

Further, fund flow data from the Investment Company Institute shows the market saw significant inflows during January 2018.  The inflows may have contributed to January's measure of the S&P 500 14-month relative strength indicator showing the market the most "OVERBOUGHT" it had been since Clinton was in office.  Perhaps a market that overbought in January left the market vulnerable, and maybe Amazon's announcement provided just enough of a catalyst to initiate the S&P 500's greater than 10% selloff from late January to February 8, 2018.

Then, as February progressed, we started to receive the earnings updates for Q4 2017 and the outlook for 2018.  The data was strong, with positive earnings and revenue surprises.  Again, the market showed its sensibility with the S&P 500 gaining 5.4% from February 8, 2018 through February 28, 2018. 

Then, on March 1, 2018 President Trump made an announcement that he planned to initiate tariffs on imported steel and aluminum.  The market's first reaction was to selloff.  And since March 1, 2018, the market has been given a barrage of information on tariffs.  Initially, no one knew who might or might not be exempted.  However, as we saw Canada, Mexico, and the European Union receiving exemptions, the market stabilized and began to move up again.  But then on March 22, 2018 Trump announced plans for another $60bn of tariffs against China.  The renewed fear of trade wars introduced new uncertainties, and the market sold off again. Understanding that the market does NOT like uncertainty, the increased volatility is a very sensible reaction.  

Also contributing to the market's uncertainty, significant questions with some of our tech stocks surfaced in March, and it very much appears Facebook, Google, and other tech giants will face higher levels of scrutiny and very likely increased regulation.  The question the market is asking is, "HOW MUCH WILL THIS COST THE TECH GIANTS?"

But even amidst all of this uncertainty, we know last week's reversal was driven lower by the best performing stocks over the last 12 months - the leaders got hit. And while this is one of the most uncomfortable phases of a correction, it is also a sign that we're getting close to the end. The percentage of stocks hitting 20-day lows continues to decline and the 5 day average of the put/call ratio is in the 98th percentile, two conditions often seen at or near market lows. With internals improving and sentiment starting to flush, it may be a good time to put some cash sitting on the sidelines to work.

Markets recovered last week as volatility continued; a selloff in Technology stocks impacted the Nasdaq, the worst performer among the major indices for a second consecutive week.  On Monday, the FTC confirmed it has an open non-public investigation into Facebook’s privacy practices.  On Thursday, President Trump targeted Amazon’s treatment of sales tax as unfairly disadvantaging traditional “brick and mortar” retailers.  The negative headlines added to regulatory pressures in the EU and raised questions about the sector’s valuations.  Since 2015, the Nasdaq has returned 49.1% compared to 28.3% for the S&P 500? Index; given the increased scrutiny and recent outperformance, Technology’s leadership may be nearing an end.  Meanwhile, reports that the U.S. and China have begun negotiations on improving U.S. access to Chinese markets alleviated concerns of a potential trade war.  And, geopolitical risks moderated on media reports that North Korean leader Kim Jong Un, during a two-day surprise visit to China, “committed to the denuclearization of the Korean Peninsula”; he is attending a bi-lateral summit in South Korea in April in addition to his as-yet-unscheduled meeting with President Trump.  The diplomatic crisis between Russia and two dozen Western nations (related to the May 4th poisoning in the UK of a former Russian spy) escalated this week; for now, though, the dispute has had a limited impact on markets.

Economic data Last week revealed a robust consumer.  The final estimate of fourth quarter GDP (+2.9%, up from +2.5%) reflected upward revisions in consumer spending.  The Conference Board’s Consumer Confidence Index remained strong while slightly below February’s reading; notably, 39.9% of survey respondents stated that jobs are “plentiful” while just 14.9% stated that jobs are “hard to get.”  Consumer sentiment in March hit its highest level since 2004; households in the bottom-third of income brackets accounted for the entire gain.  The broadening of the economic recovery is an important development for its health and sustainability.

For the month, the S&P 500? Index fell -2.7%, which follows February’s -3.9% pullback; these were the first consecutive monthly declines in the Index since October 2016.  Utilities and Energy were the only sectors with positive performance for the month; Financials, Materials, and Technology were notable laggards.  Markets have remained in a volatile trading pattern as investors focus on technology, trade, and geopolitical headlines.  Next week’s release of the March jobs report and the subsequent start to first quarter earnings season will help determine a more definitive near-term direction.

*Source:  Pacific Global Investment Management Company

https://d1xhgr640tdb4k.cloudfront.net/5853219b3711676cde000296/1522695991/image.png

Chart reflects price changes, not total return.  Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

 

Last Week's Headlines

1. The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 6.2% annual gain in January, down from 6.3% in the previous month. The 10-City Composite annual increase came in at 6.0%, no change from the previous month. The 20-City Composite posted a 6.4% year-over-year gain, up from 6.3% in the previous month.

2. "Consumer confidence declined moderately in March after reaching an 18-year high in February,” said Lynn Franco, Director of Economic Indicators at The Conference Board. Consumers’ assessment of current conditions declined slightly, with business conditions the primary reason for the moderation. Consumers’ short-term expectations also declined, including their outlook for the stock market, but overall expectations remain quite favorable. Despite the modest retreat in confidence, index levels remain historically high and suggest further strong growth in the months ahead.

3. Real gross domestic product (GDP) increased at an annual rate of 2.9 percent in the fourth quarter of 2017, according to the "third" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.2 percent. The GDP estimate is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, the increase in real GDP was 2.5 percent. With this third estimate for the fourth quarter, the general picture of economic growth remains the same; personal consumption expenditures (PCE) and private inventory investment were revised up.

4. Personal income increased $67.3 billion (0.4 percent) in February according to estimates released by the Bureau of Economic Analysis. Disposable personal income (DPI) increased $53.9 billion (0.4 percent) and personal consumption expenditures (PCE) increased $27.7 billion (0.2 percent).

 

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Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017, 2018 Five Star Wealth Managers!

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Five Star Professional Disclosure:
The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided. Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf
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Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness.

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