State of the Stock Market Analysis for the Week Ending on April 15, 2018 Tough Week for Stock Market as Reaction to Syria Strikes Loom  4-15-18)

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The stock market closed out the week with a thud on Friday, but overall, it was not a bad week. There are a lot of worries about the political situation in Washington DC, but for the week the Dow Jones Industrial Average rose 0.4%, the Nasdaq gained 0.5% and the S&P 500 lifted by 0.4%. It was a tough week for the stock market, and the S&P 500 closed out the week at 2,670, which left it slightly below its 50-day moving average of 2,686. It recently saw a bounce from its 200-day moving average of 2,605, and that is a positive sign for the S&P 500 as we head toward May.

Earnings season has been good, but not all that great. This puts the stock market in a good spot, but investor sentiment has taken a bit of a hit in terms of interest rates. The yield on the 10-year U.S. Treasury finished the week at 2.95%, which has investors concerned. DoubleLine bond guru Jeff Gundlach had warned about problems for the stock market if long-term yields rose too much, and the big question now is whether the 10-year yield will continue to rise. It seemed to weigh on the stock market this past week.

The Federal Reserve had its various “Fed Heads” out this week, and the consensus is that more rate hikes are on the way. It has been ten years since the meltdown that caused the “Great Recession,” and the “temporary” cut in interest rates to near zero has apparently run its course. That path seems to have worked, and housing for the most part has bounced back in a way that few economists could have predicted. So the Federal Reserve and its new Chairman Jerome Powell look likely to continue to “normalize” interest rates.

The tough part for the stock market is that higher rates are rarely welcomed. This is a key issue as we head into the rest of the year. Since the correction, we have seen a healthy bounce, but the post-Trump election bounce has clearly run out of steam. Earnings season has been good, but it has not been great. The FANG (FAANG) stocks continue to be under pressure, and the fact that the “mega-techs” are not driving the stock market higher is also a cause of alarm for the broader stock market as we head toward summer.

As for the political situation, it seems like we might be headed toward a Nixon-style Watergate situation. The stock market is always good at ignoring politics, and it often rallies when the government is divided. The current scenario we are facing seems different, though, and it is not a question of “divided government,” but it is rather something that is unclear on how it might affect financial markets. The good news is that the talk of “trade wars” and tariffs have taken a back seat, and that is one good positive for global financial markets at least for the time being.

The midterm elections are on the way in November, which could also be creating some uncertainty in the stock market right now, so we will see what happens. That should not affect individual, well-run companies, but it still is one more thing for investors to worry about through the summer months. The stock market is extremely resilient, though, and the bulls are thinking that a more sustained bounce might be on the way. That said, the Gorilla wishes each and all a relaxing Spring weekend, and we will be back in action on Monday!

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