Anticipation is making the markets wait and that does not seem to be a bad thing! The Fed removed the word “patience” from their statement, however in the news conference that followed, Fed Chief Yellen made it clear that it didn’t mean impatient when it came to raising rates. It was that statement that told the markets “game on” and stocks rallied over 2.2% from that point to the end of the week. There remains concern over weak economic readings, the better jobs data notwithstanding. Little has changed post Fed meeting, rates are going to stay low, providing plenty of juice to keep the rally going in stocks. At some point that will change, but that doesn’t seem to be happening for quite some time. Now that the meeting has wrapped up, the various Fed governors will be out and about at various conferences and there will be plenty of comments about monetary policy. Investors will be parsing those comments to determine the most likely time for their official first rate hike, now anticipated to occur in September – maybe. Greece will be “on the wires” discussing their situation as well, just to keep global worries on the front burner. Little for the markets to anticipate and get worried about in the coming week, so enjoy the first week of Spring!
In keeping with the March trend, stocks managed to move 100 Dow points in each of the sessions last week. Does the added volatility indicate a top or bottom? Hard to say, as there has been plenty of indecision ahead of market peaks as well as bottoms. One concern for investors, as we quickly enter the earnings season in a few weeks, is how much can the companies earn in a slow growth environment? Earnings are expected to grow at roughly 4% in 2015 and with stocks up nearly 3% already, the market multiple will rise if stocks rise 10% as many expect this year. With an expensive market, it will be much harder for stocks to make meaningful headway in the weeks/months ahead. Over the last 18 weeks, stocks have managed a gain of just 2%. With the price of the market roughly 20x earnings, it was hard for significant gains to occur. Stocks are back at 20x earnings with Friday’s close. While it is possible for a “melt-up” as investors chase stocks expecting the Fed to “never” raise rates, stocks are entering the flashing yellow light territory.
The bond model is flipping back and forth again, having gone from “buy” to sell twice in the past four weeks. So what gives? This may be similar to the last half of 2013, when rates, like stocks of late, go dramatically sideways. During that period, yields rose and fell by a quarter-point twice during that six month period. Given the Fed’s desire to begin increasing rates, this may rile the bond market, effectively increasing rates without the Fed lifting a finger. How should fixed income investors handle this? Patience. The trend of interest rates, at worst, is sideways and not yet the scary stair step higher of the 70s. Bond investors may experience some small losses in the months ahead, but it is not enough to warrant a dramatic change in the approach to bond buying.
As outlined above, stocks rallied hard after Yellen indicated that the Fed remains “data dependent” and rates are not likely to rise in the near future. The beaten down sectors, like international, energy and even gold all rallied on the week. International markets, boosted by the suddenly weak dollar, rose over 3% on the week. Many of the same sectors that have been pushing the markets higher continue to do so, as healthcare and consumer cyclical companies are leading through the first quarter. Investors have been rotating out of the “dividend” stocks, into more economically sensitive stocks. The thought behind the change is the belief the Fed will “eventually” raise rates and that will be competition for income stocks. Utilities have been under pressure over the past six months as well as many other higher yielding sectors of the market. Even though stocks have been very volatile, they continue to do better than bonds. We are sticking with the view that a more global focus should best the SP500 during 2015, starting a multi-year run by “other” parts of the market.
The market could be setting up for a buying frenzy in the months ahead, as investors realize the Fed could keep rates low through this year. That could be the “blow-off” that then leads to a more meaningful correction. We still favor stocks vs. bonds. We are also buying international and increasing our weight toward that sector, expecting that the dollar won’t be rising as sharply as it has been over the past six months.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.