The stock bulls got a nice fundamental trifecta Monday with good news on the economic, central bank, and geopolitical fronts.
However, the rally attempt thus far has done little to alter the market’s intermediate-term risk-reward profile.
Retail Sales: Better Than Expected
After the stock market sells off significantly, any form of good fundamental news can create a fairly significant “oversold” bounce. The stock market bulls got what they wanted Monday in the form of retail sales. From Reuters:
U.S. retail sales recorded their largest gain in 1-1/2 years in March in a decisive sign the economy is bouncing back from its weather-induced slumber. Monday’s upbeat report was the latest to indicate growth was set to accelerate in the second quarter after an unusually cold and snowy winter hobbled activity early in the year.
The good news did little to alter the “economic concerns are increasing” look of the weekly chart below. Consumer discretionary stocks -- SPDR Consumer Discr. Select Sector -- (ARCA:XLY) still looked ugly on a relative basis as of 2:00 p.m. EDT Monday.
ECB: Good News and Bad News
Risk takers prefer easy money policies from central banks since the added liquidity has to land somewhere. The good news from the European Central Bank (ECB) Monday was they signaled a willingness to expand their stimulative measures. From Reuters:
The dollar rose against the euro on Monday after European Central Bank President Mario Draghi signaled the bank would ease monetary policy further, while strong U.S. retail sales data also boosted the dollar against the yen. Draghi said in Washington on Saturday that “a further strengthening of the exchange rate would require further stimulus”. Bank of France chief Christian Noyer hammered home the message saying: “The stronger the euro is, the more accommodative policy is needed.” “The ECB is taking the value of the euro more seriously in their approach to monetary policy,” said Thierry Albert Wizman, global interest rates and currencies strategist at Macquarie Ltd in New York. The statements marked the ECB’s strongest signal yet that it would act to head off further gains in the euro.
Given the Fed’s easy money policies have been a big driver of stocks in recent years, it is fair to say that all things being equal stock market bulls feel more secure when the U.S. greenback is weakening. The bad news Monday was comments about ECB policy helped push up the U.S. dollar.
The Big Picture
Since investors have much longer time frames than traders, looking at risk from a weekly perspective makes more sense. This week’s stock market outlook video provides numerous forms of observable evidence that point to a deteriorating outlook for equity investors.
Ukraine: A More Peaceful Path?
There is no question the Russia-Ukraine standoff has weighed on the minds of investors in recent weeks. The bulls can make an argument that tensions eased a bit Monday. From The Wall Street Journal:
A day after threatening a full-scale military operation to drive pro-Russian militants out of a string of eastern Ukrainian cities, the country’s acting president offered an apparent olive branch Monday, saying he wasn’t opposed to a countrywide referendum on possibly granting regions greater autonomy. The move appears to signal increasing desperation from Kiev, highlighting it has few options for a real response as opponents take over further territory.
Investment Implications – Show Me
Is it possible stocks have found a bottom? Yes, but one day does not make a new trend. Last week we noted the concerning lack of progress in stocks, which is a symptom of increasing economic concerns. The “vulnerability box” was not altered in a meaningful way during Monday’s rally in equities.
We entered the week with an allocation of cash, stocks (SPDR S&P 500 (ARCA:SPY)) and bonds (iShares Barclays 20+ Yr Treasury (ARCA:TLT)); a mix that aligns well with an indecisive and hesitant market. As noted on March 21, discipline is the key to ending up in the right place once a period of consolidation is complete. Last week, the scales tipped toward risk-off. Depending on how the market reacts to the incoming data, including Tuesday’s report on consumer prices, we will ratchet up or ratchet down our risk exposure over the coming weeks.