Markets in Minutes February 28, 2017
Markets in Minutes is intended to give our client partners and friends a quick and easy understanding of current market conditions.
In this update: S&P 500, Bonds, Bonds, Gold, World Stock Market, US Dollar, Commodities, the Economy, Earnings, Recession Probability Indicator, & S&P 500 chart.
Investor Learning: Successful investing means focusing on what is knowable and important and pretty much ignoring everything else. If something is important but unknowable (like what the Fed Rate will be in 24 months) remove it from your decision making process until it becomes it becomes knowable. Focus on What IS, not What IF.
S&P 500: +0.7% for the week, +5.2% year-to-date. The S&P continues to rise as positive economic data, earnings, and the new administration’s chatter about tax cuts supports equities. The primary up trend is intact. Corporate tax cuts, if they materialize, are a positive for current valuations – it’s been estimated that for every 1% US corporate taxes drop, S&P aggregate earnings will rise by approximately $1.25. The market appears to have priced in at least a 10% cut in corporate tax rates, as of today.
Bonds The 10 year treasury yield closed down 4.55% from the week prior, pushing bond principal up incrementally. It will be interesting to see if a Fed rate raise in March causes a bond rally (as it did in 2015) or if the raise will encourage sellers. Either way, passive investments in bonds (especially those with durations in excess of 5 years) should be carefully considered at this point.
Gold: Up 1.68% for the week, and still experiencing what appears to be a counter trend rally since the beginning of the year. Buying interest has risen, but is not displaying exceptional strength and actually fell in the most recent week, suggesting the rally so far this year may be a countertrend rally nearing a selling point. At least part of this rally is related to dollar softening year-to-date.
World Ex-US: Down 0.3% for the week on the heels of a 7.5% run year-to-date. Many analysts think this will be the year emerging markets and 2nd world stocks from developing economies will make their long promised run. Entirely possible, but risks outside the US warrant careful consideration. US markets have benefited from capital flight from less stable markets including China, Europe, etc. I expect that to continue, and my view on European stocks is unchanged despite mild gains year-to-date.
US Dollar: USD rose slightly last week, but has been fairly stable for three weeks. A stable dollar is better than a rising dollar, a falling dollar even better. However, with the expectation of rising interest US interest rates, the dollar may be biding its time ahead of a move up.
Commodities: Oil rose about 0.5% last week but remains range bound. OPEC appears to be serious about holding down production, but with American frackers able to make money above $40 a barrel and falling, it seems unlikely OPEC will be successful in creating any upward price pressure in the near term. Dollar strength is also a negative for oil prices. Copper futures pulled back slight last week, but given statements out of the administration, copper is likely to continue to hold the majority of gains since the election and may be basing for a move higher if economic and policy positives continue to stack up.
Economy: Recent data supports the idea of an economy that is improving, but still below potential. As long as interest rates remain moderate, the potential for the economy to gain a little more speed moving into the 2nd half of the year seems solid, subject to negative surprises from the new administration (universal 30% border tariff would qualify as an unexpected negative surprise).
Earnings: 4th quarter reporting is nearing completion and earnings have mostly slightly exceeded expectations, continuing the theme of earnings expansion ACI anticipated occurring beginning in the 2nd half of 2016.
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 it’s unlikely valuations will drive a meaningful (or enduring) sell off.
Recession Probability Indicator: The most recent reading on the RPI is 12. This indicates we are not in recession and the investment environment is stable.
S&P Technical Picture: The S&P is now 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, but I would not look for the index to fall that far should a correction ensue. Barring a nasty policy surprise, the weight of data suggests that pullbacks in excess of 5% are likely buying opportunities.
SPY Chart (S&P 500 Proxy)
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ACI Wealth Advisors, LLC
Process Portfolios, LLC