As I write this, the market is all over the place due to uncertainty of our trade agreements with China. Terms were not met as of last night’s deadline, so additional tariffs will be imposed on imports from China. Right now, market participants are trying to figure out how to value stocks in that environment and what their courses of actions should be if the trade deal eventually is or is not met.
As I mentioned in my April update, I was concerned about the stock market (the S&P 500) being overbought, but that condition has largely corrected itself. Between the flat market of last week, and the down market this week, I think the S&P 500 is pretty fairly priced right now, at 2863. Of course, assets don’t always sell for a fair price, so sellers may keep selling, pushing stock prices down further, possibly to where they are oversold. For many of our discretionary accounts, we are sitting on more cash than usual, and we made a nice move into Treasury bonds a few weeks ago. Often, when the stock market falls, Treasury bond prices rise, and that is what happened this time. So, we’ve has some investments actually increasing in value this week.
Despite the volatility, the pullback doesn’t even register on my long-term charts, and we are still well above trend lines. Because of the rapid recovery we had in the first quarter, support for the S&P 500 is about 3% below where we currently are, so if there’s no trade deal, we could move a little lower. If so, I think we’ll be buying stocks at that level.
There’s still more positives than negatives for investors, I think. Amazingly, initial jobless claims keep falling, which is a great leading indicator. Liquidity abounds, demand is still in control, and consumer confidence is high. On the flip side, we are heading into the historically weak season for stocks (May-October), and railcar loads are down.
All in all, from here, I don’t expect the S&P 500 to move meaningfully higher through the end of the year. There will be pullbacks and advances, but after being up about 15% so far in 2019, I can imagine the market not moving much higher. What I do believe will happen is rotation. Sectors that are doing well now could well rotate out of favor, while unloved sectors could see money flow in. If so, that bodes well for healthcare, basic materials, and oil stocks. Also, small cap stocks may not be as impacted by tariffs, since many of them don’t trade overseas. We could see money flow from large, multi-national companies into the smaller stocks.
Either way, I am comfortable with our positioning. We are well diversified, and we invest in companies with growing earnings expectations, which, over time, is a main driver of stock performance. I’m not suggesting a change in allocation now, but I will keep you posted.
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.