The Dow’s Back, But For How Long?

The Dow Jones Industrials recently erased its losses for the year, but we advise our Global Income Edge investors to stay invested in the most conservative global income investments, as the recent market rise could again prove fleeting.  

That rise is being attributed in part to the Federal Reserve announcement it wouldn’t be raising interest rates as aggressively as it said it would in December. The Fed now forecasts two increases in 2016, but many believe if markets remain weak we may not see any rate increase this year. Would this new policy be enough to keep the U.S. economy strengthening to offset global weakness, as the Fed hopes? That’s hard to answer.

Meanwhile, we’re still optimistic about the European Central Bank’s (ECB) stimulus to boost the recovery of the Eurozone. We markets there are still significantly undervalued and the region is only starting to recover.

Focus on the Fundamentals

The main reason many investors, including myself, are suspicious of the latest rebound is that it’s not clear why the reversal has occurred, as economic fundamentals have not changed significantly in the last few months.

There are many theories for the rebound. One good one is overseas and institutional investors that lost money on the collapse in Asia markets have ploughed into safe U.S. investments.

Whatever the reason, here are some key factors to watch when handicapping the strength of the market rebound:

Inflation: Some economists, such as former Fed Chief Alan Greenspan, have suggested that the threat of inflation is not being taken seriously enough. , Consumer prices in the U.S., excluding food and fuel, increased more than forecast in February—the second month in a row.

We would have to see a step up in capital investment and bank lending, which has been weak, as well as higher circulation of the money supply before we would come to that conclusion.

Oil Prices: Oil prices have been on the rebound, reaching $40 dollars per barrel. If the prices were to increase significantly it could hurt consumer spending globally and reverse gains. For the last year this “consumer dividend” from low oil prices has offset currency devaluations and increased weakness in global markets.     

International trade: The intense debate among U.S. candidates over international trade has many global businesses worried.  Actions such as raising tariffs could hurt the U.S. and global economic recovery if a trade war erupted. We plan to cover the candidates’ positions on international trade in detail once the Republican and Democrat nominees are known.