Published August 18, 2017
Stocks took a potentially nasty turn this week. Whether that turn leads into a sharper decline will be the question facing investors in the month of September – historically known for providing its share of upset. Eight months into the Trump presidency, there has been little progress on the business-friendly reforms the market expected. Tax reform in some way is certainly still coming. But it is clear now that it won’t occur in 2017 as the market had hoped. Nor will any major infrastructure spending package. There have certainly been some relaxation in regulations which have supported business and therefore stocks. But those reforms have been very incremental and hardly enough to offer much support.
The souring of expectations for a super-charging of the domestic economic engine is shown very clearly in the lack of performance from domestic-focused small-cap stocks. Chart 1 below shows that small-cap stocks have given up the entirety of their 2017 advance over the past four weeks as expectations for the above government actions has diminished. Chart 1 shows how small-cap stocks have fallen back to a point of potentially strong support – from both the horizontal support at 132.5 as well as the 40-week moving average (at 135) which provided support throughout 2016 (see arrows).
Chart 1: Small-cap stocks are a-tumblin’
Instead, it has been a resumption of global economic growth that has supported stock markets. The same chart below (Chart 2) this time showing global stock markets – thus large global companies. You can see that it has been solidly up and to the right with this week’s slip only a blip, and another visit to the 10-week moving average.
Chart 2: Global stocks still just fine
Both of these patterns suggest that support should be coming for stocks very soon. However, moving into the typically weak month of September will likely keep that support from being very pronounced. And could well see the support give way and lower prices prevail.
Market Update
The diffusing of tensions with North Korea led to a broad rally on Wall Street Monday leaving the indexes +1% and recouping most all of the prior week’s North Korea-led selloff. Retailers continued their struggles with three of them reporting results Tuesday and seeing subsequent 15-20% selloffs. Stocks broadly held their ground, however, with a flat finish. Wednesday brought minutes from the Federal Reserve’s most recent meeting where members expressed concern about soft inflation data. Those minutes led investors to express confidence that interest rates will remain low. Stocks ticked slightly higher on the day. The underlying pressure on stocks returned to the fore Thursday. Perhaps it is seasonal; perhaps given to some buying exhaustion after many months of gains; perhaps something else entirely. Whatever the cause, Thursday was a complete washout with stocks down as much as -2% during the day. Rumors that President Trump’s chief economic advisor, Gary Cohn, might resign in frustration over the President’s handling of the Charlottesville event were viewed as the catalyst for the selloff. President Trump’s continued slide in approval polls and a seeming inability to work effectively with Congress are increasingly calling into question the possibility of any progress at all in passing pro-growth economic policies. Mr. Cohn’s departure, were it to occur, would be read as a concrete sign that those policies had stalled out. Stocks were unable to bounce back Friday with stocks finishing slightly in the red.
Another week of losses for stocks with the Nasdaq 100 (QQQ) down -0.61%. The S&P 500 fell -0.58%. Small-caps continued to lead to the downside with their 4th week of selling. The group tumbled -1.14% on the week.
Warm wishes and until next week.