Thackray Newsletter – Market Update – May 2016
by Brooke Thackray, AlphaMountain Investments
The stock market is not well setup to advance strongly over the next six months (the unfavourable period for stocks) and is susceptible to a correction. See my recent report Stocks are in for a Rough Summer, on my website www.alphamountain.com or visit http://bit.ly/1oSL0En.
Starting the unfavorable period for stocks does not mean that the stock market will immediately plunge. In fact, there are no assurances that the stock market will be nega.tive when the next six months comes to a finish. Since 1950, the unfavorable period for stocks has been a volatile time period that has produced an average geometric loss of 0.5%. A lot of pundits point to the fact that the S&P 500(R) has been positive 63% of the time in its unfavorable period as a reason to stay fully invested at this time. They are clearly missing the point and are not considering risk adjusted returns. It is not possible to determine in any one year, if a loss or gain will occur, but on a long-term risk adjusted basis it is best to adjust a stock portfolio to be more conservative. Why take large risks in a time period that has on average lost money?
The six month unfavorable period for stocks does not mean that you go fishing and come back in six months....
although if you enjoy fishing this strategy can make sense. There are ample seasonal opportunities in the stock, bond and currency markets to help ride through the unfavorable period.
What can push the stock market higher above its previous all-time highs? I keep asking myself this question but I do not see a strong catalyst that can drive the stock market substantially higher. The three drivers over the past seven years have been:
- earnings,
- strong economic reports,
- central bank loose monetary policies
These three drivers are not set to provide the necessary muscle to power the market higher. We are just finishing up the earnings season and for the fourth quarter in a row they have been negative on a year-over-year basis. Hardly the jet fuel needed to move the market higher. In addition, the earnings season is largely over and the next earnings season will not have an impact until late June and early July.
It is possible that in the next earnings season companies will surprise to the upside and just being positive for the first time in more than a year, investors will view this as an inflection point and a sign of better times ahead. Nevertheless, the earnings would have to be strongly positive to have a meaningful impact.
The recent economic reports have been less than stellar. The last week ended with a dismal 160,000 increase in the Non-Farm Payroll report, 40,000 less than expected. This has not been the only disappointing economic report recently. It is possible for economic reports to reverse direction, but large improvements would be needed to have a meaningful impact on the stock market. Large scale reversals usually take place o. the bottom of recessions or through aggressive monetary action. The U.S. is not bouncing o. a recession and the Federal Reserve is not set to introduce another quantitative easing program in the near future.
Central bank policy is becoming ineffective. On this side of the ocean, the U.S. has very few monetary policies left with which to experiment. At the beginning of 2016, the stock market went into a free fall as the Federal Reserve was initially pushing out the dialogue to expect four inter.est rate increases in the year. When they backed o. this position, the stock market responded with a strong rally in February. Now that investors do not expect the Federal Reserve to increase interest rates at a fast pace, does it really matter if they delay yet another few months for the next successive rate increases. It doesn't. Watch for the Federal Reserve to keep the conversation alive by putting forward the possibility of increasing rates. Investors do not really believe the Federal Reserve's expectations for future increasing rates.
Can the stock market climb the Wall of Worry?
How many times have we heard the saying that the stock market is climbing a wall of worry. This expression is used to describe a condition when the stock market continues to advance when the majority of investors are negative on the stock market's outlook. Stock markets climb a wall of worry after they have been advancing for an extended period of time and the supporting conditions have turned negative. This is currently not the case. The S&P 500(R) has been in a consolidation range around the 2100 level since late 2014. A strong rally above 2131, the all-time high in the S&P 500(R) set last May, is going to re.quire a lot more support than the market sneaking higher without a strong catalyst. It could happen...but not likely.
Read/Download the complete report below:
Thackray Newsletter 2016 05 May 1 by dpbasic
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