This past week, for those long-term focused investors that were able to block out the post- “Liberation Day” noise, they were nicely rewarded as we experienced a broad rally across the major indexes. Headed into the week, market sentiment was still quite poor as the indexes had just made a fresh lower high and were resuming the downtrend. Additionally, this was being magnified by several factors. Firstly, investors were worried about the steep level of tariffs that still remained on our top trading partner, China, and the downstream economic effects of these tariffs should they be left in place. Secondly, fears regarding the future of the Federal Reserve’s independence swelled, as President Trump and others in his administration had signaled that he was probing the possibility of firing current Fed Chair, Jerome Powell. Following the long weekend, these factors led to markets opening down significantly on Monday and plunging intra-day. However, they finished well off of their worst levels. This was a clear sign from the stock market to the Administration that there needed to be a tone shift regarding the sacred cow of Central Bank independence and the unconscionably high tariff rates on China. Clearly the message was received. Shortly after markets closed on Monday, President Trump reversed course on his rhetoric regarding his pursuit in firing Jerome Powell, saying that he has “no intentions of firing” the Fed Chair. Additionally, the Administration began to dial back the hawkish China rhetoric saying that current tariff levels are unsustainable, that they are actively working towards a deal (that will likely take some time to finalize), and finally they floated the idea of cutting tariffs on Chinese goods by more than half, seemingly extending an olive branch to expediate negotiations. The investors got exactly the good headlines that they were starving for. These positive developments were warmly welcomed by the market and helped to propel the strong run in stocks to close the week. Now, any market watcher worth their salt should be well aware of the uncertain and vacillating nature regarding trade policy coming from D.C., yet the major positive developments from this past week are encouraging and we’ll take the win.
Once some of the immense pressures coming from the Administration were dialed back, this allowed investors to more so focus in on the fundamentals and earnings results, many of which were quite strong. The Tech sector as a whole has been beaten up over the past few months. A number of the major Tech companies that reported last week delivered solid EPS beats. This would include the likes of GOOGL, IBM, & NOW amongst others. It was not just Tech-related companies as well. We saw strong results from other companies like GE & ISRG too. While generally companies are communicating that there is a cloudy horizon for the rest of the year, it was positive to see companies that delivered strong results be rewarded by investors.
Over the past week there were several significant ‘technical’ developments in the market that merit being discussed because it could mark that the ultimate bottom in this decline is already in. On “Liberation Day”, the S&P 500 closed at 5670, and in the wake of those developments, the following day the index opened after a gap down at just a touch below 5500. In early March, this level served as a clear point of support, however, the index broke below it on April 3rd, turning this previous level of support into a key level of resistance. This 5500 level was a massive line in the sand that had been drawn. In the aftermath of the April 2nd tariff announcements, this 5500 level became the lid over the S&P. The index quickly rallied back near this level on April 9th, however, the rally fizzled out as the index failed at this resistance point. This week though, was different. On Thursday, the index again rallied higher approaching this level of resistance setting up for an interesting Friday trading session. Friday delivered a strong technical signal as the S&P 500 was able to break through the 5500 level and close above it. Additionally, since mid-February, there was a clear downward sloping trend line where the S&P 500 continued to find resistance. Friday’s session was the first in over two months in which the index was able to trade above this resistance trendline, making a new short-term higher high. The final technical sign from this past week that I want to highlight is found in the ‘weekly’ chart of the S&P 500. Looking at a chart you will see this past week’s bar indicating a very definitive ‘bullish engulfing’ pattern, which is reliable trend reversal candle. This means that this past week’s trading, at least in the short term, could have marked a trend reversal in stocks.
Following last week’s powerful bullish thrust in stocks, we are taking a more optimistic, yet still cautious approach to markets. Certainly, we are beginning to get some positive headlines from the Administration regarding trade policy as opposed to the daily onslaught of negativity that we endured for a few weeks. If we can continue this current trend and also begin to see some progress in getting new and meaningful trade deals announced, then this should continue to provide support for markets. After the recent uncertainty and given the likelihood that these new tariffs are not likely to be completely done away with, there will certainly be some form of economic impact from this. We will be watching closely for further positive policy developments as well as any indications regarding any damage done from the increased tariffs. After this past week, we are beginning to feel more strongly that the April 7th bottom could prove to be ‘the’ bottom. Now, we still expect choppy trading in the weeks and months to come and the recovery will more likely look like a ‘W’ rather than a ‘V’, but if the early April low holds, there will likely be many tradable moves throughout the recovery.
