Chart of S&P 500 (SPX, SPY) – Economic Concerns Threaten Stock Market Recovery – Source: TheTechnicals.com and TradingView

Equity markets pulled back on Thursday after hitting yet a new year-to-date high just a day earlier. Investors were a bit spooked by significantly worse-than-expected economic data and reverberating economic concerns coming out of the Federal Reserve. Is this just a temporary blip within a strongly positive trend? Or is it a harbinger of an impending downturn?

It’s the Economy

If any one factor can halt the current market recovery in its tracks, it’s the state of economic growth. Fears over domestic and global economic weakening can quickly result in massive downswings in the stock market and a flight to assets that are perceived to be safer – like gold and Treasuries. Though stocks are still in the midst of a sharp rebound and recovery from the lows of late December, we’re starting to see more signs that economic concerns may be snowballing.

Fed on Hold

The Federal Reserve released meeting minutes from its January 30th FOMC meeting on Wednesday. The overarching theme was “patience” in raising interest rates further. Typically, any sign that the Fed may be slowing its rate hike trajectory or keeping interest rates low would be met with applause from investors. Companies and markets prefer low interest rate environments because higher interest rates have a negative impact on borrowing costs, business growth, and earnings. But if the Fed puts a hold on rate hikes due to concerns about the economy, which is now clearly the case, markets tend to get really nervous. Investors may be able to endure gradually rising interest rates. But a bad economy? Not so much.

The Fed’s increasingly dovish stance was reinforced on Thursday when St. Louis Fed President James Bullard told CNBC that interest rate hikes and balance sheet reduction are “coming to an end.” Bullard said that FOMC committee members had paid close attention to the “bad reaction in financial markets” as a result of December’s Fed rate hike. The hike was seen by investors as a Fed-driven step towards recession.

Economic Data Disappoints

On top of these worrisome signals coming out of the Fed, Thursday also featured disappointing economic data. The Philly Fed Manufacturing Index, a major Fed survey of manufacturers in Philadelphia, hit its lowest level since 2016 at -4.1. Economists had been expecting +14.1. In addition, durable goods orders fell short at 1.2% against previous expectations of 1.6%.

What May Come Next?

Fickle markets respond to a wide variety of forces and influences – earnings, interest rates, politics, wars, natural disasters, and much more. Most of the time, though, economic growth takes center stage. Initial warning signs of a recession or a slowdown in global economic growth can quickly escalate, spreading panic among investors and weighing heavily on stock prices. We’re not saying we’re there yet, or that we’ll get there any time soon. But troubling signs of a faltering global economy have clearly emerged.

Looking ahead, three key economic releases in the week ahead include U.S. consumer confidence on Tuesday, U.S. gross domestic product on Thursday, and U.S. ISM Manufacturing PMI on Friday. (See our Market Events & Earnings Calendar for more.) Ongoing U.S.-China trade negotiations will also continue to play a key role in market sentiment.

The Technicals: S&P 500 Remains in Strong Recovery Mode … For Now

As shown on the chart above, the S&P 500 (SPX, SPY) continues to trade in a sharp uptrend from the late December lows. This parabolic rise has seen the benchmark index break out above multiple resistance levels. This includes the key 200-day moving average. According to some technical analysts, this places the S&P 500 in bull market territory. Since the December lows, the index has climbed just over 18% (as of the market close on Thursday, 2/21/2019). This puts it just shy of the 20% rise that other analysts see as the definition of a bull market.

Now that the S&P 500 has cleared its 200-day moving average, this average has now turned into support. It’s currently around the 2747 level. Any breakdown below this support would be a strongly bearish signal for the markets. To the upside, the next major resistance level and bullish target is around 2815 (the highs from late last year). Any strong breakout above that level could open the way for an extended market recovery.