Everyday, Everyday I Have the Blues
By John Stoltzfus,
Chief Investment Strategist
Trend Analysis
Market Strategy Radar Screen Weekly April 10, 2017
In this article:
- The current level of economic growth should continue to feed into revenues and corporate earnings particularly if the dollar stays in a moderate range.
Patience and Diversification Remain Essential
As earnings season begins, fiscal stimulus remains on hold
Friday’s non-farm payroll at 98,000 (versus a survey estimate calling for 180,000) did not appear to us as an indicator of a reversal of a positive trend but rather a sign of the economy likely nearing full employment while also reflecting the impact of weather which was unseasonably warm in February and cold in March. It also served as a reminder that the monthly jobs number can diverge from trend from time to time. (For illustration see the vertical bars in our chart of the non-farm payroll number on page 3).
The headline unemployment number showed the rate fell to 4.5%—its lowest level in ten years and at a level the Fed was looking for by year end. Even as the jobless rate moved lower from the prior month, average hourly earnings increased just 2.7% yearon- year, in line with its average over the prior 12 months.
Last week, the economy continued to show evidence of sustainable growth even if at a moderate pace. While data showed construction spending eased somewhat along with domestic vehicle sales last month, durable goods orders rose and trade balance figures showed a pickup in US exports.
Up Next: March Quarter Earnings
Q1 reporting season, which unofficially starts this week when the big banks report earnings, is likely to hold investor attention over politics near term.
Earnings, should they surprise to the upside, will add support to current equity market price levels as “vitamin e” (earnings) reduces P/E multiples if just a tad. A good Q1 earnings season would likely provide a platform to justify higher prices for stocks in the months ahead.
The current level of economic growth (even without the long-touted but too-soon-to-expect tax reform and fiscal stimulus) should continue to feed into revenues and corporate earnings, particularly if the dollar stays in a moderate range.
The dollar’s ascent slows
The dollar has weakened against nine of ten G10 currencies from the start of the year and fallen against 18 of 22 emerging market currencies.
While the dollar (as gauged by the trade-weighted DXY index) stands 26% higher from where it stood in April of 2012, its more recent moderation in upwards trajectory against the aforementioned developed and emerging markets appears to show a tempering of its strength taking place. Such moderation could provide support for US multinationals and even encourage an opportunity to repatriate earnings held abroad should the politicos in Washington finally get around to making a deal favoring repatriation.
Politics in Washington, geopolitics (and terrorist actions just last week in Russia and Sweden) resound loudly and rattle the local and global landscapes but have been met by the markets with considerable resilience and signs of determination. As of last Friday, the S&P 500 stood just 1.7% below its record high reached on March 1st.
The recent rally in the 10-year Treasury note (taking its yield from 2.6% on March 13th to 2.4% last Friday) does not indicate to us that the US economy is slowing as much as it reflects that Treasuries had been somewhat oversold ahead of the March FOMC meeting as well as on earlier expectations for fiscal stimulus that is likely to come later rather than sooner than some market participants are said to have expected.
Gold losing its luster?
In commodities, gold’s appeal (up over 8% YTD through Friday) persists among some investors as geopolitical tensions mounted and yields fell. However, in our opinion, gold’s recent glitter could fade as the Federal Reserve’s commitment to the process of interest rate normalization becomes more apparent and defined via action. We expect the Fed will raise rates two more times this year.
Sustainable economic expansion stateside and persistent signs of economic recoveries in foreign developed and emerging economies point to the potential for future upside for global equity prices and further risk for bond prices.
However, even as interest rates rise, we would expect that an apparent perennial appetite for fixed income yield by institutional, sovereign and private investors could cushion the downside in the process so long as central banks are able to normalize interest rates in modest increments and at moderate pace.
Diversification and patience should remain essential for investors to be rewarded. “Know what you own, why you own it and how it might perform under a variety of scenarios” should remain an operative phrase.
In a week bookended by two holidays of religious significance, markets are likely this week to feel the effects of lower volume and reduced information flow barring any unexpected news.
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