S&P 500 update

By David Morrison  |  17/04/2018 15:53

US indices shrug off worries

Two weeks ago, the S&P 500 was trading below its 200-day exponential moving average (EMA) and looked on course to retest the correction low of 2,530 hit on 6^th February this year. But the US stock market steadied last week and appears to be staging a come-back. Yesterday the major indices all rallied sharply following the limited military response from the US, UK and France in the aftermath of allegations that Syrian President Assad has once again used chemical weapons against his own citizens. It also appears that investors are happy to shrug off the risk of further escalation in the tariff tit-for-tat between the US and China. What was in danger of turning into a full-blown trade war seems to be nothing more than a series of threats from both sides which could end in agreement between the two countries. This, of course, is the best-case scenario.

Earnings season

Meanwhile the first quarter earnings season is getting underway and investors seem comfortable to increase their exposure to US stocks on the expectation of solid numbers. Netflix rose over 7% in early trade this morning after the company added more subscribers than anticipated. But Goldman Sachs was unable to hold on to early gains despite posting a strong set of earnings and revenues. In this it echoed Friday’s session when JP Morgan, Wells Fargo and Citigroup all posted solid numbers only to end the session sharply lower. It appears that as far as financials are concerned, there’s a worry that this quarter’s earnings could be as good as it gets for now. However, analysts remain convinced that Trump’s tax cuts will feed through to corporate results and raise the likelihood of further share buybacks and raised dividends.

Forward guidance

Yet some investors remain concerned that this quarter’s results may still prove to be a disappointment. 2017 saw a strong first quarter which means the year-on-year comparisons could come in below expectations. On top of that there’s the danger that we see some weak forward guidance from corporations. Yesterday GE’s share price fell sharply after Goldman Sachs warned that there was a risk of its 2018 earnings-per-share being cut. If this becomes more widespread, it would be another excuse for investors to trim their exposure to equities.

Dollar and yields rangebound

It’s also worth bearing in mind that tax cuts and increased spending are set to add a fat chunk to the US budget deficit and national debt. This at a time when the Federal Reserve is raising borrowing costs and engaged in quantitative tightening. Despite all this both the dollar and key US bond yields remain rangebound. Remember the brouhaha over the yield on the US 10-year Treasury bond? It wasn’t long ago that bond ‘gurus’ Bill Gross and Jeff Gundlach were warning that a break above 2.65% (Gross) or 2.80% (Gundlach) would signal the end of the 35-year bond bull market which would be a precursor of dire things to come. The next red line for the 10-year is now 3.00%. But yields have oscillated in a relatively tight range since early February with resistance around 2.85% and support around 2.75%.

Dangers persist

Investors appear to have rediscovered their ‘mojo’ and are now using the Feb-April sell-off as a dip-buying opportunity. But it’s worth noting that most of the issues that upset investors remain unresolved. These include the obvious geopolitical factors such as the West’s involvement in Syria and the tariff tit-for-tat between the US and China. But February’s sell-off in equity and bond markets came on fears that US inflation was set to spike higher which would lead the Federal Reserve to tighten monetary policy more aggressively than previously anticipated. That fear may have subsided to some extent but it hasn’t gone away.  

Technical outlook

Chart-wise, the S&P is now back above its 200, 100 and 50-day EMAs. It is also trading just north of 2,700 – a level which roughly corresponds to the 50% retracement of the sell-off in early February. This could prove to be an important technical level although the index would have to rise by a further 50 points or so to test the trendline from January’s all-time high. Overall, sentiment is considerably more positive than this time last week, but dangers still lurk.
 
 


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