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S&P 500 gains 2% in another volatile week

To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit. – John Templeton

Stock market volatility continued again last week as nervous markets were taken on a roller coaster ride over geopolitical uncertainty with regard to Syria and trade war fears with China. But unlike the previous week that saw stocks close lower, all of the major stock averages posted healthy gains ranging from 1.8% for the Dow Jones Industrial Average to 2.8% for the Nasdaq Composite Index. The broad-based S&P 500 Index rose 2%. Through April 9th of this year, the S&P 500 had posted 27 moves of greater than 1% compared to only 8 such moves in 2017. Stocks were also influenced by other news events, including an FBI raid on the office of President Trump’s personal lawyer and two exhaustive days of testimony before Congress by Mark Zuckerberg of Facebook. Although there was an abundance of inflation data last week as well as the start of first quarter earnings season, they seemed to take a back seat to the geopolitical noise in the background. Markets were on edge over what the U.S. response would be for a suspected chemical attack on Syrian people by the Assad government. Trade war fears also lingered, but Chinese President Xi Jinping allayed those fears on Tuesday by saying that China would work to further open up the country’s economy by reducing import tariffs on autos and enforcing intellectual property laws. The tone of his speech was conciliatory, giving investors hope that a trade war with China would be averted and negotiations would be successful. Federal Open Market Committee (FOMC) minutes from March also were a calming influence for the market as all of its members expect the economy to strengthen and for inflation to gradually rise to their 2% target over the near term. Based on this outlook, it is likely that the Fed will continue with gradual interest rate hikes, probably one in June and one again in September for 25 basis points each. Earnings season also began on a positive note as JP Morgan Chase, Wells Fargo, Citigroup and Blackrock all beat earnings estimates, although the market reaction to those earnings was tepid. Expectations are so high for first quarter earnings results that the market could be set up for disappointment.

Last Week

Inflation data released last week was mixed as the producer price index (PPI) rose more than expected while the consumer price index (CPI) fell slightly and was less than expected. In the 12 months through March, CPI has increased 2.4%. U.S. import prices were flat in March as the cost of petroleum products fell while food prices rose. The University of Michigan consumer sentiment index in April was slightly less than expected and weekly jobless claims fell by 9,000 to 233,000 compared to 230,000 that were expected.

House Speaker Paul Ryan announced that he would not run for re-election in November and would retire in January to spend more time with his children.

For the week, the Dow Jones Industrial Average rose 1.8% to close at 24,360 while the S&P 500 Index gained 2% to close at 2,656. The Nasdaq Composite Index jumped 2.8% to close at 7,106.

This Week

March retail sales are forecast to rebound strongly after posting a slight decline in February. Leading economic indicators for March should also post a healthy increase, although not as high as the previous month. March industrial production and housing starts are expected to rise to levels that denote ongoing strength.

The Federal income tax filing deadline is midnight on Tuesday April 17th.

Financials will again highlight this week’s earnings reports as Bank of America, Goldman Sachs, Morgan Stanley, U.S. Bancorp, American Express, Charles Schwab and Northern Trust are due to report. Other notable companies on the agenda include IBM, General Electric, Honeywell, Waste Management, Johnson & Johnson, Abbott Labs, UnitedHealth and Procter & Gamble.

Portfolio Strategy

There has been no shortage of geopolitical uncertainty recently, which is one of the reasons that the stock market has been so volatile. From the risk of a trade war with China to the potential for a wider, more prolonged conflict in Syria, investors have been whipsawed by these unsettling events. Throw in last week’s testimony by Facebook’s CEO before Congress and the possibility of increased government regulation in the technology sector along with the daily drama that occurs in the White House and it’s no wonder that investors are worried. But most of these news stories are noise and only serve as a distraction from what really matters – the economy and corporate earnings. The economy remains strong with GDP growth expected to be between 2.5% and 3% this year and earnings are expected to post the best quarterly growth in seven years. With the economy at or near full employment, the prospects of a recession are very low. Inflation remains relatively benign and unless wage growth accelerates, interest rates are not likely to rise much further. The stock market also remains in a long-term uptrend as the S&P 500 Index has been able to stay above its 200-day moving average, a technical level that provides support for stocks even as the market continues its big daily point swings. Although there is certainly a lot to worry about, investors should focus on the fundamental and technical underpinnings of the market, both of which remain supportive of stocks.