Digging into Last Week’s Sell-Off
May 23, 2017, 1:04 am
With former FBI director James Comey’s Congressional testimony looming, it would not be surprising to see the market panic if anything negative comes out of it. We’ve been stuck in a headline-driven environment for quite some time, and while I know it can be hard to tune out the noise, it’s more important to do so now than ever. I want to help you do that, and a good way to start is by digging deeper into last Wednesday’s sell-off.
While I know the sell-off caught many off guard, there was no real reason to panic. When you take a step back and look at the bigger picture you can see that the sell-off wasn’t nearly as bad as it looked. The market was only 2% off its recent all-time highs, and it had needed to consolidate those post-election gains for some time. The headlines out of Washington may have been the spark, but I believe what we saw was ultimately healthy. There’s simply been too much complacency, especially surrounding tech and small-cap stocks, and last Wednesday brought investors a little closer to earth.
While we may see some additional downside as the market works through things, I believe the S&P 500 will hold its April low of 2,322. The increasingly difficult political situation President Trump finds himself in is clearly something to keep an eye on, but it’s important to keep in mind that earnings are good, the economy is sound and interest rates are low – all of which will help support stocks.
What Wall Street is counting on from the Trump administration is tax reform to give earnings a boost and make current valuations more reasonable, which is still likely. If anything, Republicans may want to push the issue faster to get some relief from the Russian controversy. And even in the most dramatic scenario of President Trump leaving office, I believe a Pence administration would keep tax reform front and center so Republicans can claim a legislative victory prior to the mid-term election.
Remember, stock futures were down sharply when Trump was elected – the Dow initially fell over 800 points – but snapped back quickly when investors realized his pro-growth agenda, especially tax reform, would be a boon to stocks. The market is really pro-growth and higher earnings, not necessarily pro-Trump, and with Republicans still in control of Washington for now, the market can get what it wants.
Overall, stocks remain up for the year, putting the S&P 500 well above its 200-day moving average with significant support between 2,300 and 2,330. It didn’t even come close to those levels on Wednesday, with the low of the day at 2,356.21. And the index started this week off nicely above its 50-day moving average.
Given all these factors, it is especially important that you tune out the noise. And even if volatility does tick up, I urge you to stay calm and stay invested. In the longer term, you’ll be glad you did.