Market Direction Week of June 18, 2018©

Market Direction:BULLISH alert issued 2/15/2018

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Last Week Review: Q1 earnings season is essentially wrapped up and an impressive 81% beat analyst’s EPS estimates while 74% have beat on the top line.

Stock prices fluctuated within a small band for most of the week—a notable contrast to the volatility of recent months—as investors seemed largely unmoved by a series of important macroeconomic events and data. In particular, the summit between North Korea and the U.S. on Monday seemed to have little impact on markets, perhaps because details of North Korea’s promised denuclearization remained to be finalized.

Stocks had a larger reaction to the Federal Reserve’s policy meeting on Wednesday. Officials decided to raise the federal funds rate by another quarter point, as expected, but stocks fell after policymakers offered a slightly more hawkish outlook for coming hikes. According to the Fed’s “dot-plot” survey of individual policymaker’s rate expectations, one more official now expects a total of four rate hikes in 2018, rather than three. Disquiet over the prospect of a faster pace of rate hikes in the U.S. may have been offset by a somewhat more dovish tone from the European Central Bank (ECB) during the week. The Fed’s change in tone had more of an impact on emerging markets.

Tariffs on Chinese imports that were approved by the Trump administration put a damper on investor sentiment. We expect the focus on interest rates and trade negotiations to drive volatility for the remainder of the year.

How the market finished last week, the S&P 500 flat 0.0%, the Nasdaq up 1.3%, and the Dow down 0.9%.

This Week: Although trade relations remain a risk for markets, the U.S. economy continues to point to signs that it is heating up, but not too much to concern the Fed or investors.

The market knows earnings growth is still strong; it knows interest rates are still relatively low; it knows the elements are in place for a pickup in consumer spending and business spending; and it hopes the trade spats aren't going to lead to a full-fledged trade war.

The market knows the easy money has been made in this bull run, yet nothing has truly tripped it up yet, so it continues to climb a wall of worry constructed on concerns about peak economic growth, peak earnings growth, and a peak in monetary policy accommodation.

It's sneaking a peak into a more challenging future fundamentally speaking, so the market isn't moving as resolutely today as it did not that long ago when it could feel assured the Federal Reserve wasn't going to run interference by raising interest rates.

Those days are gone and rate hikes are back because the financial crisis is over and the economy is in good shape. That's not a bad thing, but it means the road ahead for the stock market won't be a smooth one as a higher interest rate environment takes shape.

Economic Calendar: Building Permits (6/19), Housing Starts (6/19), Crude Inventories (6/20), leading Indicators (6/21)

Some of the major earnings announcements on deck: FDX, ORCL, MU, WGO, KR.

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