Markets in Minutes March 20, 2017
Markets in Minutes is intended to give our client partners and subscribers a quick and easy understanding of current market conditions. This update covers March 1 – 17, 2017.
In this update: S&P 500, Bonds, Gold, World Stock Market, US Dollar, Commodities, the Economy, Recession Probability Indicator, & S&P 500 chart.
Investor Learning: “Your ultimate success or failure [in investing] will depend on your ability to ignore the worries of the world long enough to allow your investments to become successful.” – Peter Lynch.
S&P 500: +0.2% for the period, +5.3% year-to-date. The S&P made an incremental new high on the 1st on the back of the largest overbought condition for the year so far, but the only thing that has changed since the last update is the Fed Funds target rate has increased by 0.25%. The market continues to be supported by the promise of tax cuts & deregulation and an improved earnings picture. As I’ve said, the market appears to have priced in a corporate tax rate of 25% or perhaps even 20%. Look for volatility if the promised tax cut is meaningfully smaller, doesn’t materialize or is overly delayed. The markets are showing signs of a near term top again as we saw in mid-December. This suggests another period of consolidation such as December 9 until February 13, or we will finally see a pullback. I’m leaning near term pullback. A correction of 5% or more is a buying opportunity under current conditions. The primary up trend is remains in control above $182 on the SPY, $1820 on the S&P.
Bonds: The 10 year treasury yield closed up 2.9% at 2.53% from the prior period, pushing bond principal down incrementally. The 10 year hit a high of 2.62% before pulling back. With the economy likely to tolerate the Fed’s planned 2 additional 2017 rate hikes, passive investments in bonds (especially those with durations in excess of 5 years) should be carefully considered. If yields drop because of an equity correction, it may benefit investors to have a hard think about longer duration bonds.
Gold: Down -1.83% for the period after hitting a low of $1153 on 3/10, but +6.7% year-to-date. The most recent action suggests gold may be trying to find a near term range trade as it held above its January low. Regardless, it will stay positioned within a larger counter trend rally structure unless it can sustain a move above $1260. Buying interest still doesn’t show commitment. This may become a problem for gold bulls at or above $1195 if it makes it that far. As before, recent dollar weakness is providing some support for gold and other commodities.
World Ex-US: +2.64% for the period and 7.6% run year-to-date. World Ex-US stocks offer the distinction of good historical value at current valuations with the caveat that there are more unknowns in investing outside the US and also several knowns that are probably negative. Rising rates in the US are not great for the rest of the world, particularly emerging markets. My view, which may or may not be accurate, is that the US markets, despite uncomfortable valuations in some areas, will continue to benefit from capital flight from less stable markets over time. My negative view on European/Asian/Emerging market stocks is unchanged despite gains year-to-date. Time will tell if this is the correct perspective.
US Dollar: USD began to fall March 10, but is flat for the period. A stable dollar is better than a rising dollar, and a falling dollar even better at least where earnings are concerned. Interestingly, the dollar has fallen about -2% from its March 9 high in the wake of a less than aggressive Fed plan to raise rates. From the market’s perspective, it would be nice to see the dollar continue to show some weakness, but given other factors the higher likelihood is the dollar holding most 2016 gains and perhaps even moving higher at some point.
Commodities: Oil fell -8.8% for the period despite a -2% fall in the dollar, but still within the expected range I’ve talked about in the past. The reality is that oil producers outside the US are not going to be able to consistently hold down supply with agreements. There will be cheaters, and when prices are high enough to show profit (about $40) American producers are going to pump. This is a benefit to US consumers and companies that use petroleum products in their supply chain. Copper futures rebounded from the March 9 low to finish the period down slightly, but barring a shock of some kind seem likely to hold most of the post-election gains.
Economy: Recent Fed data continues to support the notion of a slowly expanding economy, with Real Retail and Food Services Spending pulling back slightly in February as the holiday credit card hangover does what it does, but still moving upwards. The March US Manufacturing report (ISM) also showed its sixth consecutive month of gains.
Market Valuation: Valuations are stretched, but 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 scary (or enduring) sell off. However, the market is moving into a price zone that requires measurable earnings acceleration and tax cuts to sustain prices.
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.
S&P Technical Picture: The S&P remains overbought on the weekly timeframe (red arrow), which hasn’t occurred since June of 2014. Historically, this is suggestive of a near term top, but does not put the underlying uptrend (green line) at risk. Fair Value is approximately $1800 – $1850, if tax cuts materialize the number is $1900 – $1950 but I would not look for the index to fall that far should a correction ensue. Barring a nasty political or policy surprise, the weight of data suggests that pullbacks of more than 5% are likely buying opportunities.
SPY Chart (S&P 500 Proxy)
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ACI Wealth Advisors, LLC
Process Portfolios, LLC