Markets like earnings; Washington, not so much

  It was another week of volatility that saw stock averages bounce up and down within a well-defined range. It is what happens when investors are unsure of the future, but this period of uncertainty may be ending. Buoyed on the downside by good second quarter earnings thus far, but hemmed-in on the upside by political concerns, the markets have been marking time. Investors now believe that the Republicans are so disorganized that none of Trump’s initiatives will pass this year. If that were the case, traders believe the markets are too “rich.” If, on the other hand, Washington did get their act together, traders believe we could see 2,450 on the S&P 500 Index in quick order. I hate to say it, but time will tell. Technically, the S&P 500 Index came within 6 points of re-testing the intraday low it made on March 27th. I wrote last week that this re-test was likely to happen. Purists would say the re-test doesn’t count because the index never actually touched that low at 2,322.  And so we wait. It was Steve Mnuchin, the administration’s Treasury Secretary, who saved the day this week.  With the words “We’re pretty close” to bringing forward tax reform,” stocks soared on Thursday.  It just illustrates how keyed up investors are when it comes to the present debate in the nation’s capital. In a short period of time, investor sentiment has gone from everything that Trump wants will be done in his first 100 days to nothing he promised will ever get done, ever. Readers may agree that nether attitude is realistic. But that doesn’t...

Uncertainty descends upon the markets

Pick your poison—U.S.-Syrian strife, weak employment numbers, China-U.S. relations—those are just some of the issues investors had to contend with this week. Despite these potential roadblocks, the averages hung in there, losing little ground as the week closed. There was even more bad news, if you include the latest minutes of the Federal Reserve Bank’s FOMC meeting. There was much discussion among the members and a chorus of assent to begin the delicate task of reducing the Fed’s $4.5 trillion balance sheet later this year. Recall that the Fed bought mountains of U.S. Treasury bonds over the last eight years in an effort to keep interest rates low (and stimulate the growth of the economy). Now the bankers feel it may be time to start selling those bonds back into the market. They reason that the economy and the gains in employment are strong enough to weather such a move. Since this effort would be in addition to the two or three rate hikes already planned for later this year, investors are worried that even higher rates could provide an obstacle to further stock market gains. I remind readers that it is the path of interest rates this year, and not the success or failure of the Trump agenda that will worry me most. And speaking of the Trump agenda, Paul Ryan, the Speaker of the House, cautioned investors (just before taking a two week recess) that cutting taxes may take longer than expected. That did not play well on Wall Street either. As the week’s uncertainty continued to build, President Trump’s meeting on Thursday and Friday with his...

New quarter, new market

As traders and institutions put to bed the first quarter, several concerns loom large in the weeks ahead. How things play out over that time period will have important implications for the averages, given that they are not far from their all-time, historical highs. What will the Fed do in May? Will Washington pursue tax cuts and if so, will there be opposition? What will first quarter earnings look like and how will markets react to all of the above?  Let’s look in my crystal ball, shall we? Wall Street analysts expect corporate earnings to be higher by as much as 10-11%. That would be a big change from the recent past, where dismal guidance and feeble results have been the name of the game.  If the numbers match or beat expectations, that could be good for stocks. Next up, the central bank, what are its intentions between now and June? The betting is that there is little chance that the Fed will raise rates again between now and then. If so, chalk up another positive for the markets. Then there is the Washington wild card where all sorts of things could go right or wrong, depending on a fractured Republican party and a mercurial administration. Last week’s debacle, centered on the belly flop that was the House’s attempt to “repeal and replace” Obamacare has set people thinking and worrying about the future. I’m thinking that we may still need a few more days/weeks of consolidation before markets begin to climb. We have already brushed my first downside target for the S&P 500 Index at 2,323. Many times markets...

Congress’s comedy of errors

Volatility was back in the markets this week as traders watched the House of Representatives wrestle to repeal and replace the Affordable Care Act. As failure after failure marked the progress of the new bill, some wondered if this might be a hint of what the future might be under the Trump Administration. Given that this is really the first piece of legislation the new Republican Congress and White House has introduced, it might not be fair to judge the next four years by this week’s performance by our new legislators. Much that could go wrong did go wrong, but there is still a chance that something may be passed before the weekend. What confounds me is that Republicans have had seven years to come up with an alternative to Obamacare. For seven years, they have been demanding the end to the Democrats’ first attempt at providing insurance to millions of Americans and Donald Trump campaigned on his promise to repeal Obamacare. One might have assumed that Speaker of the House Paul Ryan’s alternative plan would therefore be the blueprint for change that all Republicans could get behind. That was the smoke and mirrors that was sold to the public. This week’s antics revealed that the majority of Republicans were nowhere near ready to back his plan.  Some want to simply ditch the whole effort. Others want to moderate the most draconian parts of the proposal, while still others simply want a new plan altogether. On Thursday night, after the House failed to vote on the plan (because the votes weren’t there for passage), President Trump lost his patience...

Fed rate hike sets the stage for more

This week the Federal Reserve hiked interest rates again. That’s two times in as many quarters. Back in the day, the markets would have swooned. This week they did the opposite. What gives? The short answer is investors believe both the economy and inflation are beginning to accelerate, so the Fed has every right to reduce the gas and ease its foot off the monetary pedal. There is, after all, no need to keep interest rates at historically low levels at this point. That’s good news, after buoying both the economy and the financial markets through several years of anemic growth and worries over deflation. It is one explanation for why the stock market has climbed to record highs. Another would be that with Donald Trump in the White House and Republicans a majority in Congress, most investors believe only good things are ahead of us on the economic front. So tell me something I didn’t know. Well, for starters these interest rate rises (with more to come) signal a new economic era in this country and possibly the world. After a race to the bottom in bond yields worldwide, our central bank has now reversed course. It is only a matter of time, I believe, before the rest of the world’s central bankers follow suit. Historically, rising interest rates have provided headwinds for the stock markets. Looking back, about the best that can be said was that stocks do okay for the first two years in a rising rate environment, as long as interest rates rise gradually and each rise is moderate. Call it the “goldilocks” version of...

Mushy markets in March

Investors took a break this week from the on-going Trump rally, even as the pace of change in Washington seems to be accelerating. Both the financial downside and political upside should be positive for your investment portfolio overtime. The minor consolidation I have been expecting in the stock market began this week. The averages have pulled back a little, but the S&P 500 Index, for example, has loss less than one percent from its all-time highs. That’s not exactly the end of the world… I see a meandering two steps back, one step forward, kind of market with the downside risk somewhere between 2,300 and 2,330 on the S&P 500 Index. That would equate to about a 4% move. As pullbacks go, that would be minor and necessary given the stupendous gains we’ve seen since November. Some readers, mostly Trump-haters, (and there are a lot of them in this neck of the woods) have asked why I am so positive on the markets right now. It’s simple: hope is a powerful motivator for stock market investors. So far, that hope has been justified. The repeal of Obamacare was one of the new president’s major campaign pledges. This week, Congress began work on repealing and replacing the Affordable Care Act (see yesterday’s column “America’s road toward universal healthcare.” Not bad, for a president who has only been in office for 49 days. His trillion dollar infrastructure project campaign pledge was this week’s focus in the Oval Office. Work is also progressing on federal cost-cutting, while regulation after regulation is coming under scrutiny from cabinet members/businessmen who, by their very nature,...