TGIF! May 20, 2016

The S&P 500 ended its 3-week losing streak, closing higher than it was last Friday.  The same can’t be said for the DOW.  Both major indices are still in the green for 2016, but only ever-so-slightly.  The wide swings of volatility continue which speaks to the maturing nature of this Bull Market.  We still see a path to higher levels, but think there’s a little more work to be done in this correction before lift-off.  It should be expected that the 2nd longest Bull Market in history requires an extra long correction to prove its worth.  The correction has come in both price and time.  The correction turned 1 year old today. The DOW hit an all-time high of 18,350 on May 20, 2015.

Between earnings, the Fed minutes and the missing plane, there was plenty for investors to absorb this week.  The Federal Open Market Committee, otherwise known as the Fed, announced another interest rate hike is very much on the table for the June meeting.  Entering the week, the Market was pricing in just a 10% chance of that happening.  Now, it’s up to 26%.  A rate hike is far from certain in the Market’s eyes, but the Fed was pretty clear in its statement.  Something’s going to give.  Fed credibility is back on trial.

Interest rates jumped, but settled back in.  The price of oil remains elevated, holding the strong gains near $50 after spending the first 2 months of the year in the $20’s.  The Dollar continues to climb, with its 3rd straight week of gains.  Stock and commodity markets are in the process of repricing another Fed rate hike. G7 Finance Ministers meet this weekend.  They have plenty to talk about.  The big question for Wall Street and beyond right now is whether a rate hike in June is positive or not.

Earnings season has been a mixed bag overall.  Growth is still hard to come by.  There are just a handful of companies that are generating significant revenue and earnings growth.  These companies are innovators.  They’re disruptors that are changing the game.  It’s been terrible for retail companies.  Retailer’s continue to get hit with challenges in their business lines, much due to the Amazon effect.  Amazon is seriously disrupting the business model of department stores and beyond, as more and more people purchase online.  For perspective, overall retail sales have risen year-over-year in every month for the past 5 years. However, brick-and-mortar retail sales have declined 80% of the time.  Free shipping and the convenience of the couch is sucking away billions of retail Dollars from the physical stores.  Why get in the car, pay for gas and battle crowds and parking, when the same items can be brought to you for free?  That’s the very issue that everyone is debating.  We study it closely, because this trend is permanent and it’s always investable.  Right now, Amazon is a clear winner, and they’re competing with everyone.  Wal-Mart proved this week that they are in a position to compete in Amazon’s world.  Wal-Mart’s doing it.  They’re clearly a survivor.

When growth slows, markets get re-priced.  That’s what’s going on right now on Wall Street.  The Market wants to see where interest rates are going and how the American consumer responds.  Expectations are that rates stay low, even if they’re higher than current level and the consumer increases spending in the second half of the year.  The uncertainty of the Fed and the election are playing a major role in lower spending.  We’re also seeing the restraint at the corporate level, as companies are reluctant to commit substantial investment dollars without knowing what’s going to happen with Washington and the Fed.  It’s a long time til November.

We see more volatile and grinding price action ahead while the Bull navigates thru the challenging period.  But it’s just a period, which will pass.  We’re staying defensive.  Weakness is buyable.  We are long-term investors protecting from near-term risks.  We’re all over it.

Have a nice weekend. We’ll be back, dark and early on Monday.


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