Research & Advice

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Markets catch their breath

It was one of those weeks where stock market indexes needed a pause before marching higher. The pullback was orderly and shallow, which is just what the bulls like to see, if the markets are going to move higher from here.

The culprits (if you are looking for catalysts for this week’s minor declines) were interest rates (the ten-year bond reached 3.10%), temper tantrums out of Kim Jong Un (peace talks canceled with South Korea) and higher oil prices (renewed U.S. sanctions against Iran). A stronger dollar could also be added to the list, since the greenback’s recent gains are bad for exports.

However, these are all short-term worries and could rapidly disappear in the weeks ahead. The rise in interest rates have the markets spooked. The Ten-Year Treasury bond is at its highest level since 2011. That alone is cause enough for concern among two-thirds of Wall Street. These players are so young that this is the first time they have confronted a rising interest rate environment.

The same could be said for those who trade currencies. Since historically, rising rates meant a stronger dollar and weaker stock markets, why not ump on the band wagon now and sell? And so, for a week or two, traders will play that game before something else diverts their attention.

For anyone who has lived through past rising rate cycles, this is simply the first inning in a nine-year game. We know that rising rates are initially good for stocks. It will be a year or two before interest rates reach a level that could curtail growth in the overall economy.

As for the dollar, it is simply rebounding from last year’s decline. It could go higher before momentum fades, but it will fade, because there is no fundamental reason why it should break out of its multi-year trading range. Oil is on a tear and the president’s recent decision to levy sanctions on Iran have caused energy prices to spike even higher. At some point, if oil prices continue their upward climb, the markets will start worrying about how this higher input cost will play out among U.S. corporations.

All the above are simply additional bricks in this market’s wall of worry. They are excuses that day traders and others use to reposition, take profits, or establish new shorts for a few days or weeks. Ignore it.

What you need to know is that global growth is still accelerating. Worldwide, we are expecting 3.7% growth with slighter higher levels in developed and emerging economies. Here at home, we should see 2.9% growth rates and inflation at around 2.4%. Thanks to greater growth in earnings per share among our companies, the price/earnings ratio, one of the financial sector’s most meaningful measures of value, has gone down, not up, over the past quarter.

Technically, I like how the S&P 500 Index held the 2,700 level. Sure, next week it could go a bit lower (2,686 or so), but all that would mean, in my opinion, would be a repeat of a classic, two-steps forward, one-step back pattern we usually see in a rising stock market environment.

 

 

 

Posted in A Few Dollars More