All hail the Powerful Oz! (Fed or OPEC member statesman – you take your pick)
Written by: Benjamin Bimson CIMA® / BCJ Financial Group
Rhetoric once again was one of the big moving factors for the markets last week. In fact, Janet Yellen, Alan Greenspan, Ben Bernanke and Paul Volcker took part in a round table discussion about the economy. This is where Yellen declared that we are not in a bubble but rather “we remain on a reasonable path.” Sure enough, when the Fed meeting minutes were releases, it showed that Fed staff economists saw good times for the USA. They are not saying there are no risks. They are saying that they are confident a slow and cautious raising of rates is appropriate.
Oil was also top of the news with both surges and declines in the headline crude prices. There is great anticipation of an OPEC meeting in late April which resulted in some sort of production freeze. A freeze is seen as giving the market time to stabilize and get prices back to a more normal place. Right now it is just a lot of talk, but not without market effect!
We have been examining the stock market recovery from the February 11 lows. I wanted to examine where values were if we didn’t have energy in the equation. I was able to find the following chart that really helps illustrate market valuations today, versus their earnings and sales, versus their profits.
It is a little interesting that without energy in the S&P 500 universe, prices are overpriced, just not exceedingly overpriced
If energy does start to stabilize with some sort of OPEC agreement later this month, we could very well see more support that the S&P 500 has room to grow. If it all falls apart, we likely will see more of this “see-sawing” in the market (which none of us like).
I created the chart below to show the drop in rig counts in correlation to the drop in prices. The interesting thing is that the US rig count has continued to decline in the latest oil rally, which may mean we can stabilize in price. OPEC is going to have to show us that they mean business though.
There is a lag in when most of the rigs are brought online, but so far the rig count has stayed under the spot price of oil as it has rallied according to the latest available data.
Furthermore, we really need a reason for the stock market to grow. I plotted a few charts that show upper and lower resistance levels of the S&P 500 since 2013. (see below)
If we look at just 2013, the last time we had a fantastically bullish market, we can see it bounces off the top but always finds a reason to go higher.
The chart above shows a time when quantitative easing kept us moving along! The Fed was there to perk up the markets with smooth talk and a heavy hand of assistance. Now the Fed is “normalizing policy” (their term) and market behavior has been heavily reliant on comforting words.
If the comforting words can continue, we may just be able to keep moving upwards for a while. Even after all of the market movements, calming words, potential promises from OPEC, non-recessionary US data and oil/commodity slumps, analysts are predicting a staggering 9.6% increase over the next 12 months ending March 31, 2017 (as of end of Q1 2016).1 The only problem is that market analysts have been off by a lot. Over the past 5 years they average being off by 6.8% and in the last 12 months they have been off by 13.5% as the following chart illustrates.
Perhaps if oil prices stabilize we will move back towards the normal deviation average, which would still be upwards from here. A lot is riding on the Fed and oil right now, and we continue to look at all of the potentials because they help shape where the most likely moves may be.
Unfortunately, when movements by non-market participants (Fed and OPEC) drive markets as much as they are, volatility is the big result. There have been big moves more frequently, and almost every huge move becomes more oblivious as we look backwards.
Some things can’t be foreseen by any of us, but we can be aware of what drives the market and what those drivers are likely to do. The Fed wants to calm the market, and they may just be able to do that for a while, but every time we get to uncertainty about what they may do next, things will go haywire.
Furthermore, if we are almost fairly priced, how do we get to the analysts’ predictions without going too over-priced ? One way is by a Fed that is driving the market. The one thing we don’t know is how long they can keep bouncing the stock market ball down the street before it goes in the gutter.
1-Factset Target & Ratings – S&P 500. FactSet Research Systems. John Butters. Factset. April 7, 2016 [4/8/16]
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