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Stocks fell last week, and the major indices are testing support (50 day moving average line) for the first time since the election. The bulls argue that Trump’s pro-growth policies will get passed even if the healthcare bill doesn’t. On the other hand, the bears argue Trump’s other policies will not get passed because healthcare was supposed to be a virtual lay-up. Only time will tell what happens, but here are the facts:
The small-cap Russell 2000 led on the way up (it surged 18% right after the election) and is now leading on the way down. Other important areas of the market, that soared on the so-called Trump Rally, are also under-performing. Put simply, the bulls must defend support. If not, we could easily see a spring swoon that could cause the market to fall ~5-10%. Conversely, if support is defended and Trump manages to get his policies passed, we could easily race higher from here. At this point, we know we are still in a very strong bull market, and the market is way overdue to pullback and digest some of that move. This is exactly what is happening. Until we see any material damage emerge we have to expect this to be a normal pullback and will look to add more risk (buy) on the next bounce, after this pullback is over.
Stocks closed mixed on Monday as the market lacked any clear direction. Traders waited for a busy week of speeches from Fed officials, including Janet Yellen, for signs of when the next Fed rate hike will be. Traders also waited to see if Trump would be able to repeal Obamacare. Stocks fell hard on Tuesday after talks broken down regarding healthcare reform. The market sold off on worries that President Trump’s other pro-growth policies will face similar roadblocks or not be passed at all. Stocks were relatively quiet on Wednesday as hope returned that a a deal will get done in the 11th hour. On the economic front, existing home sales came in at 5.48M, missing estimates for 5.55M.
Thur & Fri Action
On Thursday, stocks were up in the morning but closed mostly lower after the House delayed the vote to repeal Obamacare. Elsewhere, Janet Yellen spoke in the morning and did not say anything new with respect to future rate hikes. Economic data was stronger than expected. New home sales rose by +6.1% in February to a 592,000 annualized rate. That easily beat the Street’s estimate for 565,000. Stocks closed mixed on Friday after the the House failed to get enough votes to pass Trumpcare.
Market Outlook: Strong Action Continues
The market remains strong as the major indices continue to hit fresh record highs. The bulls have a very strong fundamental backdrop of monetary and now fiscal policy. All the major central banks are still relatively “dovish” which is bullish for stocks. The US Fed only raised rates by a quarter point to 0.75%, which, historically, is still very low. On the fiscal side, Trump’s pro-growth policies are received well.
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