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The “Heat Map”

April 12, 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).

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- (below average). As things stand, first-quarter S&P 500 profits—out in a few weeks’ time—are estimated to be down 7%. And, S&P 500 profits are forecasted to be a negative 2% in the second quarter ending 6/30/2016. Analyst estimates have plunged for the third quarter ending 9/30/2016; the Street now expects a rise of 5%, down from 14% six months ago.

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. While decreased, these risks still deserve our ongoing attention.

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