Happy New Year! Skipping ahead to the 1st quarter of 2018. Will this stock market ever stop going up? Yes.
The 4th quarter results were driven by the expected FED decision to raise rates by .25%, the Republicans’ passage of a tax cut bill, the weakening of the U.S. dollar, investors from the sidelines throwing more cash into the market frenzy and the strengthening of global markets. That’s a lot going on. But there’s more. U.S. treasury yields have risen to rates not seen in several quarters. As treasury yields rise, investors will rotate from exposure in the equity markets to the return and safety of the treasuries.
Speaking of the treasury yields, there is still concern that the gap between the 2-year treasury and the 10-year treasury is hovering around .50 basis points. A strong economic outlook would normally show a spread of 1% or more. That yield curve indicates concern that a problem is on the horizon.
As mentioned, the FED raised its rate by .25% and indicated 3 more hikes planned for 2018, but the FED continues to be very accommodating and the cost of money is still helping fuel the market’s upward trend. A risk is that the FED would suddenly pull the rug from beneath the rally.
The Republican tax cut immediately impacted the market. Announcements by several companies that they would pay bonuses and increase wages pushed the market higher and led to talk of inflation perhaps coming back into the picture. In addition to the tax cuts, corporations have also benefited from regulation rollbacks from the Trump administration which had stifled business growth under the Obama administration. GDP continues to stay at 3% or better with the more optimistic predicting 4% in 2018.
The U.S. dollar continues to weaken against world currencies. That is good news for the 50% of the S&P which generates its revenue from business outside the U.S. It also affects the cost of commodity prices pegged to the dollar. The European and Japanese central banks have begun to reverse their monetary policy which has contributed to the dollar weakness.
The Oak Springs portfolio continues over weighted in emerging and European markets along with our position in gold. While U.S. companies are performing well, the emerging and European markets are outperforming. There is still plenty of cash sitting on the sideline and investors concerned that they are missing out are throwing money into positions where values are becoming stretched.
As we move into the 1st quarter we are watching for inflation and the FED’s response to it, the ability of the U.S. congress to come to agreement on a budget, any weakness in the tech stocks, the President’s twitter account, UT basketball, the UT football recruiting class, slippery spots on the road and the price of oil. Not in that order.