Markets in Minutes April 30, 2017
S&P 500 10 Year Treasury Gold World Ex-US US Dollar Commodities
Markets in Minutes is intended to give our client partners and subscribers a quick and easy understanding of current market conditions. This update covers April 17 – April 28, 2017.
Investor Learning: “We would rather underperform in a huge bull market than get clobbered in a really bad bear market” — Seth Klarman, Founder Baupost Group, 17% average annual return over 3 decades.
Economy: The only new number of import since the last report is GDP, which came in slightly below expectations but still in growth mode. The economy continues to tick onwards and upwards, albeit slowly and below potential.
Earnings: Earnings so far have been mostly positive. The exception is a dozen or so beleaguered retail companies such as Bebe and Sears who are singularly ill-equipped to compete in the digital age. Amazon, among others, is eating their lunch (and dinner, snack, breakfast and dessert by the looks of their earnings). So far my expectation of seeing some earnings growth vs. same period last year holding true. This is a big positive for markets – bull markets don’t usually die from valuation issues, they die from earnings issues.
S&P 500: +2.3%since April 17, +5.5% year-to-date. The S&P has managed to hold most of the year’s gains to date as positive economic data and earnings, along with the prospect of corporate tax cuts, continue to support the market in the face of rising global and domestic political uncertainties. The primary up trend remains intact, with the intermediate uptrend still intact.
Bonds: The 10 year treasury yield closed up +1.8% for the period, reducing bond principal incrementally. Yields fell to as low as 2.18% ahead of Trump’s tax proposals, but rallied as the equity market applauded (at least initially) the proposals. I’m beginning to sound like a broken record, but keep an eye on yields when we finally see an equity correction, or if geopolitical uncertainty causes a flight to bonds (Open conflict with North Korea, a potential La Pen victory in the upcoming French elections in May). If yields drop to 2% or below, passive investments in bonds (especially those with durations more than 5 years) should be re-evaluated. As an aside, if yields fall into the 2% range, that’s a good time to think about locking in a great rate on a 30 year mortgage if you missed that opportunity last time.
Gold: Down -1.5% since the last report. From a technical perspective gold is showing some signs of strength given the geopolitical uncertainty around North Korea and now France. As before, however, buying interest is still not displaying exceptional strength and until that changes the durability of the rally should be questioned. Gold remains in a countertrend rally unless it sustains a move above $1260. If gold falls below $1180, it seems likely to keep falling for a while.
World Ex-US: Up 2.5% for the period, +9.7%year-to-date and continuing to show speculative strength. This may be a be a good year for world stocks. However, I don’t see this as sustainable. Therefore, my view on European/Asian/Emerging market stocks remains negative, perhaps incorrectly. Time will tell.
US Dollar: Fell 1.3% for the period to close at $99.04. From a technical standpoint, the USD looks to test last period’s low of $98.75. A falling dollar is good for earnings.
Commodities: Oil fell 7.9% despite incremental dollar weakness for the period but remains within the projected range. Rising supply is outstripping rising demand. As long as oil can hold above $40 per barrel on average, American producers will continue to pump oil, putting a cap on oil prices. This should hold oil in my projected range of $45 – $60/$65 a barrel for the intermediate term. Copper futures rose 1.6% for the period, maintaining a moderately tight range which is likely to hold until we get clarity on Trump’s infrastructure spending plan.
Market Valuation: Valuations are high. But as above, valuation doesn’t end bull markets. Interest rates continue to hold in a range of historic lows, earnings appear to be gaining strength, and the possibility of tax cuts before year end seems a strong focus of the administration. These are all supportive of the market, and therefore it’s not likely that high valuations will drive a meaningful (or enduring) sell off. IF the tax cuts do not materialize, the market is not likely to appreciate it as a 10% reduction in the corporate tax rate is already priced in.
Recession Probability Indicator: The most recent reading on the RPI is 17 and indicates we are not currently in recession. The investment environment is currently stable.
S&P Technical Picture: The S&P setup continues to be suggestive of a near term top, but we’ve seen nearly two months in a relatively tight range of price movement. This “time” correction or “consolidation” period could allow earnings to push the market higher. Fair Value is approximately $1800 – $1875. The weight of data still suggests that pullbacks more than 5% are likely buying opportunities, even in the face of geopolitical risk, provided earnings strength continues. The intermediate term and primary trends are identified by the red arrows below. These can be reasonable entry points for index investing from a technical, if not fundamental, standpoint.
SPY Chart (S&P 500 Proxy)
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