Market Direction Week of June 11, 2018©

Market Direction:BULLISH alert issued 2/15/2018

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Last Week Review: Stocks were higher on the week, and the Dow Jones Industrial Average posted its best weekly gain since the beginning of March. Helping stocks move higher was a renewed focus on positive economic fundamentals, particularly from the service sector, with the Purchasing Managers' Services Index reaching a three-year high. While we expect economic fundamentals to continue improving, risks, including trade-negotiation uncertainty and anxiety regarding the future path of both short- and long-term interest rates, remain. We continue to believe the positive fundamental backdrop modestly outweighs the current risks, which should allow the bull market to run further.

The stock market logged another solid week, continuing its rebound from the volatile correction earlier this year. Stocks are up 7.5% from the February lows, bringing the S&P 500 within 3.4% of its record high set in January. The market has found some footing, but the coast isn't clear. Incredibly, 2017’s steady gains that culminated in January's surge higher reflected an environment in which investor sentiment was perhaps too complacent. On the other hand, February's sharp drop and sizable daily market swings reflected a more pessimistic stance than was warranted by the fundamentals. Since then, the market has resided in the middle ground between the two, rallying on sound economic and corporate readings and pulling back amid worries over higher rates and trade turmoil.

This week European Union leaders announced their intention to hit U.S. imports with additional duties starting in July, a retaliatory move against the tariffs imposed by Washington beginning on 6/1, on incoming EU steel and aluminum. US Products that seem likely to be impacted include whiskey, Harley-Davidson motorcycles and blue jeans.

Separately, G7 leaders meet this week in Quebec’s Charlevoix region for two days of meetings that will likely focus mostly on trade. The tariff induced trade “skirmish” is likely to pit the US on one side and the other 6 nations on the other. President Trump is expected to leave the summit early to go to Singapore and meet with North Korean Leader Kim Jong Un.

Last weekend U.S. Commerce Secretary Wilbur Ross was in Beijing negotiating a trade agreement that would include Chinese companies buying more U.S. soybeans, corn, natural gas, crude oil, coal and manufactured goods. As a small concession, China did offer to purchase nearly $70B of U.S. farm, manufacturing and energy products, but only if the Trump administration was willing to abandon its threatened $50B in tariffs on Chinese goods. President Donald Trump has pressed China to reduce its trade deficit with the US by $200B, so the two sides still seem rather far apart.

How the market finished last week, the S&P 500 up 1.6%, the Nasdaq up 1.2%, and the Dow up 2.8%.

This Week: While the long-term trajectory is encouraging, optimism and complacency may be just a bit too high.

Next week is a relatively light week with regard to the number of economic reports, though some of them are potential market movers. The reads on inflation (CPI & PPI) could cause volatility if they are too high, as concerns of faster rate hikes will likely emerge. The Fed rate hike on Wednesday should be a non-event, as there is a 100% chance of a hike, and an 84% chance it will be 0.25%; any other outcome could cause a major market move. Lastly, the retail sales report on Thursday will be closely watched, as traditional retailers have seen a bit of a renaissance as of late, and retail spending is a proxy for consumer spending, which drives about 2/3 of our economy.

Continue to watch tariff induced trade skirmishes still escalating, the VIX very near a 4-month low, and the SPX likely a little too far above the long-term trend.

Central banks dominate the week, which features appearances from the European Central Bank (ECB) and the Bank of Japan (BoJ). The middle one of these is expected to be the most interesting, after comments this week from its chief economist regarding discussing an end to quantitative easing (QE). It is also a week for UK data, with the trio of employment figures, consumer price index (CPI) and retail sales.

Economic Calendar: CPI (6/12), PPI (6/13), Retail Sales (6/14), International Trade (6/14), Industrial Production & Capacity Utilization (6/15)

Some of the major earnings announcements on deck: ABDE, RH, BITA, MIK, FNSR.

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