It became obvious after last week's G20 meeting that all its members made a pact not to engage in any form of competitive currency devaluation to strengthen their own domestic economies. A quasi deal had to include the Fed not raising rates again too as long as foreign economies remained weak and fears of deflation remained high.
While the pundits looked for multiple rate hikes this year, I always looked for 2 or less, but recent events and data points have dictated a change in that view. I now believe One and Done for 2016. If the economy had picked up steam in April and May, I felt that the odds favored the Fed moving in June or September at the latest, but after September, the Fed would be on hold not wanting to impact the Presidential election in November.
The Fed out of the way for the remainder of the year lifts a huge cloud holding back the global stock markets, especially in the U.S. and explains the market moves to new highs.
Energy prices after the Doha meeting initially fell but rallied back due to production cutbacks in Kuwait due to a strike. But that strike just ended so let's see how the energy markets react now.
President Obama will be visiting Saudi Arabia shortly trying to improve relations, which have suffered over the last year. I am sure that he will be negotiating with them to find a way to let Iran increase production somewhat while other producers, including themselves, freeze at January levels.
I still believe that the oil market will move into balance next year as production, especially in the U.S., continues to decline while demand increases modestly.
I am watching Saudi Arabia closely as they can make or break energy prices. While I covered my energy shorts 7 weeks ago, I never went long and remain flat.
The strength in the industrial commodity stocks so soon has been surprising. While I went "all in" 8 weeks ago as readers to my blogs can attest, I did not expect so much so soon. I still believe that we have passed the abyss and supply/demand is turning favorable for most commodity prices, which will continue to move higher over the next year. There clearly has been a mindset shift toward this group and other more cyclical companies who have rationalized their businesses and will achieve better results ahead.
I commented two weeks ago that S&P earnings would be hiked for 2016 due to weakness in the dollar. It is clearly happening. You should read Johnson & Johnson's (NYSE:JNJ) first-quarter report where they hiked 2016 numbers due to a lower than earlier forecasted dollar. Finally, positive surprises due to the dollar!
Higher earnings plus lower interest rates add up to a good market environment for risk assets now. But not all stocks are equal.
My key concern remains the political landscape both here and abroad. The working class is raising their voices, wants to be heard and be part of the solution. Just look at Trump's and Sanders' supporters who feel disenfranchised from the process. Time for the politicians to listen and make changes!
Make America Great should be more than a slogan. Similar financial and social problems exist in other parts of the world. How else do you explain Brexit?
Bottom line is that events are moving quickly and you better think as a global investor rather than as a trader. This is our strength and explains our continued significant outperformance.