Strong Economy Equals A Strong Stock Market!

The economy posted a 3.2% gain in the first quarter and as the saying goes, a strong economy equals a strong stock market! Is it any wonder as to why the Nasdaq Composite (see chart here) hit an all-time high on Monday! The same rings true with the S&P 500 (see chart below). The S&P 500 hit an all-time high on Monday as well. Now the Dow Jones Industrial Average (see chart here) has a bit more work to do in order to tap its own record as does the small-cap Russell 2000 (see chart here). However, I am sure the bulls will take 2 out of the 4 major averages setting all time highs. What is also helping the stock market is how the Federal Reserve has taken a cautious approach to raising rates any further. In fact, there are calls out of Washington DC asking the Fed to start lowering rates to stimulate the economy even further. Now I am not so sure that the Fed will accommodate Washington’s request, but I do think it is safe to say that we should not see a rate hike in the near future or maybe not at all for the rest of this year.

One note of caution to me is that with nearly half of corporate America reporting their Q1 earnings so far, we are seeing on average a year over year decline in earnings. There are still 100’s of companies set to report over the coming weeks but if this trend continues, this will be the first year over year decline in corporate earnings in years. I will be keeping an eye on this development.

The technical shape of the aforementioned indexes remain intact. The Dow, Nasdaq, S&P 500 and the Russell 2000 all are trading above their respective key moving averages. However, both the Nasdaq Composite (see chart here) and the S&P 500 (see chart here) have entered into overbought territory according to the relative strength index also know as the RSI. That said, I would not be surprised to see at the very least some consolidation or an outright healthy pullback. Good luck to all šŸ™‚

~George

S&P 500 - Paula Mahfouz

New Year, New Records?

Happy New Year! Will 2018 be a new year of new records? Nothing would surprise me. Especially as the Dow Jones Industrial Average (chart), the S&P 500 (chart), the Nasdaq (chart) and the small-cap Russell 2000 (chart) shattered record after record after record in 2017. In fact the Dow Jones Industrial Average set 70 record closing highs in 2017. That’s not a typo folks, 70 record closing highs. The other aforementioned key indices also set multiple record highs throughout last year. So could we see a repeat performance in 2018? I don’t know about another 70 record highs this year but I would not be surprised to see continuing strength in the markets in 2018. Yes the Federal Reserve is now in a rate hike mode which typically does not bode well for stocks, but this Fed and central banks from around the world understand the need to go about their new rate hike policies in a gradual manner. Raising rates too aggressively could be the exact catalyst to put the brakes on this almost decade long bull market. I don’t think this will be the case at least with our own Federal Reserve. Jerome Powell will be replacing Janet Yellen in early February as our new Federal Reserve Chairman. Mr. Powell who has been a member of the Federal Reserve’s board of governors since 2012 has voted for keeping interest rates at bay while the economy continues to recover.

Speaking of the economy, expansion continues to occur and we will soon find out how our economy isĀ  trickling down into corporate America. Fourth quarter earnings reporting season will begin here in January and this could very well serve as a key catalyst for the continuation of the bull market. That said, I think most investors and traders are looking for the markets to pause and pullback from this historic run we continue to be on. It is truly breathtaking to witness the record pace that stocks have enjoyed for years now. Personally, I hope and some point in time we do get a meaningful pullback so we can have the opportunity to step in at lower prices. Good luck to all and Paula and I wish everyone the healthiest and happiest new year! šŸ™‚

~George

Markets Cheer Fed Rate Hike!

As expected, the Federal Reserve raised short term interest rates by one quarter point and indicated that they will keep raising rates throughout the year albeit gradually. I do think what helped the markets yesterday was the language of only two more rate hikes this year. The economic data coming out so far is stronger than expected including the February jobs report which confirmed how the job market is continuing to expand and this had some pundits thinking three more rate hikes were in the cards for 2017, not just two. Markets rallied once again on the news and quite frankly the market is seemingly rallying on anything that hits the tape. That said, the Federal Reserve is doing a masterful job with how it is handling the change of guard so to speak from accommodation to raising rates and how they are communicating each message.

So what does this mean to the markets going forward? I gotta tell you as much as I have been expecting volatility to increase, my expectations now are as long as the Fed remains in its current position, volatility may just stay in hibernation until further notice. I have not seen a market to where vol has been and remains this low. As I write this blog the CBOE Market Volatility Index also know as the VIX remains historically low and even when there is pressure on stocks, the VIX does not move very much, just look at the chart below.

