Market Strategy Radar Screen Weekly May 30, 2017

 Stand Back and Move Away Slowly

Spike in Bitcoin price and a surge in inquiries signal caution

As investors return to their posts after the holiday weekend they will likely be focused on the last few names of the S&P 500 reporting results as well as the economic data crossing the transom leading up to the non-farm payroll number to be released on Friday. With a Bloomberg survey of economists pointing to expectations of 185,000 jobs added in May (vs. 211,000 in April) and expectations of a headline unemployment rate steady at 4.4%, we’d think that only a wide divergence from the anticipated number (either up or down) would cause any significant degree of drama.

Considering last week’s broad gains in the equity markets we would not be surprised to see a pause in the market’s upward progression to allow some time to digest the latest record highs in the S&P 500 and the Nasdaq composite as well as allow investors to ponder their next move.

Based on the market’s performance on May 17th when stocks moved down nearly 2% in one day (causing quite a ruckus amongst those with lapsed memories of markets past) only to bounce to new record highs in the next few days—we’d think the market could now seek out a catalyst to justify some profit taking ahead of the start of Q2 earnings season, which lies just a few weeks away.

Where might a catalyst come from to justify some profit taking or sector rotation is the question. With the US economy growing at an annualized pace of around 2 to 2.5% (see comments on the upwardly revised Q1 GDP number on page 5) and Q1 earnings as of last week up just under 15% on the back of nearly 8% revenue growth (see our earnings scorecard on page 4 of this report for details) there’s a perception at least among some investors that there’s a lot of good news already priced into the market. With economic fundamentals improving (albeit at a somewhat anemic pace stateside), the Fed’s normalization process is likely to remain at a moderate and measured pace and with signs of economic recovery becoming more apparent of late, any profit taking will likely be short term and best left to short-term traders.

With growth stocks leading the market higher since the start of the year and with value stocks lagging we’d expect a possible rotation into value as the calendar page turns into the new month and the summer months come onto the horizon. Baby Boomers who have eschewed the traditional role of dividend paying stocks for the rush of chasing “growthier” issues could discover the functionality of dividend paying stocks that have the potential to offer dividend income and the potential for capital gains.

While some investors have been knocking stateside stock market valuations the recent declines in the dollar could likely help drive revenues and earnings higher for US multinationals in the quarters ahead.

From our perch on the radar screen global diversification remains a core element of our allocation decisions particularly within equities, driven by the U.S. expansion, a data-dependent Fed, and improving economies abroad.

Bitcoin Looking Bubbly

One area of concern on our radar screen has been the recent jump in the price of Bitcoin and the number of inquiries we have received for our opinion regarding its sizeable run up.

In the past week alone we have been asked about Bitcoin by investors and market observers as diverse as relatives, casual and longtime friends, financial professionals and most telling from one of our favorite New York City doormen.

Our take on Bitcoin has from the start been that the mechanism or the algorithms that generate the Bitcoin encryption process are what look to be something of value and interest for payment platform providers. However, to the best of our knowledge, the process has no patent holder. In fact the creator of Bitcoin is only rumored to be known.

As to “the coin” itself and its “value?” We smell too much speculation, animal spirits, and irrational exuberance around the parabolic move it has experienced.

As strategists who deal with a hefty array of asset classes, the process of “mining” a Bitcoin as we understand it appears to be a digitally virtual “adventure.” We believe that currencies backed by governments offer levels of accountability and transparency that appear to be lacking in Bitcoin.

At the end of the day it is not even gold that stands behind the value of traditional currencies but rather the economic substance, transparency and accountability of the country that stands behind it.

For now we’ll recall the lyrics of the late great Gregg Allman whose southern classic “Stand Back” from the “Eat a Peach” album suggested, “stand back and move away slowly.”

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