The rough road for stocks continues.
Despite finishing last week with gains, the Dow and the S&P 500 still remain in the red for the year with investors continuing to find themselves at the mercy of the volatile political news cycle.
“While volatility remains alive and well, the market managed to have a good showing [last] week,” said analysts at Bespoke Investment Group on Friday. “While it’s nice to see, it’s important to remember that conditions still have a ways to go before stabilizing.”
Stocks on Friday closed in the red and reacted negatively to an NBC News report which suggested President Donald Trump — who called former FBI director Jim Comey an “untruthful slime ball” on Friday — will likely fire Rod Rosenstein.
Rosenstein is the deputy Attorney General leading the Russia probe after AG Jeff Sessions recused himself. This has also led many in markets to speculate that Trump could also move to fire special counsel Robert Mueller. As of Sunday morning, both men remained in their roles.
And this political drama followed this week’s testimony from Facebook CEO Mark Zuckerberg, who faced two days of questions on Capitol Hill this week. Judging by the action in Facebook shares, however, investors appear undeterred by any threats of regulatory action out of Washington, as the stock had its best day since in almost two years on Tuesday and gained 4.5% for the week.
In the week ahead, earnings season will begin to ramp up with with Goldman Sachs (GS), United Airlines (UAL), Johnson & Johnson (JNJ), IBM (IBM), Bank of America (BAC), Morgan Stanley (MS), American Express (AXP), Procter & Gamble (PG), and General Electric (GE) among the S&P 500 members set to report results.
The economic data calendar will be relatively tame, though Monday’s report on retail sales for the month of March will be closely watched.
Monday: Empire State manufacturing, April (18.2 expected; 22.5 previously); Retail sales, March (+0.4% expected; -0.1% previously); Homebuilder sentiment, April (70 expected; 70 previously)
Tuesday: Housing starts, March (+2.5% expected; -7% previously); Building permits, March (+0.7% expected; -5.7% previously); Industrial production, March (+0.3% expected; +1.1% previously)
Wednesday: Federal Reserve releases Beige Book
Thursday: Initial jobless claims (230,000 expected; 233,000 previously); Philly Fed manufacturing, April (20.8 expected; 22.3 previously); Leading index of economic indicators, March (+0.3% expected; +0.6% previously)
Friday: No major economic data expected.
The stock market is still a mess
This past week, the major U.S. indexes finished with gains of about 1%. But the Dow and the S&P 500 failed to recoup their year-to-date losses after having made a run at getting back into positive territory for the year earlier in the week. And the longer markets continue in this period of higher volatility while failing to make new highs, the more skeptical investors are likely to become about the health of the bull market.
In a note earlier in the week, Credit Suisse analysts said the outflows from passive funds investing in the U.S. stock market over the last two months are the highest since 2008. The volatility seen in early February and which has continued is clearly spooking investors.
Meanwhile, the final three days of this past trading week were the three lowest volume days of the year, signaling a decreased appetite for new money coming into the stock market, especially as many corporations are currently unable to make new discretionary repurchases of their own stock.
On Tuesday of this past week, Lori Calvasina, head of U.S. equity strategy at RBC, cut her year-end price target on the S&P 500 to 2,890 from 3,000. “The bull is limping,” Calvasina said, “but still moving forward.” Wall Street strategists are clearly growing skeptical that the double-digit returns so many had called for in 2018 will materialized, but are not yet ready to call for outright declines in the market.
On Thursday, Goldman Sachs’ David Kostin noted that correlations in the S&P 500 have shot up in recent months, meaning that the performance of individual stocks is moving in a more uniform fashion.
“Average 3-month S&P 500 stock correlations have increased from just 9% in January to 52% today, the fastest and largest increase outside of 1987,” Kostin said in a note to clients. “Despite two 5%+ drawdowns YTD, the pickup in volatility has been modest when compared with the rise in correlations. This dynamic has resulted in a decline in S&P 500 return dispersion and has made the environment difficult for stock-pickers.”
Taking all of these signs together — low volume, declining faith in the market this year, investors pulling money from stocks, and individual stock performance clustering — it is simply a very challenging time to be investing in the U.S. stock market.
In 2017 and through the first three weeks of 2018, the U.S. stock market seemed to do one thing — go higher. And not only move higher, but advance with a historic lack of volatility. Not only were returns strong, but along the path to these solid returns investors were provided with hardly any anxiety-inducing stretches.
But this past week’s volatility, which ultimately produced modest gains but still left many investors feeling uneasy, is a great snapshot of why 2018 is so different. And the longer this dynamic continues, the more we’re likely to see continued erosion of the unquestioned faith in the bull market which prevailed just a few months ago.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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