Trading the Week: Valuation Fears Loom
Coming off a truncated trading week due to Presidents Day, last week saw markets again reach all-time highs, but concerns over valuations are starting to weigh heavily on the minds of traders and investors.
“The S&P 500, relative to its 50-day moving average in terms of standard deviations, has not been this overbought since 2004,” Larry Peruzzi, managing director, international equities sales/trading at Mischler Financial Group, told Markets Media. “The Dow recorded its 9th straight new high–its longest winning streak since January 1987.”
The Dow Jones Industrial Average ended the week with a 1.1% gain, but closing above the 20,800-level remained just out of reach. The Nasdaq Composite’s and the S&P 500’s performance mirrored each other as the Nasdaq Composite saw a slight 0.7% drop from its mid-week high while the S&P 500 Index finished the week with a 0.7% increase.
The Federal Open Market Committee notes from its meeting on February 1 showed that the FOMC is comfortable raising interest rates “fairly soon.”
Fed Funds are pricing in a 38% chance of a rate hike, up from the 18% before the release of the meeting’s minutes, noted Peruzzi.
“As we approach the end of the earnings season, we have seen an improvement in the underlying numbers, but for the most part, the markets have been rallying on the expectation of tax reductions and deregulation,” he said. “Market momentum continues, but it seems as though many questions from the pace of rate hikes to tax and regulations specifics need to be answered if the rally is to continue.”
In terms of tax reform, there’s a good chance that the Trump administration will back the corporate tax reform put forward by Speaker of the House Paul Ryan (R-WI) and Rep Kevin Brady (R-TX). Their proposal would eliminate the current 35% corporate tax rate and replace it with a destination-based cash flow tax of 20% and 25% for corporations and other businesses respectively.
Whether Trump and Ryan can convince Senate Republicans to adopt such a novel tax plan remains up in the air.
Meanwhile, the Fed continues to watch employment and inflation number closely.
“Although the policy specifics coming from the White House are unorthodox, and at time difficult to decipher, the inflation and employment data are a little easier to track,” said Peruzzi.
This Week’s U.S. Economic Indicators of Interest:
Pending Home Sales Index
US International Trade in Goods
Richmond Fed Manufacturing Index
|Wednesday||PMI Manufacturing Index
Motor Vehicle Sales
ISM Manufacturing Index
Chain Store Sales
Fed Balance Sheet
|Friday||PMI Services Investment
ISM Non-Manufacturing Index
Market sentiment remains strong as traders see little near-term risk.
Traders continue to grapple with economic, interest rate and geopolitical concerns.
Stocks cling to higher levels while fixed-income securities slide.
Stocks continue to drift higher amid dearth of selling and low volatility.
Storms could cloud traders' appetites and FOMC rate hike resolve.