foxex: Reasons We Worry

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Thursday's Headlines

1. Stocks Fell Today: Why that Might Continue

Markets Close

Dow
25,850.63 -0.40%

S&P
2,774.88 -0.35%

Nasdaq
7,459.71 -0.39%

VIX
14.46 +3.14%

INV Anxiety Index
103.15 High

US 10-Yr Yield
2.668 +1.28%

Economic Risks Threaten Market Recovery

Equity markets pulled back on Thursday after hitting yet another year-to-date high just a day earlier. Investors were spooked by significantly worse-than-expected economic data and reverberating economic concerns coming out of the U.S. Federal Reserve. Is this just a temporary blip within a strongly positive trend? Or is it a harbinger of what's to come? Only time will tell. If I knew, I'd be shouting this from my yacht.

It's the Economy
If any one factor can halt the current market recovery in its tracks, it's the economy. Fears over the state of domestic and global economic growth can quickly result in massive downswings in the stock market and a flight to assets that are perceived to be safer - like gold and Treasuries, for example. Though stocks are still in the midst of a sharp rebound and recovery from the lows of late December, we're starting to see more signs that economic concerns may be snowballing.

Fed on Hold
As we noted yesterday, the Federal Reserve released meeting minutes from its January 30th FOMC meeting on Wednesday. The overarching theme was "patience" in raising interest rates and tightening monetary policy further. Typically, any sign that the Fed may be slowing its rate hike trajectory or keeping interest rates low would be met with applause from investors. Companies and markets prefer low interest rate environments because higher interest rates have a negative impact on borrowing costs, business growth, and earnings. However, if the Fed puts a hold on rate hikes due to significant concerns about the economy, which is now clearly the case, markets tend to get really nervous. Investors can handle gradually rising interest rates. But a bad economy? Not so much.

The Fed's increasingly dovish stance was reinforced on Thursday when St. Louis Fed President James Bullard told CNBC that interest rate hikes and balance sheet reduction are "coming to an end." Bullard supported this assertion with his view that FOMC committee members had paid close attention to the "bad reaction in financial markets" to December's Fed rate hike, which was seen by investors as a potential step towards recession.

Data Disappoints
On top of these worrisome signals coming out of the Fed, Thursday was also not a good day for economic data. The Philly Fed Manufacturing Index (a major Fed survey in which manufacturers in Philadelphia are asked about the direction of change in overall business activity), hit its lowest level since 2016 at -4.1. Economists had been expecting +14.1.Also, durable goods orders fell short at 1.2% against previous expectations of 1.6%.

Why it Matters
Fickle markets respond to a wide variety of forces and influences - earnings, interest rates, politics, wars, natural disasters, and much more. In most cases, though, the economy truly takes center stage. Initial warning signs of recession or a slowdown in global economic growth can quickly escalate, spreading panic among investors and weighing heavily on stock prices. We're not saying we're there yet, or that we'll get there any time soon. But troubling signs of a faltering economy have undoubtedly emerged.

Looking ahead, three key economic releases in the week ahead include U.S. consumer confidence on Tuesday, U.S. gross domestic product on Thursday, and U.S. ISM Manufacturing PMI on Friday.

Chart of the Day: S&P 500 Remains in Strong Recovery Mode ... For Now

As noted above, the S&P 500 continues to trade in a sharp uptrend from the late December lows. This parabolic rise has seen the benchmark index break out above multiple resistance levels, including its key 200-day moving average. According to some technical analysts, this places the S&P 500 in bull market territory. Since the December lows, the index has climbed slightly over 18% (as of the market close on Thursday, 2/21/2019). This puts it just short of the 20% from recent lows that other analysts see as the definition of a bull market.

Now that the S&P 500 has cleared its 200-day moving average, this average has now turned into support, and is currently around the 2747 level. Any return below that average would be a strong bearish signal. To the upside, the next major resistance and bullish target is around the 2815 level. Any strong breakout above that level could open the way for an extended market recovery.