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The “Heat Map”

July 6, 2016 | Weekly Commentary

Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.

CONSUMER SPENDING: This grade is A- (very favorable). Favorable activity in the housing market continues to support growth in the level of spending.

THE FED AND ITS POLICIES: This factor is rated B (favorable). The U.S. economy can handle higher rates as long as the pace of future interest rate increases is slow. Fed Chair Janet Yellen made clear in her press conference after the June meeting that the path higher would be “gradual”. And, the BREXIT vote has reduced the possibility of a rate rise soon.

The Fed’s plan to gradually raise rates in the coming years won’t derail the economy and brings some certainty to the market, says Morningstar’s Bob Johnson.

BUSINESS PROFITABILITY: This factor’s grade is a C- (below average).  Next week, corporations will start to release their second quarter corporate-earnings reports.  We will monitor this closely.

OTHER CONCERNS:  The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 4, a decrease from last week. These risks deserve our ongoing attention.

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