foxex: Rally Blocked

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's Headlines

1. U.S. Markets Fade after Furious Start

Markets Close

Dow
26,179.13 -0.30%

S&P
2,867.24 0.00%

Nasdaq
7,848.69 +0.25%

VIX
13.36 -0.30%

INV Anxiety Index
98.59 Low Anxiety

US 10-Yr Yield
2.481 -0.64%

Not so Fast...

You didn't think it could go on like this all month, did you? U.S. markets hit the pause button today as the DJIA slid 0.3% and the S&P 500 and Nasdaq were essentially flat for the day. There were no economic catalysts to swing markets too far in either direction, and the corporate front was relatively quiet. Pauses like this after a monster rally like Monday's are perfectly normal.

But a Strong First Quarter is Usually a Good Sign...

Today's performance non-withstanding, April is historically a very strong month for stocks. Here are some encouraging stats for market bulls:

Biggest average gains for any month across the last 20 years
Up in 13 of the last 20 years (65%)
Average gain of 1.7%
Since 1950, average April gain is 2.6% when Jan., Feb., March were all positive
Since 1950, Jan., Feb., March all were up 19 times prior to 2019
- April was also up 15 of those 19 times (79%)

P.S. This guarantees nothing, but it is notable.

What is also notable is how strong the rally was in the first quarter despite the fact that investors had fled the stock market in droves in December and January, pulling $88 billion out of equities and hiding in cash and money market funds. That means there is a lot of money on the sidelines and a lot of investors suffering from FOMO (Fear of Missing Out).

Still, investors are still wary of the stock market, even after the strongest rally in 20 years.

The American Association of Individual Investors weekly survey of investors shows that only a third of those surveyed are bullish about the direction of the market in the next six months.

Why Worry

There are plenty of things on the 'wall of worry', that investors need to climb to become confident in stocks, again. You know them well, by now - but just in case:

Trade War uncertainty
Slowing global economy
High valuations for stocks
Corporate profits are falling
We are overdue for a recession (Maybe?)
Brexit

One of the major concerns - the Fed raising interest rates - is off the table, at least for this year. That's probably the key reason U.S. and global markets rallied so hard in the first quarter. As I wrote Friday, this creates the T.I.N.A syndrome (there is no alternative). With the federal funds rate essentially locked in between 2.25-2.50% for the rest of the year, the bond market and savings accounts look a lot less attractive to investors searching for growth. Stocks are one of the only places to find that growth, although oil has been pretty strong lately.

LPL Financial, which we cite a lot, put together a handy and fun Final Four report on the four major factors that will impact markets going forward. For our non U.S. readers, the Final Four refers to the men's and women's college basketball tournaments that culminate next weekend with four teams from each region of the country battling it out for the national championship. The Final Four takes over the national conversation, as offices run betting pools and pretend to work while employees stream the games on their computers or call in sick so they can watch their alma maters compete.

In summary, here are the Final Four Factors that will move the markets:

#1 - POLICY: LPL looks at monetary policy (the Fed) and fiscal policy (taxes, trade and government stimulus). Now that the Fed has tipped its hand, fiscal policy will have a bigger impact on the markets. LPL expects a trade deal with China in the next few months and more government spending in the form of infrastructure investments to extend the economic cycle and promote growth.

#2 - THE ECONOMY: LPL projects U.S. GDP to grow at a 2.5% rate through 2019 as consumer spending remains strong, employment is robust and wages are increasing. A trade deal and more government spending will be the icing on the cake.

#3 - RATES: There has been a lot made about the downside of treasury yields and the inversion of the yield curve, and for good reason. A flattening or inverted yield curve signifies a lack of confidence in the economy and often precedes a recession. U.S. Treasury yields below 3% impact corporate bonds as well, since their yields are often benchmarked off of U.S. Treasuries. LPL expects Treasury yields to rise this year as the economy holds up better than forecast.

#4 - PROFITS: LPL expects corporate profits to rise 6% in 2019 for the S&P 500, which is higher than most other forecasts. LPL cites cheaper borrowing costs (thanks to the Fed) and share buybacks which reduce the average share count, to boost earnings. As we know, stocks are valued based on their future earnings or cash flows. Better than expected earnings is always good for stocks and the market in general.

Net-Net (see what I did, there?) LPL says the Final Four factors to impact the markets are all generally positive. Could LPL be wrong? Absolutely. But their analysis is valuable as we try to get a better picture of the future.

Here's LPL's fun chart with the Final Four factors and brackets.

More News:

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Why IPOs of 2019 Won't Crash Like 2000 Dotcom Bubble

Manufacturing Data Lifts Stock Prices

Chart of the Day: 58,000 points later, Dow up 100

James is off today, so you are stuck with me.

This chart, shared by Michael Batnick of Ritholtz Wealth Management, caught our eye. We talk a lot about how 'the market is doing', and we monitor its movement like it's a patient on the operating table. The real truth is that the market moves 'around', a lot, but it takes real momentum to actually make it move meaningfully in one direction or another. The daily ups and downs are basically noise, until we see a trend like we did throughout 2017 and 2018, 2017 trended higher while 2018 trended lower.

Batnick charted the point changes in the Dow Jones Industrial Average (the Dow), since the beginning of January 2018 until yesterday. In all, the Dow moved 58,000 total points, but only added 100 points in total once you subtract the selloffs from the rallies.

It's like the midfielder on a soccer team who runs an average 8 miles per game, but essentially stays in the same one third of the field the entire time.

Good perspective next time you are asked 'How's the Market doing?"