By David Nelson, CFA
No other way to put it. A monster week for stocks and as the media points out, the best start for the market since 1987. Before we all take a stress pill it’s important to note that despite the crash, 1987 was an up year.
9 trading days into the month I talked about reversion to the mean pointing out the S&P 500 was more than 10% above its 200 day moving average. Interestingly the next day the market had its first meaningful intraday reversal closing at the low of the day. Here we are a little more than a week later with the market at another all-time high only now more than 12% above the 200 day. Reversion to the mean is a powerful force but being technically overbought even for long periods is quite common in bull markets.
Dollar 1 Year – Unforced error
There’s no shortage of bricks in the wall of worry and each passing day we add another. Despite an over 2% move higher in the SPX last week there were several opportunities to knock traders off their bullish stance. Secretary of Treasury Steve Mnuchin’s comments on a weak U.S. dollar IMHO was an unforced error. The U.S. dollar doesn’t need a cheerleader to help jaw bone the dollar lower. It’s been doing that for more than a year all by itself. No question a weak dollar helps U.S. multi-nationals making their goods more attractive but be careful what you wish for. With oil, gold and commodities all pushing higher along with wage pressures building in the industrial complex there could be unintended consequences. Not to mention Mnuchin’s remarks open us up to the same type of criticism we put on China as a currency manipulator.
World Returns Trailing 1 Year – It’s all about the dollar
World markets are putting in another good year as well. U.S. investors have reaped outsized returns overseas but understand where your performance is coming from. On a trailing one year basis, Germany’s (DAX) looks like it is outperforming the U.S. by over 600 basis points. In local currency, Germany’s return is about half the U.S. The falling U.S. dollar has added all the juice a dynamic that can end just as quick as it started. The real outperforming markets vs the U.S. are China and to a small degree Brazil.
We’re 1/3 through earnings season and as the graphic from Goldman Sachs points out not a bad start for the year. Positive earnings surprises are coming in at 56% but the stand out is revenue with beats in almost 60% of the reports. The largest negative surprises are coming from the Utility sector.
As we head into another busy week for earnings the FANG’s Facebook (FB), Amazon (AMZN) and Alphabet (GOOGL) are all on deck. There’s more than just earnings and economic data to deal with. We still have another potential government shutdown coming in February with both sides of the aisle trying to position for advantage. If past is prologue, get ready to add another brick in the wall.
