U.S. equities were down slightly in March as all four major indices we track printed slightly negative returns. Global equities, on the other hand, increased. The Barclays Aggregate Bond index fell slightly as the US Dollar and Commodities both lost value for the month.
|U.S. & International Stock Index Returns|
|S&P 400 (Midcap)||(0.58%)||3.56%|
|S&P 600 (Small Cap)||(0.28%)||0.74%|
|Barclays Agg. Bond||0.81%|
|CRB Commodity Index||(3.34%)|
|U.S. Dollar Index||(1.57%)|
Source: Morning Outlook April 1, 2017
Even with March being a slightly negative month for U.S. equity markets the strong rally in the five months since the presidential election is hard to deny. Right now we view the action as being a natural pause in a bull market move. Of course what we “think will happen” and what actually happens is not always one in the same. After a big move higher markets tend to “correct.” A correction can be either a sideways price movement that happens over time, or via a move lower in price.
The questions that we face as investors are simple: What is the likelihood of a price correction happening? Where would one expect a correction to reverse itself? And how should we react to a move down in prices?
As avid readers would expect, we have no idea if a price correction is coming or not. We wait to see what the market tells us with price action and react to what we see happening. As we do not have any great wisdom (or access to tomorrow’s newspaper today) any opinion we have is an educated guess at best, pure speculation at worst. What we do have, however, are charts and technical analysis that gives us some foresight into what a correction may look like.
Using a number of technical indicators, including Fibonacci analysis, we took a look at the S&P500 chart below with an eye toward levels at which a market turn would line up with technical indicators. We came up with five- 2275, 2175, 2100, and 2035 – that make sense to us. We would also note that a 10% fall from the market highs is around 2160 (not far away from 2175). A 15% correction would happen around 2040.
While nobody ever wants to see the value of their investments go down, moves of these sizes are perfectly normal. We would also note that it is not a foregone conclusion that the market will turn down. The sideways trend of the past few weeks could continue on, allowing the market to correct via a sideways movement over time.
The post-Presidential election consolidation in yields for the 10-year US Treasury continued on during the month of March. This has happened as The Governing Board of the Federal Reserve Bank (The Fed) increase short interest rates and noted the likelihood of more 2017 rate increases. The 10-year rate is important for the housing industry as mortgage rates are set based off of 10-year Treasury yields. Economically, the spread between short-term and longer rates are important as well. Generally speaking, the wider the spread the healthier it is for the economy. In the event that short-term rates are higher than long rates (an inverse yield curve) an economic recession is sure to follow.
Since regular readers are likely tired of hearing us say that there is nothing much happening with the US Dollar we thought that we would take a step back look at the larger picture of where the US Dollar Index is right now on an historical basis. The first thing that becomes obvious on the long-term monthly chart (Chart #3 below) is that the value of the dollar is sitting roughly in the middle of the range it has held over the past 20 years. After peaking above 120 in 2001 the dollar spent the next seven years losing strength, eventually bottoming in early 2008 around 72. From there the index spent the better part of six years trading between the low 70s and the upper 80s.
That trading range produced a technical pattern referred to as a wedge. In mid- 2014 the pattern was broken as the dollar quickly strengthened. The US Dollar Index moved from the low 80s to 100 in less than 9 months. For a currency this is an enormous move.
Big moves typically will be followed by a period of consolidation. This consolidation is why we sound like a broken record every month. At some point we believe there will be either another burst of strength for the index or a precipitous drop in the value of the dollar. Big picture, we would see 120 and 77 as the possible target on the upside and downside respectively.
Which direction it breaks, we think, has more to do with politics than technical analysis. There is much talk of tax reform coming out of Washington these days. How this plays out in the coming years will dictate the direction of the dollar. A change which leads to some form of a boarder adjustment tax will likely send the dollar soaring while one that adds to the Federal budget deficit could be detrimental to the dollar’s strength.
So yes, in the short-term the currency markets look rather boring. Big picture … worth keeping an eye on.
Once again there is nothing much to see here – consolidation continues.
Looking At The Financial Markets Ahead
Earlier in this post we took a detour from our usual more short-term discussion of the markets to open up and look at the longer-term trends. Getting it right over the course of a few weeks, a few months, or a few quarters feels really satisfying. It can even make you feel like you are smarter than the markets. Eventually, however, trying to time markets will make you look like a fool. To keep ourselves grounded here at Magellan Financial we keep an eye on the big picture – the larger cycles. Getting it right over the long term is much easier, and logical, than trying to guess where the market will be in 30 days’ time.
Thinking both forward and backwards it seems the obvious conclusion is that we are now in the later stages of a bull market for stocks. Since the market bottomed eight years ago the stock market has moved steadily higher. At the same time the US economy turned from a deep recession into a steady grower. Unemployment has moved to relatively low levels, short-term interest rates are clicking higher, inflation has crept back into the economy, and for the most part most Americans are feeling pretty comfortable, even with investing. This is what it feels like to be closer to the end of an upcycle than the beginning of one.
All that being said, there is a real important point you need to understand: typically good results come in the late cycle of an uptrend as more investors invest more freely in the stock market. History tells us that you not only do very well during the late bull market, but you do not give back everything you made when the next bear market comes along.
When this bull market ends and the next bear market starts is anyone’s guess. It could be next week, next month or next year. Keep in mind that a stock market correction like the one we suggested earlier could occur in the near future is not a bear market, but a short period of down markets in the middle of an uptrend. Corrections don’t necessarily feel good but they do give opportunity. In the meantime we will continue to watch and adjust or thinking with the markets.
On behalf of Magellan Financial we would like to thank you for taking the time out of your busy day to consider our report. If you found this helpful, please forward it on to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
 A Bear Market is generally defined as a drop of 20% or more from the market peak for a number of broad market indices.
Past performance does not guarantee future results and there is no guarantee that any forward looking statements made in this communication will be attained. The indices presented in this communication are to provide you with an understanding of their historic performance and are not presented to illustrate the performance of any security. Investors cannot directly purchase any index
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC, a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. Magellan Financial, Inc. is a separate entity from WFAFN.
Investment and Insurance Products:
|NOT FDIC-Insured||NO Bank Guarantee||MAY Lose Value|
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