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The “Heat Map”

December 29, 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 going into 2016.

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 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). In about three weeks, investors will turn their attention to the fourth-quarter earnings season, and it probably won’t be pretty, says Christopher Zook, chief investment officer of CAZ Investments. Corporate profit margins have hung in near their highs, but with revenue growth scarce, investors might be surprised by the prevalence of margin compression at S&P 500 companies, he says.

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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