U.S. stocks fall further. Yesterday, the S&P 500 Index posted its worst day since January 3 as investors sorted through the implications of additional U.S. and Chinese tariffs. The recent equity market volatility, though unpleasant, is consistent with our expectations given our switch to a market weight allocation seven weeks ago. Stocks’ rally from the December lows has been powered by an accommodative Fed, better-than-expected U.S. gross domestic product growth, lower-than-forecast inflation readings, solid employment gains, and first quarter profits that came in better than feared. None of these factors have changed. Uncertainty about trade currently weighs on investor sentiment, and we continue to believe that a path toward progress will come soon, alleviating market pressures.
Technical support. In the meanwhile, we look for S&P 500 support in the 2,775 range, the index’s 200-day moving average. If this level were to be reached, it would represent a 6% slide from record levels, and at the low range of a typical 6-10% market correction. Solid fundamentals and technical support may provide investors with potential for relief from the recent bout of market volatility.
Yield curve fears. Renewed trade tensions have weighed on longer-term Treasury yields, and subsequently impacted the yield curve. The spread between the 3-month and 10-year Treasury yields fell to 4 basis points (0.04%) yesterday, stoking concerns about another inversion (long-term rates falling below short-term rates) in a closely-watched part of the yield curve. Don’t fret too much about the yield curve, though. Even though a prolonged yield curve inversion has preceded past economic recessions, quick and shallow inversions are common later in economic cycles.
Uncomfortable, but expected. Stocks’ recent volatility has been uncomfortable, but expected given the lack of turbulence year to date. The S&P 500 has slid 2.1% over the past two days, smaller than stocks’ largest pullback of 2.48% this year. Since 1970, the S&P 500 has only made it through the first five months of the year without a 2.5% pullback once — in 1995. On the LPL Research blog later today, we’ll review U.S. stocks’ rough ride over the past two days, and why conditions could be ripe for more volatility.
NEW Market Signals podcast. In this week’s podcast, LPL Research Chief Investment Strategist John Lynch and Senior Market Strategist Ryan Detrick discuss the ongoing trade dispute, the Federal Reserve’s (Fed) action – or inaction – and improving economic data. Subscribe to the free Market Signals podcast series on iTunes, Google Play, Spotify, or wherever you get your podcasts.
- Germany Industrial Production (Mar)
- China Trade Balance (Apr)
- China Exports (Apr)
- China Imports (Apr)
- China CPI Report (Apr)
- China PPI Report (Apr)
- PPI Report (MoM, Apr)
- Initial Jobless Claims (May 4)
- Trade Balance (Mar)
- Japan Consumer Confidence Index (Apr)
- CPI Report (MoM, Apr)
- Monthly Budget Statement (Apr)
- Germany Exports (Mar)
- Germany Imports (Mar)
- UK GDP Report (Preliminary, Q1)
- China Foreign Direct Investment (Apr)
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