Economic and Stock Market Commentary for the week of June 5, 2018
Geopolitics are taking center stage on Wall Street these days, with the on-again, off-again summit with North Korea, the intensifying trade standoff with China, and the political and economic dramas unfolding in Italy and Spain topping the list of current global headwinds. Add in worsening relations with Iran (following our decision to pull out of the nuclear deal struck earlier with that nation), and it is understandable why the equity market continues to experience a series of alternating sharp rallies and brisk selloffs.
This is probably a brief interlude, however. That is not to say that such matters cannot have longer-term effects on trading. In fact, event risk is high on the list of influences on market behavior. But after a time—and especially if a second shoe does not drop—these issues tend to take on a secondary role, as investors return to focusing on the fundamentals, most notably the economy, earnings, and interest rates.
The good news is that the fundamentals are generally sound. To wit, the economy, which grew by a modest 2.2% in the seasonally weak first quarter, and is now underpinned by strengthening consumer outlays, rising industrial production, and durable housing demand, could expand by better than 3% in the current three months. Similar improvement is likely in the second half and the first months of 2019. Add in continuing solid earnings growth, and investors may be well served once the global fireworks begin to tone down.
Still, there will be challenges up ahead, with uncertainty on the inflation and interest rate fronts and consequent concerns about Federal Reserve policies topping the list of domestic worries. Add in the unresolved global issues and the highly charged political backdrop in Washington, and the possibility of further stock market turbulence looms quite large.
Indeed, the stock market’s mettle is likely to be tested further, with the bulls’ quest to put another 12-month win under their belts likely to be a rather challenging one, particularly in light of the extended P/E multiples still in place.
Conclusion: Going forward, we sense that the recent standoff between the bulls and the bears, and the resultant range-bound trading, will persist for a while.