State of the Stock Market Analysis for the Week Ending on March 4, 2018 Challenging Week for Stock Market 3-4-18)

All You Need Is Jobs

After an early session selloff, the stock market managed to rally back for a mixed close on Friday. The Nasdaq and S&P 500 were positive for the day, but the Dow Jones Industrial Average finished lower partly as a result of McDonald’s (MCD) falling 4.8% for the day. Apparently, McDonalds new lower-priced menu is not going as well as planned. It was overall a challenging week for the stock market, as we saw weekly losses of 3.1% for the Dow, 1.1% for the Nasdaq and 2.0% for the S&P 500. It was also a challenging week for the bulls, but the stock market did have an impressive run since the beginning of the year.

The tariff comments from President Trump did seem to keep the stock market in a subdued mode on Friday. It was a quick economic news item that even seemed to catch Trump’s advisors off guard, and put investors on edge. Tariffs and trade legislation are bombshells that can make global financial markets nervous, so it will likely take a few days for investors to sort through this whole new economic development. Retaliation is always a worry, but George W. Bush apparently did the same sort of tariff in the early 2000s.

On a lighter note, the University of Michigan Consumer Sentiment number came in a 99.7 versus expectations of 100.0, and Friday’s number hovered around a 14-year high. This is not to say the economy is completely booming, but it is a plus to have consumers in a great mood. Housing remains strong, employment is very solid, and the stock market is vibrant. The stock market may have entered into a “correction” mode, but given the big run over the past year or so, a pullback was very likely (and actually) healthy.

Politics are still front and center, and with the ongoing departures from the Trump Administration, this could be adding to stock market nervousness. President Trump is being, well, President Trump, and the brashness of his actions this week could be adding to the volatility we are witnessing in the stock market. His brashness is nothing new, but when it comes out of the blue, it tends to keep investors and the stock market on edge. The Volatility Index (VIX) finished Friday just below 20, so it is clear that a little fear remains.

As for interest rates, the yield on the 10-year U.S. Treasury closed out the week at 2.86%, and while the yield edged higher on Friday, it is still below the 3.0% level that has become sort of a “line in the sand” for the stock market. As long as long rates remain low, it makes a 3% dividend-yielding stock look attractive. However, when interest rates rise, Treasuries look like a safe investment as compared to stocks. This is what has investors scratching their heads, especially with talk of tariffs and potential trade wars in the weeks ahead.

The bounce we saw from the big decline earlier this month was impressive, but it has run out of upward steam. The S&P 500 closed Friday at 2,691, which has left it below its 50-day moving average of 2,736. This is normal from a technical standpoint, mainly because it is difficult to erase a 10% decline in a little over two weeks. New bases need to get built, and we are seeing the broader stock market do that right now. It is a new month, so we will see if the broader market can regain its composure and continue to head higher.

The “wild card” right now is the Federal Reserve and its new Chairman, Jerome Powell. Powell came across fairly hawkish this past week before Congressional committees, but he did hint at multiple rate hikes this year. This may have added to the nervousness on Wall Street, but then again, the “normalization” of interest rates is a big goal of the Fed in 2018. We will see what happens. That said, the Gorilla wishes each and all a very relaxing weekend. Except for the Northeast, Spring seems to be on the way, so enjoy the weekend. We will be back in action on Monday!

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