3 Things You Need To Know In Our March Stock Market Update
The S&P 500 made a new high at the end of February. But stocks have been moving lower over the last few weeks.
It’s important to note that the 3.5% pullback in the S&P has taken place within the upward trending price channel.
In other words, the recent pullback hasn’t changed the direction of the long term trend. This has simply been a pullback in a bull market.
However, the pullback has been driven by changing market fundamentals. I see three things weighing on investors and keeping the stock market held in check…
First off, we have interest rates.
Falling unemployment and higher wages are the leading edge of inflation. So, the Fed is preparing to hike interest rates in order to keep inflation near their target of 2%.
This will be the first time the Fed has raised short term interest rates since 2006. But it’s no secret that the Fed is getting closer to raising interest rates.
As a result, investors are front running the move by the Fed. Investors are already flooding out of interest rate sensitive investments like utilities. And they’re moving into sectors that perform better in a rising interest rate environment.
Secondly, there’s the US Dollar.
The US is the only country that’s willing to let our currency appreciate. Just look around the globe and you’ll see that the US Dollar is appreciating in value relative to every other major currency.
This is due to a host of economic conditions and central bank actions aimed at keeping their currency cheap relative to the US Dollar.
The strong dollar is typically a good sign for the US economy. It draws in foreign capital that is put to work in the US economy and helps drives economic growth.
The flip side to the strong dollar is that it depreciates the value of the earnings that companies make in foreign currencies. In other words, a strong US Dollar hurts earnings growth and stock performance.
And the third thing weighing on investors is falling oil prices.
The surge in US oil production coupled with a slowing demand has created a glut of oil. In fact, the largest US storage facility in Cushing, Oklahoma is 70% full.
And the reduction in drilling rigs has failed to slow the rate of oil production in the US.
If storage reaches capacity, we’ll inevitably see oil prices fall even lower.
The combination of falling oil prices, a strong US Dollar, and rising interest rates is a very different environment than we have been in the last few years.
For the most part, oil prices, the value of the dollar, and interest rates have been stable over the last three years. The stability has given investors confidence and helped push all sectors of the market higher.
Now that things are changing, there will certainly be changes made to the investments that they’re willing to hold. The money flows that accompany these changes typically drive sector performance.
I’ve identified the ETF I believe will benefit the most in my latest monthly installment of the Sector ETF Trader.
Good Investing,
Corey Williams
Note: Corey Williams writes and edits ETFTradingResearch.com. Sign up for our free ETF reports and free e-letter at http://etftradingresearch.com/free-sign-up. We’re devoted to helping you make more money from ETFs.
Category: Market Analysis
