Let summer begin!
Written by: Benjamin Bimson CIMA® / BCJ Financial Group
This week marked the end of our kid’s school year! Summer vacation here we come! That seems like a much more fun way to start this week’s commentary than talking about politics again…
However, politics has dominated the market and will continue. The much-anticipated public testimony of former FBI Director James Comey, the UK elections and the ECB happened all together in one politically heavy week. Don’t worry, the Fed is next!
Markets breathed a sigh of relief about no “smoking gun” in the Comey testimony. Often I prefer to read the text of political speeches after they happen, but this one had potentially huge impacts for the market, so I went all out and watched for myself. If President Trump had been shown to have obstructed justice, it would have resulted in a hullabaloo! As I watched, I became increasingly convinced that this was not going to happen in the public testimony and likely never will. Markets were relieved.
The next excitement was the special early parliament elections Prime Minister May called in the UK. It resulted in a loss of the Conservative party’s majority in parliament. Initially markets got a bit nervous. May and the UK are starting their Brexit talks and had desired to have the majority to push through the agreements quickly. That is highly unlikely now.
The ECB kept interest rates unchanged and gave clarity that a rate hike is unlikely in the next 6 months.
Now we look forward to the Fed. Based on the CME Group’s estimation, we will most likely get a rate hike this week. Here is the expectation chart at the time of the writing of this commentary.
Let’s turn our attention back to summer. Summer has a reputation of being a time when investors question what the second half of the year will bring in terms of potential returns. Ned Davis Research wrote an interesting paper on what they view as the three most likely scenarios for happenings in the stock market, and even put a potential probability on each scenario and how technically things seem to be shaping up.
The first scenario, at a 60% probability, is what they call “Lower for Longer.” Under this condition markets will moderate in terms of growth, but extend the bull market, stretching it nto mid-2018. This is based upon cycle analysis which illustrates that the current bull market has followed the typical 2.4-year cycle of expansion (beginning early 2016). Under a typical expansion, the market grows rapidly and then moderates until it finally hits a wall of worry. So far the market has shrugged off worries (latest one being the UK vote results).1
The second possibility was referred to as “Thrust and Bust.” This was projected to have a 30% probability of occurrence. Under this situation, the market would rise rapidly this summer, confirmed by very strong sentiment. It would seem exciting at the time, but most likely would rush in the wall of worry and speed up the next bear market to early 2018. 1
The last scenario was a “Summer Stall.” Given the strong sentiment and resistance to what could be considered worrisome items, this only has a 10% probability of happening. It is based upon some weakening economic data persisting and proving to not be transient. Under this scenario, we would expect to see safe investments outperform, and the market rally stalling, possibly leading to a bear market as soon as this fall.1
Certainly, we will be watching as things develop and adjust the portfolios as needed. For now, we should all be excited for summer vacation, warm evenings, family time and perhaps some pictures of nature sneaking into summer commentaries!
1-Global Markets. Ned Davis Research. June 6, 2017
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