Risk/Reward Vol. 381
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Friday's action notwithstanding (discussed below), this week was a welcome relief from the roller coaster ride which characterized the previous two. The Dow went green on 5 straight days rising 4.3% in its biggest one week percentage gain since November 2016. The S&P 500 also gained 4.3% in its best week since January, 2013 while the NASDAQ rose 5.3%, its best performance since December, 2011. That said, at current levels the Dow is 5.3%, the S&P 500 4.9% and the NASDAQ 3.6% below the records each set last month. So if TINA (There Is No Alternative) is still in effect and I believe it is, I see very few obstacles to regaining if not surpassing those levels in the near future. So why did the market correct? Once again, few have offered any explanation, and none has offered one that is definitive. The best one I read defaulted to Occam's Razor, the philosophical concept positing that when multiple explanations are advanced, use the simplest. Simply stated, lots of sellers sold for no particular reason other than others were selling.
So what obstacles do I see to continued upward movement? I foresee profit forecasts as good, monetary policy as stable and inflation within predictable bounds. Interest rates could be problematic if the rate on the US 10 Year Bond spikes above 3%, but as each day passes with the 10Year hovering at or near 2.9% the shock value recedes. The most recent inflation numbers are in check, with the all important core inflation (strips out volatile oil and food prices) holding at 1.8%. A major confrontation in Syria between Turkey, Russia and the US could cause a market panic although the incidents occurring there these past two weeks have received less news coverage than Kim Jo Yong's snarky side glance thrown toward Vice President Pence. (Excuse my digression, but do you realize that the comely lass is the North Korean Minister of Propaganda and has a long list of human rights violations? Jeez, folks, giving her any props is like fawning over Joseph Goebbels at the 1936 Olympics.) No, I stand by what I wrote a few editions ago. The major threat to Mr. Market is political. If you doubt me, review the hour by hour tape of Friday's action. The Dow was up nearly 230 points before Mueller released the 13 indictments. Within minutes the Dow lost all of its gain and finished a paltry 19 points to the positive. Having read the indictment, I do not see any spill over onto Trump (although Mueller is not finished). So all things being equal, the move upward should continue, albeit with the same amount of jitters we saw this week, unless and until another political bomb is dropped.
And how about those interest rates? I must admit that the rate on the US Ten Year has increased faster than I anticipated. The question is how soon will it reach then breach the 3% barrier. That barrier is significant because many commentators have speculated that at that level some investors may rotate out of stocks and into bonds. In other words, the TINA effect would be over. First, I don't believe 3% is attractive to any investor other than institutions that are required to hold a percentage of assets in bonds and foreign buyers who face even more depressed rates domestically. Second, the Ten Year rate is still suppressed by the overhang of quantitative easing as the Fed continues to be one of its largest buyers. Third, even in the absence of QE, the 10Year correlates to the rate of inflation which as noted above has remained steady. And lastly, the securities I like during a period of steady rates, preferred stocks, have not nose dived as one would have expected given the recent rate spike. Do those guys know something we don't? Who knows, but as always, the 10 Year is worth watching.
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