Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Markets Higher – Broader Conviction Needed
Optimism over Trump’s trade policies along with last week’s uptick in economic data (i.e., jobs and manufacturing) pushed the tech-heavy NASDAQ to a new all-time high. Though the S&P and Dow have yet to follow suit, it may be a foregone conclusion that they will do so. Certain technical barriers that would otherwise have prevented such record levels have already been broken. So, as previously mention here, we have an extremely speculative environment at hand. It doesn’t take much to set stocks ablaze, even if the benefits behind the information are temporary at best, or spun in order to boost psychology. In any case, retail and banks led the gains while oil and gas lagged (on lower oil prices) in the broader market.
Away from stocks, Treasuries were a bit lower across the curve, with the spread between the 2- and 10-year notes holding steady at 45. Fixed income overseas was lower in front of ECB discussions to discontinue QE. In particular, the Italian 10-year yield reverted to near its interim high at 3.15% –despite a $500 million intervention by the Italian Treasury to monetize 2-year debt. Crude was lower on record US production (over 10 million barrels daily). Weakness in the dollar helped the metals to another weekly gain, as gold added about 0.36% to silver’s 2.15% amid minor technical improvements. On the economic front, there wasn’t much to speak of except a fairly sharp decline in US Consumer Credit, to $9.26 billion in April, and a below-trend (bearish) move for Canadian housing starts in May.
Next week, the Fed is expected to execute a rate increase of 0.25%. That expectation means the Fed’s forward guidance should take center stage in terms of focus. If Powell maintains a hawkish stance, we could see markets pause pending further economic data. On the other hand, if Powell turns dovish, we could see what may turn out to be the last hurrah for the stock market rally. The latter development would likely lead to higher market rates at the short-end and a further flattening of the yield curve. As I have said before, I suspect the Fed will maintain a tightening bias as long as the Fed Funds remain a safe distance behind comparable market-determined rates.
VP Investment Management