Last week saw mixed economic data, continued progress on the trade front and ongoing domestic and global political uncertainty. Markets were somewhat listless in this environment, with U.S. stocks rising slightly for the week.1 The biggest winners were technology and financials, while materials and defensive sectors sold off.1 In general, we think markets are fairly valued and expect the current bull market to persist, but also expect a near-term consolidation.
Investors are hungry for concrete details about progress on a U.S.-China trade deal before they push a global equities rally further, leaving the S&P 500 Index seemingly stuck below the key 2,800 level. Trade and slowing growth are on the agenda as China’s most powerful officials gather in Beijing for the National People’s Congress, while investors will get the latest read on the U.S. economy with the monthly jobs report Friday.
Elsewhere, European shares ended slightly higher, while equities in Japan, Korea and Australia slumped after China lowered its target for economic growth. Indian stocks recouped early losses made after the U.S moved to end key trade concessions for New Delhi.
Here are some key events coming up:
• Australia’s central bank Governor Philip Lowe will give a speech on the housing market Wednesday.
• Bank of Canada Governor is expected to keep rates on hold Wednesday due to lingering uncertainty on housing and investment, while sticking to his message that borrowing costs eventually need to head higher.
• European Central Bank policy makers are expected to leave rates unchanged amid a deteriorating outlook. President Mario Draghi will hold a news conference on Thursday after the decision.
• The U.S. jobs report Friday may show hiring moderated in February. Nonfarm payrolls may have increased by 185,000 while the jobless rate fell to 3.9 percent, according to estimates.
• The S&P 500 fell 0.1 percent as of the close in New York.
• The Nasdaq 100 Index rose 0.1 percent.
• The Stoxx Europe 600 Index rose 0.2 percent.
• The MSCI Emerging Market Index climbed 0.2 percent.
• The MSCI Asia Pacific Index sank 0.2 percent.
• The Bloomberg Dollar Spot Index increased 0.2 percent, its fifth straight advance.
• The euro fell 0.3 percent to $1.1306, the weakest in more than two weeks.
• The British pound was little changed at $1.32.
• The Japanese yen decreased 0.1 percent to 111.87 per dollar.
• The yield on 10-year Treasuries was little changed at 2.72 percent.
• Germany’s 10-year yield climbed one basis point to 0.17 percent.
• Britain’s 10-year yield rose less than one basis point to 1.28 percent.
• West Texas Intermediate crude was little changed at $56.61 a barrel.
• Gold added 0.1 percent to $1,287.73 an ounce, reaching a six-week low.
Stocks may soon enter a consolidation phase
U.S. stock prices have risen by 20% since late December, thanks to three key tailwinds: better-than- expected (or feared) earnings, an aggressive dovish pivot by the Federal Reserve and reduced trade tensions.1 During that same time, economic fundamentals have not really shifted much. Growth remains slightly positive, inflation is still tame and interest rates are still generally low.
Together, these factors suggest that stocks have probably risen too much, too quickly over the short term, and we think U.S. stocks may be overbought. We think the bulk of the good news is already baked into market prices, with investors expecting the Fed to remain on hold and believing that trade disputes are fading.
Fundamentals and sentiment are strong enough that we don’t expect the quick and sharp correction that dominated market action late last year. But we do think investors will probably be in profit-taking mode and stocks may enter a consolidation phase in which prices remain in a trading range for a while. Eventually, we think the risk-on phase will reemerge, but that would require government bond markets to remain calm, the geopolitical backdrop to remain stable and global economic growth to firm modestly.
We continue to have a constructive long-term view toward stocks and think prices still have room to rise, but it pays to be tactical in this market. Focusing on companies with solid levels of free cash flow and being willing to buy into weakness and sell into strength seems like a logical approach in 2019.