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The “Heat Map”

February 15, 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 equals B+ (very favorable). Gasoline prices continue to drop.  These trends put more money in the pockets of Americans in 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 December 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). To date, the earnings reports for the quarter ending 12/31/2015 are mixed because net profits reports show more favorable surprises than disappointments while revenue reports are just the opposite. The bottom line is the data does not support either raising or lowering this factor’s grade at this time.

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 7 due to Saudi Arabia severing diplomatic ties with Iran and the potential for social/political upheaval in China.  These risks deserve our ongoing attention.

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