Markets in Minutes: June 9, 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 May 1 – May 31, 2018
Investor Learning: “The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future.” — John Bogle
“The investor of today does not profit from yesterday’s growth.” — Warren Buffett
S&P 500 (SPY): +2.5%, +1.2% for 2018. The market looks like it’s stabilizing, and has started an upside move, which is supported by both growth in earnings and the economy. Both the primary and intermediate uptrends remain intact.
Bonds (TNX): Yields on the 10-year Treasury fell -3.9% in May on the heels of renewed fears surrounding Italian debt and Italy’s continued participation in the Eurozone, but yield is still up l, and a whopping 16.3% year-to-Date. Although the Italian bond question is going to come up repeatedly in the next few months, the bond risks I’ve warned about previously are moving 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): -1.3% for the period, -1.3% for the year. Gold fell below support at $12.50 and although it is holding near the high end of $12.30/$12.50 it doesn’t seem like there is adequate buying interest right now to get it back into the higher range. Volatile periods in stocks are probably going to be with us for the rest of the year, so there may be gold spikes, but at this point it appears that it may fall lower into the $11.65 – $12.50 range rather than breaking back above.
World Ex-US (SPDW): -1.9%, -1.5% 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. The Italian situation may bring forward the point where the potential for gains in the rest of the world are not worth the risk taken.
US Dollar: +1.9% for period, +2.6% for 2018. The dollar has begun to move up aggressively in the last weeks in the face of geopolitical news & rising interest rates. News of the potential contagion in Italian bonds and the impact on the Euro drove investors into the safety trade of the US dollar. It will be interesting to see if the dollar manages to hold in the $92+ range when the fear trade softens.
Commodities: Oil -2.1% for period, +11.5% 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 continues to seem unnecessarily negative. As before, US producers are aggressively increasing rig count in an effort to ring every dollar from current prices they can. I will be surprised if American production levels don’t push oil back into the 50’s in the 2nd half of the year.
Copper futures flat for the period, -7% for the year. Fears over tariffs held copper down for much of the year, but have rallied into early June as the likelihood that tariff threats are a negotiating tactic becomes more apparent. As before, copper is likely to rally strongly if the President’s infrastructure plan gets moving.
Economy: Consumer prices rose 0.2% in April. Year-over-year, price inflation remains about on target. This will keep the Fed raising interest rates in a gradual and predictable fashion as long as muted inflation continues to be the norm. Gradual rate increases are supportive of a growing economy.
Industrial production rose a solid 1.4% in May, and is squarely in expansion mode. The Non-Manufacturing Index rose 1.8% in May, performing well. The official unemployment is listed at 3.8%, another multi-decade low. We won’t see another report on wage inflation until the end of June but anecdotal accounts suggest we will see another moderate uptick. 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 basically complete, and it’s been very strong, despite stock market gyrations. As I suggested in the last edition, Q2 of this year had some of the strongest earnings we’ve seen in about a decade, ranking as the 2nd highest increase we’ve seen since 2011.
Market Valuation: The market is basically neutral for the year, while earnings have grown. While the market is fully valued, it is not excessive given low interest rates, continued prospects for growth, and the potential of a significant bear market in bonds. Barring recession, many sectors still have reasonable entry points, even if they are not ideal.
A brief note on Italy. The idea of contagion is not one that is going to go away easily, and we can expect news out of Italy, one of the largest bond issuers in the world as well as one of the larger economies, to continue to add volatility to the markets. The reality is the Italian economy is moribund, and current policies are not doing much to help it. Add unwelcome forced immigration courtesy of the EU Council, and it’s a recipe for discontent. I expect this to be a slow motion train wreck that drives investors to safer American stock and bond markets over time, which seems likely to delay the true onset of the bear market in bonds I’m anticipating, while potentially increasing money flows into American stocks, both intermediate term positives from my perspective.
Recession Probability Indicator: The most recent reading on the RPI is 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. Update coming soon.
S&P Technical Picture: The S&P continues to find support where expected and a test of the January high seems likely in the near term (1- 3 months). Both the intermediate and the primary uptrends remain 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, please visit: http://www.aciwealth.com/market-risk-snapshot-april-2018/
SPY Chart (S&P 500 Proxy)
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