The Market: May 2015

Yesterday’s employment report was “just right” – not too good as to send rate hike jitters through the markets and not too weak to bring out fears of low corporate profits.

The markets are a whisker away from all-time highs.

The middle of the road report brought out the buyers and the Dow Jones Industrials rose 267 points. The markets are a whisker away from all-time highs.

Mind you that earlier in the week the market prognosticators were moving to the bearish camp and calls for the long-awaited correction were abundant. The resilience of this bull market is impressive. On pullbacks, buyers step in.

Many have named this bull market “the most hated in history”. I’m not sure if that statement is true but certainly, the market has impressively climbed the “wall of worry”. I have felt and still do feel that the market will experience some form of correction this year, perhaps a 10-15% decline.

Maybe my reasoning is too simple but given that in the recent past, seasonality seems to spook investors and given the quick sell reaction to hints of a Federal Reserve rate hike, there will be some period of decline this year.

The conventional wisdom holds that the Fed will raise rates in September. This fits into the narrative that the market has a seasonally difficult time in late summer and early fall. Having said this, I do not think the bull market is over and I would suspect that any sell-off would be met with buyers.

What this means to my portfolios is that I still would like to slowly build cash in the accounts to have some dry powder to put to work in the event of a correction. I was of the mind to target 20% cash by the summer but that might be too much given the market’s resilience and my expectation that the economy is doing ok.

Even if we get a rate increase, it will be small and more symbolic than an effort to tighten monetary policy.

When will the Fed raise rates?

Over a beer at the Yankees game, an economist friend told me he believes the Fed will not raise rates until 2016. His reasoning is that the Fed’s own targets for doing so, 2% inflation, higher wage rates, and stronger GDP have not been met and are unlikely to be met this year.

If he is right, there might not be a meaningful correction this year.

On the corporate earnings front, the numbers came in better than many were expecting given the overall GDP weakness. According to FactSet, of the 447 companies in the S&P500 that have reported to date, 71% reported profits above estimates and 45% had revenues that exceeded expectations.

Of course, the estimates had been adjusted lower throughout the 1st quarter as the oil price decline, dollar strength, weather and port strikes on the West Coast put pressure on profits. 1Q15 earnings growth came in at 0.1%, which is very weak but nevertheless beat the expectations of -4.7%.

Looking ahead, the negative pressures that hurt 1Q15 are receding. Plus Europe’s economy seems to be sending out “green shoots”. Again, evidence that the bull is still running.

— Ian Green, Pendragon Capital Management

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Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.