Market update

 

By Paul Nolte.

 

Wall Street is singing “It’s always better when we’re together”. From the Royal Dutch Shell buying BG Group to Mylan and
Perrigo hooking up, there have been over 120 mergers announced already this year totaling nearly $600 billion.

Some may argue that the deal flow is a result of a lousy economic environment, where many companies are trying to “buy growth” since they are not able to do so organically. Others will say that low interest rates make for an easy hurdle to clear when calculating potential returns from a merger.

Finally, still others will argue that this “frenzy” is a sure sign of the final act for a stock market that has risen very steadily over the past six years. Whether these mergers are deemed successful will only come with the benefit of hindsight and a few years of distance.

For its part the economy remains “ok”, neither showing robust growth nor falling into a recession. The now normal slowing during the first quarter may give way to a “spring” in the second quarter GDP figures released in July. The big event of the upcoming week will be a combination of corporate earnings and the end to the tax season that CPAs will be roundly celebrating on the 16th.

The release of the Fed minutes last week gave stocks a reason to rise, as it was evident that they remain very split on
when rates should rise and while not discussed, how quickly rates should rise. The last two months have been marked by
daily 100 point intra-day swings in the Dow, even though the markets may close relatively flat. When looking at many of
the short and long-term market indicators, they seem to be bunched toward the middle of their usual ranges, indicating
little buying or selling pressures.

Earnings season will be more company specific rather than broad market moving news. As usual, companies will do their best to beat already lowered estimates and talk poorly about the business to tamp future expectations. However, it will be instructive to hear their comments regarding overall business conditions and the effects of the higher dollar and lower energy prices on their businesses.

Keep an eye on revenues. It should not be surprising if many report relatively flat sales. Bonds have been called many things from a bubble to a sure fire loser. But bond investors continue to laugh as rates continue to decline.

Of course the trend will change, it has to at some point, right? Tell that to the Europeans, when Switzerland was the first country ever to issue 10 year bonds with a negative interest rate. It can’t, it won’t happen here, so it is thought. While our economy seems to be doing better than those around the world, allowing for the Fed to actually raise rates, the trend in rates around the world is lower not higher.

Are we leading the shift to higher rates or merely raising rates because we have promised to do so? It is a global economy and we are not an island. For the first time since mid-July last year, there are now six major asset classes trading above their long-term averages.

Emerging markets have generally done poorly since late 2010 in relationship to the SP500. Emerging markets has only been considered a distinct asset class since 1987. Over that time there have been four distinct performance periods to compare emerging markets to the SP500. From ’87 to late ’94, emerging markets did well.

From ’94 to ’01, the SP500 was king when compared to nearly any asset class. After the tech bubble burst, emerging markets did extremely well until late ’10. Since that time it has been the SP500. It may be a bit early to declare the time has arrived for emerging markets, but a strong dollar and very weak commodity prices are not likely to persist at their recent pace.

If the global economic train is indeed led by the US and we are “pulling out of the station”, it won’t be too much longer before emerging markets begin to gain momentum and begin besting the SP500. The dominance of the SP500 over many assets classes has been nearly unbroken for five years. It may finally be time to look outside of the SP500 for performance.

The economy will be taking a back seat over the coming weeks to earnings announcements. Corporate commentary
regarding the stronger dollar and lower oil prices will likely be pointed to as the culprits for weak earnings performance.
The path of least resistance seems to be higher, but for how much longer if earnings don’t improve. Bond investors will
continue to benefit from stock market volatility.

The opinions expressed in the Investment Newsletter are those of the author and are based upon information
that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or
future financial market conditions.

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