The Stock Market looks like it's ready to take a breather
June 19, 2018
When we last wrote to you we made the following observation:
"As this letter is being written, on Saturday, April 21, 2018, most major stock indexes are hovering around "unchanged" for the year. A few are up nominally. More are down just a bit. The upside action has been in other markets so far this year."
As of that writing stocks had gone nowhere in 2018. Gold and Commodities looked like they were ready for significant break outs to the upside.
What a difference two months can make. Gold is now down for the year. The DBC commodity ETF is still up, but not as much as it was in April. Several stock indexes that were flat or down in April are now up.
Here is an updated version of the table we showed you in April. At that time the S&P 500, Dow Jones Industrial Average, German DAX and Canada's Toronto Stock Exchange Index (TSX) were all down for the year. Now they are all up. The Canadian market has made a remarkable recovery.
(All performance numbers calculated by net change in price from December 29, 2017 as per Stockcharts.com)
U.S. stocks are doing well. This table shows only the S&P 500 and the Dow Jones Industrial Average. Both are now up for the year. The NASDAQ 100 and the Russell 2000 are up even more.
Back in April, stocks were supposedly underperforming because of fears of rising interest rates and rising inflation. The 10 year U.S. Treasury yield had moved up over 22% in 2018 alone. It was spooking the equity market.
But it has flattened out since then. Oil prices were up 7.91% for the year in April. They have flattened out too. No one seems to be afraid of 3% Treasuries and $65 oil any more. Equity markets have gotten used to both.
Even so, the charts are telling me that U.S. stocks may be ready for a breather. A 3% to 5% correction could easily be in the cards. If we do get a correction it could be simply from summer doldrums; or it could be something more. President Trump's trade policies are clearly making markets nervous, and not just in the USA. Whether or not you believe he is taking the right path for the long run, he certainly has leaders shaken up all over the world. U.S. trade relationships are clearly being tested at every turn.
While long term interest rates have flattened and oil has stopped rising in price, those trends could reverse too. The U.S. Fed is promising two more rate increases in 2018. Their actions impact short term rates. The health of the general economy will determine whether or not long-term rates continue to rise, and how quickly.
The European Central Bank is finally starting to dial back their quantitative easing policies too. Our Fed has been way ahead of them. A significant change in policy in Europe could have impact on markets everywhere. We will have to wait and see how things play out during the remainder of the year.
We are headed into the heat of summer, which has often been a very soft season for stock prices. Summer is arriving with "trade wars" in the headlines, central banks pulling back from their support of bond markets, and uncertainty in energy prices. That is a mix that could cause weaker stock prices, at least for the short term.
Everything else seems to be working. The tax cuts in the U.S. were controversial, but they are seemingly fueling economic growth. The U.S. GDP growth rate is actually approaching 4%. Corporate earnings are rising very nicely. Technological innovation is accelerating in ways we can't even measure and is adding to productivity. Unemployment is at the lowest level in years. Wages are finally starting to rise. The residential real estate market is on fire. Interest rates are rising, but they are still at relatively low levels and rising slowly-at least so far.
The bottom line is that the economy is doing incredibly well. Despite that, anxiety is rising. That is showing up in the charts.
Let's see what the continuing threats of trade wars, rising rates, and rising energy prices do to markets as we work our way through the summer.
All will be revealed as we go. Two months ago, commodities and gold looked like they were ready to break out and be the leaders to the upside. Stocks were stuck in the mud. Since then, both trends have reversed.
In the meantime, we have attempted to position Mendocino, Prosper and Global Select to do well regardless. As of June 15, 2018, both Mendocino and Prosper are outperforming both the S&P 500 and their respective benchmarks. (performance calculations by Orion Advisors).
Global Select is up on the year, but not as much as Mendocino and Prosper. Global Select, as the name implies, is very diversified around the world. That diversification has not worked in its favor so far this year. Interestingly stock markets in China, Russia, and Korea are down significantly year to date. These countries have been in the headlines a lot. We consider the swoon in Chinese stock prices to be a buying opportunity.
Global diversification in portfolios can be important. It is a smaller and smaller world, after all. Global Select will have its day.
All the best,
(707) 603-2672 Office
(707) 486-7333 Cell
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