Market Strategy Radar Screen Weekly March 20, 2017

 Don’t Fight the Fed

The Fed delivers the goods – as telegraphed

In the international realm stocks broadly bested US equity gains (in dollar terms) as MSCI EAFE (developed markets ex-US and Canada) rose 1.99% while MSCI Emerging Markets jumped 4.26% and MSCI Frontier markets added 0.92%.

It was a mix of good news on the home front and abroad that pushed stocks higher around the world, saw bond yields stateside edge lower on the longer end of the yield curve and the price of oil stabilize some as WTI (West Texas Intermediate) rose 0.6% on the week.

From our perspective on the radar screen the catalyst for stateside and international markets’ move higher last week was in large part a relief rally on back of the Federal Reserve’s decision last Wednesday to raise its benchmark rate by 25 bps along with Fed Chair Yellen’s comments post the FOMC announcement that signaled the Fed for now remains committed to rate normalization at a pace which provides ample consideration to the moderate nature of the current US economic expansion. A further catalyst for markets’ gains last week from a global perspective was the increasingly evident process of economic recovery crossing developed and emerging markets.

The outcome of the election in the Netherlands which resulted in the incumbent (the moderate, pro EMU choice) winning more votes than the populist candidate gave international stocks a further boost. European bourses reflecting on earlier populist wins in elections in the UK and the US had shown concern leading up to that vote.

The overall effect for equity markets was to see investors move out somewhat on the risk curve last week, rotating into mid-caps and small caps with greater verve than they added to large caps.

With the markets highly prone to rotation-andrebalancing, the move among stateside equities made sense to us as mid-caps and small cap stocks have trailed the performance of large cap stocks since the start of the year.

M&A activity, driven by corporate restructurings and activist trends, along with a domestic economy that continues to provide signs of sustainable growth auger upside risk to the economy should fiscal stimulus via infrastructure and tax reform be enacted at some point this year.

It signals to us that the mid and small caps, which are highly sensitive to economic growth (and considered to be not quite as sensitive to dollar fluctuation as large caps), are likely to participate should the direction for stocks point higher near term.

Entering this week short-term market players will likely consider what to do with recent gains. Any catalyst worthy of inspiring a downside move however will likely have to contend with economic trends that continue—though certainly not in a straight line—to point toward further improvement.

With the Bernanke legacy, Yellen-led Fed remaining highly transparent and communicative and with prospects for corporate earnings to continue to improve, skeptics and bears could experience further consternation.

Since the markets turned to recovery-mode a little more than eight years ago we have frequently recalled and once again are reminded to repeat investors’ primordial mantra: “Don’t fight the Fed.”

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