Market Update: Thursday, May 18, 2017


Yesterday’s Market Activity

  • The S&P 500 suffered its worst one-day performance in nearly a year, falling 1.8% after markets changed their tune yesterday; no longer shrugging off political uncertainty in Washington as was the case so far this year. The Dow suffered similar losses, while the Nasdaq and Russell 2000 were hit harder, losing 2.6% and 2.8%, respectively. VIX measure of implied stock market volatility spiked >40% to 14+.
  • No surprise–safe havens led. Yesterday’s market leadership was dominated by safe havens. COMEX gold surged 2% to $1261, large caps held up better than small caps (1% better based on the Russell indexes), defensive sectors held up better than cyclicals (real estate, utilities and staples in particular), and Treasuries surged, sending the 10-year yield down 0.11% to 2.22%, while the yield curve flattened.
  • Trump trade performance indicative of the political environment. Some of the biggest beneficiaries of the Trump agenda such as financials, industrials, small caps, Treasury yields and the U.S. dollar, were among the biggest losers in yesterday’s session. Should confidence in the Trump agenda be restored on Wall Street, we would expect these trades to reverse.
  • Quiet economic calendar Wednesday, though a bullish weekly inventory report provided support for the energy sector which lost less than the broad market.

Overnight & This Morning

  • U.S. stocks are recovering slightly following yesterday’s losses; the S&P 500 is up 0.4% in early trading
  • International equity markets fell overnight, playing catch-up as Wednesday’s U.S. losses carried over into the overnight sessions in Asia. Japan’s Nikkei was down over 1% while European markets are lower in midday trading overseas.
  • Oil rose slightly overnight even after private industry data revealed an inventory build.
    Treasury yields are down slightly this morning with yields near 2.20%. The latest market volatility has lowered the fed funds futures pricing for a June rate hike slightly but markets are still pricing in a roughly 80% chance of a Jun 14 hike.
  • Jobless claims, the Conference Board’s Index of Leading Economic Indicators, and Philly Fed Index highlight today’s economic calendar. Claims fell 4K to 232K versus Bloomberg consensus at 240K while the Philly Fed Survey for May rose to 38.8 from 22.0 in April (consensus 19.6).


Key Insights

  • Key question is how much of the market’s ascent has been policy driven. While yesterday’s selloff may have a little more to go, we think investors should be focused on market fundamentals to help answer this question. Market participants doing just that as stocks are already showing signs of stabilization this morning after earlier losses. Clearly, earnings have driven some of the post-election gains in the stock market, suggesting markets may be able to withstand another pushout of the policy timetable.
  • We are still in the headline risk stage, not the fundamental risk stage. We suggest investors focus on economic growth, inflation, interest rates, corporate sales, profit margins, and earnings, which still suggest the economy remains robust and the current bull market has not run out of steam.
  • Fundamental measures of the economy and markets are still consistent with the new version of normal for this market environment: yield curve, 10-year yield, credit spreads, credit default swaps, etc. We have not seen worrisome signs of stresses in fixed income markets, while monetary policy is still supportive and is providing liquidity.
  • Technically, we see potential support around 2320 on the S&P 500 with stronger support in 2200-2250 area, which would represent additional weakness in excess of -5.0%. The percentage of stocks at 20-day lows at near 30% is not yet indicative of oversold conditions (typically around 50%).

Macro Notes

  • Finally some volatility. After 15 consecutive days without a S&P 500 close up or down of 0.5% (the longest streak since 1969), volatility came back in a big way with an 1.8% drop. This was only the second 1% drop this year and it was the worst one-day drop since September. Technically, the S&P 500 closed beneath its 50-day moving average for the first time since April 21. Given it made a new all-time high two days before, this is a historically one of the quickest moves from a new high to beneath the 50-day moving average.
  • The worst day of the year. The S&P 500 fell 1.8% yesterday and is currently the worst day of the year. We are aware there is plenty of time left in 2017, but to put this in perspective the average worst day of the year going back 20 years is down 4.2%. Also, yesterday this would be the ‘best’ worst day of the year since 2005 (-1.7%). For more color, as strong as 2013 was for equities, the worst day that year fell 2.5% – showing how normal a one-day big drop can be.
  • Second quarter gross domestic product (GDP) is still on track for +2.0% to +2.5% growth. Corporate profits rose 15% the first quarter and are still tracking toward high-single digits for the rest of 2017, despite little anticipated fiscal policy boost (though executive orders for energy infrastructure projects could help some this year).


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