Does the bull market still have room to run? Investors look for evidence 

David Joy – Chief Market Strategist, Ameriprise Financial
Weekly markets commentary — April 16, 2018

 

If earnings season is going to be the catalyst for higher stock prices, it certainly didn’t look like it on day one. Better than expected earnings from JP Morgan Chase and Citigroup on Friday did nothing, either for their own share prices or for the broader market. On the day, JP Morgan Chase skidded by 2.7 percent, while Citigroup lost 1.6 percent, as sluggish loan growth in the quarter sapped whatever enthusiasm there was for better bottom lines. Overall, the S&P 500 index itself fell 0.3 percent on Friday, although it did manage a 2.0 percent gain for the week. 

Of course, we have a long way to go before we know how strong first quarter earnings will be. And in the week ahead, the banking industry has another chance to impress with Bank of America, Goldman Sachs and Morgan Stanley among others scheduled to report. But the banks have been lackluster performers lately. Along with technology stocks, the banks helped drive the market recovery from the early February low. But for both, that rally ended in the second week of March after the imposition of steel and aluminum tariffs raised concerns about the impact on world growth. Both sectors fell sharply for the next two weeks, where they joined the rest of the market which had, for the most part, remained weak since February. 

Since that March 23 low, the overall market has managed a modest gain of 2.6 percent, but banks have been no better than a less than market performer, up 2.4 percent. Technology stocks, in contrast, are higher by 3.2 percent since March 23. If the economy picks up as expected, so too could loan growth, which in fairness has climbed in three of the past four quarters, and monthly since last November, although the pace is modest. A steeper yield curve would also help. But the reaction to Friday’s earnings reports suggests that investors want to see hard evidence, not just expectations. 

Inflation and geopoliitical risk becomes more of a concern

Also last week, the March Core Consumer Price index showed a sharp increase. The year-over-year rate rose to 2.1 percent from 1.8 percent in February. Core inflation has been trending higher since last August, but the March increase accelerated the process. And the next four monthly reports will be replacing modest 0.1 percent increases from last year, so by summer inflation could be more of a concern than it is today. And concerning the headline level, energy prices have been moving higher as well and are currently at their highest level in three years. Producer prices rose at the fastest pace in six years as well last month. 

Geopolitical concerns also ratcheted higher last week, as the U.S., along with France and the U.K. launched a retaliatory missile strike against Syria in response to a suspected chemical attack on civilians. The strike came in the early hours on Saturday, too late to have a market impact, and the U.N. subsequently rejected a Russian resolution of condemnation. In Monday trading, stocks in Japan were higher overnight and were slightly higher in Europe halfway through the trading day. Bond yields were higher, and oil and the dollar were lower. U.S. equity futures were pointing higher.

Investors will watch for earnings reports and economic data this week

First up on this week’s economic calendar is the March retail sales report. Retail sales have fallen in each of the past three months, so this will be watched closely. In fairness, retail sales surged in the prior three months, between September and November, but have since languished. Given the high level of employment this would seem to be a temporary phenomenon, and personal consumption will be a critical component if higher growth expectations in the months ahead are to be realized. Also on this week’s calendar are housing starts and permits and existing home sales. It is worth noting that the average rate nationally on a 30-year fixed mortgage is currently 4.42 percent, up from 3.95 percent on January 4 (according to the St. Louis Fed Reserve). Industrial production, leading indicators and flash manufacturing activity are also scheduled. 

But the primary focus this week will be on earnings. Beyond the remainder of the banking sector, other heavyweights will weigh in, including Netflix, J&J, American Express, Honeywell, Proctor and Gamble, and GE. Lower tax rates will be an obvious influence, but just as important will be disclosures regarding management’s plans for their expected increase in cash flow, whether reinvested or directed toward buybacks and dividend increases. Also of note will be the expressed level of concern regarding trade tensions and its impact on their planning. 

Notwithstanding Friday’s lackluster price action in stocks, they did post a gain for the full week, for just the second time in the past five, and the 200-day moving average on the S&P 500 has so far provided major support. The VIX index also fell for just the second week in the past five. And investor sentiment continued to drop. According the American Association of Individual Investors, bullish sentiment is currently at its lowest since last August. The same decline is reflected in the Investor Intelligence bull/bear ratio. This set of conditions could be conducive to a modest rebound in stocks if earnings ultimately deliver as promised.