As Trade Worries Seem To Recede, Markets See New Emotion: Optimism

Spring is in the air, especially when it comes to the stock market this week compared with last week. Although blustery conditions continue, the market is showing a lot of green.

After selling emotionally last week, with the baby flying out with the bathwater, investors returned on Monday also on an emotionally driven bent — just in the opposite direction this time. The market is looking for that sweet spot somewhere in between. Pre-market trading early Tuesday pointed toward a possible extension of Monday’s gains, which, on a percentage basis, were the best one-day jump since August 2015.

International markets followed the U.S. up the ladder early Tuesday, with Japan’s Nikkei rising 2.6 percent and European stocks climbing more than 1 percent. Some of the “fear trade” appeared to be drying up, with U.S. Treasury bonds, gold, and the yen all giving up some of their recent gains. Those assets tend to be ones some investors pile into when worries start accumulating. The U.S. 10-year Treasury yield is back to right in the middle of its long-term range between 2.8 percent and 2.9 percent.

From a technical perspective, some analysts on Monday pointed out that the S&P 500 (SPX) bounced after nearly falling to its 200-day moving average, a place some technical analysts see as a key support point. The SPX last bounced off of its 200-day moving average back in early February and posted decent gains for a while after that.

On Monday, stocks were helped by a rebound in banks and tech as fears eased about U.S./China trade relations. There was also good news for Under Armour Inc UA UAA and Nike Inc NKE as the market seemed to believe the companies might not be as sensitive to a potential trade war with China, in part because they have production elsewhere.

Despite trade war fears, the chip-making business is an opportunity that has still been growing, and Intel Corporation (NASDAQ;INTC) might be looking somewhat shiny right now after upgrades from Baird and Raymond James Financial, Inc. RJF. Chip demand is being driven not just by the U.S. but also by Europe and Asia. While the latter may be a risk point because of tariffs, the average consumer is still willing to pay more for Intel’s product.

Meanwhile, with its cloud-based business looking skyward, Microsoft Corporation MSFT shares rose 7.5 percent, its biggest one-day percentage gain in over 2 years after a Morgan Stanley analyst report suggested its market cap could reach $1 trillion in a year.

Homebuilders and home improvement companies also rose Monday. There’s a whiff of spring in the air, perhaps reminding some investors of that important time for home improvements and housing sales. In coming days, watch weekly mortgage applications each Wednesday from the Mortgage Bankers Association, which could tell us more about the future for the U.S. housing market. Also consider paying attention to what happens with wages when the March jobs report comes out late next week, as more money in the pocket can sometimes mean more spending on house work.

FIGURE 1: RIGHT BACK AT YOU. This two-day chart of the three major indices ($DJI is the candlestick) shows how quickly all three rebounded at the start Monday morning after their huge plunge late Friday. Afyer a bit of a drop-off at midday, all three came storming back to put in some of their best gains in the final hour. Data sources: Nasdaq, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Choppiness Persists, But Long-Term Investors Need Perspective

Elevated volatility seems like it could be the new norm for some time as the tariff issue and Facebook controversy both might take a while to resolve. Also, inflation could remain a concern with the Fed appearing to be in a rate-raising kind of mood. As of Monday there’s already been more volatility this quarter than for all of last year, with the number of Dow Jones Industrial Average sessions with a 1 percent move up or down more than double the atypically quiet total in 2017, according to MarketWatch. The S&P 500 has also surpassed last year’s number. Only one of the three major U.S. indexes, the Nasdaq, hadn’t surpassed that measure of volatility, but it isn’t even April yet.

If you’re a long-term investor, this sort of choppiness can be a little uncomfortable to watch, but it’s not something that necessarily should guide your trade decisions. As we noted yesterday, it’s important not to let day-to-day fluctuations knock you off your game. Remember, a long-term investor is in it for the long haul. In 2017, volatility was effectively absent. This year, it’s back. Volatility can certainly be a challenge for traders moving in and out of the market, but those who don’t regularly trade might see less of an impact when all is said and done.

Under GDPressure

Looking ahead this week, we’ll see the government’s final estimate on Q4 gross domestic product on Wednesday morning. This is what some investors see as the mother of all economic reports, and can move the market if numbers come in well off expectations. At the moment, the Briefing.com analyst consensus is for annualized growth of 2.6 percent. The last official government reading for Q4 was 2.5 percent. Despite the slightly different figures, basically it looks like Q4 GDP was pretty good, but not spectacular. Real GDP in Q3 showed 3.2 percent growth. A downturn in private inventory investment and rising imports weighed on GDP growth in the final quarter of 2017, the government said.

It’s looking like growth may continue to slow, with the Atlanta Fed’s GDP Now web site forecasting 1.8 percent seasonally adjusted annual GDP in Q1. Of course, it’s important to keep tabs on the overall health of the economy as it’s among a basket of factors in how the Fed makes interest rate decisions.

Hooray for Small Caps

Even though the wider markets got trounced last week, large-cap energy, real estate and utilities stocks have still managed gains month-to-date as of Friday, but the real story seems to be the small-caps, according to research firm CFRA. For small caps, five sectors are in the green for the month, with consumer staples, energy, healthcare, information technology and utilities in positive territory. The firm notes that in most cases S&P Small-Cap 600 sectors beat their large-cap brethren in the S&P 500 on a relative basis. Mid-cap sectors also similarly outperformed large-cap sectors. “As a result, one might conclude that the greatest area of uncertainty and concern for investors remains the growing tiff over tariffs,” CFRA said.