Investors Place Their Bets On Improving Forward Guidance

Q2 is well underway for the economy, while Q1 corporate earnings reporting season kicks into high gear this week. Although investors have pretty much written off the quarter as a stinker, they are eagerly anticipating forward guidance for the back half of the year. With the major indexes and underlying valuations sitting at lofty heights, investors are evidently pricing in improving fundamentals ahead, particularly here at home in the U.S.

In this periodic update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable ETF trading ideas.

Market overview:

We have seen a strong rally starting with the edge-of-the-cliff reversal that commenced on February 12, but equity investors will need more than hopeful optimism to keep the party going. Luckily, they have a still-dovish Fed on their side and low Treasury yields as an uninspiring alternative, which is likely to entice capital into risk assets, including U.S. equities. And after being led at first by what many call a risk-on short-covering junk rally, investors now appear to be getting more discerning as correlations fall and breadth gradually improves, and higher quality names are finally garnering some attention.

Notably, ETGI reported that US-listed assets invested in ETFs/ETPs reached a new record of US$2.17 trillion at the end of Q1, surpassing the prior record of US$2.15 trillion set at the end of May 2015. This includes 1,863 ETFs/ETPs from 94 providers.

However, Friday’s economic reports weren’t good. Consumer Sentiment recorded its fourth straight month of decline, falling to a dismal 89.7, and Industrial Production came in at -0.6%. The only good thing about these readings from an investor standpoint is that they help keep Fed rate hikes at bay (in another case of bad news is good news).

Also, stocks continue to be tied to the daily gyrations of oil prices. But I think this is only the case while oil price hovers around $40, which is something of a threshold for the fortunes of energy companies and the high-yield market for energy loans. DoubleLine Capital’s Jeffrey Gundlach has been adamant that crude oil needs to trade back up above $45/bbl to stave off a wave of junk bond defaults and all the associated global fallout, especially in the Energy and Financial sectors and in emerging markets.

Unfortunately for stocks over the near term, a weekend meeting in Qatar of major producers collapsed without an agreement to freeze production at January levels. Saudi Arabia demanded that the agreement include its rival Iran, which did not attend the meeting. So now the fear is of a renewed price war for market share. As I’ve said many times in the past, oil is a Goldilocks asset that can’t be either too hot or too cold. Although lower prices help the consumer’s pocketbook and a large segment of a fuel-dependent economy, they also hurt energy companies and high-yield debt markets and destabilize emerging market producers, threatening jobs and capital investment programs, and emerging market government spending. The comfort zone is probably in the range of $50-80/bbl.

Sorry but I can’t help but make a token comment about the Presidential election campaigning. Virtually since the beginning of the Republican campaign, the discourse has been characterized by mudslinging and vitriol among the top candidates, while the Dems have shown much more decorum. Bernie showed a lot of integrity by not taking the bait of questioners and keeping to the issues. But now that has all changed, and the Dems are in full-on food-fight mode. Why? Because it works. Voters react and change their votes. In order to win, you quickly realize that you can’t just calmly share your ideas and experiences -- you also must tear down the support of your opponent. But don’t blame the politicians. It’s on us. A good mudslinger is always popular.

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Disclosure: Author has no positions in stocks or ETFs mentioned.

 

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice ...

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