Market Strategy Radar Screen Weekly May 22, 2017

 Come Together Right Now Over Me

Stateside political factions moved apart last week costing markets a midweek spill

Last week as political tension rose over the Potomac, the VIX volatility index surged 46.4% on Wednesday (from a level of 10.65 on Tuesday to 15.59 on Wednesday). Stocks responded by taking a stumble mid-week that saw the S&P 500 drop 1.82% on Wednesday, causing a jump in some investors’ angst, a surge in adrenalin for volatility-starved traders and what seemed a significant increase in the usage of the word “plunge” among pundits commenting on the day's action in the markets. For all the energy and ink spent on Wednesday’s move lower, in the two days that followed the market regained more than half of what it had shed to end the week off just 0.38%.

From our perch on the radar screen it seemed that last Wednesday’s drop was simply the market’s finding a catalyst to take some profits in the problems and issues that surround the administration in Washington and justifying concerns that the latest round of political drama could delay indefinitely any progress on useful things for the economy like tax reform, reduced regulation, repatriation of US multinational profits held abroad and fiscal stimulus via infrastructure spending.

Considering that the VIX had hit a multi-decade low in the week prior, the discovery last week by the market of a catalyst to “take a haircut” should have been much less of a surprise than it appeared to be.

By the end of the week the market had stemmed its mid-week losses with the Dow Jones Industrial Average and the S&P 500 closing 0.44% and 0.38% respectively lower on the week. The S&P 400 (mid-caps) and the Russell 2000 (small caps) respectively shed 0.42% and 1.12% whilst the NASDAQ Composite edged 0.61% lower in the same period.

With fundamentals continuing to improve stateside in the economy and with corporate earnings on the rise, it would appear in hindsight that last Wednesday’s mini drama was less of a harbinger of dark things to come but rather just a short-term reaction.

S&P 500 Earnings Up 15% in Q1

With 470 of 498 companies having thus far reported in the 1Q earnings season, results have beaten consensus expectations with S&P 500 earnings up 15% on the back of an 8% rise in revenues. Four cyclical sectors have led the pack with Energy’s results rebounding in the realm of triple digit growth and Materials, Financials and Information Technology reporting double digit earnings gains for the quarter. (See page 3 for earnings score card update).

In the process of last week’s politically induced drama the 10-year US Treasury saw a jump in price and a drop in yield for the week from a yield of 2.34% on Monday to a low of 2.23% on Wednesday and closing last Friday at 2.24% as investors reached out for risk off assets.

June Fed Rate Hike Priced In

This week investors will take focus on the earnings reports as well as on the release of the FOMC minutes from the May meeting for clues as to what to expect when the Fed meets in June. As of last Friday Bloomberg data showed Fed Funds futures indicating a 97.5% chance of a 0.25% increase in the Fed funds at the June 14 meeting.

Midst the rattling of chains in the equity market and the rally in the bond market last week the price of oil advanced 5.2% on expectations that when OPEC meets on Thursday its members and allies will continue to adhere to a policy of production restraint in order to support the price.

OPEC Tries for Restraint as US Producers Add Rigs

With US energy producers having increased rig count stateside over 127% or by a factor of 2.3x in the past 12 months, oil prices are likely to stay under pressure despite OPEC’s determination and even as the summer driving season approaches.

Notwithstanding last week’s move higher and a rally since the beginning of May that’s taken the price of oil up some 3.5%, the price of black gold is down 5.7% year to date reflecting adequate supply even as the global economy shows increasing signs of recovery and as the economic expansion in the US continues to show signs of being sustainable at an annual rate of 2% to 2.5%.

In the week leading to the Memorial Day weekend a mix of updates on the progress of the President’s journey abroad, news flow out of Washington, several days of Fed speak in cities across the US along with the government’s update on US 1Q GDP (on Friday) should keep investors’ attention even as the calendar anticipates the summer ahead.

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