The SPX closed at 2096.27 on May 31, 2016, up for the month and +2.5% on the year. The NASDAQ closed -1.19% YTD.
The index is still 1.7% below its all time high of 2132.82 reached last July.
With 98% of companies having reported earnings in Q1 2016 the earnings decline was 6.7%.
The SPX forward 12 month P/E ratio is 16.7. The current P/E ratio is above the 5 year average of 14.5 and the 10 year average of 14.3 according to Factset.
The Fed was hoping to raise rates again in June or July before today's job figures. While the headline unemployment rate was 4.7%, non farm payrolls increased by only 38,000. U6, a broader definition of the unemployment rate is steady at 9.7%.
Average hourly earnings were up 2.5% over the past year. Average work week is 34.4 hours. Labor force participation rate has backed down to 62.6%.
The Fed is in a box and frankly their next move is hard to gauge.
Oil has bounced 92% from its low of $26/bbl of WTI but even at $50/bbl it is down more than 50% from 2 years ago, peak levels.
The big question after the 15% drop from last July to the February 2016 lows is; has the market already discounted an ongoing earnings recession?
Bulls argue the economy will pick up in the second half. Bears believe valuations are too high, margins are shrinking and earnings will not recover to compensate for the above P/E ratios.
The market is trying to come to terms with mixed signals.
Bill Gross of Janus believes that future returns from bonds and stocks will end up below the 7% and 10% averages achieved over the past 40 years.
Due to slow economic growth and repressed interest rates he believes the Barclays Capital U.S. Aggregate Bond Index will return between 1.5% and 2.9% over the next 10 years .
Stocks will earn about 3% more, or 4.5% to 5.9% with higher levels of volatility along the way.
Will more monetary stimulus from Japan, Europe and China lift those economies? Central bank moves now appear to have less effect on markets as well as the economy.
Will U.S. dollar strength resume after a nearly 10% drop below last December levels or has it begun a longer term decline?
The U.S. Dollar Index Chart below suggests a top may be forming.
If the U.S. dollar begins to decline, earnings headwinds for U.S. multinationals will diminish and commodity prices will continue to rise, particularly precious metals.
The next Fed meeting takes place on June 14-15.The Brexit referendum takes place on June 23. Both bear careful watching.
Today the U.S. 10 year note yields 1.72%, 10 Year German Bunds +0.12%, the Japan 10 year -0.11%, the Swiss 10 year is at -0.43% and the UK Guilt +1.27%.
The public increasingly fears the trend toward negative rates. Negative rates not only offer less than zero returns but creates unease for savers.
Governments asking for a payment to hold their debt are creating a psychosis among investors. This in effect is a tax on savings.
Less savings does not necessarily lead to more spending. It can lead to more hording of currency, which creates the opposite effect of central banker intentions.
This upside down world has led individuals to remain on the sidelines with excess cash and institutions to reach for yield to meet payment obligations.
The 5/25/2016 market sentiment figures from AAII showed only 17.8% Bulls, 59.9% Neutral and 29.4% Bears.
Ironically, this is a rare reading which has proven bullish at similar junctures in the past.
We expect the year long trading range - SPX 2134-1810, may continue for some more time.
Given the volatility of bonds, commodities and stocks this year, we believe opportunities will arise to buy assets on the cheap.
Doug Coppola
John Coppola
June 3, 2016
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