The Ball Bounces
In the wake of March Madness, the current market gives us the chance to mangle another metaphor. The stock market story since the beginning of 2016 has a lot in common with an intercepted bounce pass.
From January 1st to February 11th, the market declined 10.3%. By March 31st the market had bounced 12% to arrive at quarter’s close up 1.35%. It is almost as if the Memphis Grizzlies had mistakenly given the ball to the Chicago Bulls. The Bulls, now with possession, are hesitating. Do we drive it quickly down the court toward the basket or are there too many Grizzlies between the basket and us? Was the interception by the Bulls an opportunity or a veiled threat?
The metaphor being thoroughly exhausted, we respond that we do not know the answer, but the fundamentals underlying the “game” have not changed much since the beginning of the year. The U.S. stock market’s valuation, having approached a neutral stance in February has assumed its familiar overvalued posture in the most recent rally. European and Asian markets are less expensive than the U.S. by most measures.
The outlook for corporate earnings and margins after the first quarter is as about as uninspiring (flat to low single digit growth) as what prevailed at the end of 2015. The credit and commodity markets have given us a little information. Commodities, particularly oil, seem to have halted their sharp descent in the first quarter, providing a source of optimism to a deflation averse investor public. Positively, China, a big source of worries in the past year or so seems to have stabilized and moved further back in the conversation.
While some measures of inflation have increased (as have the price of TIPS), long-term interest rates have remained low. Monetary policy confusion prevails with the Fed talking of rate hikes while other central banks set negative interest rates. The stock market still rallies off of the dovish coos of Chair Yellen and fades when more hawkish central bankers make an errant comment or two.
This ambiguous environment provides little incentive for making larger bets. More assertive inflation readings would be a cause for caution. Stock allocations should be slightly conservative to neutral. Bond portfolios should remain high in quality and short to neutral in duration. With the indicators giving little clear direction, the stance of the Bulls and the Bears seems inapplicable. An appropriate point of view may be that of the Owl, who has the wisdom to act when his game is in sight and not before.
The Altavista Investment Team - Spring 2016