Markets in Minutes June 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 15 – June 30, 2017.
Investor Learning: “Holding cash is uncomfortable, but not as uncomfortable as doing something stupid” — Warren Buffett
“It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.” — Charlie Munger
S&P 500: +4% since April 13, +6.8% year-to-date. The S&P managed to continue to creep upward since the last update, establishing a new incremental high June 9 before pulling back slightly. Earnings have continued to be positive across most S&P sectors and economic data remains positive. The prospect of tax cuts and deregulation continue to support the market despite continuing global and domestic political uncertainties. The primary up trend remains intact, with the intermediate uptrend still intact.
Bonds: The 10 year treasury yield is down 0.02%for the period, with bond principal holding steady. The Federal Reserve raised rates again June 14 but interestingly the 10 year basically didn’t react. Yields finally began to creep higher the 26th after the Treasury cleared some major banks to raise buyouts and dividends, incidentally sparking a mild rally in financials. Yields are currently low enough that long duration (more than 5 years) should be examined to make sure they are in your portfolio for a specific reason. It is still a good time to compare corporate bonds with highly rated municipal bonds in both the taxable and exempt spaces.
Gold: Down 3.7% for the period after a failed run at overhead resistance at $1260. Gold has fallen despite a weakening dollar. Gold still appears to be in a counter trend rally and may take another run at $1260 if it can stay above $1158. If gold falls below $1138 it’s likely the larger down trend will reassume control of price. As before, a sudden large scale geopolitical event is likely to cause a rapid spike in price. In my view, that spike is likely to be temporary.
World Ex-US: Down +5.9% for the period, +12.9%year-to-date and continuing to show speculative strength. As before, my view on European/Asian/Emerging market stocks remains negative, perhaps incorrectly. Time will tell.
US Dollar: USD fell -4.9% for the period (down -6.6% year-to-date). The Buck re-visited the lower end of its range in late April and early May before staging a failed rally to $100. It broke down in mid-May and is entering another zone of support between $94 and $95. We’ll see what happens next, but whatever else a falling dollar helps corporate earnings.
Commodities: Oil fell -12.4% since the last update, drifting into the bottom end of the projected range identified in January ($40 – $60/$65). While this makes life harder on energy producers, it’s a positive for just about everyone else. Falling oil prices drive costs down for many manufacturing companies and free up consumer dollars to be spent or invested, net positives for the economy. As previously discussed, OPEC has had difficulty constraining pumping among members, and a leaner American fracking industry can pump profitably at $40 a barrel and falling. Copper futures rose by 5.3%, supporting the notion of a stable economy and maintaining most of the post-election gains.
Economy: Consumer prices continued to weaken incrementally, again benefiting from falling oil. This is a positive for consumer spending. Industrial production fell very slightly since the last reporting period, with official unemployment rate falling 0.1% to 4.3%. Demand for qualified workers continues to rise, helping push salaries higher &supporting consumer spending along with low inflation and rising employment.
Earnings: Q1 earnings are in and by and large were pretty positive with only pockets of weakness (energy/retail). This suggests that the earnings expansion that began last year may be sustainable.
Market Valuation: Valuations are more than stretched in many sectors, and near term value is difficult to come by. However, with interest rates still in a range of historic lows, rising earnings, and the possibility of tax cuts before year end its unlikely valuations will drive a meaningful (or enduring) sell off. The market remains in a price zone that requires measurable earnings acceleration and tax cuts to sustain prices. So far at least, earnings appear to be holding up their end.
Recession Probability Indicator: The most recent reading on the RPI is 12 and indicates we are not currently in recession and the investment environment is stable. CLICK HERE to learn more about the RPI.
S&P Technical Picture: The S&P managed to grind almost 2% higher since February’s $240.32 high and moved briefly into another overbought scenario in early June. It’s possible this is again signaling a near term top. Regardless, the underlying uptrend is intact and is supported by both rising earnings and low interest rates.
Fair Value is approximately $1850 – $1900, but I would not look for the index to fall that far should a correction ensue. As before, barring a nasty fiscal/policy surprise, the weight of data suggests that pullbacks more than 5% are likely buying opportunities, even in the face of geopolitical events. 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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