Market Strategy Radar Screen Weekly April 24, 2017

 Here I Am, Stuck in the Middle with You

Markets look towards rally mode on news of French election

It Ain't Over 'Till It's Over

While there is no assurance that Macron will win in next week's runoff, Bloomberg news reported on Sunday that a snap poll indicated that Macron would receive 62% of the vote to defeat Le Pen by more than 20% in next week's runoff.

Ironically, the two parties considered to be the establishment parties in France were eliminated in the first round of the election on Sunday. French Republican candidate Francois Fillon conceded after he placed third with a projected 20% of the vote an hour after the polls closed. Fillon had been a front runner early on but saw his popularity ebb as questions tied to his hiring of his spouse arose during the campaign. Communist Party-backed Jean-Luc Melenchon with 19.4% had refused to concede as we prepared to go to press with this week's strategy report.

As market participants around the world digested the results of the French election stocks rallied in Asia with the futures markets broadly pointing toward gains in Europe and stateside as the sun rises across markets Monday. The euro advanced on news of the election's outcome and US bond prices eased some as “risk off” positioning put in place ahead of the election receded, and “risk on” mode moved back on.

Stocks stateside traded mixed during last week, but closed higher for the week as results for S&P 500 companies for the first quarter continued to broadly surprise to the upside even while mixed economic data and concern about current market valuations kept enthusiasm somewhat in check. As of last Friday the S&P 500 stood just 2% off its record high of 2395.96 reached on March 1.

Q1 Earnings Season—so far so good

With just under 20% of S&P 500 companies thus far having reported, 75.8% have beaten consensus earnings forecasts while 62.1% have beaten consensus revenue forecasts according to Thomson Reuters I/B/E/S.

Though it is still too early in the reporting season to jump to conclusions, Q1 earnings so far are up over 11% inclusive, of course, of an improvement in earnings from the oil sector which had been a significant drag on earnings for the benchmark in prior quarters.

For the week ended last Friday, the Dow Jones Industrial Average, the S&P 500 and the Nasdaq respectively advanced 0.5%, 0.8% and 1.8%. The S&P 400 (mid-caps) and the Russell 2000 (small caps) respectively advanced 2.2% and 2.6% in the same period, indicating investor confidence in economic growth.

All that Glitters

Gold has been on a roll in 2017 (up nearly 12% since the start of the year), but softened last week on improved equity earnings and expectations of details on tax reform. These boosted growth expectations. In the week prior to last it was up around 2.5% as the dollar weakened and prospects for tax reform and other fiscal stimulus agenda items of the new administration looked to be pushed out further. However, gold was flat with a negative bias on the week ended Friday as comments from the White House and the Treasury signaled that an update on tax reform could come this week.

Spot Gold Price

In the week ahead look for earnings results and administration agenda updates stateside, geopolitical signposts abroad (France, North Korea, Middle East) and economic data to continue to keep investors focused and on their toes. Friday's US Q1 GDP update will likely have some influence as investors close the week.

We remain positive on equities and reiterate our call favoring cyclical sectors over defensive sectors, a market cap agnostic stance (favoring large, mid and small caps near equally). This is based on our expectations for the US economic expansion to continue at a sustainable (if moderate) pace while the process of global economic recovery becomes more pronounced in the international realm. A steady but not heady pace of growth and reflation should help the Federal Reserve keep its process of interest rate normalization on track, but at a pace modest enough as to not jar the equity market. The bond market remains vulnerable to interest rate normalization though in our opinion with less drama likely in the foreseeable future as the Fed's pace and incremental increases remain measured.

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