Several significant themes have reemerged in recent trading sessions, in part as a follow through to last Friday’s disappointing Employment Report resulting in Monday’s talk given by Fed Chair Yellen, that have given a modest lift to US equity pricing this week.
As a result of the “miss” represented in last week’s Employment Report and Chair Yellen’s balanced/realistic approach to the timeline on rates (read lower/longer), the US dollar has weakened this week as the yield on US notes has slipped (US 10-year yield 1.71%). Crude WTI has regained its momentum rallying for two days on tightening supplies (3.2M barrel weekly draw) to close at $51.60/bbl on Wednesday. Gold has also rallied this week as a direct result of the aforementioned shift in timeline to close yesterday at $1265.20/oz.
‘The perceived stall in the next move in rates has not only helped lift equity markets, crude and gold; it has also provided a reversal of sorts for emerging market equities and currencies.
Effectively, triggering a modest but undeniable global tick higher in prices and as a result, a collective global sigh of relief. Hard to believe that all this is the result of a perceived delay of a 25 bp move by the Fed. It certainly isn’t earnings or recent economic data.
Not to rain on anyone’s parade but I remain cautious. Equity market valuations are stretched. I still believe equity prices are and will continue to be range bound – at least until we see either a meaningful uptick in inflation, earnings, corporate revenue or all three.
I know,”range bound” seems fairly defensive given the fact that the S&P 500 and Dow industrials are both only 1% away from their respective 52-week highs and that the S&P Small Cap 600 is + 8.1% YTD, but I still just don’t see a meaningful breakout from here. Given the fact that macro economic data is suggesting only modest expansion through the first half of ’16 and that recent employment data has reflected slowing gains, we can only hope for some acceleration in economic and corporate performance in Q3 and Q4. If that eventuality does materialize, that will alter the investing landscape and my outlook, if. In the meantime, equity prices find ballast in Fed accommodation, modest economic expansion, hopes for a corporate rebound and a lack of a dire geopolitical risk off narrative.