A Stealth Rally – No Respect - July 23, 2018

Do you want to wallow in negativity? It’s easy. A PC and a couple of keystrokes will provide you with access to any number of news sites. While some financial sites may be more balanced, highlighting strong corporate profit growth and the economy, you won’t have to look very long before you run into stories about the escalating trade war and threats of new tariffs.

But look what’s happened to the stock market recently. The S&P 500 Index, which is comprised of 500-large American companies, is up nearly 9% from its February 8 and April 2 lows – see Figure 1.

7 23 18 SP500

Despite the constant barrage of negativity, the S&P 500 is less than 3% away from its January high, and it’s positive for the year – up almost 5%.

But the S&P 500 Index fails to capture the entire market. Indexes that track smaller and midsized companies have gone on to new highs (MarketWatch data). And the tech-heavy NASDAQ hit another new high last week.

The inability of the S&P 500 to break new ground can likely be traced to two factors: the ongoing trade disputes, which could pressure larger industrials that rely heavily on overseas sales, and the recent uptick in the dollar.

A rising dollar can shave a few percentage points off revenues when sales made overseas must be translated back into a stronger dollar. Smaller and midsized companies generally have less international exposure.

Still, the economy is expanding, the early read on Q2 earnings season is very positive (Thomson Reuters), and the Fed Chairman Jerome Powell reiterated in Congressional testimony last week that he expects interest rates to rise gradually.

7 23 18 INDEX

Despite economic concerns, investors don’t seem to be that worried about the ongoing trade war. Sure, it can create day-to-day volatility, but as Figure 1 illustrates, shares have been in an upward trend.

It is possible investors are underestimating the economic impact of the trade spat. Possibly, they expect the U.S. to prevail, or they simply don’t believe a trade war, even if extended in length, will have that much of an economic impact.

As we continue through summer, news headlines may not get much better, and volatility can never be ruled out, but investors have been focused on the positive economic fundamentals. Bottom line—the upward move in stocks is welcome, it’s been quiet, and it hasn’t gotten much respect.