Weekly Wrap: The Tax Cut Narrative Is Losing Its Luster

This week we are focused on rising interest rates and a strengthening dollar as the narrative of synchronized global growth fails; rising prices from tariffs, troubles in the oil markets and wage pressures; equity weakness despite earnings as investors become more bearish, fearing this is as good as it can get.


First, let’s recap the market’s moves for the week. Monday’s close marked the end of the first third of the year with the S&P 500 down -0.5% in the first four months of 2018, the Dow Jones Industrial Average down -1.8% and the Nasdaq 100 up +3.5% with the Russell 2000 small cap laden index up +0.80%. The strongest sector for the first four months was Consumer Discretionary, up +5.4% with the weakest Consumer Staples, down -10.8% – yet another hallmark of a late stage market. Only two other sectors closed the 4-month period in the black, Energy, up +2.9% and Technology, up +2.7%.  As we stepped into May, most every major US equity index was below its 50-day moving average, from the Dow (DIA) to S&P 500 mid-cap (IJH) to Russell 1000 (IWB) to Micro-Cap (IWC) to S&P 100 (OEF) and the Total Stock Market (VTI).

As of Friday’s close, the S&P 500 will not have made a new closing high since January 26th and its 50-day moving average is within 66 points (as of Thursday’s close) of closing below the 200-day moving average – the infamous “death cross,” having bounced off of it in an early morning plunge on Thursday. In the last bear market, we saw a death cross on December 21, 2007, which was 73 days after the market had peaked. The S&P 500 dividend yield has declined 36 basis points since February 2016 while the yield on the 2-year Treasury note has increased by 160 basis points – stocks are facing yield competition, TINA has left the building.

Rising Dollar

Wednesday the US Dollar Index (DXY) closed above its 200-day moving average for the first time in nearly a year, ending its seventh-longest streak of closes below that level dating back to 1971. The dollar is still down 6.6% over the past year, but we just may be seeing a turnaround in progress and the world is watching.

Around half of S&P 500 sales come from overseas, which makes a falling dollar a serious tailwind, but the reverse is also the case. Keep in mind too that transactions in US dollars account for almost three times more than those in euro and twenty times more than in yuan. It is the most widely used currency globally and growing in use. When it gets more expensive, it has a profound impact across the globe.

Earnings Fail to Impress

While more than 80% of companies have reported so far this season the average stock in the S&P 500 saw a move of +/-3.5% following the release of their company’s results, according to data from Goldman Sachs, well above the 2-year average of +/- 2.8%. While the results are rather impressive with respect to both top and bottom line results in terms of percent of companies beating expectations, shares are not feeling much love. This week’s AAII sentiment survey found bullish sentiment has fallen from 36.9% to 28.4%. Talk about a case of “What have you done for me lately?” In at least one earnings call this season we learned that analysts must work on not asking “boring” questions concerning such mundane topics as cash burn. Yep, that happened, and it sent Twitter aflutter… so much so that Elon Musk embarked on a tweet filled “guilty with an explanation” response that many have used when pulled over for a speeding ticket.

The sentiment trend has also been negative since the market peaked at close to 60% bullish earlier in the year. We are seeing lower bullish highs on the weeks that sentiment improves followed by weeks with even bigger declines. Investors are increasingly concerned that this is the best it is going to be, particularly when we see the economic data is failing to show accelerating growth as the prevailing narrative assured us we’d see post the tax cuts.

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Disclosure: None.

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