Market Strategy Radar Screen Weekly August 14, 2017

 Hooked on a Feeling

Markets found a catalyst for profit taking in last week’s headlines

The market found its catalyst last week and took it. Stocks around the world gave up some of their record and near record gains on back of a spike in geopolitical tensions centered around an escalation of threats against the US from North Korea, a few disappointing earnings season results among some stateside household names in the consumer discretionary sector, and continued concerns about the pace of stateside economic expansion as the Consumer Price Index pointed to a continuation of reflationary softness rather than a level of inflation that might provide a compelling reason for the Fed to hike rates another time before the end of the year.

Intensified geopolitical risk goosed the VIX (a gauge of market volatility) last week, causing it to jump 61.5% from Tuesday through Thursday’s market close with the index reaching its highest level since November 8th (Election Day) last year. On Friday as traders regained their composure and stocks rallied, the VIX edged lower but remained at an elevated level relative to the near-historical lows where it has traded most of this year. For the week, the VIX advanced 54.6%, reminding investors of the adage that one is supposed to buy household insurance before there’s a fire in the kitchen (see figure on next page).

Stocks reflected last week’s drama in a manner that suggested the market had found the catalyst it had been looking for to justify at least some profit taking after this year’s remarkable run-up in the price of the major stock indices on back of improving fundamentals.

On the week, the Dow Industrial Average, the S&P 500, the S&P 400 (mid-caps) and the Russell 2000 (small caps) closed respectively lower by 1.06%, 2.31%, 2.7%, and 1.5%. We’d note that those same indices after last week’s selling were up respectively on a year to date basis by the following: 10.6%, 9.04%, 3.04%, 1.26% and 16.23%. The performance particularly of the large-cap indices leads us to believe that last week’s action was more investors taking advantage of news that justified some profit taking, rotation and rebalancing rather than a market rout or harbinger of worse things to come.

The bond market rallied on the jump in nervousness last week. The yield on the 10-year Treasury moved lower in the course of the week from 2.26% to 2.19% by Friday afternoon.

Gold last week rose 2.43% on investor appetite for some safe haven exposure. The precious metal moved from $1,258.77 to $1,289.35 from Friday to Friday.

Comparisons made by many sources in the financial media and among market commentators and participants regarding the current geopolitical condition versus other periods in history when geopolitical tension became elevated (including the Cuban Missile Crisis in 1962 and the Gulf War in 1990) helped remind investors that while markets may be rattled by spikes in tensions between nations and even war, the unsettling periods for the bourses around these occurrences tend to be short in duration and with fleeting effect.

The markets look to economic, revenue and earnings growth as key to what course they will take. As Mark Twain is credited with having said, “History may not repeat itself but it often rhymes.”

In the week ahead, investors are likely to focus on the companies that remain to report in the current S&P 500 earnings season, economic data including the July retail sales numbers, the NY Federal Reserve’s Empire State Manufacturing report, along with data on housing.

On the regional front, NAFTA negotiations begin in Washington on Wednesday with the US, Canada and Mexico looking to renegotiate terms of the treaty.

Should the negotiations that are getting underway lead to the modernization of the original NAFTA agreement to take into account a myriad of changes wrought by globalization and technology on labor, business and governments in this region of the world, a more equitable and economically efficient agreement could emerge.

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