Don’t Look Now

Don't Look Now...

but U.S. stocks are in a decided uptrend as a period of market anxieties appear to have faded—at least for the moment.

There are a number of factors that investors say are underpinning the recent resurgence in risk-taking that’s lifted the market.

Muted Inflation: Inflation was the culprit for roiling the market back in February, as fears that a pickup would force Jerome Powell’s Federal Reserve to dial rates up faster than hoped for in 2018—a worrisome turn for stock investors compelled to revalue corporate cash flows and equity valuations at higher rates.  Some of those worries have dissipated as of late. For one, the reading on consumer prices for April, came in at 0.1%, slightly below average estimates.  Moreover, the 10-year Treasury yield, a debt instrument used to price everything from car loans to mortgages, has held below the round-number level of 3%, which also had worried investors back in late April.

Solid First Quarter Earnings: Earnings have widely been considered among the best in recent memory but had been mostly ignored by market participants, until now. Instead, investors have fretted that the recent batch of first-quarter results may be as good as it gets for earnings.  So far, 90% of the S&P 500 companies have reported, with 78% delivering earnings-per-share results that have come in better-than-expected.  On average, 64% of companies outperform relative to estimates, based on data going back to 1994. What’s more, only 14% of companies reported results in the first quarter of this year have underperformed thus far, versus a historical norm of about 21%.  (Source: Bloomberg)

Oil’s Surge: U.S. benchmark crude-oil has soared steadily to its highest level since November of 2014, breaking above $71 a barrel level. Although a rapid burst up in crude could have knock-on effects for average consumers, driving inflation and prices higher, at the moment, they are helping to deliver a jolt to an energy sector that was all but forgotten last year, producing the worst performance among the S&P 500’s 11 main sectors.  Part of that rise is Trump’s decision to take the U.S. out of the multilateral Iran nuclear pact, threatening to disrupt the oil supply chain. Another factor is a raft of production curbs instituted across the globe and led by OPEC.  The combination of those events may have a lasting effect on oil prices and values for some of the biggest energy companies.

Tech-Sector Renaissance: Don’t call it a comeback? Technology and internet stocks have shifted into higher gear, providing a key leg for equity benchmarks because those companies, including Apple and Facebook to name a few, tend to carry the biggest weight, and therefore have the most influence on the broad-market benchmarks.  They have started to recover, with Apple ringing up records in the past few sessions and Facebook returning to its trading level before its Cambridge Analytica scandal.

Volatility Downtrend: One measure of volatility, the CBOE Volatility Index, is on track for its lowest close since Jan. 26, meaning it has completely erased the massive spike it saw in early February. Because the VIX, aka Wall Street’s ‘fear gauge’, reflects S&P 500 bullish and bearish options bets in the coming 30 days, and slumps as stocks rise, it is often used as a litmus test for the degree of implied volatility.  In other words, the trend lower, with the VIX touching a level beneath 13 for the first time since January, and under its historic average at about 19.5, suggests that there are fewer wagers for further declines in the market. Perhaps, that is because there is more optimism brewing in the financial system.

Trade Wars And Tariffs: Worries about a trade conflict between the U.S. and China have subsided somewhat. Fears that the two largest economies could engage in a full-blown trade war have rattled investors’ nerves because it is a scenario that Wall Street investors find unpredictable at best, and at worst one that could do damage to the global economy. On Thursday, reports suggested that some optimism was forming around the notion that Beijing and Washington could resolve their differences.

So, all things considered, the environment for continuing to hold top-quality companies remains excellent. If these positive conditions persist, we’ll likely see inflation risks re-emerge, which in-turn may bring further market volatility. We don’t expect to adjust our allocations due to this volatility but plan to hold these investments through the cycle.  That said, we do plan to increase the allocation to the Alternative model portfolio (Real Estate, Market Neutral Hedge, and Gold) so stay tuned for that.