Advisor Insights Market News Weekly Market Commentary

The 5-Day Stock Market Retreat

Written by: Benjamin Bimson CIMA®, CMT® / CIO, BCJ Financial Group

Last week we had a 5-day stock market retreat. As with all trends and possible future implications, we can look at the rhymes we see in history, but we must be patient to see where this movement leads from here.

One of the interesting developments through the course of last week was a return to the apparent focus on the economics. Throughout much of the recovery rally that began just after Christmas last year, there was a more heightened focus on sentiment change than on the fundamentals which underscore the global and US economy. Markets were relieved to hear from the Fed that they would be pausing interest rates.  Markets were happy the US Government re-opened for normal business and also pleased to imagine a positive outcome to the ongoing trade-war with China. Then we got an apparently soft jobs report last Friday. Which was very far off from estimates.

What does all this show? Well, it shows that the economy is softening. It isn’t in dire straits here in the US, but other parts of the world are a bit softer. For example, the Euro Zone is now expecting slower economic growth and it is blamed on both trade and “internal factors.” In other words, their economy is slowing faster than they thought last December, before the market recovery even began.1

The combination of potentially slowing global growth, the still-yet-to-be-resolved China/US trade-war and a hint at even a potential for softening US economics might be a catalyst for a retesting of markets. A retesting of the S&P 500 down to perhaps even 2630-2451 would undoubtedly spook many investors. Fortunately, the data we watch still doesn’t support a more sinister drop from here.

 

Chart Source: BCJ Financial Group
It is interesting to notice that there does appear to be some rhyming going on with even the 2015/2016 double dip. During strong up trends, the 50-day moving average tends to be above the 200-day moving average. In strong downward markets, the opposite is true. Inflection points can fluctuate at the crossing points.

 

Depending on the next batch of economic reports, markets might find a catalyst to continue higher (economic data positively correlated to expectation), or conversely (economic data worse than expected), they could find a reason to pull back and reset the recovery.

Nevertheless, this is a highlight to the fact that near-term risks remain high. We are not clear of the correction that began in October 2018 yet, but we do expect to clear that hurdle at least by the second half of 2019.

If you were looking to be optimistic, you can take comfort in the fact that this type of behavior does tend to happen in markets that are experiencing maturing economic cycles, not necessarily those that are just about to experience the pain of recession.

 

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Sources:

1- https://www.cnbc.com/2019/02/07/reurters-america-update-1-eu-slashes-zone-growth-outlook-expects-inflation-to-slow.html?&qsearchterm=eu%20rates

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