March Madness
Stocks continue to climb on the back of higher earnings, steady interest rates and the prospects of lower U.S. tax rates.

The probability for repatriation of $2-3 trillion of U.S. corporate earnings, less regulation, and more infrastructure spending has sent the major averages to new highs.

Year to date, the Barclays U.S. AGG Bond ETF returned +0.67% while ​stocks as measured by the S&P 500 gained 5.57% to close at 2363.64.

The S&P 500 index has risen 9.4% since the day after the election, while the 10 Year U.S. Treasury rate on November 9th has risen from 1.96% to 2.35% at month's end.

We are in a market environment with rising interest rates and rising earnings.

Consensus price expectations by strategists for stock market gains in 2017 have been reached in most cases.

Further interest rate rises by the Fed starting mid-March are baked into bond prices.

Rising rates cause longer dated bond prices to go down. Many bond experts see the 10-year rate closer to 3% by year end.

Gold was up 8% year to date while the U.S. dollar is slightly lower.

​Spreads on high yield bonds have narrowed considerably in the past year as oil prices have doubled off their early 2016 bottom of $26/bbl.​

With no recession in sight, the Federal Reserve is expected to raise their benchmark Fed funds rate 3 times by year end or by 75 basis points. These are positive signs and as investor confidence rises, so do equity prices.

With Q4, SPX earnings up 4.9% and forward earnings estimate of $133.78 according to FactSet we derive a forward P/E ratio of 17.8 times. Q4 sales growth for SPX companies also rose 4.9%, which is a welcomed change.

Valuations are high, but not dangerously. One strategist argues that the current P/E level is justified with present long term rates being well below historic norms. This may account for the nearly 3 SPX multiples higher than the 15X long term average.

Bull markets die of euphoria not of old age.

While this bull ages we look for obvious signs of euphoria that would lead us to a cautionary stance.

A 10% market drop would be normal during the course of any year.

We have not had a big sell-off since the Nov, 2015 - Feb, 2016 decline of 14%.

If you have any questions please reach out to speak with us.

Spring & March Madness are upon us.

Doug Coppola

John Coppola

March 2, 2017

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