Market Strategy Radar Screen Weekly - March 21, 2016

Patience Rewarded

The DJIA and S&P 500 cross into positive territory for the year

A mix of positive economic data, a rebound in oil and other commodity prices (suggesting oil and an assortment of other commodity prices are stabilizing), along with some good corporate news items brought a change-of-pace feel to the market scene and turned the beat around in a pronounced fashion.

Aiding and abetting the stabilization (and in some cases rebound) in commodity prices, the noticeable decline in the dollar against a broad array of currencies from among both developed and emerging markets has also helped to bring some stability to markets and the world economic outlook.

As of last Friday, eight of ten G-10 currencies were up year to date against the dollar ranging from a rise of 2.55% (Swedish krona) to as much as 7.77% (Japanese Yen). The euro and the Canadian dollar in the same period gained 3.76% and 6.42% respectively against the dollar. (See currency charts on the next page).

Among emerging markets, 18 nations have seen their currency rise against the US dollar year to date from as little as 0.34% (Chinese renminbi), 0.86% (Korean won) to as much as 9.36% (Brazilian real) and 7.65% (Russian ruble).

Change in Currency Value versus U.S. Dollar
in Year to Date through March 18, 2016.

 

G-10 Currencies:

Emerging Market Nation Currencies:

Source:  Bloomberg, OAM Research.

Much of the gains against the dollar can be attributed to the US Federal Reserve’s consideration of the current state of the global economy in setting its current monetary policy.

After the FOMC meeting last week Fed Chair Janet Yellen reiterated that the US central bank will continue to give significant weight to the condition and recovery progress of economies outside of the US.

The Fed has acted much as we had expected it to and reminded us often of the market adage “don’t fight the Fed”.

Chair Yellen’s comments last week helped provide more wind under the market’s wings as even skeptics last week appeared to begin to opt not to fight the Fed. Going into last week’s FOMC meeting, the market still carried concerns that the Fed was still planning on four rate hikes to its Fed Funds rate in 2016.  That concern was somewhat assuaged last week with the Fed speaking of its plans for two hikes instead of four in 2016 and with interest rate futures pointing more confidently as a result toward only one hike this year.

Based on the market’s positive trajectory since February 11^th and the significant amount of ground regained from earlier losses this year, major averages appear to us likely to experience at least some profit taking before they move significantly higher.

As we mentioned in this publication last week, investors should not be surprised if the market pauses sooner than later to seek a catalyst before it moves much higher from present levels.

First quarter earnings season unofficially starts in a few weeks when Alcoa presents 1Q results on April 11^th after the market close. With consensus analyst opinions already having drastically cut expectations, earnings season when it arrives, will likely find investors keenly focused on results and guidance from company managements for what might lie ahead.

In the interim we’d expect the market to become more sensitive to news items in a presidential election year that are political or geopolitical in nature, commodity price-related as well as economic data and corporate announcements.

From our perch on the market radar screen the current environment looks appropriate for investors to review objectives and portfolio positions, rebalance as needed, and consider tactical repositioning where applicable.

We continue to favor alpha (active management/individual stock selection) over beta (passive management/indexing) as well as industry/sector emphasis that favors cyclical sectors (positively sensitive to economic growth) over defensive sectors (those less sensitive to shifts in the economy).

Cyclical dividend plays remain among our favorites in an environment in which the economic expansion appears sustainable but wherein the economy remains highly susceptible to transitional uncertainties tied to technology and globalization and the effects of those trends nearer term on labor, supply and demand, disinflation risk (stateside), deflation risks (abroad), and the resultant need (evidenced by central bank monetary policies around the world) for economies around the world to reflate (grow again or grow at a stronger pace).

In such an environment investing for total return makes sense to us. We like to see investors “get paid while they wait” via dividends from stocks that also have good potential for capital appreciation.  

With the Fed remaining in a data-sensitive mode and closely observing stateside and international economies, we continue to believe interest rates are likely to remain low for longer—contrary to what interest rate “hawks” expect.

Much is said in the press about some private investors’ reluctance to add exposure to equities in their portfolios in a post tech-bubble, post financial crisis and housing bubble era.

With the US now in its eighth year of low to near zero interest rates across a wide array of fixed income investments, we’d expect those “still reluctant” investors may soon be willing to “dip their toes in the water” and add dividend-paying stocks to their investment mix.

Russell Growth and Value Indexes YTD

Source:  Russell Associates, Bloomberg and OAM Research. Change in index values from 12/31/2015 to 3/18/2016.

This may already have begun as the allure of many pure growth stocks to investors has given way to value stocks.

If indeed just a small portion of investable assets relegated and allocated to cash over the past seven plus years gets repositioned into stocks, P/E multiples may have further to expand.

In the market’s holiday-abridged week ahead, economic data tied to manufacturing including durable goods as well as that related to housing, jobs and services are slated to cross the tape. On Friday when the stock and bond markets are closed in observance of Good Friday, the final read on 4Q 2015 GDP is scheduled to be released.

A survey of economists shows expectations for 0.9% or no change from the prior read. A stronger than expected GDP number could provide the market a catalyst to move higher when investors and traders come back after the long weekend. 

Our mantra:  practice patience.

Stay tuned. 

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