A Robust First Quarter, But What Next?

Today is the final trading session of the first quarter, and what a mighty Q1 it has been. The major averages are on pace to log their best quarter in nearly a decade. As of this writing, all four majors — Dow Industrials, S&P 500, NASDAQ Composite and Russell 2000 — are up double-digit-percentage gains year to date.

This performance is most impressive, especially when compared to what was the worst fourth quarter for the stock in many years. The chart here shows just how mighty Q1 was for the majors.

As you can see, the gains were virtually uninterrupted through the first two months of 2019; however, those gains definitely settled down in March.

A closer look at this month in the chart below reveals the timid gains by comparison. Though the S&P 500 and NASDAQ Composite were positive in the month, the Dow and Russell 2000 actually lost ground.

The numbers here tell me that markets are at an inflection point, and which way the trend heads next will depend on a few factors that I will be watching closely in the weeks ahead.

Chief among those factors are indications via the data that both U.S. and global economic growth is stabilizing. Preferably, I’d like to see a real uptick in growth, as recent indications from Europe, China and here at home have been disconcerting of late.

I also want more clarity from the Federal Reserve, and possibly one or even more rate cuts by the central bank this year. Then there’s the trade situation between the United States and China. While the market is pricing in a deal, there isn’t one yet. So, if things go south here, so too will equity prices.

Finally, and most importantly, there’s the upcoming Q1 earnings season. The season begins in earnest about mid-April, and here I will be looking for (of course) strong top and bottom lines, but also upbeat commentary from key companies that buttress the optimism that’s being reflected in stock prices.

Interestingly, my friend and market maven extraordinaire Tom Essaye of the Sevens Report just pointed out to me that the research firm FactSet said that S&P 500 companies saw the best price reaction to negative (Q4) earnings per share surprises in nine years. In fact, companies that reported negative earnings per share surprises declined, on average, just 0.40% during the most-recent reporting period, compared to an average 2.6% decrease of the past five years.

This makes sense, as downbeat earnings were baked into the cake during that disastrous Q4. Yet for Q1, we don’t have those bad expectations baked in. So, we cannot expect the same kind of positive reaction to lukewarm earnings like we saw for Q4. Instead, Q1 earnings had better impress, or we may be in for some real selling.

As always, we’ll be here to make sense of it all, and to make sure we continue to hold the best income-producing stocks that also are displaying strong share price appreciation. And of course, we’ll continue to take advantage of tactical opportunities as they present themselves.

In the name of the best within us,

Jim Woods
Editor, Intelligence Report

P.S. I will be a featured speaker at the MoneyShow in Las Vegas, May 13-15, where I will share my latest views about the market and the best investments to make now. The event will be based at the Bally’s/Paris Resorts and feature more than 200 presentations. Click here to register free as my guest or call 1-800-970-4355 and be sure to use my priority code of 047465.