Quarterly earnings report is the most awaited moment for all investors. Good earnings or earning beats market expectation will normally propel stock prices for further record high. However, this earning season going in after two weeks, most corporate reports have been undoubtedly impressive. They beat Wall Street’s estimations both top and bottom lines. However, market response appeared strangely different this time.
As I wrote previous post, that one of the reasons is that market expectations were much higher than what was reported. Most of current stock prices were already priced in during the one year run up in 2017 after Trump became the US President.
It seems right now after those giant tech stocks called the FAANG have already had their turns, except Alphabet on the coming Monday. But market indexes did not run up substantially in any way for the past one week, but down instead for most of the time.
Tech stocks were the most propelling force for market ran up in the past. Right now, if these major good earnings reported stocks could not propel market surge, we really do not know what kind of earning extent from the remaining reports can do the magic. If those positive reports could not make it, what would happen if the remaining reports are just meeting expectations or below expectations? I am sure market will fall hard. Therefore, the down side risk is more certain than any upside potential.
Inflation Rate Hike
Due to Trump imposed tariff increase on steel and aluminum starting last month, cost of production for the manufacture corporations are expected to be increased. Though some of US Allies are temporary exempted from the tax hike, but the exemption deadline is coming closer on May 1st. There is no breakthrough from the European Union trade talk so far. South Korea is the only country granted exemption permanently from the tax hike.
Currently inflation data are also reported to be on the increase. This increase will attract the attention of the Fed which is going to meet in the coming week. It might have little effect for the result of the meeting this round but the consistent increase of inflation rate in the following months will surely invite faster increase for the interest rate than previously plan.
If the inflation increases were caused by consumers’ spending, increase of interest rate will have a positive effect of pulling the inflation brake effectively. But if the cause of inflation is merely from the import tax hike, increase of interest rate will only cause double injury to the US economy. The effect will be detrimental to both the US and the world economy at large.
Bond Yield Increase
Bond yields are also observed to be on the steadily increase beyond 3% currently. Corporate has to increase their service to their debts. The benefit of corporate tax cut implemented by Trump is supposed to be realized by these corporations, however, the increase of bond yield and production cost would have neutralized them all eventually.
Since bond yields are more attractive, investors will be tempted to move their asset from the equity market to bond. This is also another down side risk for the equity market indexes imminently and double injury to the US stock market performances.
By next week, we would enter the month of May. The “Sell in May and go away” has been a traditional charm of US investors. Historically the first half of the year has been the best months of the year for stock market. The second half will come with a lot of challenges. Starting from May right down to November, especially with US midterm election looming, market will be then hovered with uncertainties. Even though past performances might not be a guarantee of future performances as the saying goes, but there is nothing exceptional coming ahead of us to prevent this market behavior. There is no catalyst for market hike any more as investors see it from now.
From the technical side, all major US market indexes are showing the downside risk as well. Both Dow Jones Average, Nasdaq and S&P 500 have been forming descending symmetrical triangle and are closing to the critical decision making stage within a few trading sessions.
Nasdaq was previously seen as the only market that created new height on March 12th after the February correction. But it failed to sustain its bullish surge and fell back down into bearish trend and joined others for the descending symmetrical triangle as well.
Closer to home, Hang Seng index does reflect descending symmetrical triangle consistently with the US counterpart.
Worst still, because of the threat of trade tariff imposed by Trump, Shanghai market index has even dropped below its descending symmetrical triangle.
The lowering bank reserved policy recently announced by China authority did not have any help to boost stock index.
With all these back drops, UT investors are advised to either lower their equity exposures for large account or move their assets totally to fixed income, practically for small account holders. For impatient investors, they may consider switching their investment into gold related equity funds such as RHB Gold and Resources Fund and Precious Metal and General Fund.
And of course the best timing would rather be the time where these funds lowering 4 to 5% to the bottom from currently price level.
There is no guarantee Gold price will spike up high above the current resistance level immediately though. There is neither lack of possibility gold prices will drop further, but chances might be rare if fundamental market conditions above are in consideration. Gold prices might be seesawed for a while before any breakthrough on the up side.
These are all my current market analysis. Views are subject to change according to market development. Investors are advised to do further reading and study before making any investment decision rather than based on this writing alone.
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The view and opinion expressed are personal views of the author and are subject to change based on market and other conditions. All material(s) have been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This write up does not constitute sole advice for investment decision. Readers and investors are advised to do further reading or research and make up individual investment decision.