Why the Market is up 5 Weeks in a Row

By David B. Armstrong, CFA | Mar 21, 2016 | Weekly Market Commentary

I always find it very interesting to observe the difference in behavior as markets move up and down – especially in the press. I get it, markets tend to go down much more quickly than they go up. It’s much easier for people to get on TV and try to look smart by saying things like, “the reason the market is down over 10% in the past few weeks is ‘XYZ’” and then market that to the benefit of their own business. Unfortunately, there is very little accountability for when they are either dead wrong OR the market has five back-to-back weeks of positive returns, as we have just seen.

In case you have missed it, both the Dow Jones and the S&P 500 are now positive year-to-date at 1.02% and 0.28% respectively.

If you subscribe to the same philosophy that I do, which is have a plan for liquidity so you don’t panic in downswings, then this latest swoon in the markets have resulted in…well…not much.

I started out in this industry in 1999 after grad school and while I can’t say I’ve seen it all, man I’m tellin’ ya, I have seen a lot.

The common theme I have come not only to observe but totally embrace is that unless you need the money for something, the best thing for an INVESTOR to do is NOTHING.  If you have a good plan, you will have already forecasted the need for money and have it all ready to deploy before something happens like the past few months. Portfolio managers should be taking some action inside portfolios (to also possibly include doing nothing) to try to mitigate losses, but an INVESTOR should not be doing anything.

So What’s Going On?

Everyone, and I mean EVERYONE who is reading this sentence needs to go back and read this (admittedly long) blog post from January 20^th of this year.  Whether you just skim it or read all the way through word for word, go to it.  At least look at the snapshots of the market graphs and what we were saying.

I’m not asking you to re-read it because I’m looking for pats on the back, I’m simply trying to point out that one thing we are good at is looking at the market and NOT FLIPPING OUT.

Flipping out is NOT A STRATEGY.

So back to what’s going on… One reason that is very quickly cited for the five-week improvement is the rise in oil prices.  I’ve pointed out in previous blogs that oil and stocks have traded together since late last year.

But the reality is that while oil is still affecting stocks, some better economic data have also eased concerns that the economy was set to stall.  We have been maintaining that while the economy is certainly tepid at best, we were not heading into a recession at this time.

Last week, the Federal Reserve met and added some fuel to the five-week equity market rally by changing their outlook on interest rate increases.  This caused the U.S. dollar (USD) to weaken, which also aided bullish sentiment. More on that below, but first, I believe there was one key takeaway from the Fed meeting.

The Fed reduced their forecasts from four projected rate hikes this year to two rate hikes.

As we watch the tepid economy continuing to chug along creating jobs and inflation, policymakers are focused on the weakness overseas…and that brings us to the USD.

Given that the Fed now appears less willing implement rate hikes, foreign investors have been less willing to trade their respective currencies for USD.  By looking at the USD quarter-over-quarter (meaning we compare the USD in Q1 2015 to Q1 2016) we see that it is stable.  Email me if you are interested in the data or the chart on this.

While it may seem patriotic to cheer for a stronger USD, a more stable (and weakening) dollar is a nice benefit to large corporations that do a significant amount of business overseas because they no longer have to convert their foreign sales into more expensive USD.

Basically, a strong USD hurts revenues. This was pretty apparent in Q1 earnings reports.

While the start to the next earnings season is still weeks away, investors are discounting such an event, and I think it has contributed to the recent rally.

To put a nice bow on all you’ve read above, I think there is more at play than just the gains in oil prices.  Oil prices have clearly helped, but the change in the Fed’s outlook, better economic data, and the ‘less stronger’ USD have all played a role in the turnaround in stocks.

Give us a call with any questions.

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