Mike’s Morning Brief – January 10, 2018

Mike Frazier portrait headshot

Market opens in the red for the first time this year. The S&P increased 6 straight days to start the year. It is up 2.9%, the best start to a year since 1987. It’s the first 6 straight up days since 2010. But the 6 consecutive new highs to start a year is the best since 6 in a row in 1964. The strong start bodes well for the Bulls. When the first 5 days of a year are up 2%, since 1950, S&P 500 is higher for the year 15 out of 15 times. Average return is +18.6%. So, the perfect history will be tested this year. The Bulls are completely in charge with fresh new highs on the S&P 500 daily. What could derail the rally? Well interest rates and inflation are 2 that are sort of tied together. Interest rates are on the rise again with the 10-Year Treasury yield punching through that important 2.5% for the first time since March. It looks like a breakout to the upside. The price of money is on the rise and expected to increase further. 3 rate hikes are expected this year from the Fed. Commodity prices have been strong with a new uptrend, including Oil. Inflation is being sniffed out a bit too. These are generally late cycle events, which suggests a strong global economy. That is something these Markets have been pricing in all last year and into the new year. P/E’s are getting pretty stretched. But if the E keeps moving higher, the P will absolutely chase and in fact overshoot it. We’re in that part of the cycle. Notable investor Jeff Gundlach of DoubleLine came out yesterday saying he thinks the S&P will actually close in the red for the year. That is consistent with what he said when I saw him in November. The year just began. There’s going to be much more volatility than last. The strong start is undeniable. But the straight moves will likely change with wide swings and more red within the green. We are seeing it today.

Have a great morning,

Mike Frazier

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