|
|
|
|
||
Break Out!The S&P 500 Index ended the week at 2439.07, a new ATH. If the stock market can be visualized as a long staircase, it took another step higher this week after resting on the lower step since early March. Although it could go a little higher early next week, IMO the market is due for another rest as the stock market eyes another rate hike at the next Fed Meeting on 6/14. At the next Fed meeting, I expect the Fed to raise the Fed funds rate another 25 basis points to a range of 1.00 to 1.25%, still very accommodative by historical standards, but which will probably lead to another substantial flattening of the yield curve, assuming long-term rates don't follow short-term rates higher in lock-step as has been the case with prior rate hikes. Indeed, the current yield of the 10YR Treasury at 2.15 is very low, given where the economy is in the business cycle. (Although this low yield has hurt the performance of the financials since March and has engendered doubts about the viability of the economic recovery, IMO the low yield stems, in part, from the even lower yields of foreign bonds and, in part, from the Fed's own crushing of inflation expectations by keeping interest rates at zero for much too long. In short, I don't think the low long-term yield is a reliable indicator of the health of the economy.) A few days after the Fed meeting, I would expect long-term interest rates to start moving up again, especially if Ms. Yellin suggests in the presser that the fed will start shrinking its balance sheet in September with the next rate hike postponed to December. IMO a shrinking of the balance sheet will cause long-term rates to rise since the Fed will be less of a buyer of long-term Treasuries and mortgages in the future. Higher rates should cause the USD to move higher, ending a 6.7% slump YTD. This should help financials, small-caps, and stocks of companies in certain sectors that derive most of their earnings domestically and hurt the big tech multi-nationals and consumer staple stocks. IMO the market will suffer another rotation in late June and possibly mount another step on the staircase in July if 2nd Q earnings are good, as I expect. In September, I expect a 3-7% dip in the S&P 500 Index as fear grows that Congress will not pass a budget, will not raise the debt ceiling, and/or will not cut corporate taxes. Of course, at the very last minute, Congress will do all of the above, IMO leading to a big rally making up all of the lost ground and then some. IMO a rally caused, in part, by higher interest rates and, in part, by tax cuts could last for the rest of 2017 and well into 2018. See the latest blog by Chris Ciovacco, my favorite technician, entitled "Be Open to Enormous Upside in Stocks." http://www.ciovaccocapital.com/wordpress/ (IMO the best thing about reading Ciovacco's blog every week is that he is a trend-follower. He will tell you when the moving averages are starting to roll over, giving you plenty of time to exit the stock market before the next bear market. Tops are a process, not an event, unless a big geopolitical event crashes the market (in which event, you have to hold your positions until the choppiness subsides). Right now Ciovacco couldn't be more bullish. IMO a big dip in September will be the last good entry point for some time.) When inflation rises due to an overheating economy in 2018 or 2019, the Fed will have to raise interest rates aggressively, thereby removing the punch from the punchbowl, and causing a recession and a bear market. I wouldn't be surprised if the Fed raised interest rates in December 2017 and then again in March 2018. The March raise might be one raise too many given the shrinking of the balance sheet that will be going on at the same time (every shrinkage of $300B is estimated to be the equivalent of a 0.35% hike). As I said in a prior post, I will go on high alert next spring. But my timing could be way off! Hopefully, Ciovacco will still be posting and give us a "heads-up" when the moving averages on the S&P 500 Index and other charts are starting to roll over. GLTA! Savannah |
return to message board, top of board |