In an email dated April 13, I posted that the market has continued a steady move higher, although (as I suggested in my last email,) the pace has slowed down dramatically.  It is my opinion that the market won’t move much higher from here and that a modest pullback is not out of the question.  By my calculations, the market is down 2 tenths (.02) of a percent.  That seems like the definition of a modest pullback!

To summarize the current conditions, the S&P 500 has retreated approximately 2% from the 4/20/16 high close of 2102. Weak earnings from the Tech sector (20% weighting in the S&P 500) have been the major catalyst for the pullback. Global manufacturing data has been below expectations, and a modest rise in the Dollar has been a headwind.  The 2% decline has brought the index near support.  2040-2035 are the next support levels to note on a pullback.  Breaking below those levels could trigger short-term selling but with plentiful support near 2000, the downside should be limited. For those who missed the 15% rally off the February market lows, remain patient and consider purchases.

Manufacturing: data around the globe was weaker than expected in April. US ISM (Institute of Supply Management) manufacturing was a slight disappointment as well, but still expansionary. A June rate hike by the Federal Reserve is still on the table, but as of now, expectations of a Fed move are low at that meeting.

China: Sentiment on their economy is improving. Fiscal stimulus measures are coming through and stabilizing. However, if policymakers back off the stimulus, the data may become choppy again.

Earnings: At one point, expectations projected S&P 500 earnings for Quarter 1 to decline approximately 9%, but at this point of the earnings season (84% of S&P 500 have announced,) expectations have moved to -7.1%, according to FactSet. We would not be surprised to see earnings continue to come in better than the very low expectations.  Much of the weakness in earnings is attributable to the energy sector. We’ve slightly increased our stock allocation and decreased our allocation to alternatives.  However, I do want to buy on pullbacks.

Other Factors: The railcar indicator was down dramatically again, which is a sign of a slowing economy.  Combined with expected earnings decreases from the S&P 500 (an average of course, not every company,) that paints a modest picture for economic growth.  This does not always spill over to stocks, but it certainly bears watching.

On the plus side, the Federal Reserve seems to have slowed the pace of their interest rate raises which should keep the Dollar from strengthening and may give a boost to US stocks and to US-based manufacturers.  It should cause oil and gas prices to drift higher, too.  Initial jobless rates still look good too, although the pace of improvement has slowed.

Takeaway: In all, conditions favor stocks, but not as they have in the past.  Consider buying stocks on pullbacks, and re-evaluate your risk appetite.

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As always, these recommendations are mine, and may or may not be the same as those of Raymond James.  This is not a solicitation to invest, although we do invite you to review your portfolio with us to see if any changes should be made.  Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur.  Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss.  The S&P500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.  Individuals cannot invest directly in any index.  Every investor’s situation is unique and you should consider consider your investment goals, risk tolerance and time horizon before making any investment.  The foregoing information was obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation.  Any opinions are those of Scott Mitchell and not necessarily those of Raymond James.

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