Financial markets have a distinct rhythm, whether viewed on a quarterly, weekly or daily basis. The second to fourth week of each new quarter constitutes earnings season for example, when the majority of S&P 500 companies report their performance for the previous quarter. Weeks are usually punctuated by major economic data releases such as GDP growth, or the jobs report that is released on the first (or sometimes the second) Friday of the month.
It is rare to find a week such as this, with relatively little data expected and no obvious major driver of stock prices, but when they come, they can often tell us a lot about one of the main drivers of equities - sentiment.
Trader and investor sentiment is usually a hard thing to gauge as it is not a coordinated thing. It is a result of the feelings of thousands of individuals about what the future holds, and is never unanimous. As hard as it is to divine, however, it is enormously influential.
Sentiment is the thing that is normally at the root of movements that look illogical, such as a rapid recovery from the dip following last week’s rate hike. The hard news suggests that consumption and investment will slow to some degree but traders and investors believe that the economy can easily withstand higher interest rates.
There are data releases and scheduled events this week, but they are not particularly relevant to stock pricing right now. Weekly jobless claims, which will come out on Thursday are notoriously volatile, and as you would expect from a weekly data point the rolling average has more import than any one number.
Housing stats are also due this week but the housing market is not the driver of prices that it once was, and Leading Indicators, the other major economic release scheduled for Thursday, is essentially an aggregation of other, known data and rarely moves markets drastically.
There are also a whole host of speeches by members of the Fed’s Federal Open Market Committee (FOMC), but as we have just heard from Janet Yellen and given this Fed’s high degree of transparency about future policy, we are unlikely to hear anything of import this week.
On the international front, Brexit negotiations begin today but that is a process that will take months at the minimum, more likely years, so no immediate impact can be expected.
Without any data to move things, we are left with how a large group of individuals “feel” about what is to come.
That feeling doesn’t have to be based on logic. From a logical perspective, there would seem to be very few reasons to buy at these levels. Valuations indicate that some serious growth is needed from here and with the aforementioned rate hike indicating tighter monetary policy, that would have to come from fiscal changes.
Tax reform has been promised and a big cut in the corporate tax rate would obviously have an immediate effect on every corporation’s bottom line, but so far, no legislation exists and the still ongoing healthcare fight indicates that getting a bill passed may not be as easy as was first assumed.
Still, stocks keep going up. The “belief” that tax reform is coming soon, the “feeling” that Brexit will be no big deal, the “hope” that despite decades of failure, this time Japan will stimulate growth ... these are the things driving stocks upwards.
None of these things are concrete, but they are still powerful. This week, with very little data or significant news expected and the specter of the Fed no longer an issue, perception will matter, and without too much outside influence that usually elusive influence on stocks will be easier to read than usual.
So far, the indications are that sentiment remains positive. Each dip, whether in the overall market or in sectors brings out buyers. On that basis, the best value this week should be in the large tech stocks that were hit hard last week. If sentiment remains supportive, Apple (AAPL) and Alphabet (GOOG: GOOGL) look sure to recover strongly this week. There will be opportunities like that, but it is important that investors stay alert.
Sentiment is fickle, and this week, without much else to move things, watching for a shift in enthusiasm should be a priority.