Stocks Rally On Interest Rate Uncertainty Ahead Of FOMC

Stocks Rally On Interest Rate Uncertainty Ahead Of FOMC

$DIA, $SPY, $QQQ, $VXX

Many US industrial companies’ shares that fell last year over concerns of an economic slowdown have rallied recently, but investors and analysts suspect the stocks are standing on uncertain footings.

Shares of 10 large industrial manufacturers and distributors like Caterpillar Inc. (NYSE:CAT), Parker-Hannifin Corp. (NYSE:PH) and Eaton Corp Plc, (NYSE:ETN) have risen between roughly 5 and 15% YTD, most have not recouped significant declines they saw in Y 2015.

Shares of mining equipment maker Joy Global Inc (NYSE:JOY) have spiked about 25% in Y 2016. Impressive yes, but  hang on, after last year’s plunge of more than 70%, Friday’s price of 16.14 is only about a 25% of the stock’s high in Y 2014.

The industrials group broke ahead of the broader market in early February.

The Standard & Poor’s industrial sector index is off 1.1% for Y 2016,

Analysts point to factors that could be supporting industrial shares like improving US manufacturing indicators, stabilizing markets for Crude Oil and other commodities, and the weakening USD, whose strength has undermined the competitiveness of US manufacturers and the value of their foreign sales.

It is not yet clear whether some struggling industries that are customers of these manufacturers, such as energy and mining, will strengthen or support growth.

Right before earnings season got into full swing in late January, a Robert W. Baird analyst said that the 8 diversified manufacturers he covers were trading an average of 16% below their 200-Day MA, and 7  machinery stocks were 27% below that mark.

The stocks may no longer be so oversold, so any new investors could be “hoping” for real recovery and growth. That is too early to call I beleive.

Large industrials, including aviation and transportation stocks, as a group have traded at a discount to the S&P 500 since late Y 2014, but the gap has closed some in recent weeks. The sector is now at 15.2X forward earnings estimates Vs 16.1X for the broader S&P, and the S&P 500 is at 17.3X, these valuations are high.

Stock traders there have been forced to re-think their outlook now that global stock markets have come back and economic data has been surprising more to the Northside, that is not the same as saying it has been strong.

The latest data from the Fed funds futures market shows a 52% probability of a rate hike at the July meeting.

If the economic data continue to produce positive surprises, and Crude Oil prices keep rising, there is likely to be some growing angst that the Fed will raise rates a few times this year on its path toward normalization.

This may be a problem, because the Fed funds futures market for the most part continues to be positioned for the “under” in terms of how many times the Fed could actually raise rates this year.

The 15-16 March Federal Open Market Committee (FOMC) meeting, and Ms Yellen’s press conference after to explain the Fed’s projections, will provide new insight to digest and act upon.

This rally has been more that expected and has closed just above the target resistance at 17,200 DJIA.  .

The rally has happened as earnings estimates have continued to fall, and moreover, it has been based on the reason that the US economy is not going to suffer a recession soon. Nuts…

The stock market has had a great run since mid-February.  There is no denying that.  The reasons why have been voiced in the media, and there will be more discussions about the meaning of the rally.

I am not sold on the notion that the stock market is on track for big gains this year.  It cannot be given the declining state of corporate earnings and the otherwise sluggish state of the global economy. And I do not believe the US government numbers. This is a presidential election year.

Friday, the US major stock market indexes finished at: DJIA +218.18 at 17213.31, NAS Comp +86.31 at 4748.46, S&P500 +32.62 at 2022.19

Volume: Trade was off of the recent average with 974-M/share exchanged on the NYSE

• NAS Comp 5.2% YTD
• Russell 2000 -4.3% YTD
• DJIA -1.2% YTD
• S&P 500 -1.1% YTD

Have a terrific weekend.

Paul Ebeling

HeffX-LTN

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