The most watched of US indexes yielded slight ground during the week ended May 18, with the S&P500, Dow, and Nasdaq each sliding between -0.5% and -0.7%. Bonds continued to experience downward price pressure with key interest rate benchmarks resuming their inching-up. Weaker equity performance however comes on the heels of an eight day winning streak for the Dow, and an S&P500 that remains nearly +2.5% higher than it was at the end of April. Most interesting perhaps is that what are often thought of as the more economically sensitive and risk-seeking sectors including Small-size companies, industrials and the transports, actually continuing to climb, creating an interesting and arguably positive divergence when looking beneath the surface.
Economically speaking, data continues to support the notion that inflation and interest rates are going up but the pace of change for both so far looks manageable. The latest installment of retail sales data was solid, and key manufacturing and industrial production indices were also a support. Housing data however was more mixed. Corporate earnings season is winding down, and with over 93% of S&P500 companies reported it appears as though the aggregate level of earnings will top the same period a year ago by more than 20%; this is noteworthy because no recession has ever begun when corporate profits were still rising.
A key theme so far in 2018 is the question of whether this (economic growth and corporate earnings) is as good as it gets? Indeed, most data is quite robust and the consensus of market participants believes that we are late in the business cycle. It is undebatable that in terms of time, the US cycle is extended based on historical standards. Casting the proverbial shot clock aside, there are still quite valid arguments that pent-up economic demand remains and there are several catalysts for how that demand might ultimately be unleashed. Those catalysts include getting full employment in the US; government fiscal stimulus (tax cuts, full expensing of corporate capex), rising velocity of money due to some awakened inflation (you buy today because you believe goods, houses, etc. will only be more expensive in the future); and/or more investment of corporate cash. We remain of the perspective that the fundamental backdrop is more supportive of a continued upward sloping equity market trend. Yet the summer months are unlikely to be as sleepy or calm as last when considering it a mid-term election year and an environment that looks setting up for significant incumbent party losses. And an already tarnished Trump administration may have even more challenged days ahead should republicans lose control of the House. That reality is likely to keep waters choppy for investors. In the shorter run, while nearly two weeks of trading remain the often repeated mantra of sell-in-may and go away would, at least so far, result in missing some of the best performance since the correction that began in late-January. Should the month conclude in positive territory, it is yet another perfect example how one cannot create a successful, repeatable investment discipline based on the calendar or number of worrisome headlines crossing the tape.