wHere’s the news of the week – and how we see it here at McAlvany Wealth Management:

Political Strife Keeps Stocks in Check

By the close on Thursday, when I had to leave for the week, stocks were caught in an unrelenting process of relinquishing earlier gains attributable to North Korea’s withdrawal of threats regarding Guam. By days end, the Dow had given up approximately 274 points to finish at 21,750.73. Although that move doesn’t put the Dow in any technical danger, the same cannot be said for the S&P 500, the NASDAQ, or the NYSE composite index, all of which have tested and broken the lower limits of their respective moving averages.

The reason for the sudden shift in prices should be no surprise to readers of this recap. As I have mentioned before, since the election US markets have staged a fundamentally unsubstantiated rally using dangerous amounts of leverage, believing that Trump’s policies would not only be enacted but also solve all our problems. As it turns out, and to the chagrin of those in that bullish camp, it’s been a struggle to pass anything in Washington. Trump’s spat with Republicans over the events unfolding in Charlotte has only reinforced that fact, which may mean that the market is at the threshold of giving back a good portion of its post-election gains. Since the election, the Dow has gained about 3,500 points. If lost, that would take us back to around 18,200 on the Dow. It may still be too early to fully embrace that scenario, however, as I don’t expect much to happen until we get more – or less, in this case – regarding Trump policy or news about third quarter earnings prospects.

Away from stocks, Treasuries and municipals were once again seen as safe havens, while mortgage, corporate high yield, and investment grade debt struggled to maintain any real momentum. As for the dollar, it danced to the tune of stocks, giving up earlier week gains on the gridlock in Washington. Still, the dollar finished the week with a small gain, which held the metals to small movements, too. Gold and silver lost 0.03% and 0.38%, respectively. Overseas bonds and stocks mimicked their American counterparts during the week, so it’s likely we’ll see a sharp selloff across stock markets come Monday morning. As for US economic data, there wasn’t much the market paid any real attention to. Housing starts lost 4.8% and permits shed 4.1% in July, which effectively neutralized the gains seen in the month prior. At the same time, retail sales growth impressed enough to reignite Fed rate hike fears. Sales rose 0.6% in July, mostly on the back of an “Amazon Day” promo.

Tomorrow and next week we’ll see if stocks continue the post-election back peddling we witnessed today. I’m sure a few setbacks will be in order as the market digests the news, but if the Dow drifts below its 50-day moving average, around 21,611.0, we may see the selling begin to feed on itself. We’ll also hear from Janet Yellen and Mario Draghi. Both are attendees at this year’s policy summit in Jackson Hole. Trump’s Trans-Pacific Partnership trade deal will also be back in focus, along with new and existing home sales for July.

Best Regards,

David Burgess
VP Investment Management