It’s All About Greece….Again
“It’s the same old story, same old song and dance.” It seems as though this was the key take-away from the Fed meeting last week. Low interest rates stay for the foreseeable future and they will remain data dependent. They will raise rates if/when the economy strengthens and inflation picks up. The economic data remains “meh” at best, with many of the recent releases coming in worse than expected. There are some silver linings in the clouds though, as housing seems to be steadily improving and inflation, especially core (excluding food and energy) remains very well behaved. The coming week will be heavy with “important” economic reports that will culminate with the employment report ahead of the 4th of July weekend. The likely focus this week will be on personal spending and incomes. Judging by the recent retail sales report, consumers have been holding back on spending. IF incomes can pick up in line with the estimates from the monthly jobs report and spending can also show some life, it may be a good news/bad news result for the markets as it increases the likelihood for a rate increase in the fall. The Fed is trying to push the markets closer to realizing a rate increase is actually coming, however their comments indicate the song remains the same: wishin’ and hopin’ and thinkin’ things will actually change.
The US markets continue to meander in an interesting way around the unchanged line this year. For all the daily swings of 100+ points (all five days last week), the markets have not moved more than 3.5% from the zero line yet this year. This actually makes 2015 the longest time from the start of the year where stocks have remained so close to unchanged. One old Wall Street maxim is to never short a dull market. But in order for stocks to move significantly above the highs for the year, many more stocks will need to advance and make new yearly highs. For example, when stocks first reached today’s levels late in December, the number of stocks making new highs was just over 300, today it is routinely less than 100. The cumulative number of advancing to declining stocks peaked in early April and has tailed off over the last six weeks. This too must turn around if/when stocks march higher. Without these two indicators supporting higher stock prices, the trends are likely to reverse. We will be looking for broader advances and many more new highs if stocks make new yearly highs in the weeks ahead. If not, it could be a long sweltering summer in the markets.
The bond model remains in negative territory as it has for the past two months. There have only been three longer periods of negative readings in the past 7 years. Bond investors are beginning to sense that things are different, but eerily the same. Inflation readings remain very weak, as commodity prices remain well below year ago levels. Short-term rates are stuck until the Fed decides to increase rates. However utilities (and other rate sensitive sectors) have been performing poorly and are now back to levels of 8 months ago. After dipping near all-time lows, long-term interest rates are too back to levels of 8 months ago. To a certain degree, our rates may still be influenced by international (Europe) events. During times of global stress, investors seek the US as a safe haven. If things go sideways in Europe, expect our rates to decline.
Little new in the way of asset class changes or for that matter the various industry groups within the SP500. As with the broad market described above, volatilities for the groups are very low. Investors are waiting for signs of a directional change from “sideways” to pile into whatever asset class or industry group that begins to lead the markets. There is some concern that only three of the seven major asset classes we track are above their long-term average prices, but this may be symptomatic of the six-month sideways trading pattern in general. Within the SP500 industry groups there have been only two changes in rankings over the past two months, both of which are very minor. It is our expectation that when the markets break out from their trading range, we will see a shift in the asset classes and industry group rankings reflecting the new bullish (or bearish) attitude of investors. For now we mark time.
The hardest thing to do in a market like we have seen so far this year, is to be patient and sit on your hands. Many times dramatic changes in investments (from equity to cash or fixed income) wind up being the wrong thing to do. We have maintained our bullish stance in the markets and will continue to do so until proven otherwise. We believe that international and emerging markets will likely perform much better than the SP500 in the coming two to four years and have made investments in those markets. Slow and steady is likely to win this “race” rather than the trader trying to catch every temporary shifts in the market.
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.