Market Strategy Radar Screen Weekly August 21, 2017

 Ain’t No Cure for the Summertime Blues

Political drama and terrorist attacks raise concerns but don’t take the market hostage

The stock market stateside once again proved resilient in the face of challenges on the political and geopolitical fronts last week. After having navigated its way through North Korea’s threat of an attack on Guam the prior week, and then having recovered all of the ground it had lost and even moving higher, a third set of comments by President Trump on Thursday related to the tragedy in Virginia in the prior week triggered adverse reaction from the President’s opponents as well as from many of his supporters.

An increased level of concern about what was said and how it was said reverberated quickly through the media, Main Street America, social media, and the markets stateside and abroad. Then a series of horrific terrorist attacks in Catalan, Spain last week further shook the world and the markets. In turn, the VIX spiked, stocks sold lower and risk-off assets, including bonds, gold, and defensive stocks, advanced.

From Thursday through the weekend, proponents of the bear case for the equity markets predicted the end of the bull market, citing dysfunction in Washington, late cycle market indicators, valuations, and anecdotal references of signposts which have served (in market hindsight) as precursors of past declines in earlier bull markets. One bearish commentator called investors’ attention to the fact that the Dow Jones Industrial Average saw its biggest one-day drop in three months (a slide of 274 points) on last Thursday. Another source said that last week’s decline in the markets had “overwhelmed bullishness.”

From our perspective on the Market Strategy Radar Screen, a decline of 274 points in the Dow last Thursday needs to be taken in context of what it is—a decline of 1.24% with the benchmark closing that day at a level of 21,750.73. The percentage of that decline tells us that the market essentially acknowledged what was happening but was quick to discount and digest the bad news.

Commentary and prognostication that key administration personnel might be considering resigning their posts, along with concerns that the President’s style of leadership and management might endlessly delay enactment of key agenda items (such as tax reform, repatriation of profits held abroad by US corporations and infrastructure spending) that might have found support from both sides of the aisle ahead of midterm elections next year, all added to the uncertainty through the second half of last week and through the weekend.

From our perspective as investment strategists, we were impressed with the market’s resilience in light of the strong reaction—including the numerous resignations by business leaders from the President’s business councils as a result of his remarks last Thursday.

With all the drama in last week’s news (and much of it quite legitimate in our opinion), the S&P 500 closed off just 0.65% on the week. In the latest 12-month period and in the year to date, the S&P 500 has advanced respectively through last Friday’s close 10.91% and 8.34%.

As we went to press late Sunday, global futures were modestly but broadly lower.

In the week ahead, we expect the market will likely further digest the political and geopolitical issues at hand near term but find its more meaningful catalysts for its next substantive moves in the weeks and months ahead from monetary policy, economic data, and revenue and earnings results.

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