The U.S stock market continued its late-2016 rise with three of the four indices posting gains and new highs. The lone laggard was the small cap index which is coming off a stellar year. Global equities outperformed. Commodities and the U.S. Dollar were down as bonds posted a small January gain.
|U.S. & International Stock Index Returns|
|S&P 400 (Midcap)||1.60%||1.60%|
|S&P 600 (Small Cap)||(0.45%)||(0.45%)|
|Barclays Agg. Bond||0.17%|
|CRB Commodity Index||(0.25%)|
|U.S. Dollar Index||(2.63%)|
Source: Morning Outlook February 1, 2017
For most of areas of the U.S. stock market the month was positive. The lone exception was the small loss posted by small cap stocks. After a very strong 2016 we feel the benefit of the doubt is appropriate for small company stocks. No market or stock moves in a straight line, and just because the “pause” happens at on the other side of a trading month we don’t feel the need to see it as more than what it appears to be. If large stocks are ok we believe small caps will be fine as well.
More important is the recently positive performance of the two international indexes we follow. Global markets have lagged behind U.S. markets since the market bottom in 2009. Chart #2 is the MSCI EAFE index with the S&P500 in the lower panel. What it shows is that while the S&P500 has been above its 2007 highs since 2012 the MSCI EAFE has yet to get close to those levels. And from the middle of 2014 through the first half of 2016 the index had turned back down.
We attribute the turnaround of global markets to the economics turning from bad to less bad. In case you missed it, Europe and Japan have not been in a good place the past few years as they dealt with deflationary pressure related to their flat to contracting economies. And emerging economies, many of which are economically tied to commodity prices and the U.S. dollar, have benefitted from commodity price stabilization after a big drop in prices.
The final two months of 2016 saw bond yields handily increase to levels which made us seriously consider that we were entering a new phase for the bond market. In our December 2016 report we noted this rise, not confident that the 35 year bond bull market was over. We expected short-term consolidation with a true understanding of the new trend coming at some point in the future. Right now the new trend is sideways as rates have been bouncing between 2.3% and 2.6% for the 10-year Treasury. The question going forward is: are we in a sustained sideways trend or is it just a pause before rates move higher?
We have been showing you this same long-term chart for well over a year. In that time it looked like the same chart, just with an additional month added to the long consolidation of the dollar’s value vs. a basket of currencies. Right after the Presidential election the consolidation broke as the index moved above the range and it looked like the dollar would start to strengthen again. With the turn of the calendar came a drop in the dollar, which is now back at the top of the consolidation zone.
Was the drop a fake-out-breakout or just a retest of the breakout? Time will tell. The implications for corporate earnings, commodities, and trade are real.
Once again there is nothing much to see here – the consolidation continues.
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Robert I Cahill, Managing Partner Rob.Cahill@wfafinet.com
Jeffrey T. Bogert, Partner
Jonathan D. Soden, Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Associate Financial Advisor Jay.Knight@wfafinet.com