July 11, 2016

Stocks opened sharply higher this morning, eclipsing all-time highs for the first time in about 14 months. At the moment, the Dow and SPX are up 126 pts & .5%, respectively. The Nasdaq is up .8%. Industrials, tech and materials sectors are leading the way. The dollar is stronger on the day and WTI crude oil is trading down modestly to $45/barrel. Bonds are trading off a bit, with yields moving higher. The 5-year Treasury yield is up to 1.02% and the 10-year yield is up a bit to 1.42%. 

We’re watching a few indicators that have turned positive recently. First, AAII’s Bullish Sentiment survey has bounced from 22 to 31 in the last few weeks. It’s still relatively low—only 31% of individual investors say they’re bullish—but moving in the right direction. Second, Citigroup’s Economic Surprise Index has moved into positive territory for the first time since early 2015. That means most economic data are coming in better than expected. Third, Wall Street earnings estimates for S&P 500 companies have finally begun to trend a bit higher. At the beginning of 2016 analysts’ consensus forecast was for $124/share, but that outlook steadily fell to $117/share (5.5% lower) as global economic growth faded and currencies fluctuated wildly. Over the past two weeks, however, earnings estimates have begun to trend higher. At the moment it’s not a big shift, but still worth noting. 

So the setup for today’s break-out in stocks is (I think) perfectly summed by Bloomberg: “…the dollar strengthened with industrial metals amid speculation the US economy remains strong enough to propel global growth without forcing the Federal Reserve to tighten policy.” Now that would be a real Goldilocks investing scenario. Theoretically, under those conditions both growth and dividend stocks could rally together, and the bond bubble wouldn’t burst. 

Goldman Sachs, however, doesn’t buy it. The firm is urging investors to sell now while the market is achieving new highs. Goldman says the earnings recession (i.e. negative earnings growth for corporate America) won’t end this quarter so stocks are essentially overvalued at the moment. Reasons for caution also include political uncertainty, unstable global economic growth and decelerating stock buy-backs. The firm is especially wary of energy companies, banks and Apple. The most important metric to watch during the upcoming earnings season is corporate earnings guidance for the next 1-2 quarters. I should note this is a short-term trading call, and not reflective of their constructive long-term outlook for the US. 

 


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