Expect Markets to Close Higher for the Year

April 04, 2019

The markets look to have found a bottom in the 2350 area and now look to be overbought after running into resistance. Look for the market to trade back and forth between the two areas identified in the chart below for a few weeks, if not a few months, before building up enough steam to break above the 2620 area. This is to be expected as the market starts to calm down from the recent period of volatility. We do expect the markets to close higher for the year, potentially into double-digit gains.

01-16-2019 SPY

 

Small-caps are oversold and could enjoy a multi-month rally as the broad market bottoms. Small-caps have been hit especially hard during the correction. The Russell 2000 Index tumbled 27% from its August 31 record high to the December 24 low. Relative to the Russell 1000, the Russell 2000 fell to its lowest level since April 2016, retracing the tax-cut gains.

The drop has left small-caps deeply oversold versus large caps. The 126-day (six-month) percent change in the Russell 2000/1000 ratio fell to -12%, a nearly two standard deviation event.  Historically, 10% drops in the six-month change have marked mean reversion opportunities for small-caps

  • On a y/y basis, producer price inflation eased to 2.4%, the slowest pace since July 2017, while core inflation was steady at 2.7%.
  • While energy prices fell into deflation territory for the first time since November 2016, food inflation was the highest in four years.
  • Services PPI inflation rose to 2.8% y/y, the highest since data started in November 2010, led by transportation and warehousing.
  • The PPI for final demand personal consumption moderated to 2.2% y/y, also the slowest pace since July 2017, and consistent with the pullback in consumer price inflation last month.

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