Markets in Minutes April 15, 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 March 20 – April 14, 2017.
Investor Learning: “Good long-term performance results from beating the market in bad times. Caution should not be seasonal.” — Christopher Browne, co-founder, Tweedy Browne Value Fund.
S&P 500: -1.9% since March 17, +3.2% 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 down -1.2%% for the period, pushing bond principal up incrementally. The rate raise in March sparked a mild rally in bonds, probably supported by rising geopolitical tensions. If yields drop further due to a potential equity correction or in response to a geopolitical event, passive investments in bonds (especially those with durations more than 5 years) should be re-evaluated. As an aside, municipal bond yields are now approximately level with corporate bond yields in some classes. If you have significant corporate bond positions it might be a good time to compare with municipals.
Gold: Up +4.9% for the period, and still experiencing what appears to be a counter trend rally with a tailwind from a falling dollar this week and increasing geopolitical risks. Buying strengthened on nuclear rhetoric out of North Korea and may have positioned gold for a run to resistance at $1260. 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 below unless it sustains a move above $1260, but a sudden rise in geopolitical uncertainties could cause an equally rapid spike in price.
World Ex-US: Down -0.5% for the period, +7.0% year-to-date and continuing to show speculative strength. My view on European/Asian/Emerging market stocks remains negative, perhaps incorrectly. Time will tell.
US Dollar: USD rose slightly for the period (+0.3%) but has shown a fair amount of volatility with moves in both directions. From a technical standpoint, the USD made a lower low at $98.86 but rallied off support, setting up a potential range between $98.75 and $102.25. Reminder – falling dollar is good for earnings.
Commodities: Oil rose about 7.4% since the last report but still within the range identified in the December 19, 2016 edition of MIM. Outages in North Sea production early in the month and increased military activity in the Middle East combined with a recent dollar weakness to support the move. As before, my view is that American producers will continue to produce supply above $40 a barrel, keeping oil within a projected range of $45 – $60/$65 a barrel for the intermediate term regardless of OPEC agreements on constraining production. Copper futures fell by 4.5% as uncertainty about the speed of the Trump infrastructure agenda surfaced in the markets, but continue to hold most of the post-election gains.
Economy: Consumer prices weakened somewhat unexpectedly in the period, mostly on the back of falling gas prices. This is a positive for consumer spending. Industrial production was unchanged since the last reporting period, while job gains slowed slightly but drove the unemployment rate down to 4.5%. Demand for qualified workers is rising, helping push salaries higher, also supporting consumer spending.
Earnings: We are on the cusp of 1st quarter earnings reporting, and should see growth vs. the same quarter in 2016. Expect earnings to fall from last quarter – the 1st quarter has been slower for years following a 4th quarter spending hangover in consumers.
Market Valuation: Valuations are still 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 meaningful (or enduring) sell off. The market remains in 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 17 and indicates we are not currently in recession and the investment environment is stable.
S&P Technical Picture: The S&P has worked off the previous overbought condition by virtue of time passing. Conditions still support the idea of a near term top, but the underlying uptrend is not currently at risk. Fair Value is approximately $1800 – $1850, but I would not look for the index to fall that far should a correction ensue. 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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