Market Outlook | June 19, 2017

“Conflict is inevitable, but combat is optional.” Max Lucade

Dancing with the Inevitable

The stock market eventual peak is inevitable, so is the market realization of failed Central Bank policies and mega deals at the end of cycles. There are moments where one event or another will transpire. 

Before expanding on the three themes, waiting for the inevitable market event is one matter. Making money while waiting for the inevitable “cataclysmic” ripple effect is a daunting task and requires a tremendous amount of wit and, of course, luck. Waiting for the inevitable by preparing the next move is another approach to either buy distressed assets or reduce risk from current exposure.  Barging search and increased cash exposure in the near-term are being contemplated by professional money managers.

The FOMC is struggling between defending their credibility and confronting the realities of growth and potential failed prior policies.  The Federal Reserve raised rates in a symbolic manner last week rather than in a  meaningful manner during a period where growth is slowing and the stock markets are closer to record highs. At some point, many wonder, when's the narrative of low rates, higher stocks and muted volatility going to shift? “When” remains a major unknown and the landscape  is not crystal clear.  

Disconnect & Discontent

For too long the acceptance of rising stocks reflected improving economic data, and that data have been used to casually dispense comforting messaging while ignoring the lower long-term bond yields and lower inflation. Not to mention, the outrage of the voting class and distrust of Federal leadership are  intertwined in the anger against failed DC policies. The failure of the Fed to implement a pro-growth environment may end up being the ultimate highlight of the disconnect between financial market narratives and the common person’s daily sentiment. Of course, growing disconnect and discontent can pave an inevitable spark in volatility. Although, it must be said, the false alarms regarding a spike in volatility have shaped numbness in investors.

The conundrum of low rate policies is not only a US matter, but a global issue where Central Banks will have to confront the misleading stimulus story that's more political than tangible at this juncture.  The UK, Europe and Japan have mastered the trickery of low rates raising asset prices, but failure to raise wages creates political unease. The UK elections have demonstrated a shift in one year, from Brexit to far-left, showcasing the rapid and dangerous shift from one extreme to another. The swing is nothealthy or comforting for those seeking stability.

Summer Fridays

Two Friday's ago, Nasdaq’s leading stocks retraced sharply during the afternoon, which begged questions about the suitability of high-octane growth stocks such as Facebook, Apple, Netflix and Google (FANG). It is quite natural that a crowded trade has a breather, and even more natural for participants to ponder, debate and speculate on the penultimate market top. Now, timing is everything, but timing the market with automated or classic human emotion is nearly impossible as many bears have learned the harsh way in recent years.

Last Friday's Amazon's announcement of acquiring Whole Foods reiterated that the post-2008 cycle winners are in a position for mega deals and are eager to deploy capital. They are maturing from a growth company to potentially a "value" company.  The Time Warner-AOL deal comes to mind from the late 90's as an example of a mega-deal flow ahead of the tech bust in 2000. Now, Amazon is a conductor of an industrial revolution of its own, with logistics and incredible alternatives to traditional retail, newspaper and other means of reaching wider audiences. Yet, Amazon taking on debt while integrating a new purchase may shift its status from a growth company to a more “value” driven path. And the momentum chasers may have to re-evaluate Amazon's soaring stock price, which call into  question other tech high-flying companies. Perhaps, the Friday when FANG sold off after making record highs was a slight reminder. Yes, the next phase of growth remains questionable or mysterious for some tech companies, especially in the context of the current script. So far the Amazon empire has been remarkable across quite a few industries and the efficiency has reshaped the business landscape between old, near-obsolete models (i.e. traditional retail) and ongoing innovative ideas.

Reconciling Conflicts

Stock markets are performing at near-record highs, yet long-term bond yields are suffering. There are low prices for consumers, but also a lack of wage growth.  Real estate prices increase, but there is a lack of wealth creation for the middle class. On-line efficiency is expanding, but traditional business models are collapsing. There are talks of rate hikes but lower inflation numbers, muted financial market volatility but political outrage at the ground level, a reigniting of Middle Eastern rifts but mildly declining Oil prices, etc. …All highlight some noteworthy dichotomies.

Key Levels: (Prices as of Close: June 16, 2017)

S&P 500 Index [2,433.15] –   June 9, 2017 highs of 2,446 remain the record highs, and in the near-term, sets the benchmark for bulls. So far, June’s turbulence and shaky movement is creating suspense for the long awaited “top”.  A break below 2,400 can set off further panic based on prior trading patterns.

Crude (Spot) [$44.74] – April and May 2017 showcased a lack of upside momentum with crude falling below $52. The glut supply seems to be a bigger matter than pending disruptions in the Middle East such as Libya and diplomatic tension with Qatar and Saudis.

Gold [$1,266.55] –   A mildly positive trend since December 2015 lows of $1,049.40 remains intact. Recent signs of stabilization appear, but not a major surge as Gold bugs expected. Interestingly, Bitcoin has skyrocketed higher than Gold as the alternative currency.

DXY – US Dollar Index [97.27] –   Less than what most expected this year, the Dollar is weaker, and the annual peak was reached in January.

US 10 Year Treasury Yields [2.15%] – March 2017 highs of 2.62% seem a long time ago since 10-year yield is hovering below 2.20%, even during a week that the Fed raised short-term rates. The chronic low rate enjoinment is more pronounced now as dipping below 2% seems like a feasible reality.

 

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