A quarter ago investors harbored concerns about declining oil prices, an economic slowdown in China, and the potential for recession looming in the U.S. prompting the first double-digit loss and resulting double-digit gain ever in one quarter, with the markets essentially going nowhere for the first three months of the year.
Will this be a year of dips and rallies, as opposed to a large upward or downward move in the market? Probably. Why—you may ask? Lots of uncertainty, from low GDP (economic growth), to flat-to-down corporate earnings projects, to an election year, and to the Fed’s potential for raising rates. The market (S&P 500) does not like uncertainty, so it’s apparent that until we can see resolution on some of these areas, the market most probably will be in a trading range (1800-2100 S&P 500).
There are two significant bright spots developing. The first, the increase in the stability in the price of oil, now over $42 a barrel. The U.S. markets have been correlated with the price of oil for the past year so this is a positive. Secondly, the U.S. dollar has been a major headwind for corporate earnings over the past year rising significantly. However, it appears to have peaked and thus, the combination of a weaker U.S. dollar and strong industrial prices should lead to faster growth in S&P earnings through the last half of the year. We continue to believe that we are still in a bull market, but most probably now in the “mature phase” of the cycle (last year or so).
Thus, while the environment for stocks appears more positive than negative, due to low inflation, low interest rates, modest economic growth, etc., we remain cautious and under-weighted in equities at this point, and instead favoring bonds and more of a preservation-of-capital approach until we see more evidence that some of the uncertainties have cleared (other developments we are watching include the rise of gold and emerging markets).
