Selling Pressure On Wall Street Resumes With Mounting Concerns

This week is likely to prove an important week as equity markets have gyrated back and forth throughout February and through the first couple of trading days in March. Stability in equity markets is needed to recapture investor confidence and without said stability a retesting of the February lows is a probable consequence. Some of the more heavily weighted concerns investors continue to monitor and opine over are rising interest rates and reflation, economic growth, the potential of a mulit-national trade war and cohesive government unwinding of monetary tightening around the world. Last week was a rough week for U.S. equities as the Dow fell 3.1%, the S&P lost 2% and the Nasdaq shed 1.1 percent. At current levels, the Dow is 7.8% below its record, while the S&P is down 6.3% from its peak and the Nasdaq is 3.3% below its own. The CBOE Volatility Index or VIX rose 18% last week and is up more than 75% in 2018. However, it fell 14% on Friday.

Last week, consumer spending was reported to have grown 0.2 percent by the Commerce Department. It was the smallest increase since August and followed a 0.4% advance in December. A strong labor market has supported consumer spending in recent years and months, which is seemingly at full employment. Personal income rose 0.4% in January after increasing by the same margin in December. Wages increased 0.5% in January after rising 0.4% the prior month, further stimulating wage inflation concerns.

The retail-reporting season is coming to an end this week, but not before some key retailers report their Q4 2017 results. Target Corp. will report on Tuesday before the opening of trading and ahead of Costco whom is set to report later in the week.

There has never been a longstanding bear market accompanied by strong and strengthening corporate earnings growth. As such, the underpinnings of U.S. equity markets remain strong and with corporate earnings expected to grow double digits. With most of the S&P 500 having now reported for the Q4 2017 period, Thomson Reuters has once again updated and revised its forecast.

Just last week, Reuters revised its S&P 500, Q4 2017 forecast to express corporate earnings growth of 15 percent.  On March 2, 2018 and with more companies having reported earnings last week, Reuters has updated this outlook as follows:

Aggregate Estimates and Revisions 

• Fourth quarter earnings are expected to increase 15.2% from Q4 2016. Excluding the Energy sector, the earnings growth estimate declines to 13.0%.
• Of the 485 companies in the S&P 500 that have reported earnings to date for Q4 2017, 76.3% have reported earnings above analyst expectations. This is above the long-term average of 64% and above the average over the past four quarters of 72%.
• Fourth quarter revenue is expected to increase 8.2% from Q4 2016. Excluding the Energy sector, the revenue growth estimate declines to 7.1%.

As it was with the first week of February, investors are absolutely focused on the Nonfarm Payroll report due out this Friday. The wage inflation number imbedded within the report, which showed wage inflation in the month of January, spurred a market sell-off and correction. All eyes will be on this metric once again and with the hopes that wage inflation in January will prove transitory. Last week, during a testimony before the Senate Banking Committee, new Fed Chairman Jerome Powell suggested the Fed did not see wage inflation as a key concern for the Fed presently.

Equity markets may very well be in the late innings of a 9-year bull cycle, but that doesn’t mean they are on the verge of a steep decline or there isn’t room for markets to run further. Charles Schwab chief investment strategist Liz Ann Sonders notes the Index of Leading Economic Indicators has returned to record highs. After it climbs above the prior cycle’s peak, a recession has been, on average, years off.

Some analysts and economists are of the opinion that given the current backdrop of tax reform implementation and economic growth, a recession is likely not to be felt for another 12-18 months, if by then.