Play Ball!

PaulNolte-2No foolin’: the Fed is going to hold rates stable for quite some time, at least according to Janet Yellen. However, if you listen to some of the other Fed officials, the rate increase could happen as soon as this month – really, no foolin’! Will the Fed governors prove correct or is Yellen just a fool on the hill? Her comments about keeping rates lower for longer was enough to fuel yet another rally in stocks. Friday capped the week with good employment data and a better than expected manufacturing report. In spite of that she cited weakness in the international markets, not necessarily the US. On that count, China and Japan remain in a funk, while Europe considers additional monetary moves. Many would consider
putting the central bankers on a ship of fools and sending them out to sea! The coming week we will have more Fed officials putting their two cents in about the future of interest rate policy along with the release of last month’s Fed minutes that will get combed over for additional hints about interest rates. Investors may be fooled again, as they consistently push stocks higher upon hopes interest rates may never rise again.
It’s not a joke: the markets actually finished the first quarter higher, if only by a percentage point.

However, from the depths of the declines in February, anyone would have thought it foolish to call for a five-week race to this year’s starting point. From roughly Thanksgiving 2014, the SP500 has managed to gain a quarter of one percent, but in doing so has traveled just over 950 SP500 points to get there. The markets are looking a bit worn out from all that running in place. Earnings are down over 15% from late ’14, primarily due to energy collapsing. However GDP has barely crossed 2% over that time and wage growth remains barely above 2%. With a poor economic backdrop and still relatively high valuations, it is little wonder that stocks are having trouble making headway. Friday was a typical day for stocks, reacting negatively to a good employment report (as it may allow the Fed to raise rates). Then reversing upon good manufacturing data that may allow the economy to finally grow faster than 2% (good news is actually good news!). It is little wonder investors are finding solace away from the foolishness in the stock market and hanging out in the relative safety of bonds!

Coming into this year, the consensus was that interest rates would rise by 1% as the Fed had assured everyone after their December increase that the path was definitely higher. So what happened? Investors were fooled into thinking the Fed knew what they were talking about. Instead, interest rates fell as equity investors ran to the safety of bonds during the selloff. But rates, after bouncing higher for a bit, resumed their decline as the Fed indicated maybe they would only hike rates twice this year. Confused? Bond yields on the 10-year bond are once again approaching their lows of early 2015. If the bond market is indeed the market with a PhD, then we should expect slower economic growth in the quarters ahead and a Fed that stays on the sidelines through the rest of the year. Global 10-year yields remain well below ours, so even at
1.7%, there remains plenty of room for rates to fall even further.

For investors, March came in like a lion and finished like a lamb. Racing higher early in the month and finishing slightly higher, the month was the best since coming out of the last market decline this past fall. It was the best March since March ’09 as the markets made THE bottom of the past seven years. But the markets are still coupled with energy prices and energy was the sector winner in March, rising just over 9%. Emerging markets, usually tied to energy prices were up over 10% for the month. But now what? Although Friday was higher, more stocks traded lower than those higher, never a good sign. Volume has been declining, with last Monday’s trading the slowest since Christmas. We would expect stocks to take a break and consolidate for a bit. Earnings season will be starting in two weeks and that could provide clues about the next direction for stocks. Surprisingly strong earnings could boost stocks; while disappointments could see stocks trade lower. Investors have been pouring into the more conservative portions of the markets, focusing upon utilities, telecom and consumer staples. Until the economic conditions change, this trend may continue.

The last six quarters have been frustrating with lots of volatility, but little headway. Unfortunately that may continue well into the summer unless the economy can finally get some legs. A recession is not in the cards, just more slow growth, low interest rates and little help from governments to help boost economic growth. Even at very low interest rates, bonds still provide a better option than stocks over the coming five to seven year outlook..

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.