- The recent 10% correction in the S&P 500 since yearend resulted in the market becoming oversold, which was confirmed by extremely negative investment sentiment.
- S&P 500 earnings expectations for 2016 have been revised downward to +2.8% yoy, according to Capital IQ. This includes an estimated yoy earnings decline of -62% for energy companies. Any recovery in oil prices could bolster overall earnings growth.
- However global macro trends, as measured by global PMI and the leading indicators, have yet to signal recovery. As such, we are maintaining a defensive investment strategy.
- The markets have signaled tight financial conditions via declining equity prices, widening credit spreads, and plummeting inflation expectations since the Fed rate hike in December. Recent Yellen testimony suggests the Fed will likely wait, at least until June, before hiking rates. This would necessitate some revision to their dots plot, which calls for eight quarter point increases through 2017.
- The global economy is in need of a prodigious fiscal spending program in order to drive growth in incomes. This is probably unrealistic in a U.S. election year, unless the U.S. economy falls into recession. China recently announced that more federal spending will be allocated to local governments in an effort to boost spending.
- The bottom line is that we expect markets (both equities and bonds) to be in a broad trading range this year. Tactical investment strategies will be used in an effort to generate alpha.
- The dollar has weakened, but has yet to breakdown. The spectra of the Fed raising rates later this year may keep a bid under the currency and limit any advance in commodity prices beyond the next month or two.
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