Stocks posed a mixed close on Monday as tech continues to outperform while the Dow logged a fifth-straight losing sessions.
The Nasdaq gained less than one full point on Monday, rising 0.645 points, or 0.01%, while the S&P 500 was off about 5 points, or 0.2%, and the Dow lost 103 points, or 0.4%.
The only economic data report of note out Monday was the June reading on homebuilder sentiment, which showed that lumber prices are weighing on sentiment in the sector as the index registered a 68 in June, missing expectations for a reading of 70.
On Tuesday, we’ll get more data on the housing market with housing starts in May expected to increase 2.1% while the number of building permits issued is forecast to have declined by 1% during the month.
The good and the bad of the stock market
After 2017’s cool, calm, and collected rally in the stock market, 2018 has been a different story.
Earlier this year, the market entered a correction — defined as a 10% drop from its high — and while each of the major averages is still higher year-to-date, the Dow and the S&P 500 have not eclipsed their records from late January.
Against this mixed backdrop for the market’s overall price action, there still remain a number of positive signs for the market, including earnings, the economic outlook, and the market’s recent price action. But we’re calling the backdrop mixed because there are also a number of reasons for investors to exercise caution.
In a note to clients published last Friday, the team at Bespoke Investment Group gave a quick overview of the good and the bad for the stock market right now.
On the positive side, Bespoke cites strong earnings and guidance, an “epic” job market, and few signs of the economy nearing or entering a recession as supporting the stock market right now.
Over the balance of the year, S&P 500 companies are still expected to report earnings growth of around 20% and the first quarter marked the fifth-straight quarter that more companies raised guidance than lowered their forecast. So although the market had just a so-so run through earnings season, a continued solid run for U.S. corporates should underwrite a thesis that stocks are a good buy.
Meanwhile, as we’ve chronicled at length in recent days, the U.S. job market and economy show few signs of slowing and until we begin to see an uptick in initial jobless claims or an outright decline in the number of jobs created each month, this trend would appear solidly in place.
A potential headwind for the market right now comes from a group of stocks we seemingly think and talk about everyday — the FAANGS.
Bespoke notes that these high-flying tech stocks have more than doubled their percentage of the global stock market cap over the last five years as technology’s weighting in the S&P 500 is now at levels last seen during the tech bubble.
Additionally, global economic growth is slowing down after two strong years with manufacturing activity leveling off and trade volumes falling sharply as the Trump administration looks to reshape the U.S. economy’s relationship with its key trading partners around the world.
The Federal Reserve’s plans to raise interest rates over the next couple years also cannot be overlooked by investors. Futures markets are pricing in a Fed that will stop raising rates when the Fed Funds rate hits 3%, though the Fed’s own forecasts expect benchmark rates to exceed this level in 2020.
Over the last 18 months, the market has underestimated the pace at which the Fed would raise rates, and a market that continues to lowball the Fed’s actual interest rate decisions could end up with more bouts of the instability we saw earlier this year, when it seemed investors all-at-once realized they had misread the Fed.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland