Multi-month sideways trends in currencies, oil, stock indices and many commodity markets is destined to continue for another couple days as we await Wednesday (29th) for 1st quarter GDP results. Consensus for the US 1st quarter GDP was at 3% growth as of 2 months ago. Now the mean estimate is for just 1.3% – and falling. The range is from 0% to 3%.
While there is a seasonality of extraordinary bad weather again this year and a west coast shipping port strike that combined shaved more than 1% off the trend, we also expect another 2nd qtr’ rebound this year.
Bad news is still good news!
Declining US growth estimates have actually helped stock indices edge back to new record highs in recent days while we remain somewhat tethered to the continuing trading range. Reduced GDP growth estimates mean that the Fed will delay any milestone reversal of interest rates and maintain accommodative monetary policy. As long as the economic data is weak, the Fed will watch the stock markets back.
Thanks to Amazon and Netflix the Nasdaq has rallied to new record highs the past 2 days while most of the indices are awaiting more news before leaving the safety of this trading range. For about 5 months the stock indices have consolidated their gains as the strong dollar, contracting energy sector and weak spending patterns took a toll on earnings. The good news has been that such weakness helps to delay potential credit tightening which encourages investors to accommodate higher earnings multiples under the guise of continued monetary stimulus.
Medium Term: Some day credit tightening will not be something to fear, but embrace as a sign of a self sustaining rapidly growing economy. For now stock prices will trade sideways to mildly higher until the transition phase toward higher interest rates has reached consensus. Central Bank selling of Bonds to raise rates would be foolish for now given the weakening economic data recently and lack of investment spending on capital goods. We often state that a major reason we expect more consumption and further gains is due to demographic trends that reveal a very low rise in working age population compared to past cycles. The 2% growth we are witnessing in the labor force, while historically modest, will push unemployment U3 down below 5% within a year and the important U6 marginally unemployed under 10%. It will be gradual, but wages will rise as will spending. With a strong backdrop of labor, wages and employment expectations we should have a decent support to help the economy rebound.
While we support the case for continued strength in the US Dollar longer term, we have been stating our evidence of the need for the Dollar to depreciate short term. On April 7th we stated “we have more evidence of a possible reason for a $ correction when observing the commitment of trader positions” In addition we have been calling for a February bottom in Oil prices and a modest rally into May. With the Dollar hitting resistance at 100 we prefer to see Large Spec funds liquidate more of their holdings of the Dollar and witness signs of an accelerating US economy before buying Dollars once again. We are approaching short term support, but we wouldn’t be surprised to see still more correction in the Dollar until our economy exhibits surprising rates of growth.
China rebounds – again:
Last week we noted the 5% drop in Chinese stocks – in ONE day when we said: “Should we worry about this one day correction? We know that prices can recoup all their losses and more quite quickly in the US and especially in China.” As we can see Chinese investors feed the bubble having nowhere else to invest their money. Despite weakening fundamentals investor fears subsided and prices are back to multi-year highs once again. There is a 1920’s type of unsophisticated frenzy for Chinese to buy stocks that is a concern although somewhat unpredictable. The start of US rate hikes and Chinese bubbles are among the main concerns in coming months to be watching for. Regardless of how high prices rise first or how far they fall at some point over the next year, we still see economic cycles and liquidity propelling prices higher yet again.
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