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Key Events to Watch For
- Trade Deal Developments (Tariff Reductions)
- Mega Earnings Week
- Major Macro Data (Jobs, PCE, GDP)
Looking ahead after the strong week we just experienced for stocks, much still hangs in the balance and it will largely be determined by the developments and progress that we get on the tariff front. Weekly, I have written about this topic ad nauseum because this is the primary driver behind broader stock performance in this current market environment. Certainly, I do not prefer having a market where it is being almost entirely driven by headlines, which can and have changed on a dime, yet this is the hand we have been dealt at the moment. So, I believe it is important to digest this for what it is and understand that the current news flow surrounding tariff updates is what is moving this market. Last week we got a few promising stories that new trade agreements with several countries were close and perhaps imminent, which the market will cheer! However, at some point these deals need to begin to materialize. There is only so long that a proverbial ‘trade deal carrot’ can be held in front of investors with no payoff. Eventually the rubber needs to meet the road. I expect in the weeks to come investors will begin to demand more substantive trade deal progress. If this does not materialize in a meaningful manner, I anticipate that stocks will come under additional pressure.
As we are watching closely for updates to trade policy, Q1 earnings reporting rolls on this week in likely what will be the most consequential week of earning season. Thus far, earnings season has produced strong EPS results but not overwhelmingly strong. At this point, just under 40% of S&P 500 companies have reported their Q1 numbers with about 73% of them beating EPS estimates. This is a good EPS beat-rate as it is roughly in-line with longer term averages, but again not a blowout season thus far. This week there are dozens of major large-cap companies queued up to report their Q1 results this week including a handful of the mega-cap Tech giants. A handful of the top Tech names on deck are MSFT, META, AAPL, & AMZN. In addition to these Tech titans, some of the other significant companies we are expecting to hear from in the week to come are V, MA, MCD, & LLY amongst others. All that to say, this coming week’s reports are going to go a long way in determining whether Q1 earnings season turns out to be a strong one or not. Thus far this season, we have seen companies’ share prices rewarded for producing strong results and we hope to see a continuation of that trend.
Finally, as if watching for fresh tariff headlines and tracking this bevy of earnings results was not enough to fill a schedule, there are numerous macroeconomic reports set to be released this week which will have some bearing on the market. The first two of these reports will come midweek on Wednesday morning when both the initial Q1 GDP report & the March PCE inflation report are published. For weeks, amid this tariff chaos, people have speculated about what the effects would be on Q1 GDP. This week, we will begin to get the answer to this question. The March PCE report will also be telling because during the month of March, several of President Trump’s newly announced tariffs, primarily on China, were enacted as well as smaller retaliatory tariffs. While these tariffs were far smaller than what was to come later in early April, any upward price pressures caused by this policy may begin to show up in this data. We will also get a fresh read on Consumer Confidence this coming week. Consumer Confidence has recently declined for four consecutive months, reflecting a souring amongst consumers. It is expected that this index will have fallen in April for a fifth straight month. This is notable because where consumer spending makes up about 70% of U.S. GDP, as consumer confidence continues to fall it will likely also continue to have a downward effect on hard data like retail sales putting GDP growth into question. The last of the major economic reports due in the week to come is the April Jobs report which will be published on Friday morning. Expectations are that job growth will have slowed from the previous month, while unemployment will remained unchanged. If we get this result it would be an ok outcome for stocks as it would signal the labor market is still holding up even as job growth likely slowed last month. What really supercharges the importance of all of these reports is that the Fed is scheduled to meet the following week. While they are widely expected to leave policy rates unchanged at this meeting, these data points could certainly factor into rate decisions to come later this year should either inflation or employment become out of balance.
Thank you for reading this week’s edition of the Weekly Market Periscope Newsletter, I hope you enjoyed it. Please lookout out for the next edition of the newsletter as we will give you a preview of the upcoming week’s important market events.
Thanks,
Blane Markham
Author, Weekly Market Periscope
Hughes Optioneering Team
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