Following a mild winter whose bite never lasted longer than an occasional weekend squall, the lingering late frosts of April finally gave way to the warm breezes of a reluctant spring. For those of us who find bearings from the touchstones of the seasons: the pungent whiff of ozone, the clean crisp air of fall; the early daffodils – the receptive muddling leaves a strange and unfamiliar feeling. What month is it again? Did I change the oil in the tractor, yet? Why aren’t the Yankees on TV…
With the Dow tagging 18000 for the first time since last July and the S&P 500 now flirting around 2100, it appears that more than the weather has changed for the better. Will it last – remains the hanging question. Like the weather whose seasonal transgressions occasionally bewilders, but ultimately is beholden by our position from the sun, we expect US equities will again be capped by the cycle whose own arc at times has appeared to wobble on its axis.
Since beginning the year deep in the red, both equity indexes have rallied sharply since mid February, erasing losses that had quickly fallen by more than 10 percent on the year. Accompanying and actually leading US equities in this reflationary move has been markets and sectors that in the past had heavily underperformed. Namely, precious metals, emerging markets, oil and energy companies and commodities and commodity producers – that collectively have enjoyed their largest rally in over 5 years. What they all have in common is a valuation sensitivity weighed against the broad counterweight of the US dollar, whose best days – as we’ve speculated, were in its past.
Will the dollar continue to trend down and will it be enough to sustain a broader move in equities above their respective highs – is the follow up question for investors and traders alike. Over the near-term, the major benchmarks for the dollar continue to flirt with the lows from last fall; a spot we have speculated would provide support for a retracement bounce. Considering the strengthening inverse correlation that equities and the dollar have trended with since that time, the S&P 500 is now bumping up against its highs from last fall as well. Although the bounce in the dollar may move first, we do not believe the rally in equities is sustainable or represents a major breakout from the range the markets have remained within over the past 2 years.
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