We added an S&P 500 ETF SPY Signal that we posted on this linked page. We plan to update it close to the market close. We went short term neutral on SPY after having been bullish for some time. We are still very medium term bullish. This week has key Fed data and an important screaming-bull comment from Alan Greenspan.
Big Fed News This Week
The two grand-daddy indicators to the Fed are jobs and inflation. More specifically the Fed is glued to the PCE-Price indicator and the non-farm payrolls report. Just yesterday PCE-Price came in at .1% month-to-month. Adding up 12 point-ones and you get well below their 2% target for the year. That PCE-Price report coincides with the weak showings of CPI.
Too many weak inflation showings and the Fed will back off their planned third rate hike for this year. You can see here the Fed has planned to get Fed Funds rates to 1.4%. Currently they stand at 1-1.25%. The market still does not expect the Fed to follow through with that final rate hike this year. The CME futures for December still show 1-1.25% as the most likely expected Fed funds rate by year end.
If inflation and growth were not to pick up the Fed could even back off from their bond taper expected to start some time in Q3.
And jobs: ADP reported 178,000 new jobs for July. The all-important non-farm payrolls ("NFP") reports on Friday. Two months ago a weak NFP held the stock market from new highs. Last month's strong NFP report allowed markets to break-out further.
Friday's jobs number can set the tone for the next month.
Low Inflation Strong Growth
We think however that earnings are strong for the second quarter in a row. Factset recently cited that a record number of companies are beating revenue targets. Combining strong earnings with weak inflation is a bull market recipe. That's what Greenspan pointed out.
Greenspan A Big Ole' Bull
Famed Fed Chairman Alan Greenspan recently said that the S&P 500 is about 20% below its average valuation when factoring in low interest rates. When comparing high dividend yields to low real interest rates, stocks are cheap. Have you heard a Fed chair EVER say stocks are cheap?
Tech Led Productivity Boom
One reason we decided to allocate more resources to tech stock research is we think we're headed to a big ole' tech boom that will drive the stock market higher.
The 1990's saw a productivity boom which drove a huge stock rally led by tech. Current productivity measures are very low. The Fed has been whining about them for years. Productivity means you can produce more for less. Tech can drive that. That's also a formula for low inflation. The higher the productivity the less you need to pay to produce things which means lower inflation.
Lower inflation and more growth is...... bullish. That virtuous cycle can keep Ex-Fed Chair Bullish on stocks.
Despite moving to neutral short term on stocks we are very bullish medium term and in a race to find the best tech stocks with the most earnings power.
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