While the Federal Reserve is the only major central bank that is on track to increase interest rates in 2017, it is important to remember that it is usually not the first, second, or even the third rate hike that halts a bull market. It’s the last one. Currently we are not even close to a Fed Funds rate that will turn this bull market into a bear market. In addition, while the European Central Bank remains in an ongoing unprecedented accommodation mode, other major central banks, such as the Bank of Japan and the Bank of England are not anywhere near to being in a position to tightening interest rate policies.
There is another conundrum. Traditional stock index analysis tells us that price movements in stock index futures foretell a change in the fundamentals by anywhere from six to 12 months. Many analysts, in essence, believe stock index futures price movements are a tried and true leading indicator of forward economic performance. So it appears that if this leading indicator on the economy is correct, it must be looking towards something very bullish that is happening, or going to happen, and the fact that so many analysts and traders have become bearish on stock index futures, and incorrectly so, suggests they maybe be putting too much importance on their tighter Fed policy outlook and not enough on other factors, such as the already improving economy.
Recent economic reports on balance are showing a recovering U.S. economy. For example, consumer confidence climbed in December to the highest level since August 2001 as Americans were more upbeat about the outlook than at any time in the last 13 years, according to the New York based Conference Board. Also, the National Federation of Independent Business Small Business Optimism Index in December surged by most since 1980, jumping 7.4 points to 105.8.
In addition, the corporate earnings picture has brightened dramatically. Some analysts are now predicting earnings growth for S&P 500 companies in the fourth quarter of 2016 could be as high as 5.8% and earnings growth estimates are in the double digits range for the first and second quarters of 2017.
THE GLOBAL ECONOMY APPEARS TO BE ON THE MEND.
The global economy appears to be on the mend as well. For example, the gross domestic product in the euro zone expanded .5% in the fourth quarter and the euro zone December unemployment rate fell to 9.6%, when 9.8% was estimated. Underscoring an improving economy in the Euro Zone is the rate of inflation in Germany, which more than doubled in December to 1.7% from the year ago period. This was the largest advance on record and compares to the median estimate of a gain of 1.3%.
Economic growth in the U.K. increased .6% in the fourth quarter, which compares to the estimate of a gain of .5% and China reported its gross domestic product increased 6.8% in fourth quarter, when 6.7% was expected. In conjunction with better economic news from China are rising up inflation concerns. China’s producer price index increased at the fastest rate in over five years in December, advancing 5.5% from a year ago. This compares to the median estimate of a gain of 4.6% and the 3.3% increase in the previous month.
Another reason for the latest new round of historical highs for stock index futures is the Trump Administration plans to boost infrastructure spending and cut taxes in an effort to stimulate the economy.
U.S. and global interest rates will likely remain low enough for long enough to sustain the bull market in stock index futures for quite a while. S&P 500, Dow and NASDAQ futures are all likely to continue to advance, extending the second longest bull market in history. In fact, there is no reason why the current bull market in S&P 500, Dow and NASDAQ futures can’t be the longest bull market in history.
Alan Bush
E:
alan.bush@admis.com T: 001 312-242-7911
11 | ADMISI - The Ghost In The Machine | January/February 2017
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