Markets in Minutes: March 4, 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 December 1 – December 30, 2017
Investor Learning: Given recent volatility I thought rather than sharing a quote I’d share what drives bull markets. It’s simple if you take time to break it down. Bull markets are driven by:
1. Low to moderate inflation
2. Low to moderate interest rates
3. Rising earnings
4. Economic expansion
Inflation and interest rates are both slowly rising but are low overall. Earnings are growing. Economies both here and abroad are growing. Under these conditions, bull markets continue. That makes periods of volatility buying opportunities for smart investors.
Economy: Consumer prices rose 0.3% ex-energy in January. This inflation rate is still below the Fed mandate which will help keep interest rate rises gradual, which is supportive to expansion.
Industrial production rose by 1.7% and is solidly in expansion mode. The Non-Manufacturing Index saw a strong rebound from December’s numbers and is also in expansion mode. The official unemployment rate for February won’t be released until March 9, but anecdotal accounts suggests employment held steady at 4.1%. Wages ticked up 0.1% in the period, with wage inflation still below target. The US continues to be a sort of Goldilocks situation: moderate inflation, rising employment, low interest rates, rising GDP and corporate earnings.
S&P 500: (-3.7%), 0.0% for 2018. The S&P enjoyed its first correction in about 2 years in February, and volatility remains relatively high. Earnings season is wrapping up, and in many sectors of the S&P, stronger than expected. Both the primary and intermediate up-trends are intact.
Bonds: Yields on the 10 year Treasury rose +3.6% in February, +16.2% for 2018. Bond risk remains elevated, and rising yields even during a stock correction reinforces the idea that bonds may be nearing the end of a decades long bull run. Long duration bonds (more than 5 years) should be examined carefully to make sure they are in your portfolio for a specific reason.
Gold: (-1.7%) for the period, +0.3% for the year. Gold followed the expected behavior for February, falling from January’s high and finding support in the $12.50/$12.60 area, with some gymnastics in between. It will be interesting to see if it can continue to hold above $12.60 once we work through the stock correction. As before, a fall below $12.50 on volume could see Gold fall back into the 2017 range ($11.65 – $12.60). I use IAU as a proxy for Gold and the above is based on the ETF.
World Ex-US: (-5.2%), (-0.9%) YTD 2018. February was not a great month for the rest of the world, but it held up better than I expected vs. American markets. Interest rates are low elsewhere and economies are growing globally, which is supportive of positive market outcomes. However, 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.
US Dollar: +1.8%, +2% for 2018. The dollar hit a new 2 year low in February but has managed a mild rally towards $90 against a basket of currencies. I think the Buck will have a tough time rising about $92. I would not be surprised to see it move between $86 and $92 over the next several months. This would be a positive for earnings.
Commodities: Oil (-5%) for month, +2.4% for the year. Global growth expectations continue to support oil in the face of growing American supply (US added 30 rotary rigs in February, active rig count up +15% since last February). I expect increased American production to drive barrel prices into the $50’s by the 2nd half of the year if not sooner.
Copper futures lost -2.3% for the month, falling aggressively mid-month before recovering. Copper still looks appears to be in a consolidation phase that seems unlikely to resolve itself in either 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 it may fall back to mid-2017 levels.
Earnings: Earnings season is wrapping and it’s been stronger than many anticipated. We’ll know by the next Markets-in-Minutes if we got the record quarterly earnings I expected.
Market Valuation: February helped bleed off some of the market’s excess valuations, with the broad market falling a bit over 11% from January’s high to the February 9th low. It recovered fairly quickly before seeing some sellers in the market again this past week. The market is now in an area where it is fully valued, but not overly so. If interest rates and inflation remain muted, earnings growth still looks solid enough to offset a gradual pace of rising rates. That makes it likely this correction will look like a reasonable entry point come year end.
Recession Probability Indicator: The most recent reading on the RPI is 17, up from last’s months reading of 12. 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.
S&P Technical Picture: The S&P found support in the zone highlighted in the last edition of Markets in Minutes and institutional buyers appeared to step into the market at both the areas expected. The rally off the $2500/$2600 zone keeps both the intermediate and primary up-trends 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.
SPY Chart (S&P 500 Proxy)
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