Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Stock Momentum Slows

Stocks continued to benefit from the hype emanating from the political arena, namely Trump’s State of the Union address and negotiations on trade with China. Of course, on both counts, there’s been considerably more talk than action or results. With a relatively disappointing earnings season fading into the distance, I believe the stock “bounce,” as I put it last week, is operating on borrowed time. I won’t rule out the occasional rally for stocks from here on out, but I believe that, on the whole, the bullish arguments have been nearly or fully discounted. What that means is that we should begin to see more “fading” rallies or outright declines in stocks similar to the action we witnessed last December. Again, my main reason for thinking this way is the global normalization of the US economy (now that Florence and Michael spending have passed) and the notion that Central Bank policy effectiveness (QE) has diminished greatly in manipulating rates meaningfully lower for the purpose of stimulus.

As for the economy, there still hasn’t been much to shake a stick at in terms of economic releases. Much of the data is either from last November and December, months that no one seems to care about any longer, or the data has been skewed from the effects of the government shutdown. For what it’s worth, the January ISM non-manufacturing index slipped from 58.0 in December to 56.7, which was below expectations of 57.1. Granted, that number is still miles away from 50.0, where it’s said real contractions start, but oil fell on the news and entered a decline that lasted the week – all on the notion that the economy is starting to slow. Again, tell that to equity investors, who always seem to be the last to know.

In other markets, Treasuries gained but have been rangebound, while higher-end European sovereign debt (i.e., German, Austrian) continues to outperform as the “go-to” in the flight-to-quality race. And thanks to Mario Draghi’s timely babble about how bad the European economy is at this point, the dollar has yet to really fall – as it should under the influence of a more dovish Fed. That held the metals in check, though both gold and silver remain in bullish form on the charts. Next week, I suspect stocks will struggle between bullish trade prospects and somewhat bearish economic indicators. The U.K. parliament will have another “Brexit” vote, and we’ll have another look at US inflation (or economic strength) through the eyes of both the CPI and PPI.

Best Regards,

David Burgess
VP Investment Management