Market Commentary

Weekly commentary on recent stock market action, with a particular focus on technical analysis.

March 29, 2017

Scott Wren, Senior Global Equity Strategist

The Market Was Looking for an Excuse

  • Stocks have given back minimal ground but momentum, for now, continues to wane. After a steady four month run higher, the S&P 500 was due for some sort of corrective action.

What it may mean for investors

  • Our work continues to suggest that the Index will likely end the year somewhat below current levels. Near term could bring higher prices but look for headwinds to prevail in the second half.

Investors are a fickle bunch. A month ago, this strategist’s phone was ringing frequently because many of our Financial Advisors and their clients thought our year-end target range for the S&P 500 (2230-2330) was too low. In recent trading days, the bulk of the calls coming in are asking if our year-end target is too high. Clearly the lack of cooperation the new administration seems to be experiencing on both sides of the aisle in Congress has the potential to increase uncertainty and volatility in the stock market over the balance of this year. But really, over the last few weeks, little has changed. The economy has been and should keep on chugging along at a modest pace.

The major indices may have stopped hitting new all-time record highs every few days, but at the time of this writing, the S&P 500 is less than 2.5 percent below the record set early in March. Last Friday’s ditching of the proposed health care legislation by House Republicans was really just one more reason for a little air to come out of stocks. The biggest reason stocks have inched a little lower probably has more to do with the four-month unabated run higher than anything else. After all, from the day after the election until the beginning of this month, the index gained more than 12 percent with nary a whiff of a pullback. That just doesn’t occur all that often in any market environment. Saying that we have been due for a pullback of some sort is stating the obvious. The collapse of the health care bill just gave an additional headwind to an equity rally that was ready to give a little back.

Over the last three or four weeks it has become apparent to many market participants that the new administration’s proposals would take some time to implement—that is if any of them ever get implemented at all. We expected stumbles and compromises all along the way. We looked for little if any economic effect this year. So far, so good. But we continue to argue that the equity market has done a good job of not pricing in too much in terms of positive economic effects from what “might” or “could” happen. In our opinion, nothing on the agenda appears to be a “rubber stamp” item.

The pullback so far has been more of a hiccup, but with slow progress as to the possible implementation of any economically friendly proposals, investors didn’t need much arm twisting. We continue to believe investors are taking more of a wait-and-see approach and not jumping in with both feet at this point. That likely is a wise decision considering the legislative uncertainty that lies ahead. Of course, our concerns all along have been more oriented toward potential stock market headwinds caused by the possibility of wage pressure developing in the second half of this year and in 2018 and what the Fed might do about it. We are not looking for much of an economic pick up next year, at least at this point. If inflation is creeping higher but economic growth is not meaningfully accelerating, the market may frown.

But for now, the market was looking for an excuse to take a little money off the table after a steady run higher. The choice was easy.

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