Take your pick. On any given day, there are many bits of information both good and bad that become available and the interpretation is driven by the day’s emotions. The price action of the US equity market today gives testament to that fact yet again and is a reflection of the battle of sentiments going on since the correction began in October. To start the day (in the US), a quick tweet from President Trump last night suggested that a trade dialogue with China is in the works. The whiff of progress was enough to send the Hong Kong stock exchange (Hang Seng) over 4% higher. The optimism circled the globe to give a good open to the US markets. Emboldened by the jobs report in the US being stronger than expected (+250k jobs vs. expected 200k), the S&P 500 moved higher. Even Apple’s guidance gaffe last night which sent the stock lower (Apple is one of the largest holdings in market-cap weighted index funds) wasn’t enough to derail the bullishness. Traders seemed to be feeling good. But, the S&P 500 peaked by 9:45am, fell to its lows just after lunch and then slowly worked higher to close the day down but off the lows. You could see the narrative shift in the afternoon by watching the flashing headlines on financial news channels. White House officials said a trade deal with China is not imminent (how could it be?). The jobs report is too good implying that the Fed is going to raise rates in December (that had a market-implied probability of 75%+ already). Apple’s stock price is “weighing” on the tech sector (of course it is, it is literally the largest holding in the S&P 500 index funds). Circumstances hadn’t really changed, just the opinion of them.
Today is a great illustration of recent weeks. Generally speaking, fundamentals look good. Earnings are growing as are economies. People are working and wages are up. Businesses are making capital expenditures and buying back stock. But there are challenges. While the real Fed Funds rate (adjusted for inflation) is still near zero showing monetary accommodation, policy is tightening. Interest rates, long suppressed, are increasing. There is uncertainty in what long-term impact the trade issue with China will have. Italy is at odds with their European Union colleagues over budgets and there is a lot of their debt outstanding (and more to come). Midterm elections in the US are next week which may affect the trajectory of trade discussions as well as future fiscal policy.
In any given year, there is a number of problems in the world which are easy to point to when sentiment turns sour. Traders are still waiting for the “other shoe” to drop – as they have been really since the economic (and equity market) recovery began in 2009. Ultimately, there will be a cycle as it is the natural course of things but only time will tell when it will really begin. Meanwhile, valuation drives return in the long term. Valuation is getting better through all of this noise. Long-term investors sift through the sentiment to pick that out.