Market Strategy Radar Screen Weekly June 26, 2017

 Keep on Truckin’

A near-term lull in economic indicators likely more noise than signal

The S&P 500 index closed above our 2017 price target of 2450 last week on June 19. As a result, we are in the process of considering an adjustment to our 2017 price target and earnings estimates for the rest of the year. We had initiated our price target for this year and our earnings projection of around $125 per share (on which we placed a P/E multiple of 19.5x) last December.

The broad market’s upward trajectory thus far this year in our opinion has come as a result of a number of factors including:

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• Improvements in corporate revenue and earnings growth (Q1 results that showed earnings grew 14.6% on the back of 7.7% revenue growth); as well as

• The current stateside economic expansion that though modest appears sustainable at an annualized rate of 2% to 2.5% GDP growth;
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• A boost in the first half of the year as investors reallocated funds that had long been sidelined as a result of the Financial Crisis and Great Recession back into the market;
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• Monetary policy that while remaining committed to interest rate normalization shows sensitivity for economic growth constrained by very modest wage growth and low inflation resulting from trends tied to demographics, globalization and technology worldwide;
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• Bond yields which have fallen from where they began the year and remain low;
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• The potential for economic stimulus to be added to the landscape at some point in the future should the administration in Washington get to implement some if not all of its agenda items tied to tax reforms, regulation, and infrastructure.

Looking ahead to second quarter earnings season, FactSet data indicates that analysts have cut their projections from earlier this year and as of last week forecast earnings growth of around 6.6% for the current quarter (Q2). Nine of the benchmark’s sectors are expected to show positive growth led by the Energy, Information Technology, and Financials sectors.

Our expectation is that the recent lowering of analyst expectations ahead of the reporting season that lies ahead may provide yet another season of positive surprises once results actually get under way.

The US economy, while showing some weakness in some of the economic data that has crossed the transom of late, continues in an apparent sustainable expansion while international economies around the world show increased improvements in a process of economic recovery.

US multinationals likely received a boost from the effects of the dollar’s weakness since the beginning of the year versus the currencies of many of the nation’s trading partners in the developed and emerging economies. As of last Friday Bloomberg data showed the dollar year to date down against all ten of the G10 developed nation currencies and lower against 17 emerging market currencies. The dollar’s weakness so far this year could reflect positively on US corporate results from operations abroad.

Until Q2 earnings season gets well under way, the market could come under pressure near term as sector rotation and rebalancing ahead of the close of the second quarter take place. We suggest investors stay focused and practice patience should we see a near-term pick-up in volatility.

Oil’s slippery slope in perspective

The decline in the price of oil since it hit its high for the year in February has pushed the commodity’s price into bear market territory. The price of West Texas Intermediate crude fell just under 4% last week. It has fallen over 21% from its high on February 23rd of this year and as of Friday stood 19.9% off from the beginning of the year (see figure below).

Even as OPEC has labored to keep oil prices from falling, the effects of lack of compliance by a few of its members along with 23 straight weeks of increases in the Baker Hughes rig count stateside have served to undercut its efforts.

The decline in the price of oil has raised concern among some observers who suggest oil’s decline in price may be signaling economic weakness ahead.

However, from our perspective, we see the decline of the price of oil as more illustrative of a glut in supply caused by advanced technologies that have improved the process and efficiencies in discovery, drilling and recovery of the commodity while at the same time business and consumers become more efficient in its use and application via improvements in manufacturing equipment, automobiles, trucks, locomotives, air planes, facilities, housing and home appliances. In addition advancements in alternative fuels continue to gain competitive ground against the incumbent.

In our opinion the current decline in the price of oil may as well reflect its having become overbought as a result of the momentum which had accompanied the significant surge it experienced from a low of $26.21 in February 2016. Even with its recent decline the price of WTI as of last Friday stood some 64% above its 2016 low.

The price of oil could find support in the weeks ahead should economic data stateside and abroad point to an acceleration in global economic growth ahead. For now we reiterate our underweight recommendation on the sector that we’ve held since December 2016.

Information Technology regains some lost ground

The S&P 500’s Information Technology sector has regained around half the ground it lost when it fell just under 4% from its 2017 peak reached on June 8th. The sector stood just 1.7% off its peak as of last Friday’s close. A combination of improved sentiment about prospects for the sector from a cyclical perspective as well as in some part from the excitement and surprise around Amazon’s plans to acquire Whole Foods has served to lift the group.

Biotech looks to be on path to recovery

Last week saw a sizeable jump in Biotechnology as investors moved funds back into the segment on the back of signs that the administration might not take as hard a line on pricing as investors had earlier feared. The i-Shares Biotech ETF (IBB) surged over 9.5% last week. The ETF has risen some 32.6% from its low one year ago as investors seeking growth tied to intermediate and long-term trends in health care return to the stocks. The i-Shares Biotech ETF (IBB) remained 19.6% off its July 2015 high as of last Friday. That should help remind investors that stocks don’t always move up or down in a straight line and that patience is a virtue.

In the week ahead a large packet of economic data ranging from durable goods, home prices, consumer confidence, manufacturing, GDP, and consumer sentiment will compete for investors’ attention while a number of Fed officials including Chair Janet Yellen speak at events around the country.

Even as the summer weather beckons traders, investors and observers to vacation days that may lie ahead, the action around the market warrants increased attention.

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