Friday, June 2, 2017

Tailwind from Rising Bonds

The market is enjoying its Goldilocks scenario.  The bond market is rising as the stock indexes hit new all time highs.  This weak nonfarm payrolls number is only making it better.  The bad news is good news theme continues.  The stock market wants low rates, and this NFP number is helping to continue that trend.

The last thing this market needs is a hawkish Fed as the economy is just mediocre, and with fiscal stimulus getting pushed back further into the future.  This nonfarm payrolls number all but guarantees that the Fed will tone down on their hawkish talk, and although they have pretty much committed to a rate hike in June, it probably puts them off the table in September and probably December.  And if the stock market tops out soon, as I suspect, then June could be the last rate hike of this cycle.

At the end of a long bull market, you would expect the crowd to be fully on board, and enthusiastic about stocks.  But a mediocre economy and deep scars from 2008 prevent that from happening.  It could be one reason why this bull market has lasted so long, because there hasn't been a huge burst of equity inflows by retail to exhaust the buying power.  It has come in small increments, along with heavy inflows into bonds, helping to keep the bond market strong, which in turn supports the stock market indirectly.

How does this bull market end?  The most obvious way is for the economy to get weak enough that corporate profits start dropping meaningfully, more so than in 2015/2016 when oil was going down.  A financial shock from China wouldn't really be a big enough hit to the US.  It would have to be more internal in nature, such as the US economy entering recession.  It will happen eventually, but until then, you will not get a bear market unless you see a bubble form and then pop.

I just have a hard time seeing a bubble form with the economy just not strong enough to lift investor psychology into buying stocks with reckless abandon.  So that means we can have 5-10% corrections, or even 15% corrections like late 2015/early 2016, but not a downtrend into a full blown bear market.

SPX is above 2430, I see perhaps 1% upside and then we should chop into a range from 2450 to 2400 for a while.  That is my not so confident forecast, as the low volatility makes it harder to predict market direction.

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