Markets in Minutes: May 5, 2018

S&P 500  *  10 Year Treasury  *  Gold  *   World Ex-US  *  US Dollar  *  Commodities  *  US Economy  *  Stock Market Valuation

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 – April 30, 2018

Investor Learning: “Another valuable investment secret is that the owners of sound securities should never panic and unload their holdings when prices skid. Countless individuals have panicked during slumps, selling out when their stocks fell a few points, only to find that before long the prices were once more rising” — J Paul Getty

Markets

S&P 500 (SPY): (-1.2%), (-1.0%) for 2018. The markets have returned to a more “normal” volatility with lots of impressive movements in both directions. Earnings have been coming in stronger than most analysts anticipated, which is supportive of current prices. My take is the market is going to commit to a direction in the next few weeks. Fundamental data says it should be up, but that doesn’t mean it will be so. Regardless, in the absence of recession, staying invested in the smartest course. Both the primary and intermediate uptrends remain intact.

Bonds (TNX): Yields on the 10-year Treasury rose +2.4% in March and April, and a whopping 22% year-to-Date. The bond risks I’ve warned about previously are beginning to move into the market. Long duration bonds (more than 5 years) should be examined very carefully to make sure they are in your portfolio for a specific reason.

Gold (IAU): 0.0% for the period, +0.0% for the year. Gold has managed to hold above the $12.50 support so far, with a fair amount of up and down in between. As before, once the stock correction completes it will be interesting to see if gold can hold above $12.50 or if it will fall back down into the previous range ($11.65 – $12.60).

World Ex-US (SPDW): +1% March to April, +2.3% YTD 2018. World markets continue to hold up better than expected vs. American markets. Interest rates are low elsewhere and economies are growing globally, which is supportive of positive market outcomes. But, again, nothing has changed about my view of US markets vs. the world. I was wrong in 2016/2017. We’ll see where 2018 takes us. I continue to view risk in markets outside the US as higher than perceived and when the music finally stops (when the US goes into recession at some future point), the rest of the world may find itself without a chair.

US Dollar: +1.4% for period, +0.0% for 2018. The dollar has begun to move up aggressively in the last weeks in the face of geopolitical news & rising interest rates. At this point, I think the Buck will have a tough time sustaining itself much above about $92. I would not be surprised to see it move between $86 and $92 for a couple months, which helps sustain the earnings of US multi-nationals.

Commodities: Oil +8.2% for period, +14.1% for the year. Global growth expectations continue to support oil in the face of growing American supply. Add drama over the Iran deal and the ongoing mess in Venezuela and sentiment over production seems unnecessarily negative. The US continues to increase rig count and American producers are pumping for all they are worth as they try to take advantage of higher prices. American production looks likely to drive barrel prices back into the $50s in the back half of the year.

Copper futures lost -1.9% for the period, falling aggressively in mid-March on concerns about tariffs and the possible impact on the President’s infrastructure plan. Copper will probably continue to lack a clear direction until the fate of the President’s infrastructure initiative becomes clear. If the project gets off the ground, it is likely to push copper to multi-year highs, if not copper looks like a fall to 2017 levels.

Economy: Consumer prices rose 0.1% in February and March. Year-over-year, price inflation is now about on target, but fell slightly in March. This inflation rate is in line with the Fed mandate, which will help keep interest rate rises gradual. Gradual rate increases are supportive of expansion.
Industrial production fell in March and April, but is still solidly in expansion mode. The Non-Manufacturing Index also fell in March and April, but like Industrial production is still very clearly in expansion mode. The official unemployment was just released with unemployment at 3.9%, the lowest we’ve seen in nearly 2 decades. Wages ticked up 0.8% for the 3 month period ending in March so we are finally seeing wage inflation rise. In the near to intermediate term, this is good for the economy. The US continues to be a sort of Goldilocks situation: moderate inflation, rising employment, low interest rates, rising GDP and corporate earnings.

Earnings: Earnings season is nearly complete and it’s been very strong, despite stock market gyrations. There are still a number of companies left to report, but it certainly looks like we will wind up with one of the strongest quarters in a decade.

Market Valuation: March and April have helped reduce the markets higher valuations, with the broad market more- or-less neutral for the year. The market remains fully valued, but not excessively so in the face of low interest rates and solid earnings growth. That makes it likely this corrective period will look like a good entry point come year end.

Recession Probability Indicator: The most recent reading on the RPI is 12, down from last’s months reading of 17. The RPI is still indicating we are not currently in recession and the investment environment is stable. CLICK HERE to learn more about the RPI.  Update coming soon.

S&P Technical Picture: The S&P continues to find support where expected.

Both the intermediate and primary uptrends intact.

The intermediate term and primary trends are identified by the red arrows below, Fair Value by the thick blue line. Any of these points can present reasonable entry points for index investing from a technical, if not a purely fundamental, standpoint.

For additional color on the current technical situation, CLICK HERE

SPY Chart (S&P 500 Proxy)

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Invest Smarter. Live Better. Expect a Difference.

Dak Hartsock
Market Strategist
ACI Wealth Advisors, LLC
Process Portfolios, LLC