Regarding the stock market: The roller coaster ride continues to be a tug-of-war between TINA, There Is No Alternative to stocks and bonds, which promise positive returns to people throughout the world used to negative interest rates (most all of Europe, and the Japanese) and American investors who remain lulled by decades of constructive returns despite the Federal Reserve Board’s desire to stop the bond gravy train and raise interest rates. The latest report has Janet Yellen promising higher interest rates within months. As you know, when interest rates go up, bonds go down.
Meanwhile, some analysts are calling for a significant rise in the stock market. Credit Suisse analysts have put a year-end target on the S&P 500 at 2,150. As of this writing, the S&P 500 stands at 2,093. Their target for the Euro Stoxx 50 stands at 3,350. Again, as of this writing the Euro Stoxx 50 stands at 3,063—suggesting more upside internationally. Nevertheless, European GDP remains close to a standstill. Year-to-date, the S&P 500 is up approximately 3% while the Euro Stoxx 50 is roughly flat.
Since international affairs now represent a significant set of issues to both our bond and stock markets, let look at things that have improved. (1) China: the housing market has improved, with 65 out of 70 major cities showing price improvement. Infrastructure spending is up 23% year-over-year, though leading indicators are rolling over. (2) Oil: almost all risk trades have been correlated to oil. Oil has accelerated in price from the high $20 per barrel in January to kissing $50 per barrel as of this writing. (3) U.S. earnings revisions have turned positive for the first time since June 2014. The fact that the equities market has held up well during this two year period may be significant or more of a testimonial to TINA. Meanwhile, U.S. leading indicators are now unusually mixed, and if anything, trending weaker, though housing is improving.
Currently, the equity risk premium (ERP), the excess return one can expect to be compensated for participation in stock market volatility versus a risk-free return, is currently 5.7% according to Credit Suisse analysis. We will be watching the technical signs of this market intently for any corrections that could foreshadow a greater than normal pullback. A fall in the 50-week moving average below the 100-week moving average suggests a market decline 56% of the time over the next six months. Because this moving average crossover hasn’t occurred, we remain optimistic. Another reason we remain optimistic is the high price of bonds and real estate. Excess liquidity in the markets is extremely high in supporting the markets. Also, market breadth has also improved.
Keys issues to watch going forward include: Chinese lead indicators, U.S. wage growth and U.S. lead indicators.
Thank you for your continued confidence and trust. We work hard to repay your confidence with added value of understanding, personalized service and of course, above average long-term returns, subject to your capacity to handle volatility.
Vaughn Woods, CFP, MBA
Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views of Bolton Global Capital or Bolton Global Asset Management. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0214