It is a safe bet that our furry friends in the bear camp figured the combination of Hurricane Harvey and increasing tensions with North Korea would get the party going to the downside. However, a funny thing happened on the way to the debacle; stocks decided to reverse course and rally instead.
Yep, that’s right; with the S&P 500 only a stone’s throw from breaking important technical support on Tuesday morning, a reversal began. So, instead of a move that would create problems on the charts – problems that would have likely led to the algos piling on to the downside – the blue chip indices now find themselves smack in the middle of what looks like another sideways consolidation phase.
What gives, you ask? With seasonality favoring the bears for at least another month, valuations at sky high levels, and central bankers looking to get things back to normal, why have stocks rallied instead of sinking?
In my humble opinion, there are a handful of issues at work here.
First and foremost is the fact that the big economic data this week has come in above expectations. And the poster child on this front was yesterday’s GDP report, which was well above the consensus estimate. Instead of the economy growing at a 2.7% annualized clip as the herd had expected, the government’s second look at GDP showed growth to be 3.0% in Q2. Not bad, not bad at all.
Next up, the August ADP report suggested the economy enjoyed another strong month of job gains in the private sector as the change in Nonfarm Private Employment grew for a third consecutive month. While the correlation isn’t always spot on, a strong private sector report tends to bode well for the Big Kahuna of economic reports, the monthly jobs update from the labor department.
And then there is the political situation. Although the market’s focus appears to have moved away from Trump’s Twitter account over time and returned to the fundamentals such as the economy and earnings, the fact that the President has begun his tax reform promotion tour wasn’t lost on traders yesterday.
