Pitchers and catchers were officially supposed to report today for the Cubs, Indians, Rockies and Red Sox. For many it is the start of a new season. The Super Bowl is over and now on to baseball (with a little thing called March Madness in there too). In the Chinese calendar, it is the start of the new year (Snake). The markets seem to be turning towards a new season also. Year to date, stock markets are generally up and Treasury bond prices are down. The Fed seems to be succeeding in pushing investors out on the risk curve as funds are flowing into equities and out of money markets for the first time in years.
While the S&P500 Index managed to eek out a small gain on the back of some positive economic news, most major international markets were down for the week. European stock markets, and the euro, dropped after ECB President Mario Draghi said the exchange rate was important for growth. Corruption allegations against Spain's Prime Minister Rajoy and the possibility of a hung parliament in Italy also fueled the downdraft.
This coming week is a busy one:
- Monday - Royal Bank of Australia announcement, along with Australian trade and housing data
- Tuesday - State of the Union address, EMU retail sales, UK PMI
- Wednesday - US retail sales and German manufacturing orders
- Thursday - Bank of Japan, Bank of England and European Central Bank all have meetings, UK and German industrial production
- Friday - US industrial production, Chinese CPI and PPI
With earnings growth minimal, the recent rise in the market has been accomplished through increasing valuations. The S&P 500 Index is approaching the upper end of its recent valuation range on a P/E basis, while the Price to Sales ratio is approaching pre crash 2008 levels. Market confidence remains high even as the US average gasoline price has reached $3.54 a gallon and is over $4.00 a gallon in parts of Southern California. While the fiscal cliff was avoided, most consumers are facing a decrease in take home pay as the temporary 2% reduction in Social Security taxes of the last two years expired. In addition, many expect that the mandatory sequester cuts will now take place on March first, further slowing the economy. While these factors should not push the economy into recession, they should also not be a valuation expanding event. At the very least, they're definitely not helping the situation.
So why is the US market rising? That would be the wave of liquidity we mentioned in Anecdotes vs the Fed. This is an exhilarating and dangerous ride that can last longer than you think. It can also crash down very hard on the unskilled and unwary. So know what your plan is and in the meantime, don't fight the Fed and as they say in New Orleans:
Laissez Les Bons Temps Rouler*
*Let the good times roll