Stocks appear to have entered a consolidation phase, with equities losing ground for only the second time this year.
U.S. growth is slowing in the first quarter, joining the rest of the world in an economic soft patch.
We think equities have room to make additional gains, but it may require a catalyst like a revival in global economic growth.
U.S. stocks came under pressure last week, experiencing only their second weekly decline of 2019.1 The S&P 500 Index fell more than 2%, with higher-risk areas of the market experiencing the worst losses.1 Small caps came under pressure, as did health care, financials and energy.1 More defensive areas such as utilities fared relatively better.1 There was no apparent catalyst for the decline, but good news about a U.S./China trade deal and a more dovish Fed had probably already been priced into the markets. These factors, plus the sharp rise in stock prices since late December, have made markets vulnerable to a consolidation phase.
• The S&P 500 fell 1.755 percent as of the close in New York.
• The Nasdaq 100 Index declined 2.23 percent.
• The Stoxx Europe 600 Index declined 0.2 percent.
• The MSCI Emerging Market Index declined 1.80 percent.
• The MSCI Asia Pacific Index dropped 2.32 percent.
• The Bloomberg Dollar Spot Index increased 0.70 percent, several straight advances.
• The euro fell nearly 1 percent to $1.1235, the weakest since November 2018.
• The British pound dropped to $1.3085.
• The Japanese yen decreased 0.3 percent to 111.20 per dollar.
• The yield on 10-year Treasuries slightly dipped at 2.63 percent.
• Germany’s 10-year yield sank to 0.06 percent.
• Britain’s 10-year yield dropped to 1.17 percent.
• West Texas Intermediate crude was little changed at $56.10 a barrel.
• Gold added 0.1 percent to $1,298.00 an ounce, remaining flat or the week.
Stocks need a new catalyst to spark a renewed rally
The current bull market and economic cycle is clearly in its latter stages. And while we see plenty of global imbalances, we do not see a trigger that would spark a recession or a sustained bear market. Global interest rates remain relatively low, monetary policy remains easy throughout the world and trade disputes appear to be headed toward at least a short-term resolution.
Many investors, however, remain deeply scarred by the Great Recession and the accompanying deep equity bear market. Since the current cycle started, consistent expectations for another calamity have contributed to a long and slow recovery and expansion cycle. A recession at some point is inevitable, but we doubt the next one will look much like the last. Rather, any recession will probably be relatively minor and followed by a more traditional recovery. Unlike during the financial crisis that preceded the Great Recession, the banking and consumer sectors do not appear to have the same sort of structural debt issues, and corporate balance sheets remain healthy.
From a markets perspective, stocks are experiencing their first notable setback in 2019. But so far the decline has been much more modest and orderly than the corrections of 2018. We have been saying for several weeks that markets appeared headed for a consolidation phase due to rising stock prices and deteriorating economic data. The stronger U.S. dollar has also been a headwind, putting pressure on corporate earnings.
We think fundamentals remain sound and stock prices have room to move higher, but we also think that investors will require a new catalyst before they will bid prices up for a renewed rally. A re acceleration in global economic growth may be the necessary ingredient.
(The author of this article is Marcus Queree, Partner & Director of DNA Wealth. Any information herein is only expressions and opinions. This document does not constitute an offer, an invitation to offer, or a recommendation to enter into any transaction, nor does it constitute investment advice. The information contained herein is confidential and reproduction of any part of this material is prohibited. If you are in any doubt as to the suitability of an investment you should always consult your financial adviser. DNA does not receive any form of compensation for circulation of such material.)