Currencies -While the value of The Dollar has moved sideways since the beginning of the year it is still above key support. Will The Dollar remain the tail that wags the dog?
Commodities - The bottoming process for Oil and Gold continues. February marked the most recent near term bottom. Reaction to further Dollar moves will be important.
Equities – Equity markets have continued their range racing with no significant process higher or lower. Expect more of the same until after the election.
Interest Rates – Contrary to The Feds rhetoric about raising rates, longer term rates have continued to trend lower. The trend is your friend until the end.
Real Estate – Both Traded and Non Traded investments appear to be enjoying the low rate environment. Fundamentals remain positive.
For most investors, there are 5 key investment components that have the greatest effect on their net worth. At the center of the Quivercation process is a respect of this. At the beginning of each year we focus our energies on discussing the potential trajectory of each asset class in what we term “5 Things You Need to Know” (To read this years’ 5 Things for 2016 click here ). Then, in an effort to keep us honest we like to revisit those projections when we reach mid-year. There is a lot of ground to cover so let’s get started.
The U.S Dollar and Commodities
What We Said: Running up to the end of 2015 The U.S. Dollar had been showing uber strength relative to other currencies which lead us to verbalize the following:
"It appears to us that we are entering one of those inflection points when it comes to The U.S. Dollar and the outcomes will have an influence in how commodities and equities act through 2016. For this reason, we felt The Dollar deserved our attention first".
We also offered the following visual:
And we concluded with:
"To be fair, we should note that there is another side to the coin and The U.S. Dollar could fail and move lower setting up a different scenario. While possible, as of this moment with the information we have it doesn't seem probable. Watching that support shelf is our “tell”. A threat to break below that shelf would cause Plan B to be discussed. If and until then we are moving forward under the impression that the end of 2015 and start of 2016 will be accompanied with strength in The U.S. Dollar and this will most likely create both challenges and opportunities".
What’s Happened Since: Since the beginning of the year, The Dollar has been in a slump. Still above the key support noted on the previous chart but the trajectory has gone from up to sideways which has relieved some of the pressure markets were feeling from the stronger dollar. In the same timeframe, we have seen commodities bounce higher and equities remain essentially flat so it still appears dollar strength and/or weakness is the tail that wags the dog.
What May be Next: Currency trends tend to be long and drawn out which makes this extended period of choppy sideways action in The Dollar par for the course. As noted in our previous writings and the chart above, as long as The Dollar remains above the green support shelf we will continue to believe the path of least resistance is most likely higher. Watching the reactions that commodities and equities have to future Dollar moves will be telling. Of interest to this market watcher will be if The Dollar can experience future strength while commodities remain above their February lows. That type of divergence would be worth noting, if it were to happen.
What We Said: We started by saying:
“The election probably creates confusion and prevents commitments”
And we added:
"The second headwind for equities may be the strong dollar. Continued strength in The Dollar will place additional burdens on the earnings of many U.S. based companies‟
What's Happened Since: Because a picture can tell a thousand words I offer you this chart of the S&P 500 Index since November:
As you can see by the chart, it does appear the election has been successful in creating confusion and preventing commitments by investors. Year to date, Equity markets have been stuck in a chop zone with no real progress higher or lower. In regards to the headwinds from The Dollar strength – equity markets have been given a bit of a reprieve. The bit of weakness seen in The Dollar since the start of the year seems to have helped equity markets stabilize after a rough start in January. Regardless, in the bigger picture equity markets have made little to no progress since November 2014.
What May be Next: From now until the election we expect more of the same. The difference between now and the beginning of the year is we are further down the path in terms of time and time does matter, sometimes more than price. When it comes to equity markets there are probably 2 longer term scenarios playing out. First, is that this period since November 2014 is simply a basing or consolidation period, essentially a pause before proceeding higher. Second, is that equity markets are in a topping pattern. If this were the case then the February lows become an important sign post in determining which option is on the table. As of now, we are inclined to lean in favor of option 1. However, in the event that option 2 is on the table equity investors would be well served by having a plan that includes this “what if” scenario.
What we said: We started with:
“For 2016, we feel it will be more of the same. The Fed will be data dependent and if the data isn't giving them what they need The Feds only choice will be to jaw bone the market by sending mixed messages that will be slanted in creating the perception that The Fed may hike”.
"I wouldn't be surprised if The Fed's game is to keep the currency strong through its rhetoric while suppressing interest rates as much as they can through other measures.‟
What has happened since: Since the time Santa Claus went on vacation until now The Fed has continued its rhetoric about future rate hikes. While doing so, longer term rates have continued to drift lower. Here is a visual to prove this point:
As you can see by this chart of TNX, an index that tracks 10 year interest rates, it appears The Fed has everyone looking up while the real direction of longer term rates has been lower.
What May Be Next: Considering most of the other developed nations in the world have lower rates than The U.S., investors should probably consider how they may benefit from a continuance of this trend. There is always the possibility that rates reverse course and begin heading higher. In respect of this, we have noted on the chart above the levels that would cause us to reevaluate our lower rate thesis.
For now, it appears the trend is your friend, at least until the end.
What We Said: “While interest rate fluctuations will most likely have the greatest influence on the performance of traded investments in 2016, Non-Traded items will be more sensitive to the overall growth rate of the economy. History has shown that jobs and real estate are directly tied”.
What has happened since: Longer term interest rates have continued to trend lower throughout 2016 which has helped the Traded REIT’s be one of the better sectors for 2016 which can be reflected in this chart of IYR, an exchange traded fund that is a basket of traded real estate trusts.
In addition to rates moving lower the overall economy seems to have remained stable. The jobs numbers have been steady and while overall economic growth is below ideal levels it still appears to be positive.
What May Be Next: In the near term (next 6 months), we would expect more of the same on the economic front. Watching the trajectory of future economic reports seems more crucial now than in the past. Lower long term rates have helped keep credit expansion alive which is an important tool in creating economic growth. Longer term it becomes more important for Washington to move on making structural fiscal changes, something hopefully a new administration will focus on. For now both interest rates and overall economic fundamentals seem to be supportive to traded and non traded real estate. As long as this continues it makes little sense to try and bet against it.
Overall we are encouraged by the behavior we are seeing in markets. It seems that the last year has been what could be called a "rolling" or "running" correction. This is a process in which a correction process rotates through the various sectors and asset classes of the markets. While the process is frustrating for the shorter term time frames, it is a necessary process to maintain a sustainable trajectory of growth. Rolling corrections are typically a sign of a reset in markets and hopefully will lead to more markets working in tandem as we get closer towards the close of the year. As always a lot can happen in real time so we will continue to update you in future missives.
Until then, enjoy the start to summer.
The opinions expressed are those of Colby McFadden and Quiver Financial as of May 27, 2016 and are subject to change due to market or other conditions. This is not a solicitation or recommendation of any investment; always consult a Financial Advisor before investing into any investment. Securities offered through Newport Coast Securities, Inc. - Member FINRA / SIPC - Advisory Services Offered through Newport Coast Securities, Inc. 18872 MacArthur, 1st Floor, Irvine, CA 92612 - 800.992.5592