The Consumer Economy Could Still Benefit From The Stimulus

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Commenting on today’s trading and consumer economy data Gorilla Trades strategist Ken Berman said:

The low-volatility consolidation that we have been seeing in recent days continues to confirm the bullish trend in stocks, even in light of today’s failed move to new all-time highs. Although the President’s afternoon speech, which targeted the trade policies of China and the European Union (EU) and the Chinese reaction to it triggered an intraday pullback in the large-cap benchmarks, the damage was limited, and the Volatility Index (VIX) is still well below the danger zone.

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The major indices finished virtually unchanged for the fourth day in a row, despite an early push to new all-time highs by the S&P 500 and the Nasdaq, as trade-related worries and the materials sector continued to be a drag on the market. The Dow was up 0.1, or 0.0%, to 27,692, the Nasdaq gained 22, or 0.3%, to 8,486, while the S&P 500 rose by 5, or 0.2%, to 3,085. Decliners outnumbered advancing issues by a 5-to-4 ratio on the NYSE, where volume was slightly below average.

The key sectors were mixed in the quiet environment, and it’s hard to pinpoint a dominant pattern among them. The defensive healthcare and utilities sectors performed well together with the cyclical industrials and tech issues, and only the materials sectors lagged the broader market in a meaningful way. The firms most involved in the fracking industry remained under pressure, due to the regulatory fears, even as the price of oil was stable and we got positive economic news from Europe and the U.S. 

Consumer economy slowing?

Besides targeting China and the EU today, President Trump once again ramped up his rhetoric against the Fed’s monetary policies as well. The POTUS compared the U.S. benchmark rate to the much lower global yields, causing a slight dip in Treasury yields, and a pullback in financials. With the presidential election less than one year away, the pressure on the Fed to further ease could even increase, and since yields have been rising for several weeks, the bond market could be in for a surprise in the coming months. 

While the President’s words concerning trade revived the fears of another escalation of the trade war, other, more bullish rumors also surfaced in Washington. Last year’s plan of another round of tax cuts, targeted at the middle class, could be back in full force, which could boost the U.S. economy in the face of the global slowdown. The plan would likely push the national debt even higher, but with interest rates near their all-time lows globally, and the dollar trading near multi-year highs, the consumer economy could still benefit from the stimulus.

Inflation in focus

Inflation will be at the center of attention tomorrow, in terms of economic releases, and especially the U.S. Consumer Price Index (CPI) will be under scrutiny. The British CPI continues to be distorted by the wild moves in the Great British pound, but a much-lower-than-expected reading could cause turmoil in pre-market trading. The U.S. CPI missed big time last month, coming in flat, which was the measure’s lowest reading since January. Prices are expected to rise by 0.3% this month, while the core CPI is also forecast to tick higher to 0.2%, which would be a positive sign for the consumer economy, as inflationary pressures remain muted.

Technical Corner:  While the major indices haven’t made meaningful progress for almost a week, bulls continue to hold their ground despite the slightly stretched rally, and the rising short- and long-term trends continue to be safe. The benchmarks are still well above their rising 200-day moving averages of 7,908 for the Nasdaq, 2,903 for the S&P 500, and 26,317 for the Dow, and they are also above their steeply rising 50-day moving averages of 2,998 for the S&P 500, 8,145 for the Nasdaq, and 26,947 for the Dow.

With the major indices hovering near their all-time highs, it’s always useful to keep an eye on the leaders of the market, to evaluate the health of the underlying trend. While compared to last week’s rally, slightly fewer stocks hit new all-time highs today, the mega-cap leaders continue to shine. Microsoft (MSFT) and Apple (AAPL) both hit new record highs today and yesterday, helping the Nasdaq to a new closing high too, and until we see significant weakness among the momentum-leaders, every pullback should be viewed as a buying opportunity. Stay tuned!

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