Key Takeaways
- Market Rally Fueled By Trade Optimism And Sector Strength
- Volatility Remains Elevated; Watch For Confirmation Through VIX Decline
- Stagflation Concerns Mount As Growth Slows And Inflation Rises
Stocks staged a strong rally Tuesday and look poised to add further gains Wednesday. On Tuesday, the S&P 500 and Russell 2000 both gained 2.6% while the Nasdaq Composite and Dow Jones Industrial Average added 2.7%. All 11 sectors in the S&P closed higher on the day, led by financials which gained 3.28%.
Tuesday’s rally began following comments from Treasury Secretary Scott Bessent who said he hopes the trade war with China will deescalate. Then, after the close, President Donald Trump echoed a similar sentiment, saying he would be nice to China with respect to negotiating a new trade deal. Trump also said he has no plans to fire Federal Reserve Chair Jerome Powell after speculation began to swirl that the Fed chief’s job could be in jeopardy. Both bits of news were encouraging developments, however, I would be remiss if I didn’t offer a word of caution.
This market is very sensitive to comments made by the president. The idea of “tweet risk” is something that’s relatively new for markets in that the last time the president was in power was the first time this became a highly watched method of presidential communication. We have seen thoughts and policy announcements come via tweet, which is a non-traditional method. Therefore, I’m looking for a confirmation signal that the market is truly confident. The first clue will be to begin seeing normal trading ranges. By normal, I mean a VIX back below 20 and the S&P 500 Index trading within +/- 30 to 40 points. After that, there are some secondary clues, including a close above 5,500 in the S&P 500. Finally, I would like to see us break back above the 200-day moving average which is currently near 5,749. But the first thing we need is a reduction in trading ranges to normalized levels for a couple of weeks.
Another positive development for equities on Tuesday was in gold. Often viewed as a safe haven, gold prices have surged this year. On Tuesday, gold broke above $3,500 per ounce, putting its gains for the year above 32%, however, prices reversed and ended the day at $3,419. In premarket trading, gold is down 2.35%.
Turning to some individual stock news, Tesla announced earnings after the close that were well below forecasts. Net income fell a staggering 71%. However, in their call with analysts, Elon Musk said he will be reducing the amount of time spent working with the government beginning next month and he also reiterated plans to release a low-cost car later this year. In premarket trading, shares of Tesla are higher by over 6%.
Shares of AT&T are higher while shares of Verizon are flat. Verizon lost 289,000 monthly wireless subscribers for the quarter. Meantime, AT&T added 324,000 new subscribers, suggesting that it may be taking market share from Verizon. The company also announced it will restart its share repurchase program in the second quarter. Shares of AT&T are up more than 3.5% in premarket.
Boeing is trading higher by more than 5% in premarket. The aircraft manufacturer beat on earnings and also announced the sale of a portion of Digital Aviations Solution in an all-cash deal totaling $10.55 billion. And lastly, Intel shares are up in premarket trading by just under 5%. The chipmaker announced it would cut 20% of its staff.
On the economic calendar Wednesday, we’ll get both the Manufacturing and Services Purchasing Manufacturers Index. I firmly believe all the economic data we get for at least the next couple of months will be very important, including some of the more esoteric reports that normally fly under the radar. While the market is being lifted on hopes of a trade deal with China, the impact of tariffs is expected to take a toll on overall economic growth. On Tuesday, the International Monetary Fund reduced its forecast for U.S. economic growth from 2.7% to 1.8%. At the same time growth forecasts are falling, inflation will likely tick higher as a result of tariffs. That combination could lead to what is commonly referred to as stagflation, where growth rates are stagnant, but inflation increases.
To counter that, President Trump would like the Federal Reserve to lower interest rates, but at the moment, that is not possible. In fact, what could be more troubling is the prospect of a rate hike. The U.S. dollar is down over 11% this year. Bonds, which are higher this morning, have been weak, pushing interest rates up. If the dollar and bonds continue to weaken, the Fed may be put in a precarious position of needing to raise rates at the worst possible time. I don’t think that is something we’ll see anytime soon, but it is something I’m monitoring. On Wednesday, I’ll be closely watching the 5-year note auction — not usually a moment of excitement — to see what the demand is, where is the demand coming from, if this looks like an auction did a few months ago, or has the mix of participants changed. This could be a first clue about any change in monetary policy or caution flags going up.
For Wednesday, I want to see if the market can hold its overnight gains and equally important, what volatility does. Right now, the VIX is down nearly 8% but is still significantly elevated at 28. We have a ton of earnings still to come this week, with IBM announcing after the close along with Chipotle and Whirlpool. Then tomorrow after the close, Alphabet is scheduled to release their earnings. As always, I would stick with your investing plans and long-term objectives.
tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.
Read the full article here
