March Madness – April Absurdity. “Curiouser and Curiouser”

April 3, 2017 – DJIA = 20,663 – S&P 500 = 2,362 – Nasdaq = 5,911
 
March Madness – April Absurdity
The term “March Madness” is typically associated with the men’s college basketball tournament that happens this time of the year.  The exciting games and inevitable upsets attract widespread interest and viewership.  Of course, March Madness can be used to describe other events that happened during the month such as the weather, the markets and the search for Tom Brady’s Super Bowl jersey.
Of course, this year the madness of the NCAA basketball tournament cannot come close to the madness in Washington.  President Trump is discovering that the campaign was a walk in the park compared to being President.  He is criticized for Congress’s failure to repeal Obamacare.  He is scrutinized over wiretapping claims and is questioned on his relationship with Vladimir Putin and the Russians.  Of course, his brash unconventional approach invites detractors.
The wackiness of Washington isn’t exclusive to the executive branch.  Congress’s dysfunctional behavior moves within and across party lines.  And we must not forget the fourth branch of government – the press.  Their job of covering our political leaders has not been exactly objective.  Clearly, we will need more synonyms for ‘madness’ to form alliterations for the other months – April Asininity, May Mindlessness, etc.
This lunacy has had surprisingly little negative impact on the stock market.  Normally such acrimony and uncertainty are headwinds for higher stocks prices, but investors seem to be focused on other factors (or ignoring it).  Stocks just finished their 6th consecutive positive quarter.  There were solid gains for all the major averages.
                                                                          2017 YTD
Dow Jones Industrial                                             +4.6%
S&P 500                                                                 +5.5%
Nasdaq Composite                                                 +9.8%
Russell 2000                                                           +2.1%
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividend.
Despite the stocks markets’ recent rally, not all investors are reaping the rewards.  Last week’s American Association of Individual Investors (AAII) survey showed that more respondents were pessimistic than optimistic.  There were 37.4% bears vs. only 30.2% bulls.  This is remarkable on several levels.  First, bulls normally outnumber bears.  Next considering that stocks reached record levels in the beginning of March, we would expect a lot more excitement than the gloominess that those numbers suggest.  Lastly, both figures have deteriorated since the beginning of the year as bullish sentiment stood at 46% in January while the ursine camp was down at 25%.
Away from Wall Street, people are cheerful (this shouldn’t be surprising!).  Last week’s Conference Board’s Consumer Confidence survey jumped to 125.6 from 114.8 in February.  This is the highest reading in 16 years. Naturally, a smiling consumer is good for the economy.
Another part of the survey indicated that consumers have higher expectations for increased income.  Of course, these two are joined.  One of the reasons for a higher confidence level is the belief that you going to see more in your paycheck.
The contrast of a sanguine consumer and gloomy investor is an interesting economic backdrop.  Why the conflict?  Are the consumers’ views a result of being on the frontline of commerce and things are pretty good?  Workers are feeling upbeat about both their current conditions as well as their future and they respond accordingly.
Returning to the grumpy investors.  Are they overly influenced by headlines that are casting the new administration as a modern-day Marx Brothers?  Or does he or she view stocks prices as a little high and getting ahead of the fundamentals?  This latter point does not explain why the pessimism has been increasing while stocks have been rising.  Usually higher prices generate more excitement and enthusiasm rather a river of tears.
The fixed income markets offer another puzzling development.  The Federal Reserve fulfilled their earlier smoke signals by hiking the federal funds rate in March.  And everyone knows that interest rates will be rising.  But for some peculiar reason, interest rates have gone down during the past several weeks.  The 10-year Treasury note’s yield reached 2.6% in mid-March.  This rate closed last week at 2.39%.  The 30-year Treasury bond had a similar drop as it fell from 3.20% to 3.01% at the end of the month.
These moves may seem minor but, for several reasons, they are noteworthy.  First, the bond market is supposed to be less volatile.  Fixed income is regarded as ‘safer’ than equities and is theoretically used to reduce portfolio risk.  We’re not sure a 5% move in two weeks defines stable.  Secondly, interest rates are expected by everyone to be moving up.  That they are doing the opposite calls into question market forecasts and suggests that something else in underfoot.  That there might be unknown market influences logically increases risks.
As we transition from March Madness to April Absurdity, the markets are digesting some large conflicting signals.  While equities have corrected in the last couple of weeks, they remain resilient.  Perhaps this is an example of Wall Street climbing a wall of worry.  The summation of the current market milieu is that it is not an opportune time to increase risk.  Yet, there is no guarantee that the markets provide better entry points for investing capital.   As Alice observed, “Curiouser and curiouser”.
Jeffrey J. Kerr, CFA
Kerr Financial Group
Kildare Asset Management
130 Riverside Drive
Binghamton, NY 13901
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