Stocks got a vote of confidence last week, plus some short-covering support (and perhaps some panic buying (for fear of missing out), and now the S&P 500 (SPY) as of Friday is down only -2.2% YTD, and up +8% since its close on February 12. The Russell 2000 (IWM) small caps are up +12% over the same timeframe. At the same time, when priced in constant US dollar, we see that Chinese stocks are down -19% YTD, Italy -14%, Germany -8%, Japan -5% (and -10% in yen), while Brazil is up +20%, Colombia +13%, Russia +9%, and Canada +5%. Notably, those that are down (other than the U.S.) are all implementing massive monetary stimulus (including negative interest rates, in some cases), while those that are up do not have that option.
Emerging markets and commodity prices have been looking strong since mid-January. Now we are hearing rumblings of a “Brexit†from the EU, as Britain will hold a referendum on the subject on June 23, and of course the Presidential election cycle is in full bloom, with riotous debates and outlandish policy proposals making for quite the spectacle. Although headlines continue to “Trump†fundamentals (pun intended) for the time being, I still believe that economic and corporate fundamentals will soon gain traction once again among investors when it comes to stock pricing. Perhaps it is starting now.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs.
Market overview:
At the G-20 Summit, world leaders again called for more fiscal measures and structural reforms — as opposed to simply relying on central banks’ monetary policies to fill the void, as this alone cannot create sustained economic growth. Case in point, Europe’s inflation has fallen to -0.2% despite monetary stimulus. Measures would need to involve thoughtful government spending programs (e.g., “helicopter moneyâ€), reducing barriers to business creation and expansion (like excessive regulation or protectionist policies), tackling corruption, and putting an end to the “race to debase†through currency devaluations.
It is ironic that while countries like Iran and China continue to display a desire to embrace principles of free market capitalism and the rule of law as a path toward prosperity, here in the U.S. many citizens (especially young people) are conflicted on the benefits of capitalism, largely due to growing income inequality. Many believe a reliance on the Federal Reserve’s monetary policy (from non-elected officials) rather than fiscal/budgetary policy from our elected officials has resulted in a slow-growth economy and financial asset inflation that has provided greater benefits to the wealthy than to the masses. This has led a growing segment of our citizenry to embrace populist messages from both ends of the political spectrum.
Many Americans feel they can no longer tolerate the status quo. For some with a conservative leaning, they are fed up with a dysfunctional Congress and a President who prefers to avoid the fray and simply govern by executive order. They want to send the schoolyard bully into town to kick butt, take names, build a wall, tear up trade agreements, dismantle towering federal bureaucracies, and insulate America from a turbulent world. For some with a liberal leaning, they are tired of gridlock in Washington and want to insulate America from a turbulent world, but believe the solution is in paternalism and a broader safety net.
