The U.S. stock market indexes did a good job of brushing off an onslaught of political news to march higher. Friday helped stocked to lock in a positive week.
We expect stocks to trade lower as the emerging markets woes continue to stay in the news.
S&P 500 Cycle Outlook for the Week of August 27, 2018:
– The stock market rose last week, with the S&P 500 up 24 points to 2874, an increase of 0.8%.
– Stocks made new all time highs, even though interest rates are rising and Trump’s political crisis is getting worse.
– Will the market’s resilience continue?
Our projection is for stocks to decline into the middle of the week, before starting the rising phase of a new market cycle.
Our Weekly Market Video:
While President Trump’s base of support amongst voters appears to be stable, he lost some important allies last week, after his former lawyer Michael Cohen pleaded guilty to a set of crimes that implicated the President.
This guilty plea led to two Trump allies pledging cooperation with investigators, including media executive David Pecker and Trump Organization CFO Allen Weisselberg. There’s no telling what could emerge next, as each man has a close relationship to the President.
Perhaps sensing the risks, Trump had earlier declared in a Fox News interview, “If I ever got impeached, I think the market would crash.” However, even with troubles piling up, the market does not appear overly concerned with his fate.
The market is concerned with the Federal Reserve’s next move on interest rates. When the Fed released its meeting minutes, they showed strong support for a September hike, even though members also voiced concern about the possible negative effects of the trade war.
During last week’s speech in Jackson Hole, Fed Chair Jerome Powell argued that the economy could handle higher interest rates. “While inflation has recently moved up near 2%, we have seen no clear sign of acceleration above 2%, and there does not seem to be an elevated risk of overheating,” explained Powell.
Trump’s opinion on the matter is consistent with his previous statements, “The United States should not be penalized because we are doing so well. Tightening now hurts all we have done.”
In any case, Powell did not signal an intention to speed up the pace of rate hikes, which the market saw as dovish. This was one factor behind the market gaining nearly 1% and reaching a new all time high on Friday.
Beyond this, the US-China trade negotiations made little headway over the summer, even with latest effort of Chinese Deputy Trade Representative Wang Shouwen in Washington last week.
As such, Trump’s next move could be to proceed with another round of tariffs. Congress held hearings on $200 billion in tariffs, which are scheduled to take effect in September-October.
S&P 500 (SPX) Daily Chart
Our analysis is for the S&P 500 to rollover into the middle of the week, before it begins the rising phase of a new market cycle. If you focus on the technicals of this market, things look pretty good. The chart is bullishly configured and the current cycle has brought us to a new cycle high.
While the technical factors remain positive, we see the bond market rising and the dollar starting to weaken. That has us sceptical that the stock market will able to rise much further, as it could mean that money flow will be moving away from the stock market soon.
For more on Slim’s short term view on bonds and the dollar, check out the video at the beginning of this article.
Twitter: @askslim
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
