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With Earnings Season Ending, Focus Will Shift to Geopolitical Events, Policy Changes

By:
James Hyerczyk

One positive that can be taken from last week’s events is that sometimes it is necessary for an event to come along and drive stocks back into value areas. Too often, bull markets sputter along near all-time highs because of limited buying. However, profit-taking and position-paring is often necessary to bring prices into areas that are attractive to new buyers. It’s this new capital that then drives stocks to new highs.

Stock market analysis

The major U.S. equity market finished mixed for the week while posting a generally choppy trade. Concerns over financial and currency turmoil in Turkey, renewed trade talks between the United States and China, and strong earnings reports were primarily responsible for the two-sided trade and heightened volatility.

For the week, the benchmark S&P 500 Index settled at 2,850.13, up 0.6%. The blue chip Dow Jones Industrial Average closed at 25,669.32, up 1.4% and the tech-driven NASDAQ Composite finished at 7,814.34, down 0.3%.

With second-quarter earnings season coming to a close, geopolitical events and policy changes are expected to exert more influence on the market’s moves. This could lead to periods of heightened volatility

Throughout the year, stocks have been caught in the middle of a battle between policy risks and strengthening economic and corporate fundamentals. All factors were present last week. Escalating worries about a falling currency and economy in Turkey drove early-week losses, while earnings along with news of trade talks with China, spurred the strongest one-day rally in the Dow since April. Last week’s news led to some sizable price swings in the markets last week, but the weekly trends remained intact.

Trouble in Turkey

Over the past few weeks, the Turkish Lira has plunged 22%, sparking worries of an economic and debt crisis in the country. There was also talk of contagion due to European banks’ exposure. However, the move may have been overplayed since Turkey’s GDP is smaller than Florida’s. Compared to previous global turmoil during 1997’s Asian financial crisis, or 2011’s Euro Zone debt crisis, the problems in Turkey are important but nothing major.

Emerging Markets and Tariffs

The major issue is emerging market weakness. A decline in the broader emerging markets are the real threat to global GDP. Trump’s placement of additional tariffs on Turkey is also a concern since they put unexpected pressure on a country that was already facing economic challenges.

Corrections are Good

One positive that can be taken from last week’s events is that sometimes it is necessary for an event to come along and drive stocks back into value areas. Too often, bull markets sputter along near all-time highs because of limited buying. However, profit-taking and position-paring is often necessary to bring prices into areas that are attractive to new buyers. It’s this new capital that then drives stocks to new highs.

The price action late in the week suggests investors believe the situation in Turkey may stabilize over the short-run unless it continues to pester President Trump with additional tariffs on U.S. goods. Volatility will likely return if Trump then retaliates with more sanctions.

Perhaps off-setting any negativity from Turkey will be the upcoming trade talks between the United States and China. Investors cheered the announcement of the meeting and are likely to continue to support the markets if there are additional signs of progress. Last week’s price action indicates the Dow Jones Industrial Average could be the big winner if the relationship between the U.S. and China improves.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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