While it looked like the stock market was headed to close on Friday in the red, a late day rally once again put all the major market indices in the green. We point this out because it means the Dow Jones Industrial Average has now booked 11 consecutive days higher, closing at all-time highs in the process. This was the first time that has happened since January 1987.
Year to date, all of the major market indices are up from 5.5 percent to more than 8 percent and that has the S&P 500’s valuation clocking in at 18x 2017 earnings expectations, well above its historical averages and at the highest level since 2004.
As some have said, it looks like the market could be too far out over its ski tips, given that more signs point to the much hoped for pick up in the economy coming at the soonest in the back half of 2017. We’ve been fairly consistent in calling that timing and now we’re thinking the stock market is starting to recognize it as it stares at the disconnect between the market’s valuation and GDP expectations for the first half of 2017.
We’re mindful of the elevated market valuation, as well as the continued impact of the Trump Trade that has continued to boost optimism even though we’ve yet to get full details on a number of his initiatives. With earnings season winding down, we’ve got a crossroads of some improving economic data and other less robust data such as rising auto loan delinquencies, especially on subprime auto loans, rising gas prices that are likely to crimp consumer wallets, and the first baby boomers entering their 70s.
The question we keep pondering is what could the near-term catalyst be that would lead the market lower? Political? Economic? We’ll be sure to ponder this and more over as the current corporate earnings season begins to abate.
Is a March Rate Hike Still on the Table?
Those were some of the topics Tematica’s Chief Investment Officer Chris Versace and Lenore Hawkins, Tematica’s Chief Macro Economist, discussed on last week’s Cocktail Investing podcast. The duo also went on to discuss the renewed wave of M&A activity as well as shared their thought on the Fed’s upcoming FOCM meeting and whether we will see an interest rate hike. As part of that conversation, Versace and Hawkins touched on several pieces of upcoming data that could give the Fed room to boost interest rates, but also noted certain key pieces of upcoming Washington policy that could keep the Fed’s hand off the rate hike button.
Coming into last week, expectations were rather low for March rate hike. Between last week’s capitol hill testimony by Fed Chairwoman Janet Yellen and this week’s latest iteration of the Fed FOMC minutes for its late January meeting and next week’s end of the month, start of the new month data deluge, we thought it best to rehash recent Fed-related events in chronological order to put some perspective on things.
The Fed’s last meeting was held in late January and as we said above, this week we received the minutes of that meeting. Coming out of that report much of the media hung their hats on the following statement:
“Many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations.”
We found this one in the FOMC minutes far more telling:
“Participants discussed whether their current assessments of economic conditions and the medium-term outlook warranted altering their earlier views of the appropriate path for the target range for the federal funds rate. Participants generally characterized their economic forecasts and their judgments about monetary policy as little changed since the December meeting.”
Again, we’re looking at this in chronological order, which means we turn to Fed Chairwoman Yellen’s recent testimony. In that briefing, Yellen confirmed the notion the Fed would seek to boost rates up to three times in 2017 but also cautioned the Fed needs to see the economic stimulus and tax overhaul plans that are pending from President Trump to determine the potential impact on the economy and inflationary forces.
Last week, we received some favorable economic data in the February Flash PMIs published by Markit Economics, and a solid Existing Home Sales figure for January. Looking into the Existing Home sale report, while the figure was the strongest since February 2007, our key takeaway is that high prices and limited inventory continue to compress the affordability factor for potential buyers, thereby capping the market. Across the Flash PMIs, we saw solid economic growth, but we also saw rising input prices - something the Fed is bound to be watching.
Speaking of the timing of his tax plan late this week, President Trump stated, the tax reform plan was “well finalized”, but will only be released after a successful repeal of the Affordable Care Act. Then last Thursday Treasury Secretary Steven Mnuchin said he expects a plan to pass through Congress before the August recess.
To us, this means in all likelihood the Fed will not have time to digest and assess the plan ahead of the March meeting, which puts the next rate hike potentially in May. Our view on this was confirmed by the quick sell-off in the PowerShares DB US Dollar Index Bullish (UUP) soon after the Fed minutes were published.
Christopher (Chris) Versace is the Chief Investment Officer at Tematica Research, editor of the newsletter Tematica Investing, co-host of the Cocktail Investing Podcast and is a featured columnist to The Street.com as well as a contributor to Business Insider andForbes.com
© 2022 Newsmax Finance. All rights reserved.