Stocks Erase Tariff Losses, More Room to Go?

This past week, the wild roller coaster ride that was April’s trading came to an end on quite the strong note! After the early month slide, in which the S&P 500 index fell more than 15% peak to trough, the index rebounded sharply, only finishing in the red by just 0.76%. The S&P 500 index ended up roundtripping nearly all of the post- ‘Liberation Day’ losses by month’s end and actually did so in the first two days of May. Furthermore, the Nasdaq index, despite the hyper volatile trading, ended up positive for the month of April. This was truly a remarkable recovery in the market, for it to retrace these losses so quickly. It serves as a stark reminder for investors that in times of high distress and anxiety in the markets, often the best choice to block out the ‘noise’ and avoid making emotional trading decisions. This incredibly powerful breadth thrust culminated on Friday as the S&P 500 rallied for its 9^th consecutive day, the index’s longest daily streak in more than 20 years! This was underwritten by overwhelming buying pressure across the markets, which is evidenced by the NYSE Advance-Decline Index returning nearly to its all time high, despite the S&P 500 still remaining 7.5% below its own high.

After the powerful bullish run we witnessed last week, there were several notable technical signals that occurred. As we mentioned in previous weeks, there had been a clear level of resistance above the S&P 500 around 5500 and on Apr 25^th, the market broke through and closed above this level. This week, we were able to build upon this as the S&P 500 continued to power higher, spending most of the week trading above the 5500 level. This confirmation and follow through at the index level is very encouraging. Additionally, as the S&P 500 continued to gain over the past week it powered straight through it’s downward sloping 50-Day moving average, which I expected would have served as more firm resistance. However, the index was able to close above this level twice to round out the week and now, seemingly, investors’ sights will be set towards the 200-day moving average. The S&P is now rapidly approaching its 200-day moving average, which I expect will be a tougher hurdle to cross than the 50-day. Yet, if the index is able to close above this level, signaling the ‘Golden Cross’, this will be a very significant bullish indication for stocks. In weeks to come, this is going to be a crucial metric to watch.

The positive news flow for the market continued last week and this is largely what provided the fuel for the rip-roaring rally we saw extend through the end of the week. Last week was jam-packed full of major market moving events between economic reports, significant earnings, and more. Fortunately, for investors, nearly all of these reports delivered strong or satisfactory results providing support for stocks. Of the major earnings reports received last week, nearly all of them posted solid results, with the exception being AAPL. The market was largely able to shrug this off due to the other earnings and the good news from various economic reports. The PCE inflation report largely was in line with expectations, while Core PCE actually fell. Even though the initial Q1 GDP read showed a slight decline of 0.3%, while investors never like to see a negative GDP print, it was much better than feared. Earlier in Q1, rumors were swirling that we could have posted a much steeper decline in Q1, in the neighborhood of negative 2.5-3%, which simply would have been disastrous. Since investors’ worst fears did not materialize, this report was received better than most expected. On Friday, as the highly anticipated April ‘Job’s’ report was posted, this delivered more good news, showing continued strength in the U.S. labor market. Finally, and most importantly, there were no new escalations in the current ‘Trade War’. In fact, there were several stories to the contrary. That multiple major trade deals are either approaching the finish line or are already done, pending announcement. Furthermore, both the U.S. and China are sending more, subtle signals that they are both ready to begin serious negotiations. This multitude of good headlines was precisely what investors had been yearning for.

Now that stocks have recouped nearly all of the losses experienced over the last month, it is important to evaluate where we currently stand. At the trough of the early April decline, traders had reset the S&P 500 multiple down to 18 times forward earnings. This was down from around 23-24 times forward earnings, which was the market multiple in mid-February, so we experienced serious multiple compression. After the run over the past few weeks, we are now back trading at over 21 times forward earnings. While not all the way back to the full market multiple we traded at prior to the decline, at current levels we are still well above recent historical averages, signaling that stocks are likely not “cheap”. Now, I never like to operate off of simple market valuation alone, I prefer to pair this with broad market technicals and consult these indicators to seek confirmation. Looking at the technicals, we do see many signs confirming that likely, at least in the short term, we have exhausted the movement to the upside and should expect some profit-taking to occur in the weeks to come. Shorter term RSIs I like to follow are currently running red-hot and they do not often stay this way for long before the underlying index/equity experiences a short-term pullback. I am cognizant that an announcement of a major trade deal with a nation like China could scrap all of this opinion as we then would almost certainly be in for a massive rally higher. However, in the absence of some news like this, and I do not think we are quite there yet, I do anticipate stocks to consolidate a bit in the weeks to come. Unless another major ‘economic shoe’ drops, the technicals do lend support to the idea that the bottom for stocks is likely in after the early April lows. We still feel its likely that we will bounce around from here and experience some choppy trading as we transition from late Spring into Summer, and we could see stocks become rangebound for a period of time.

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Key Events to Watch For

Trade Deal Developments (Tariff Reductions)
FOMC Meeting Concludes – Rate Decision
More Q1 Earnings (PLTR, ANET, UBER, NVO, VRTX)

Right now, the primary concern of investors, and rightfully so, is our nation’s trade policy and it will likely remain this way until we get resolution on a number of fronts. As I mentioned, we are beginning to get some positive developments regarding new trade deals and the hope of investors is that a few of these deals, ideally with major trading partners of ours, are announced soon. I do expect that in weeks to come markets will begin to scrutinize trade deals news more heavily and take more of a ‘demanding results’ approach. There is only so much leeway that investors are willing to lend until some of these promises begin to be delivered upon. All of this said, any further positive developments on the tariff front are assured to provide a tailwind for stocks.

Of the scheduled events this week, certainly the most important one will be the Fed’s FOMC meeting which will conclude on Wednesday afternoon as the committee announces their policy rate decision and Fed Chair Powell holds his press conference. Fed Futures markets are all but guaranteeing that the Fed will not move at this meeting, opting to hold policy rates steady. Most interest will likely be in Fed Chair Powell’s post-meeting presser, his statement, and how he answers the battery of questions. Markets are currently pricing in three rate cuts by end-of-year, so any clues revealed in this press conference will be weighed heavily. Additionally, any comments from Powell regarding the FOMC’s economic outlook for the U.S. over the coming year will certainly draw the market’s attention.

Now that roughly 76% of S&P 500 companies have reported Q1 earnings, this reporting season has shaped into a solid one as 72% of companies have reported an EPS beat. While this is not a ‘blow it away’ type of quarter just yet, the results have certainly been respectable, and it has been nice to see earnings hold up well and grow during the same quarter GDP actually declined. This week’s earnings reports aren’t quite as ‘high stakes’ as last week, however, there are still a few notable reports. Beginning on Monday, once the market closes, we’ll hear from both PLTR & VRTX. Then on Tuesday, after the closing bell, ANET will report their Q1 numbers. Of the remaining reports due in this coming week, the final two that we are dialed in on will be released in the pre-market on Wednesday when both NVO and UBER post their Q1 earnings results.

Thank you for reading this week’s edition of the Weekly Market Periscope Newsletter, I hope you enjoyed it. Please lookout out for the next edition of the newsletter as we will give you a preview of the upcoming week’s important market events.

Thanks,