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The “Heat Map”

December 22, 2015 | 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 equals B+ (very favorable). Gasoline prices continue to drop. Imports have become cheaper due to the strength of the U.S. dollar. Low interest rates will help real estate, an important component for the consumers’ wealth effect. These trends put more money in the pockets of Americans in the all-important Holiday shopping season.

THE FED AND ITS POLICIES: This factor was decreased to a B (favorable) because the FED increased short term interest rates by .25% last week. 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 meeting that the path higher would be “gradual”.

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.  The market consensus on the 2016 pace of increase is somewhere around two to possibly three rate increase of .25% each.

BUSINESS PROFITABILITY: This factor’s grade is a C (average).

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 5. These risks deserve our ongoing attention.

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