Tariffs and the Market Environment

As the bull market nears its ninth anniversary, the backdrop is evolving. This year has already seen more days with the S&P 500 index closing up or down by 1% or more than we saw during all of last year. Deflation—a concern not so long ago—has been replaced by worries about inflation and a potential trade war. The prospect of three interest rate hikes has gone from being sheer speculation to seriously considered, along with the possibility of a fourth rate hike this year.chart

It’s a lot to digest. Market and economic conditions can and do change, often without much notice. Though a return to more normal volatility may give the sensation of Mr. Market trying to find his footing, it’s likelier a situation of new information being priced in. Certainly, many eyes are focused on what will come of the new tariffs on steel and aluminum.

Before discussing the tariffs, let’s step back from the trees and look at the forest. Inflation remains at moderate levels, with the consumer price index (CPI) rising by 2.1% in January. (We’ll get an updated CPI reading on Tuesday.) Yields on the 10-year Treasury appear to be stabilizing, at least temporarily, and have so far stayed below the 3% line. Traders are continuing to price in just three, not four, rate hikes by the Federal Reserve for this year. Fourth-quarter revenues for many corporations grew—an important point because the tax law led to adjusted fourth-quarter profits for many companies. The economy is still in growth mode, and the Tax Cuts and Jobs Act (TCJA) is expected to boost growth this year. (If you’re working, you may want to crunch the numbers with the IRS’ new withholding calculator.)

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AAII Sentiment Survey

Neutral sentiment rose to its highest level in nearly two years, while optimism fell to a six-month low. More about this week’s results.
This week’s results:
  • Bullish: 26.4%, down 10.9 points
  • Neutral: 45.2%, up 5.9 points
  • Bearish: 28.4%, up 5.0 points

Historical averages:

  • Bullish: 38.5%
  • Neutral: 31.0%
  • Bearish: 30.5%

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The Week Ahead

This Saturday, March 10, Computerized Investing editor Jaclyn McClellan will speak to our Puget Sound chapter about dividend investing.

Seven members of the S&P 500 member will report earnings: Signet Jewelers Ltd. (SIG) on Wednesday; Adobe Systems Inc. (ADBE), Broadcom Ltd. (AVGO), Dollar General Corp. (DG), Oracle Corp. (ORCL) and Ulta Beauty Inc. (ULTA) on Thursday; and Tiffany & Co. (TIF) on Friday.

The week’s first economic report will be the February consumer price index (CPI), released on Tuesday. Wednesday will feature the February producer price index (PPI), February retail sales and January business inventories. On Thursday, the March Philadelphia Fed Business Outlook Survey, the March Empire State Manufacturing Survey, February import and export prices and the March housing market index will be released. February housing starts and building permits, February industrial production, the University of Michigan’s preliminary March consumer sentiment survey and the January JOLTS report will be released on Friday.

The Treasury Department will auction $28 billion of three-year notes and $21 billion of 10-year notes on Monday and $13 billion of 30-year bonds on Tuesday.

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