I like to close out each week by checking in on the market's fundamental backdrop. I believe this should include the areas of interest rates, the economy, corporate earnings, inflation, and stock market valuations. In short, these areas tend to be the macro drivers of many primary market cycles. And as you might suspect, yes, we've got an indicator board for that. Let's review...
My Take on the State of the Fundamental Backdrop...
There are no changes to report on the Fundamental Factors board this week. As I've been saying lately, we are in a fast-moving environment and most of these indicators are rather slow-moving, by design. Thus, I am continuing to take the readings from the economic and earnings composites with a rather large grain of salt. However, it is worth noting that the indicators/models that comprise the economic composite have been perking up lately with the more sensitive indicators now on buy signals.
* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR. Past performances do not guarantee future results or profitability - NOT INDIVIDUAL INVESTMENT ADVICE.
Looking at the rest of the board, it is important to keep in mind that monetary conditions (interest rates and Fed policy) remain exceptionally favorable and there is no inflation to worry about. As I wrote last time, these two conditions alone are enough to create a positive backdrop for stocks.
On the negative side of the ledger, we can't lose sight of the fact that stock market valuations are high, in some cases, exceptionally high. However, before you run out and sell everything, we should remember that this is a fairly normal occurrence in post-recession environments.
All in, I continue to believe the fundamental backdrop favors the bulls and that dips should be bought.
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