Despite a lackluster March, the stock market put in another stellar performance in the first quarter. With so many pundits commenting on the longevity of the current bull run – which surpassed the eight-year mark last month – there are three non-equity indicators I’m using to see how much more room we might have on the upside:
1. Rising Crude Oil Prices.
Crude prices fell about 7% in the quarter, even with OPEC’s decision to cut production. The dramatic increase in the U.S. rig count put significant downward pressure on the market. But if this bull market is real, and driven by economic expansion and an increase in profitability, the crude market should be able to turn itself around.
Consider the drop in energies last quarter as a warning shot over the bow of the current market run.
2. Upward Pressure on Wages.
As unemployment drops, wages should increase. This is particularly true if new job growth is full time. If this is the case, wage increases would precede productivity growth – and the rising confidence needed to bump up salaries would be evidence that the C-suite has bought into the Trump reflation trade.
3. Stable (or Narrowing) Credit Spreads.
Bonds gained ground in the first quarter, even though the Fed has raised rates three times in the last year and is forecasting two more increases in 2017. What gives?
First off, with so much cash on the sidelines, investors have been supporters of every dip in fixed income prices. An improved economy has kept default rates under historic averages of 3.9%. Finally, improved earnings have made it easier for companies to service their debt.
At present, there seems to be more pluses than minuses for the current equity rally. Investors should consider the factors above in forming their short-term market strategy.