The S&P is just shy of a new high. The issue is whether investors will be willing to push the markets into new high territory now that the Fed has indicated it will wait and see how the economy performs before cutting rates again.
With the Fed finished, what's next for the markets? What gets us to sustainable new highs? "The elephant in the room is trade and tariffs and that will dictate how much upside there is," Alec Young, Managing Director, Global Markets Research at FTSE Russell told me.
That was amply demonstrated Friday afternoon, when the S&P 500 lost nearly 20 points on the sudden decision of China officials meeting in Washington for trade negotiations to change their travel schedule and head back to China earlier than planned, again highlighting that trade talks are the marginal movers of the market.
Still, the S&P is little changed this week despite a string of other potentially bad news, from the Iran crisis to the surge in oil to the spike in repo rates to very poor China Industrial Production and Retail sales figures early in the week.
"Markets were thrown a curve ball this week, with the Saudi attacks and the Fed repo mess," Nick Raich, who tracks corporate earnings as the Earnings Scout, told me.
You can see it in the market action: cyclical sectors sensitive to the global economy that had rallied in prior weeks have all fallen back this week:
Cyclical sectors lag
Metals/mining — down 3.8%
Retail — down 4.1%
Banks — down 1.8%
Industrials — down 1.3%
"It appears investors may be tentative about chasing new all times highs ahead of pivotal trade negotiations while the central bank safety blanket has been folded up and put away," Michael O'Rourke wrote to clients at Jones Trading last night.
As we heard from Federal Express and US Steel this week, it's clear the biggest concern for U.S. corporate earnings is the prospect of a continuing global slowdown. But those concerns encompass much more than just tariffs and trade.
While worries about a "global slowdown" seem vague, global fund managers surveyed in the monthly Bank of America/Merrill Lynch Global Fund Manager Survey this week cited several specific issues whose resolution would move markets forward, including a German fiscal stimulus program, continuing Fed rate cuts, a China infrastructure spending program, and a Brexit resolution.
And that's why markets keep holding up: the belief that action is coming, particularly from central banks.
"Until central bank action doesn't work and no longer improves earnings expectations, I would not recommend fighting the Fed," Raich told me.
As for third and fourth quarter earnings, Raich notes that early reports — with the exception of FedEx — have come in better than feared, and third and fourth quarter numbers, while they are coming down, are not coming down as much as the first and second quarter.
"That tells me that expectations are already low, and the markets are still reluctant to bet against the Fed," he told me.