Portfolio Thoughts February 20, 2017

Short-term outlook

Despite the markets being very over-bought (RSI’s over 80 and at these levels only three times in 10 years), the S&P 500 index managed to close the week near its all-time high of 2351. Right now, it is looking unlikely that a pullback beyond 1% or 1.5% will happen because there is still cash on the sidelines waiting for a pullback.

 S&P w RSI

Longer-term outlook

The main impetus for the markets definitely remains to the upside, with US indices looking healthy. The general outlook remains constructive, supported by a combination of earnings growth and a positive global economic outlook. So far, Q4 earnings announcements for the S&P 500 companies are running at a growth rate of 4.6%, looking like the best quarter since 2011. This is despite currency headwinds from a strong US dollar which affected the results of multi-national companies. Furthermore,  guidance is the strongest since 2011 with earnings estimates to increase every quarter this year.

Also, Janet Yellen just offered an upbeat assessment of US economy’s growth prospects and outlined progress made toward the Fed’s dual goals of employment and price stability. We are also seeing positive economic news from Europe and China. In Germany, factory orders surged 5.2% in December, which is the biggest monthly rise in 2.5 years. In China, retail sales rose 10.9% an industrial production climbed 6% in 2016. Overall, it appears that the global GDP may hit a 4% annual rate in 2017. 

Risks

QE from the US, Europe, UK and Japan will continue is one form or another, although may be reduced. Yields may gradually rise yet should stay artificially low due to these QE policies. So growth should not be too rapid, and yields should stay reasonably low. Corporate activity will remain a useful way for companies to grow. Inflation should remain contained and hard to push up.

Bill Gross suggests that, in contrast to prior decades, we live in a global environment with excessive private and government debt supporting economies and asset prices. Rapidly rising interest rates should not be possible and rates should stay low and interest costs kept low by all costs. We tend to agree.

This is an interesting chart below on Central Bank balance sheet evolution CB’s are the main provider of liquidity. In theory it would over time lead to USD strength.

 CB Balance Sheets

 

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