Market Watch (03/18/2016)

For some time, I’ve been writing about the underlying fundamentals of the U.S. economy. I stated my belief that, as the year progressed, the economy would do better and the result would be price gains for U.S. equities. In early March, a leading company that does technical analysis of the market released a statement saying that a strong change had shown up in their charts, indicating that the next nine months could prove very profitable in the U.S. stock market.

Two types of analysis are used in looking at the stock market. One is fundamental analysis; the other is technical analysis. Both appear to agree that a move up in the U.S. stock markets is impending. In fact, the S&P 500 turned positive on March 10th, on Thursday, March 17th, the Dow Jones Industrial Average turned positive.  As investors, we must look further to determine what we should be doing.

Both the price of oil and foreign currencies have grown stronger. This benefits U.S. exports as the value of the dollar, which has been very high, drops, making U.S. exports cheaper in foreign markets. The Federal Reserve announced on Wednesday, March 16th, that they would not raise the interest rate at this time and will likely not raise the rate more than 0.5% for the balance of the year. This sent two signals. The FED sees the economy still in a growth trend. Second, they are looking for a period of certainty and stabilization in interest rate-sensitive areas of the economy until at least June.

I am sticking to my original forecast for this year. I think earning by most major corporations will be down when reported for the first quarter. As they digest all the new employees that have been hired, we will see productivity increase. As demand for workers grows, we will see wages increase. These two, when placed together, should result in greater consumer spending and greater profits for corporations by the fourth quarter of this year. Because stock markets anticipate earnings growth as a leading indicator, we should see the stock market begin to rise in the second quarter and become stronger in the third quarter. As world markets are still struggling with their economies, a great deal of volatility will continue to be evident. It is not the time to buy emerging market equities or debt, nor would a normal allocation to developed countries outside the U.S. be warranted at this time. An overweighting to U.S. stocks seems like a good idea. With the economy improving and high yield bonds giving higher interest rates, this may be a place to make an investment. We will be reviewing our strategies shortly to determine allocations, where we have discretionary control over the accounts.

Ed Mallon 

March 18, 2016