Wednesday, February 15, 2017

Dow Industrial Average Rhyming Bullish

What if the Dow Jones Industrial Average was at 22,000 by the time the Fed met for their next FOMC meeting in March FOMC?  A colleague at TJM asked that I consider the price action in the Dow relative to that seen prior to the latest marked advance following the US Presidential election.  What I found was quite striking.  The chart below illustrates the similarities which may be suggesting a strong move is still forthcoming.  

Using the early-December through late-January consolidation period as the current base and drawing a similar bullish reaction seen from the mid-September through late-October base, one could project a move as high as 22,000 before the March 15th FOMC meeting.  That would represent an advance of over 7% from yesterday’s close.

There are a number of reasons for equity markets to trade bullish over a relative short term.  First, there is the proverbial ‘wall of worry’.  Just as the approach of the US election led to an pent-up bullish buying despite a surprise Trump victory, so too might seeming mishandling of cabinet affairs provide distraction from positive economic developments.  Secondly, stronger economic reports which continue to include outsized job gains provide asset managers reason to consider asset allocation from bonds toward equities.  There is massive room for adjustments there.  Finally, there remains a lot of cash to be put to work where many were expecting some decent pull-back in equity markets in order to get more fully invested.   Funds withheld may be once again forced to come into a rallying market as equity portfolio managers fear falling too far behind their peers.    

For my friends that concentrate more wholly on interest rates; right now there seems little reason to imagine the Fed raising policy rates as soon as March of this year.  However, if data continues to show signs of accelerating from the modest gains in 2016, then we should expect the Fed would be more inclined to remove accommodation.  A good argument for not moving too quickly in hiking rates was seen today in the Real Average Hourly Earnings from January (YoY +0.0% Flat).  The lack of traction here could be telling us there is a large remaining surplus of labor and that recently stronger economic growth has prompted many once discouraged to look for work.  

Otherwise, inflation and retail sales data today nudged some to consider more seriously the Feds latest ‘dot plot’ or projection of policy rates over the next few years.  In their latest December FOMC release of the Summary of Economic Projections, which include the projection of policy rates (aka ‘dot plot’), the collection of independent Committee member input showed a median forecast for 3 rate hikes this year.  Many consider that the first hike was not likely to come until June.  With today’s data, a few are now wondering about the May FOMC meeting as a possibility (despite no scheduled press conference).  Fewer still are willing to consider the March FOMC meeting as likelihood. 

So, the ‘wall of worry’ as a long-time wealth advisor (Joe) reminded me yesterday can be climbed further.  If economic data allows and equities (Dow at 22K) provide, there is reason to price a better than even odds for a March FOMC rate hike (currently priced to 40% -Bloomberg). 


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