Equities Gain, But Will the Rally Continue?

It’s hard to know what to expect given how volatile stock markets have been lately but investors can breath a sigh of relief, at least for now, as both stocks and oil appear to be recovering. The U.S. stock market closed higher yesterday for the third day in a row. This makes it the largest three day gain in equities since August of last year. It’s also the the Dow Jones and S&P 500 index’s first three-day positive streak for 2016 so far. The S&P 500’s energy sector climbed 2.9%, following a 5.6% increase in oil futures. Technology and consumer discretionary stocks also received a nice boost, rallying more than 2%. Analysts credit higher oil prices and better than expected economic data as the main reason for the rally. A lot of Americans have money to invest and they are looking for reasons to put their capital to work. Tom Siomades, head of Hartford Funds Investment Consulting Group, says the “strength of this rebound, what it’s showing to me is, people want to be in this market.” Emerging markets like China and India may be slowing down, but investors have to realize that slower economic growth even at 6% is still growth nonetheless.

It’s difficult to determine if the short term gains in the market we saw earlier this week can be sustained for a longer period of time. But based on the most recent inflation numbers and other economic data I am not optimistic that the rally will continue for much longer. The S&P 500 gained 31 points on Wednesday to end the session at 1927 points. I think it will drop back down to below 1860 sometime during the next month or so before moving back up again. Market strategist Karyn Cavanaugh, CFA, at Voya Investment Management cautions that despite the three-day rally, it is still premature to call the bottom for this market. “Because the Fed mentioned the downside in the market was negative, stock investors took it as a dovish sign and are betting that there will be no rate hikes in March,” said Cavanaugh. The only way rallies can be sustained is by some kind of catalyst. Right now there isn’t any solid footing for the market to stand on. But one potential catalyst that could drive up equities for longer run would be for the Fed to retract its current stance on monetary policy and take interest rate hikes off the table for the rest of the year.

Last week, Fed Chairwoman Janet Yellen acknowledged that “concerns about the global economy could cloud the U.S. economic outlook” so future rate increases may slow down. But it is still unclear what she plans to do in March. One of the problems with Janet Yellen’s strategy, according to Axel Merk, the President and CIO of Merk Investments, is that she performs her job from a labor economist’s approach. He explains, how she is constantly “looking into the rear view mirror. She’s looking at unemployment data which is not a leading indicator. So her entire theory about how the world works is based on looking backwards.” He suggests that the Fed should look more closely at leading economic indicators such as inflation expectation to create forward guidance. But one of the issues for is that the Conference Board’s Index of Leading Economic Indicators (LEI) really isn’t leading data since the information is almost two months old upon release.

As long term investors, our best bet is to stick with our long term investment plans, and to stay focused on our long term investment goals. So whatever happens in the market we shouldn’t change our own course.

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