April 10, 2016
Weekly Market Outlook
By Keith Schneider
US Equity markets retreated this week to the tune of about 1 % across all indexes. It was the first weekly decline in all key indexes since mid-February. The rally has stalled out in the same area that it closed at in 2015, and essentially flat for the entire year. The S & P 500 now sits just above critical longer term weekly and monthly moving averages. Momentum readings peaked right where they should have and the countertrend rally might have run its course.
The bigger message is that the central banks’ capacity to manage the global economy using negative rates is reaching its limits and that has cast an uneasy pall on the markets. The rise in the Euro and this week’s explosion in the yen highlight the issue.
The Japanese 10-year note is yielding -.1%. That’s right, put your money in JGB’s for 10 years and you will get back less than you invest a decade later. Of course that’s quite a bit better than had you put your money into Japans stock market in 1990. The logic is that inflation (deflation for Japan) adjusted returns are currently better in Japan right now than in the US even though our rates are not negative. Your actual total negative return after inflation is less in Japan than in the US, hence the flight into the yen. The last we looked, less negative returns are not an attractive investment opportunity.
Adding more fuel to the fire is that this situation does not help struggling Japanese companies in global trade. It will end up putting more pressure on corporate profits and the Japanese stock market, which in turn will end up putting more pressure on the dollar as foreign holders of Japans stock market liquidate stocks and will have to buy back even more yen.
So what’s an investor to do? If fundamentals make no sense (or money) then one can only follow the charts and right now that points to precious metals and commodities. This week, gold miners closed at new YTD highs and commodity based economies performed well.
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