Market Strategy Radar Screen Weekly January 16, 2018

For Now Eschew The Party Hats But Enjoy The Ride

Even as stocks posted their latest new record highs, fundamentals keep showing signs of improvement

Stateside investors return to a holiday abridged week which should provide a diverse number of clues as to where the market is headed over the course of the next few weeks as a number of major banks including Bank of America (BAC) and Goldman Sachs (GS) report earnings results this week; December’s Industrial Production number is released on Wednesday and Housing data and the Philadelphia Federal Reserve’s manufacturing outlook for this month arrive on Thursday.

Last week markets stateside and outside of the US continued to march higher as economic data and outlook for corporate profits continued to improve. Prospects that Tax Reform will contribute positively to corporate results in 2018 have also provided stocks stateside with a boost.

A level of seasonality likely contributed to last week’s market performance as well as since the start of the year as many investors make contributions to their retirement funds at the beginning of the calendar year.

We also expect that stock gains of late are indicative of a continuation of what we believe is a capitulation of bull market bears and skeptics.

In the week ending last Friday the Dow Jones Industrial Average, the S&P 500, the NASDAQ Composite, the S&P 400 (mid-caps) and the Russell 2000 (small-caps) moved higher to respectively gain 2.0%, 1.6%, 1.5%, 2.1% and 1.7%.

Since the start of the year those same US indices respectively stand 4.4%, 4.2%, 3.4%, 3.7% and 5.8% higher through the market close last Friday.

Foreign stocks have not slouched in the New Year as they garner increasing investor attention to their attractive valuations, cyclical and secular trends, and the respective underlying economic recoveries in many foreign countries.

Last week saw MSCI EAFE, MSCI Emerging Markets and MSCI Frontier Markets post respective gains of 1.2%, 0.6% and 2.6% through last Friday. From the start of the year through last Friday those same indices stood respectively higher by 4.7%, 4.5% and 5.8%. The results for the foreign markets listed here are priced (translated) into dollars, so the dollar’s weakness has (similar to last year) has broadly enhanced foreign returns for US investors. We note that concerns over NAFTA likely contributed to the Emerging markets’ relative underperformance last week.

In our conversations with both institutional and private investors we have found that even as the equity markets have pressed higher through the first two weeks of the New Year, investors still fret as to how long the positive trend can remain based on the seemingly relentless nature of the rally that drove much of the fourth quarter action last year and the fact that the stateside bull market is approaching a ninth anniversary in March. We remind investors that bull markets are not created with an expiry date.

We see investors’ and observers’ continued concerns as positives for the equity markets at this time. In our experience over more than three decades in the markets we have found that bull markets usually don’t turn into bear markets until fundamentals deteriorate noticeably and/or until the Fed has raised its benchmark too high and/or too fast. So far neither case seems to apply.

We have also found that when there is still plenty of worry in the hearts of investors about when the markets will run out of steam there is a tendency for markets to seek out catalysts to affect a pause or back track to allow time for rebalancing and rotation. Such actions are healthy occurrences and continue to be evident in this bull market.

While plenty of worry remains as to when the current Bull market will be overtaken by a Bear market, ironically we hear little worry from Bitcoin proponents even as volatility has increased markedly over the past few months. Girded by bitcoin’s meteoric rise (in excess of 1,500% measured in dollars over the past 12 months ending Friday) a decline of just over 22% from a peak of $18,674.5 on December 18th appears thus far not to have fazed the belief of diehard bitcoin proponents in the cyber currency.

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