Market Direction Week of September 4, 2018©

Market Direction:BULLISH alert issued 2/15/2018 

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Last Week Review: Stocks jumped higher early last week based on progress in U.S.-Mexico bilateral trade talks, which may eventually replace NAFTA. However, investor sentiment was tempered later in the week as no agreement with Canada has been reached. In other trade news, there were reports that the Trump administration is considering taking further steps to implement new tariffs on $200 billion of Chinese goods. This action, if it occurs, is likely to be met with a reciprocal response by the Chinese government and is another step in the escalation of trade tensions between the two countries. Trade and policy uncertainties are a headline risk, but the fundamental foundation of economic expansion and rising corporate profits are still very much intact and can help extend the bull market.

On Thursday (8/30) President Trump rejected a proposal by the European Union (EU) to eliminate all auto tariffs between the US and Europe. While this offer seemingly meets previously stated goals, Trump now says this is “not good enough” and compared the EU to a smaller version of China. A few weeks back Trump and EU President Jean-Claude Juncker agreed to postpone any new tariffs, but this hardline stance calls the longevity of that agreement into question.

As a result of the recently terminated trade negotiations, additional tariffs on as much as $200B more in Chinese imports could be implemented as soon as next week. The Trump administration sees the Chinese economy as vulnerable but China seems willing to wait until after the mid-term elections in November to restart discussions. Given China’s sizable trade surplus, as dollar-for-dollar tariff matching continues, this next round may be the limit for China.

How the market finished last week, the S&P 500 up 0.9%, the Nasdaq up 2.1%, and the Dow up 0.7%.

This Week: While technically stretched a bit, equities continue to be buoyed by strong economics, consumer and business sentiment and bullish momentum; all of which should continue next week.

On the negative side, trade negotiations with the Eurozone and Canada are likely to continue to cause some volatility in the markets next week. Additionally, I do have concerns that the SPX is a bit stretched from a technical perspective and next week is a big week for economic data. I also would not be surprised to see the markets pull back a bit on Friday (8/31) ahead of the 3-day weekend.

On the positive side however, the changes in the indicators this week were more positive than negative, and for the most part don’t anticipate any weakness in the economic reports; in fact the labor market will continue to show significant strength. All of these factors considered, the consensus outlook for next week looks bullish.

Economic Calendar: ISM Manufacturing Index (9/4), International Trade (9/5), Productivity and Costs (9/6), Factory Orders (9/6), Employment Report (9/7) 

Some of the major earnings announcements on deck: CTRP, AVGO, FIVE, PANW.

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