In the last month, markets have strongly rallied. With valuations rising to all-time highs, what could bring the markets back to earth?
Data from this last week supported additional advances in the market. ISM non-manufacturing index climbed to 57.2 from 54.8 last month, a strong indication of consumer strength. Consumer confidence also rose from 93.8 to 98.0[1]. These consumer indicators should provide a strong 4th quarter GDP reading. Additionally, Oil stock piles experienced a larger than expected draw down. The draw down, along with OPEC production cuts, bring short-term hope for alignment in the supply and demand.
Markets advanced last week at a solid clip as the rally regained steam. The S&P 500 advanced 2.99% during the week and the Dow Jones was equally as impressive increasing 2.96%[2]. As markets continue to set new all-time highs, it is important to keep in perspective the things that could derail the rally.
Rate Hike
For the last month or so, a rate hike has become a foregone conclusion. The markets have priced in the rate move expected from the Federal Open Market Committee (FOMC), so it will not be the direct cause of a down turn. The language the FOMC uses after the hike will set the table for the next hike. A correction could follow in the next few months as markets will be more restricted and tense. A series of geo-political events or international economic weakness could be the proverbial straw that breaks the camel’s back.
Oil
Oil has experienced a strong resurgence in recent weeks, thanks to the “jawboning” of OPEC members. The cuts in barrels is production, but will likely replaced by non-OPEC members in a short period of time. The over-supply could continue and oil prices could be further hampered by a strengthening dollar.
Conclusion
A correction, while unpleasant, is a necessary part of the cycle and inevitable as valuations stretch. The rate environment and state of the oil market could provide the catalyst for a correction. Any number of things can cause a correction, and often it is the unknown that tips the scales. These factors may just be contributors to the build up to a correction, while a currently unknown factor ends up tipping the scale.
For more information:
If you would like to receive this weekly article and other timely information follow us, here.
Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long term holding strategy is the best strategy in any market environment.
Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.
[1] www.investing.com – economic calendar
[2] www.troweprice.com – weekly global market wrap-up