A Constructive Pullback So Far

March 11, 2019|10:59am


The fact that stocks pulled back a bit last week shouldn’t have come as a surprise to anyone. The S&P 500 had enjoyed an historic joyride to the upside in a very short period of time. As in +19.2% in just 10 weeks.

Along the way, stocks became overbought and sentiment got a little too optimistic. Everybody could recite the bull narrative… The Fed is now on hold (and perhaps even thinking about returning to an accommodative stance later this year) and the Trump trade deal will fix the global #GrowthSlowing woes.

So, with key resistance overhead and some disappointment on the news front, it wasn’t exactly a shock to see a break in the action.

Speaking of the news, there were five headlines that caught my eye last week and, at least in my opinion, might have contributed to the red bars on the charts.

But first we need to set the stage. Coming into last week, it was clear that momentum had slowed. The S&P had spent the prior week moving sideways and flirting with a breakout of the key resistance zone in the 2815 area. And since the bulls had been able to break on through to the other side of the all-important 200-day moving average the week before that, it seemed it was only a matter of time until the bulls would be testing the old highs again.

At the beginning of last week, there was an awful lot of talk about a “Goldilocks economy” here in the good ‘ol USofA. As in the economy wasn’t too hot (to cause inflation and the Fed to get back to work), wasn’t too cold (to cause a recession) but was “just right” (for corporate profits to grow at a strong enough rate for stocks to continue to rise at 8-10% per year). Party on, Wayne!

But a funny thing happened on the way to the run for the border. That’s right; it didn’t happen. Nope. Instead, the #GrowthSlowing theme may have gained some traction.

First there was the ECB “pivot.” This time it was Mario Draghi’s turn to surprise investors as the ECB acknowledged the slowdown in economic activity by cutting the central bank’s forecast for growth in the Eurozone in 2019 from 1.7% to 1.1% and by offering up a new cheap loan program designed to encourage lending.

Next there was talk of “peak employment.” Mark Zandi, Chief Economist at Moody’s Analytics, provided us with this sound bite, which reminded everyone that the economic cycle is clearly getting a little long in the tooth.

We also heard from the Fed’s Lael Brainard, who acknowledged that slowing growth has caused a major change in her outlook.

And when it came time to revel in the economy’s robust jobs market, the bulls bonked. While analysts had expected the monthly report on Nonfarm Payrolls to show a gain of 180,000, the Bureau of Labor said the economy created just 20,000 jobs last month. Ouch.

Sure, there were lots of “yea, buts” to go along with the jobs report and my guess is that the numbers will likely be revised higher. But the bottom line is that 20K vs. 180K was a pretty big miss and effectively put a spotlight on the idea that growth might indeed be slowing – even here in the U.S.

Oh, and as for the imminent trade deal, you know, the deal that is expected to return the world’s economies to growth and prosperity, that didn’t happen either.

So, stocks did what one might have expected them to do. They pulled back a bit. And so far at least, the decline in the stock indices has been orderly as a fair amount of intraday dip-buying was on display last week. Friday was a perfect example of said action as the S&P closed almost 1% off the low of the day.

From my seat, the action thus far has been “constructive” and is more indicative of a pause than the start of a meaningful decline. My guess is this is the dip that many had been praying for a few weeks ago. As such, it will be interesting to see if the bears have anything left in the tank next week or if the underinvested souls that have missed out on the best start to a new year in ages continue to #BTD.

Thought For The Day:

Twenty years from now you will be more disappointed by the things you didn’t do, than the ones you did. – Mark Twain

All the best,
David D. Moenning
Chief Investment Officer

David D. Moenning


At the time of publication, Mr. Moenning and/or Redwood Wealth Management, LLC held long positions in the following securities mentioned: None

Note that positions may change at any time.


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