(Marketwatch) The stock market’s recovery from its Dec. 24 lows has been breathtaking in both its speed and magnitude.
The Dow Jones Industrial Average has advanced 20%, the S&P 500 index has rallied 20.7% in the 46 trading days since Christmas Eve, while the Nasdaq Composite Index has jumped 25.4%.
But strategists and investors interviewed by MarketWatch worry that the very success of the markets in recent weeks could set up a volatile month for stocks, even as March has statistically been a great month to buy equities.
“History would say that we won’t get a massive pullback; over the past 20 years, March has been the second strongest month for stocks,” Ryan Detrick senior market strategist at LPL Financial told MarketWatch.
Meanwhile, Detrick said investors who choose to sit on the sidelines this month may miss out on momentum-driven gains. “When you have massive buying pressure and strength off the December lows, usually the market over performs” in the short-term,” Detrick said.
Risks loom large
However, Erik Ristuben, chief investment strategist at Russell Investments said that despite the market’s recent resilience, he believes investors will need some surprisingly good news to boost valuations substantially higher than they presently are. “I’m not sure there is a catalyst to push stocks higher in March,” he said.
Ristuben said the market has already priced in good news, like the Federal Reserve’s recent pivot away for steady interest-rate increases toward a wait-and-see approach. Additionally, a growing sense that a trade deal between the U.S. and China may be struck soon also has helped to lift stock values. However, few details on a Beijing-Washington trade agreement have surfaced, and there remains a possibility that the parties fail to achieve a resolution.
“The bar right now for a deal is very high, and there’s plenty of room for disappointment,” he said. “This could be a classic example of ‘buy the rumor, sell the news,’” Ristuben said.
Another source of agita is elevated equity valuations in the aftermath of the market’s rebound over the past three months during a period in which earnings growth is expected to slow significantly. “Stocks are no longer cheap,” warned Tom Martin, senior portfolio manager with Globalt Investments in an interview with MarketWatch. “On top of that, you have weakening macroeconomic data around the world,” making it tough for investors to justify sustained increases in price-to-earnings multiples.
The return of the dot plot
This month will also feature a another meeting of the Federal Reserve’s interest-rate setting committee, set to take place Mar. 20-21. With fed-futures markets showing a 92% probability that the Fed won’t raise rates at all in 2019. Still, investors will be looking closely at the first release of updated projections of future rate increases by individual members of the committee, known as the dot plot. In December, the median projection was two hikes for this year, and investors will be looking for that to be lowered at least to one, Martin said.
“If we get a dot plot that shows zero hikes, that could send the market higher,” Martin said, while an unchanged dot plot could lead to more volatility.
Investors will also be looking for certainty regarding the Fed’s balance sheet, which has been shrinking by $50 billion a month, tightening financial conditions and putting pressure on stocks. Fed Chairman Jerome Powell said during testimony before Congress last week that “my guess is we’ll be announcing something soon.” Depending on when the Fed decides to stop reducing its balance sheet, the markets could move higher or lower on the news, Ristuben said.
Will the Chinese economy recover?
March could also be an inflection point for the Chinese economy, whose slowing economy in 2018 helped weigh down global growth and contributed to U.S. stock market’s precipitous fourth-quarter declines. China’s National People’s Congress, meanwhile, will meet next week, where the government is expected to announce its GDP growth targets for the year, while also providing more detail about its economic stimulus plans.
The Chinese government hopes to ramp up its economy by boosting consumer spending through tax cuts, rather than driving up the country’s debt load. That said, Ristuben makes the case that “China has a political imperative to hit its growth targets, and they will sacrifice their debt targets if they have to.”
Any evidence that emerges from next week’s meeting the Chinese government is getting more serious about stimulating its economy, “could be a positive development,” he said.
What else is on deck for next week?
Next week will provide investors with a number of new data points to evaluate the U.S. economy, with next Friday’s non-farm payroll report taking center stage. Since September, the three-month moving average of job growth has risen from 189,000 new jobs to 241,000 new jobs in January, helping to push wage inflation above 3%, the highest level in more than a decade.
“In order for the Fed to stay on the sidelines, we’d need to see weaker economic data,” starting with moderating job and wage growth, Ristuben said.
Other data on tap for next week include reports on construction spending for December, to be released Monday. On Tuesday, the Institute for Supply Management will release services sector data for February, while the Commerce Department will issue a delayed report on new home sales for December.
Wednesday, ADP will release its estimate of private-sector job growth, and the Fed will release its Beige Book, an anecdotal account of business conditions in the central bank’s business districts. On Thursday, investors will get an update of weekly jobless claims as well as a report on productivity growth and unit labor costs in the fourth quarter of 2018.
