The popular averages recovered nearly 1.0% of the late July early August pullback last week. Stocks were supported by an oversold condition, rapidly rising investor pessimism and mixed economic data that was non-threatening to Fed policy. The latest economic reports on retail sales, housing, inflation and weekly jobless claims suggested it was premature to assume the Fed would be shifting policy anytime soon.

A slow growth economy has been the sweet spot for stocks the past five years as it implies that the Fed will continue with a zero interest rate policy. Weaker than expected economic data from Europe, Japan and China caused rates to fall globally, which help push the yield on the benchmark 10-year Treasury note to a new 52-week low of 2.35%.

The consequence of slow growth, however, is that broad based top line growth for U.S. industry will remain elusive. This suggests that the markets will continue find upside progress difficult. Through the first seven months of the year the Dow Industrials and Russell 2000 are flat to down while the S&P 500 is only modestly higher. Short-term, pessimism remains strong enough to allow for further upside progress. 

Indicators of investor psychology are mixed. Short-term, sentiment measures show caution, which argues for a continuation of last week’s rally. Low cash reserves, stretched valuations and record margin debt suggest that once the current rally runs its course, stocks could be vulnerable to a retest of the early August lows. Support near-term is 1920 to 1940 using the S&P 500 with resistance at 1980.

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Article provided by Robert W. Baird & Co. with the authorization of its author for Evan Guido, Vice President, Financial Advisor at the Sarasota office of Robert W. Baird & Co., member SIPC. The opinions expressed are subject to change, are not a complete analysis of every material fact and the information is not guaranteed to be accurate. 

Evan R. Guido

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