Given the stock market (S&P 500) pullback over the past 2 weeks, I wanted to provide my thoughts on what might be happening. First, I think this is just a fairly normal reaction to the very abnormal run higher we had from Christmas Eve through the end of February. Stocks don’t typically move up like that, so a little pause to catch our breath seems needed.
I don’t think this is the beginning of a new downward spiral like we had in the 4th quarter of 2018. I’ve identified support at 2640 and 2600 on the S&P 500, which would represent a decline of about 4% or 5% from the March 7 close, or a decline of 6-7% from the March 1 high. If we close below 2750, which looks likely as I am writing this on March 8, we could head a little lower, maybe even to the 2600-2640 level.
I don’t believe this is a tradeable event, though. There’s just not enough downside to risk a hedging strategy, in my opinion. If anything, I likely will be buying. My indicators show more good than bad. Momentum is positive, economic activity is good, consumer confidence is high, there’s lots of liquidity, and transportation stocks are doing well. There are some things I’m keeping an eye on, though. Stock market levels are still a bit extended, railcar activity (Warren Buffet calls this his favorite indicator) is declining, the Federal Reserve is not as accommodating as over the past few years, the yield curve is flat, and initial jobless claims numbers are less positive than they have been in a few years. The bulk of the numbers indicate higher stock prices, but, as you can see, not everything is rosy.
I mentioned in one of my recent update that I felt that we were approaching a flashing yellow light. We needed to use caution before going forward. I still am leaning toward the cautious side, but I think we can move higher over the intermediate term. Since there is no ticking clock for economic expansion, it’s always hard to tell these things in the middle of the action. Sector movement suggest that we are still in the mid-phase of expansion, so I’m not prepared to get defensive, yet. As they saying goes, “They don’t ring a bell at the top,” so there won’t be a warning when the stock market hits its high. It may have already happened. But given what I’m seeing, I think stocks can still move higher.
If your situation has changed, or your risk appetite has shifted, or financial deadlines are coming up, those are things that you should make us aware of so that they can be factored into your allocation. Combined with my outlook for the market, we can create a portfolio to suit your circumstances.
As always, these recommendations are mine, and may or may not be the same as those of Raymond James. This is not a solicitation to invest, although we do invite you to review your portfolio with us to see if any changes should be made. Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss.