Presidential politics is the buzz for the media. But, we have yet to hear one interview question of any of the presidential candidates address the biggest challenge for the incoming President: “How will you tackle the huge deficit for Social Security, Medicare other mandatory spending programs?”
The reason this is the key challenge is the size of the mandatory spending. For example, during the next 10 years, mandatory spending is projected to exceed $33 trillion whereas discretionary spending (e.g. defense, education, and environmental budgets) will total only $13 trillion.
Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade is A- (very favorable).
THE FED AND ITS POLICIES: This factor is rated B (favorable). The U.S. economy can handle higher rates as long as the pace of future interest rate increases is slow. Fed Chair Janet Yellen made clear in her press conference after the December meeting that the path higher would be “gradual”.
The Fed’s plan to gradually raise rates in the coming years won’t derail the economy and brings some certainty to the market, says Morningstar’s Bob Johnson. The market consensus on the 2016 pace of increase is somewhere around two to possibly three rate increase of .25% each.
BUSINESS PROFITABILITY: This factor’s grade is a C (average).
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 5. While decreased, these risks still deserve our ongoing attention.
Last week, U.S. Stocks and Foreign Stocks increased. Bonds decreased. During the last 12 months, BONDS outperformed STOCKS.
Returns through 3-11-2016
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
-.1
1.6
1.5
2.2
3.5
4.7
US Stocks-Standard & Poor’s 500
1.2
– .6
1.3
11.4
11.5
6.9
Foreign Stocks- MS EAFE Developed Countries
1.0
-3.7
-6.6
1.7
2.4
2.1
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week Laurie will discuss: “New Beginnings-Put Your Financial House in Order”
Laurie will take your calls on these topics and other inquiries this week. Questions may be submitted early through www.yourfinancialchoices.com by clicking Contact Laurie. This show will be broadcast at the regular time. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area– or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.
After a mostly blah week, stocks staged a respectable rally Friday to cruise solidly into the black, up 1% last week. The main impetus was a concurrent rise in crude prices, but more monetary easing announced by the European Central Bank lent support.
With little in the way of important U.S. economic news, eyes were focused on the global oil market and the ECB. Crude oil rose 7% last week to $38.50 per barrel, after the International Energy Agency said it saw signs of a price bottom and talk of a production freeze from some oil producers.
This fourth week in a row of rising energy prices bolsters the idea that oil is finally stabilizing after the precipitous drop of the past 20 months. It’s perhaps no surprise then that stocks rose four weeks in a row, too.
The ECB whipsawed markets. A big move up Thursday was the initial market reaction to the ECB’s new rate cuts and other stimulus moves. However, that excitement dissipated when ECB President Mario Draghi noted that he didn’t anticipate further rate reductions. Equity investors didn’t like that, and the euro rose quickly against the U.S. dollar, but the oil rally came to the rescue.
The Dow Jones Industrial Average added 207 points or 1.2%, to 17213.31 last week, while the Standard & Poor’s 500 index gained 22, to 2022.19. The Nasdaq increased 0.7% to 4748.47.
For the past few years, when monetary stimulus is applied, “it’s been risk on,” says Richard Weeks, managing director at Hightower Advisors. The situation is more nuanced now, and the market has reached a “no man’s land” level. It’s a spot where some funds are ready to re-short the market, but where recent good U.S. economic news belies the growth scare that drove down stocks in February, he says.
After Draghi’s comments, central-bank credibility will hang in the balance, adds Jack Ablin, chief investment officer at BMO Private Bank. Investors are weighing whether the stimulus will work, as some fear Draghi has “thrown in the kitchen sink,” and that there isn’t much else he can do to stimulate Europe’s lethargic economy.
The U.S. economic backdrop seems positive, but market fundamentals are lousy, he adds. Market valuation is a head wind that could make it hard for stocks to rally, while profit growth continues to slide, he says. The market’s price/earnings ratio is nearly 17 times analysts’ 2016 consensus earnings-per-share estimates.
Investors shouldn’t get too comfortable when it seems that oil moves and central-bank maneuvers are the main reason stocks go up or down, not earnings and economic growth.
