Financial Outlook Week Ahead-3-19-17
U.S. stocks limped into the weekend with mixed results on Friday, but the market nevertheless capped off yet another winning week. Gains for dividend-paying stocks offset drops for banks and health care stocks.
Global Economy – The markets are paying attention to comments from the G-20 meeting that begins today in Baden-Baden, Germany. EUR/USD posted a 1-1/4 month high before falling back and European government bonds sold-off after hawkish comments from ECB Council member Nowotny who said the ECB can raise interest rates before its bond-purchase program has ended.
ECB Council member Nowotny said he sees no deflation risks for Europe anymore and he told Handelsblatt in an interview that the U.S. model to finish bond purchases first before raising interest rates might not transfer well to Europe and that the ECB can raise interest rates before its bond-purchase program is phased out.
U.S. Economy – U.S. factories cranked out more autos, steel and computers in February, the sixth straight monthly increase in manufacturing output.
Factory production rose a seasonally adjusted 0.5 percent last month from January, the Federal Reserve said Friday . That followed another 0.5 percent gain the previous month.
Factories are benefiting from greater consumer and business optimism since last fall’s presidential election. Companies are spending more on big-ticket items such as industrial machinery, and Americans are buying cars at near-record levels. Overseas growth has spurred more exports.
Mining output rose 2.7 percent in February, spurred partly by more oil and gas drilling. Utility production plunged 5.7 percent as unseasonably warm weather reduced the need for heating. Overall industrial production, which includes manufacturing, mining and utilities, was unchanged in February.
Factories are emerging from a rough patch that lasted from late 2015 through most of 2016. Sharply lower oil prices hammered demand for drilling equipment, such as steel pipe, and many businesses sold off excess stockpiles, reducing new orders for factory goods.
Unlike other confidence measures, the consumer sentiment index has edged off its post-election peak, to 95.7 in preliminary February and 96.3 in final February and compared against 98.5 in January. But forecasters, at a consensus 97.2 for preliminary March, see the index showing renewed strength.
This report has been noting extreme polarization in its sample, between Democrats whose index is near record lows and Republicans whose index is near record highs. The swing factor has been independents who are closer to Republicans in their optimism.
Earnings Outlook – Total Q1 earnings are expected to be up +6.5% from the same period last year on +6.4% higher revenues. This would follow +7.3% earnings growth in 2016 Q4 on +4.7%, the highest growth pace in all most two years.
Estimates for Q1 came down as the quarter unfolded, with the current +6.5% growth down from +10.4% at the end of December. T
While Q1 estimates have followed well traversed path that we have been seeing consistently over the last few years, the magnitude of negative revisions compares favorably to other periods, particularly in the first half of last year and all of 2015. In other words, Q1 estimates have come down, but they haven’t come down by as much.
Market Sentiment – Treasury yields dipped, dropping once again after the Fed on Wednesday gave a more measured forecast for interest-rate increases than some investors expected.
The Fed raised short-term rates by a quarter of a percentage point on Wednesday, as many investors expected. It also said that it still plans to raise rates by a total of three times this year, when some investors had been expecting four hikes given the recent pickup in the economy and inflation.
The bond market is stagnating and I’m expecting lack of directional bias over the near term. FED is backing away from raising interest rates again till economy becomes more stable and with sentiment in the stock market becoming increasingly negative once agan, bonds will more than likely lack direction till we see more stability from Global economy in coming months.
Lastly, sentiment towards higher stock prices is fizzling out since Trumps economic plans to spruce up the economy may be several months away, something U.S. stocks anticipated would happen much quicker…and that will cause stocks to trade lower in the short term and cause bonds to rally.
Stock Market Analysis – Stocks continued to slump and the descending triangle continues to develop towards the downside. Tech stocks are losing momentum and that’s been holding the market up over the past few weeks.
Over the next few weeks I anticipate more weakness moving into the broader market as less and less sectors are moving directionally at this time.
Tech momentum levels have not moved higher in recent weeks and at one point reached close to the 90% percentile. Historially, it’s very difficult for stocks to continue seeing upside momentum without a sharp pullback to the downside, taking the percentage of stocks trading above the 50 day line down to oversold price levels and creating balance through out various sectors.
Below is the 10 year momentum chart on the NASDAQ. You can see that every time momentum levels rise above 80th percentile the odds are strong that downside is developing and I believe we are going to see mild corrective pressure ahead.
Expect price to retrace back down to the 50 day line across most indices and volatlity to begin spiking on the VIX. The market is becoming overbought and volatility spikes sharply when price begins declining steadily. Volatility is near 10 year low level and the most likely scenario is spike in the VIX over the next few weeks.
Many traders are commenting that the market environment has changes with the low interest rate and Trump in the white house…but in response to that I will leave you with an interesting quote.
The 4 most dangerous words in investing
“It’s Different This Time”
by John Templeton
Have a great weekend.