Thursday, April 21, 2016

Newsletter 4/20/2016

Note: Click on graphs to enlarge for easier reading.

The Economy

The US economy is improving at a moderate pace. The GDP growth is at 1.8% for Q4 of 2015. 

The unemployment rate is the lowest it has been since 2009 at 5.0%.

The latest Inflation data shows inflation is tame at less than 1.0%.  

The consumer sentiment index is still above 90.

The Federal Reserve board (Fed) raised interest rates in its last December meeting by 0.25 % and stated that it will raise rates further in 2016. In its March meeting the Fed decided to hold off raising rates due to global market concerns. In my opinion, the Fed should not raise rates until the data above shows high inflation. Raising interest rates while central banks around the world are lowering rates has the undesired effect of strengthening the dollar against other currencies and lowering overseas earnings. It is estimated that 30% of the S&P 500's earnings are from exports which will suffer if the dollar strengthens. China devalues their currency to achieve greater exports intentionally. Oil went lower in Q1 due to global supplies exceeding global demand bringing energy prices down. Oil going down has the dual effect of decreasing energy company earnings and putting more money in consumer hands. Overall energy prices going down has a positive effect on the US economy.

The presidential election is upon us in 2016 and in November we will elect a new president of the US. Most likely we will have to choose between Donald Trump and Hillary Clinton. Trump scares the markets as he stated he will wage trade war against China and Mexico. Hillary is not trustworthy according to polls.


Markets around the world performed in 2015 according to the following chart. 

The ranking is in the enlarged lower right corner as follows.

Year to date in 2016 the market performed according to the following chart.

The ranking is in the enlarged lower right corner as follows.
Investment Strategy
Given the above there are two types of investment strategies. The bullish strategy states stay invested in US equities as the market will go to new highs and will climb a wall of worry. The bulls point to the above charts and state that the market has technically broken out to the up side and will continue to go up. The bears state that earnings do not support current price levels and the averages have already achieved their price target. Sell in May and go away until the dust settles. The dust is the Fed decision and the election results.
Mike Katto
Registered Investment Advisory Representative