The S&P 500/SPDR S&P 500 ETF (SPY), and stocks in general ended the week on a relatively constructive note. Major averages managed to stay above critical technical support, while some positive data points reinforced the image of a growing economy. While there are several political and economic risks investors should keep an eye on, the overall macro image appears productive. Favorable underlying elements likely to support the rebound in stocks remain healthy inflation, robust consumer and investor sentiment, government stimuli, further deregulation, a supportive Fed, as well as other fundamental factors.
SPY is the first major and most popular ETF in the world. It’s designed to mimic the exact movement of the S&P 500. The SPY Index fund has roughly $275 billion in net assets, and each share in the fund represents a fraction of the holdings. SPY provides investors with exposure to the S&P 500 index, which is widely regarded as the most significant stock market average for U.S. equities. Since SPY tracks the exact movements of the S&P 500, I will use SPY and the S&P 500 interchangeably throughout the article.
First, let’s discuss the “political chaos” that’s seemingly unnerving stocks. There is the uncertainty regarding the “Trump Tariffs”, as well as the continuous slew of “Russia News”. Personally, I believe these elements are largely overblown in the media, and do not represent significant threats to stocks in general, unless the underlying situations begin to unravel in a meaningful way.
The tariffs are designed to prevent other countries from taking advantage of the U.S. market. Despite the continuous drumbeat of pro-globalist news flow, the bottom line is that “too much” free trade has proven to be very detrimental to the U.S.’s middle class, as well as to the overall U.S. economy.
Manufacturing and other middle-class jobs have been shipped overseas at an alarming pace over the past decades, and many countries are getting unfair advantages when it comes to their “free trade” agreements with the U.S. Therefore, I view the trade tariffs, and other trade related initiatives as positive developments that should eventually even out the playing field for the U.S. and its citizens.
It’s not great policy to allow the U.S. to be swamped by cheap metals and numerous other products from various countries around the world. This is primarily why our trade deficits are so out of whack, and so many quality jobs have become extinct.
Also, it’s a productive move on the administration’s behalf to make exemptions for some of the U.S.’s closest trading partners such as Mexico, Canada, and others. This way the U.S. can secure growth for its domestic producers without alienating the rest of the world. Also, the U.S. should be able to work out significantly more favorable trade deals going forward.
The bottom line is that “a real trade war” doesn’t appear to be inevitable at this point and doesn’t even seem all that likely. Therefore, the doomsayers may be getting ahead of themselves by predicting upcoming chaos due to the tariffs, and stocks are not likely to be negatively impacted by this in the short term.
The Russia Investigation
Next is the never-ending drumming of “Russia News”. The investigation appears to be a continuous effort designed to undermine the validity of the Presidential election. In my view, it is indicative of a witch-hunt, a way to try and justify the seemingly inexplicable Trump victory.
After all, is it probable that a handful of Russian citizens influenced the U.S. election by using Facebook and other social media channels? Isn’t it likelier that for whatever reason Donald Trump just connected better with his base, and managed to win in key geographic areas due to hard work, determination, and superior planning? Some of you may not agree, but the latter appears to be the much likelier scenario in my view.
Regardless, of what the facts may turn out to be, it appears that this is nothing new, has been going on since day one after the election, and is not likely to meaningfully impact markets in the near term, unless the President himself is officially implicated in something illegal. I do not view this as a likely scenario.
Enough About the Bad and the Ugly, Let’s Talk About Good
What is important, is that a lot of the economic data looks good. The recent blockbuster jobs report, higher than expected consumer sentiment, robust investor sentiment, a healthy level of inflation, and other elements are indicative of strong growth and should support stock prices going forward. CPI inflation of about 2% is favorable, not too hot and not too cold. Moreover, the PCE gage that the Fed uses is noticeably lower at just 1.5%, suggesting that the path to normalization can be a long and steady one. Also, consumers are very confident, a preliminary reading of March’s consumer sentiment clocked in at 102, much higher than the projected reading of 98.8. This is also the highest reading in over 10 years. These are not indications of an economy approaching any kind of meaningful decline, and there is more good news.
In addition to the favorable economic developments, we can’t forget about the massive government stimuli that have not even begun to takeoff yet. The enormous economic activity that will likely arise from the introduction of vast U.S. tax cuts, and a proposed $1.5 trillion infrastructure spending plan will likely provide significant growth for the economy for several years going forward.
Furthermore, the GOP is working on creating a more deregulatory environment for the financial industry. This initiative should free up capital, and should also provide growth and stimulus to the overall economy in the short to intermediate term. By the way, this will almost inevitably end badly a few years from now, as it will likely bring back appetite for much of the risky behavior witnessed in the mid-2000s. But for now, deregulation should be favorable for financial companies and U.S. stocks in general.
Looking Towards the Fed Meeting
The Fed meeting next week is the likely source for some of the market’s recent trembles. Stocks generally don’t like higher rates, and the Fed is almost certainly going to raise the benchmark rate by another 25 basis points this week. However, the rate rise is well telegraphed, and is expected by market participants. Therefore, it will not be perceived as a negative factor.
The Fed conference will likely make for a more interesting event than the actual rate decision. This will be a crucial moment as market participants will look to the new Fed chair for guidance on future rate hikes. Presumably, Jerome Powell will not paint an overly hawkish picture and stocks may react favorably to the tone coming out of the conference.
Despite being down 4 out of the last 5 trading days the SPY chart appears relatively constructive. SPY is above its 50-day moving average and is above major support. Furthermore, SPY has made several higher highs and higher lows in recent weeks, a constructive technical development.
The S&P 500 chart looks nearly identical to the SPY chart and we can clearly see some constructive developments occurring. The S&P remains above the crucial 2,700 – 2,750 support level. Moreover, the S&P is trending above the 50-day moving average. Furthermore, we can clearly observe a series of higher lows and higher highs since the correction bottom. The CCI, RSI, full stochastic and other technical indicators seem to be showing an improvement in overall upward momentum.
Fears over trade tariffs, and the Russia investigation appear to be overblown and are likely to be outweighed by more favorable developments concerning stocks in the short term. Significant encouraging fundamental elements such as robust economic data, government stimuli, financial deregulation, and accommodative Fed policy are likely to provide support for stocks, and should continue to drive stock prices higher. In addition, the technical setup in the S&P looks constructive. The favorable fundamental picture, coupled with a constructive technical setup in the S&P 500 should enable stocks to proceed with their upward trajectories going forward.
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Disclosure: I am/we are long Various stocks in the S&P 500.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.