Taking a look at the four major indices, The Dow Jones Industrial Average (chart), the S&P 500 (chart), the Nasdaq (chart) and the small-cap Russell 2000 (chart) all are within striking distance of their record highs. The question now becomes will valuations be able to support the continuation of this bull market or will this be the catalyst to bring pause into this historic bull run. We won’t have to wait too much longer as the first quarter of 2017 winds down and companies prepare to report their earnings results beginning in April. Paula and I wish everyone a very safe and Happy St. Patrick’s Day šŸ™‚

~George

VIX chart - Paula Mahfouz

 

 

 

Happy New Year!

2015 essentially proved to be a flat to down year for stocks taking someĀ investors and traders by surprise. The Dow Jones Industrial Average (chart) closed the year down 2.2%, the S&P 500 (chart) minus dividends closed down just under 1%, the Nasdaq (chart) closed up 5.73% and the small-cap Russell 2000 (chart) closed the year down 5.71%. What’s more is how crude oil (chart) fared in 2015 declining more than 30% which also had weighed heavily on the aforementioned indices.

Looking ahead to this year, stocks find themselves in a place whereĀ they haven’t been in quite sometime and that is a rising interest rate environment. Historically speaking, equities tend to be under pressure at the beginning of and throughout a rate hike cycle with the exception of cyclical stocks and certain commodities. However this time may be different. In the past whenĀ the Federal Reserve begins to raise interest rates it is usually to fend off inflation and/or to cool off the economy when it becomes too hot. From my view and from the data flow, this is not the environment we find ourselves in today. So I do not expect that the Federal Reserve would raise rates aggressively or too quickly. With that said, the markets might not trade the way they wouldĀ if we were in an inflationary environment with rising interest rates. Nonetheless, I do think that more volatility will come into stocksĀ in 2016Ā and it will become more of a stock pickers market.

Furthermore, the technical shape of the market appears to beĀ setting up for more downward movement as the key indexes have breached or are about to breach their respective 200-day moving averages. However, it would take days of trading below their 200-day to set off an alarm at least from a technical perspective. Let’s see how the first week of trading in the new year plays out before making any sort of definitive technical opinion.

Both Paula and I sincerely wish everyone the healthiest, happiest, safest and most prosperus New Year yet šŸ™‚

~George

Stocks Skittish Before The Fed Meeting…

Stocks have becomeĀ hesitant as to which direction to head into with all eyes now on whether the Federal Reserve will raise interest rates this week for the first time in almost a decade. The Dow Jones Industrial Average (chart) started the week down 62.13, the Nasdaq Composite (chart) closed Monday’s session out down 16.58, the S&P 500 (chart) fell 8 points and the small-cap Russell 2000 (chart) closed modest lower by 4.3 points.

As investors and traders await the decision from the Federal Reserve as to whether or not a rate increase will occur, I think the markets are putting too much emphasis on the initial hike, regardless if it’s announced after the conclusion of their two-day meeting this week. To me what’s more is how will the Federal Reserve respond over the coming months and quarters ahead? Shouldn’t we be more attuned to their behavior pattern after the first hike? Or whether or not they will raise rates at an accelerated rate? To me this is the bigger question. Of course a quarter point rate hike or even a 50 basis point hike is in the cards and is inevitable at some point in time, whether it’s this week or at the Federal Reserve’s futureĀ meetings. My focus and attention will be on how they treat the interest rate environment after the first rate hike actually occurs. Based on the temperament and demeanor of Janet Yellen, I would expect a continuing cautious protocol from our Fed Chair and I would think that neither she or the Fed would not be inclined to raise rates too fast. I would think the economic data would dictate the velocity of future rate hikes and even if the data becomes robust, the Federal Reserve would want to see multiple quarters of meaningful expansion before we get back to normalized rates.

ThatĀ said, I do think that the markets and investors are going to need to get used to increased volatility and market swings similar to what we have been experiencing over the past few months. I believe gone are the days of low vol and indeed investors are going to need to pay attention now more than ever to the true growth rates of companies, especially on the top-line. You see in a rising interest rate environment companies can no longer grow their bottom line alone while maintaining high valuations. Real growth needs to come forward in the form actual sales expansion in addition to productivity in order for companies to maintain elevatedĀ P/E multiples. Bottom line, you better know the companies you choose to invest in because the free lunch so to speak that the markets, investors and tradersĀ have enjoyed over the past several years may come to a close in the near future…

Good luck to all šŸ™‚

~George