Last week may have been the break-out traders have been looking for as major indexes finished positive for the week.
After several months of correction it looks like the 200-day moving average for the S&P500 is likely to hold support. It has been tested several times. Each time a wave of buyers showed up. This is classic correction/recovery territory for a bull market.
The recent push higher has driven the markets into a slightly over-bought situation, but this doesn’t necessarily mean it will lead to a significant pull-back.
Ironically, while the markets are showing ‘good news’ with things recovering, it appears to be the ‘bad news’ cycle that keeps things moving higher. If news is too good the markets worry the Fed will change monetary policy. If the data is too bad it could mean the economy is actually slowing. This seems to be the Goldilocks spot: not good enough for the Fed to hike rates too fast, but not bad enough for money to move out of the markets. Strange times we live in.
One item to keep a close eye on is the treasury yield curve. This “curve” represents the difference between short and long term treasury rates. As the Fed has been pushing up on short-term rates, longer-term rates have been somewhat stubborn. It is a little like pushing on a string when this happens. There can be many reasons for this. What is important to note is a flattening and even inversion of the curve, where short-term rates are higher than long term, can signal choppy waters ahead. This hasn’t happened yet, but it is something to pay attention to.
Oil prices have climbed in 2018 to over $70 and $75 per barrel for WTI and Brent, respectively, representing growth of 51.0% and 61.1% year-over-year. As shown in the chart below, supply and demand dynamics tend to support changes in oil prices, and
this has certainly been the case this year.
On the supply side, global oil inventories have declined and have little risk of rising sharply, thanks to the production cut agreements among many major oil producing nations and suppressed Venezuelan oil production due to political unrest. In the short term, a withdrawal from the Iran Nuclear Accord may reduce supply somewhat, leading to upward pressure in oil prices. On the demand side, global growth has continued at a healthy, but slower, pace, which has led to an upward trend in oil demand. These recent dynamics have led to a reduction in global inventories and upward movement in prices. Over the long term, most expect that oil prices will remain relatively stable throughout 2018. For consumers, higher oil prices may erode some of the benefits of tax reform as they spend more at the pump, but should still allow for strong consumer spending and therefore healthy economic growth throughout the year. Investors also need to pay attention to oil prices, as higher oil prices will lead to increased profits in the energy sector, but also will lead to higher input costs in the industrials and materials sectors.
The main reason we invest is to out pace inflation. If prices of goods and services always remained constant we could bury our money in the backyard and never take any risk. Unfortunately, that is not how it works. Costs definitely go up over time and we must do everything we can to protect our purchasing power over the long term. Technology tends to help lower the costs of some items while others are seemingly always getting more expensive. I came across the chart below the other day, which really brought this to light for me. I hope you find it as interesting as I did.
I will continue tracking geopolitical developments—from potential actions against Syria, tariffs on Iran, and preparations for President Trump’s upcoming meeting with North Korea’s Kim Jong-un. In addition, key discussions around the American Free Trade Act and trade relationships with China remain on the horizon. We also will gain our first insights on how well consumer spending performed in the 2nd quarter.
If you would like to discuss any developments or gain a clearer understanding of how these issues may affect your portfolio, contact us today. We are always here to help you make sense of your financial life and gain clarity for the road ahead.
Quote of the week:
“An investment in knowledge pays the best interest.”
— Benjamin Franklin