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What’s Driving the Market Now?

June 5, 2018, 10:58 am

Each earnings season gives us a chance to take a close look at the assumptions that guided the market previously. With first-quarter earnings finally receding in the rear view, it’s clear to all that the U.S. economy remains as robust as we’ve seen it this decade.

Profits are tracking 24.5% above last year’s levels, thanks in large part to widespread tax relief and relaxed regulation on industries that were straining to cut through government red tape. Guidance was good enough to suggest that growth will continue at a rate of 19% or higher in the current quarter and throughout the year to come.

These numbers are nothing short of spectacular. Even long-term investors only get to see earnings growth like this a few times a decade. Only the initial rush of recovery from a full-fledged recession feels better, and if we can anticipate performance even close to what we captured in 2003 and again in 2010, that growth story is going to be enough to make tactical traders a lot of money.

In the broader economy, 2.2% growth may be slower than some economists would like, but it’s better than what we’ve seen for much of the decade. As we learned last Friday, unemployment is at its lowest level in a half century, and while the Federal Reserve is raising interest rates, the drag hasn’t been more than consumers or corporations can bear. We’ve already seen that 3% bond yields are not going to trigger an instant meltdown, and they actually are a sign that the world is returning to normalcy after a dramatic recession and difficult recovery.

All these factors give the market what it needs to keep healing after the correction earlier in the year. Last week ended with the S&P 500 in the green, and its technicals are looking good. The index broke through its key 2,740 level on Friday – a level it hasn’t seen since mid-March – and then traded around it yesterday. This is very healthy action, but we remain in a headline-driven environment so I am not ruling out a few broader market swings.

The U.S.-China deal is still in the works, and I expect Wall Street to pay very close attention to any news (or tweets) on the matter. Things seem to be back on track for the North Korea and U.S. summit next Tuesday, but as we’ve seen before a lot can happen in a week that impacts any plans.

In addition, the G7 summit begins on Friday, and headlines about trade wars and tariff threats leading up to it could be especially market-moving as the United States’ allies are against the tariffs on steel and aluminum the Trump administration levied on Canada, Mexico and the European Union (EU).

The good news is that any rocky trading will open up attractive opportunities on dips, and pullbacks on strong stocks with solid underlying uptrends are a great place to put your money to work.

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