Stocks Inch to New Highs as ‘Goldilocks’ Conditions Remain

Stocks Inch to New Highs as 'Goldilocks' Conditions Remain

Stocks remained near record highs last week, bolstered by a strong economy, decent earnings and low inflation.

The S&P 500 rose 0.2 percent between Friday, April 26 and Friday, May 3. It was the fifth gain in the last six weeks, with the index holding its ground above the old peaks from last year.

Job growth was the big surprise as payroll reports from the Labor Department and ADP blew past forecasts. Amazingly, wage pressures stayed under control despite unemployment shriveling 0.2 percentage point to just 3.6 percent. That was both a pleasant surprise and the lowest reading since 1969.

Situations like this are often described as “Goldilocks” because business is strong enough to keep the economy moving without inflation rearing its ugly head. Not too hot, not too cold. Just right, just like the fabled girl’s bowl of porridge.

Russell 2000 (@RTY) pushes above 200-day MA. Notice the contrast with commodities chart below.
Russell 2000 (@RTY) pushes above 200-day MA. Notice the contrast with commodities chart below.

Central bankers don’t know what to do. One textbook says to hike rates when unemployment is this low. But, the other one says to leave well enough alone as long as prices stay tame. That made the Federal Reserve’s meeting last week a non-event.

Earnings, Earnings and More Earnings

It was also the busiest stretch of earnings season, with Apple (AAPL) among the most prominent companies. Tim Cook’s company beat expectations and rallied after showing signs of evolving beyond the saturated smart-phone market into stickier service businesses.

Other well-known names included Alphabet (GOOGL), General Electric (GE), Mastercard (MA) and CVS Health (CVS).

Based simply on performance among members of the S&P 500, Newell Brands (NWL) was the top gainer with a 16 percent surge. The ailing consumer-products company surprised investors with strong quarterly results, partially because its Graco baby-stroller business is recovering from the Toys ‘R’ Us bankruptcy.

Drug maker Incyte (INCY) and Seagate Technology (STX) vied for the runner up spot, each up about 10 percent.

Fluor (FLR), Cognizant Technologies (CTSH) and Arista Networks (ANET) led to the downside. Each had some kind of weak earnings or disappointing guidance.

Financials Strong, Commodities Crumble

Financials, which tend to benefit from a strong economy, were the best-performing sector overall. Housing also gained as both payrolls reports showed healthy gains in construction jobs. Is that a coincidence, or is the sector recovering?

The Russell 2000 was the strongest major index amid signs of a looming “golden cross” pattern. Chinese Internet stocks and solar energy were other pockets of strength.

Reuters Commodity Index ($TRCCRBTR) showing break of 50-day MA and trendline. Is the 200-day MA now resistance?
Reuters Commodity Index ($TRCCRBTR) showing break of 50-day MA and trendline. Is the 200-day MA now resistance?

But then you had energy, which plunged 3 percent as worries about a supply glut dragged on crude. Gold miners, materials and industrial metals also fell as the overall commodity index shows signs of breaking an intermediate-term uptrend. Low inflation and strong demand for equities generally don’t help this corner of the market.

The Coming Week

This week is much less eventful but there are still plenty of earnings.

Nothing important is scheduled for today. Tomorrow features results from Mylan (MYL), Regeneron Pharmaceuticals (REGN) and Electronic Arts (EA).

Wednesday brings crude-oil inventories, along with Walt Disney (DIS) and Roku (ROKU) in the afternoon.

Federal Reserve Chair Jerome Powell will speak on Thursday. Initial jobless claims and producer-price inflation are also due. Friday’s main event is the consumer-price index.

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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.