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Every single client meeting includes conversations of what may derail the current bull market. After such a strong run off the post U.S. Presidential Election low, many fear a significant correction may be imminent based on (1) equity market post-election move too far too fast, (2) the likely 25 basis point rate hike at next week’s December FOMC meeting, (3) the spike in U.S. rates could choke off economic activity, and (4) expectations for a strong rally in the U.S. Dollar. Although there could be a correction at any time, we do not believe there is any evidence they could cause anything other than a very brief correction on the way to our 2017 S&P 500 (SPX) target of 2,340.

1. Hasn’t the market moved too far too fast? It seems incredible that just a month ago, the SPX was down 9 days in a row and the Presidential election was just ahead. One of the reasons we upgraded our market view at that time was how oversold it became in anticipation of the election despite improving global economic data. In fact, our trusty 14-week stochastic indicator dropped deeply into oversold territory by closing below 20. In just the last four weeks, this indicator has gone from below 20 to greater than 90. This degree of improvement in just four weeks has only happened twice before – both in the 1960s with at least a gain of 7% over the next six months (Figure 1). Although both instances saw a gain over the next year, the bulk of the gain following the signal was over the first six months.
2. Won’t a hike at December FOMC meeting cause a meltdown similar to the 12/2015 hike? We don’t think so. Prior to the 12/2015 rate hike, the global economy was decelerating, commodities were in a very clear downtrend, the MSCI Emerging Currency Index was under significant pressure, and there was fear of political upheaval. Heading into next week’s decision, the global PMIs are at their best levels of the past year (or more), the Continuous Commodity Index and Oil are poised to break to the upside, the MSCI Emerging Currency Index is well off early year lows, and the feared political upheaval took place with very little impact (Figure 2).
3. Won’t spike in interest rates shut down economic activity? Again we are skeptical of this fear given (a) likely fiscal stimulus from new Republican majority, (b) sharp steepening of the yield curve (Figure 3) that should further incentivize bank lending, and (c) growth accelerated to 4% and 5% Real GDP in the second and third quarters of 2014, respectively following the spike in rates from 2% to 3% in late 2013.

Won’t U.S. Dollar strength hurt the bull case? While it sounds like heresy, we do not expect the U.S. Dollar to see significant and sustainable strength over coming quarters, without a sharp reversal in the current trend of global economic activity. There is a clear inverse relationship between the U.S. Dollar Index (DXY) and the Continuous Commodities Index (CCI), especially during periods of pronounced DXY strength (Figure 4). Although many also believe much higher relative rates in the U.S. vs. key trading partners could cause a spike in the DXY, the very limited upside since March 2015 suggests otherwise.

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