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Stocks could see another swoosh before the market is able to build on, or even hold, this week’s gains.
Stocks surged on Tuesday with positive earnings news, regaining a chunk of October’s decline.
Sam Stovall, chief investment officer at CFRA, said he would not be surprised to see a test of last week’s lows, and he is not alone. Nuveen Asset Mangement chief U.S. equities strategist Bob Doll said the market could test its lows before heading to new highs later in the year.
“This is the second decline of this year of 5 percent or more and two out of every time we had more than one decline in a year, the second decline was sharper than the first,” Stovall said. The S&P 500 dipped to 2,710 last week, a 7.8 percent decline from its all-time high in late September. In February, the S&P was down nearly 12 percent at its low.
“There could be a test of the lows. I’m not surprised that tech, consumer discretionary are leading the way [higher] because they led the way downward,” said Stovall. He said if there is another flush out to lows, it could come before the Nov. 6 election.
Dow futures Wednesday morning pointed to a decline of about 100 points at the open.
Yet, strategists say the odds are high that stocks will be strong into the end of the year and next year, as is historically the case after midterm elections. This year, Republicans are expected to retain control of the Senate, but Democrats are expected to reclaim the House, creating the potential for gridlock.
“Since World War II, even if we had a majority change in Congress, the market has risen in price and the average gain was between 12 and 13 percent,” said Stovall. In the year after, if there was no majority change, the market was up even more, an average of about 20 percent.
The S&P gained 2.1 percent Tuesday and was 3.7 percent above its recent low at Tuesday’s close. “All the usual suspects that had us concerned have kind of abated,” said Art Hogan, chief market strategist at B. Riley FBR. He said oil is not rising, the dollar is not pushing higher and Treasury yields are lower. The 10-year note yield was at 3.16 percent Tuesday, well below the 3.26 percent level that spooked the market just a week ago.
“At the same time, Morgan Stanley, Goldman Sachs and Adobe — companies are giving us real news, not just things we’re afraid of,” Hogan said.
Earnings news is expected to be extremely strong this quarter, with an average gain of about 21 percent but strategists have also been waiting to hear the comments from industrial, tech companies and others that could feel the pinch from tariffs.
Earnings Wednesday are expected from Abbott Labs, Northern Trust, US Bancorp, Alcoa, Kinder Morgan, Crown Holdings, Kaiser Aluminum, M&T Bank, and Winnebago, among others.
Minutes from the Fed’s last meeting are also expected at 2 p.m. ET, and markets are watching to see if the Fed reveals any plans on its rate hiking plans or comments on it policy of reducing its balance sheet.