Global markets dropped last week. As disappointing earnings and tepid economic data provided little reason for cheer.
Earnings have begun to deteriorate. The Q1 S&P 500 earnings growth rate is forecast at negative -8.9 percent. Marking the fourth consecutive quarter of falling profitability. And the worst quarterly result since 2009. Zero companies have provided guidance above expectations. Even as the market rests just beneath all-time highs. And yet, a coterie of bullish prognosticators continues to allude to the favorable possibilities ahead.
Even Apple, Wall Street darling though it's been, did something it hasn't in 13 years -- experiencing a quarter-over-quarter sales decline. Revealing three months of rough sledding for the world's largest company. Shares responded accordingly. And plummeted.

As Oscar Wilde counseled, "To expect the unexpected shows a thoroughly modern intellect." We currently view stocks as overbought. And believe the risk of a move lower to be much more than is currently reflected by the Volatility Index (VIX). This represents a catch-22 for antsy, cash-laden investors. They see the market rising and believe they're missing the boat. But technical data portends otherwise. Stocks have risen above their Bollinger Bands, which typically alludes to extreme conditions. Those being that stocks are over or underbought. Underbought reveals an opportune time to put cash to work. Overbought representing the opposite. When stocks closed below the lower Bollinger Band the last couple years, it typically occurred during panic selling and represented excellent times to invest.
Conversely, when stocks closed above the upper Band, it represented the rare instance of panic buying, where investors felt they were being left behind, and in hindsight were generally poor times to put cash to work.
Still, hope springs eternal.
The Fed convened last week to little fanfare. Holding rates steady. Providing little clue as to intentions for its June meeting. Chairman Yellen, facing pressure from every direction, explained that the stance remains accommodative as they continue to support improvement in labor market conditions and a return to two percent inflation. Expecting business activity to expand at a moderate pace, the Fed opted for a wait and see posture.
Originally the Fed announced four quarterly hikes in 2016 of 0.25 percent each. Then the market lost 13 percent. And the Fed walked those intentions back to two hikes. Well, the Fed will not wish to be seen as affecting presidential politics. So, if it intends to stick with the two-hike program, it will have to make a move in June, lay low through November, and then hike again in December.
Once again, the Fed is driving the train. As the rest of us are left to do nothing but watch the countryside fly by.
Economically, headwinds remain. As the Bloomberg U.S. Macroeconomic Surprise Index -- which measures how the data looks versus expectations -- hit a 14-month low. Making matters worse, the Atlanta Fed's GDPNow tracking estimate of Q1 GDP growth sits at a meager 0.3 percent. And the Bureau of Economic Analysis released a preliminary reading of U.S. GDP, estimating Q1 growth at 0.5 percent. Tepid? Meet worsening...
Both business and consumers appear to be tightening purse strings.
Consumer confidence has been faltering. Business spending in Q1 fell 2.4 percent. Underscoring that weak demand at home and abroad threatens to hamper an economic expansion already restrained by low productivity, struggling corporate profits, weak wage growth and global volatility.
Add to that technical gusts blowing in from the northeast. As stocks continue to face massive overhead resistance from a falling-top pattern that began in 2014. Moreover, a few of the large consumer and technology stocks that have held markets aloft have recently rolled over. Never a good sign.
Nor should we forget that U.S. equities have been the lone island of solidity in a sea of instability. While global trade and port traffic has declined in Europe and Asia.
The chart below shows how the all-world index (ex-USA, in red) has broken down the last two years. While the S&P 500 (blue) managed to maintain its respectability. Begging the question: can such divergent trends remain? That is, are U.S. markets strong enough to buoy global markets? Or will global markets drag down those in the U.S.?
Near term, we expect the S&P 500 to perhaps waft down as low as 2,020 before it makes another portentous run at a new high. Underscored by the VIX Index's (the fear index) slumberous decline from 31 in mid-February, to 14 today. Traditionally, when the VIX hits 12(ish), it has been a good opportunity to de-risk a bit, or hedge your bets. As volatility could lie just around the bend.
Did you notice that Exxon Mobil recently lost its AAA rating when it was downgraded by S&P Ratings Service? Leaving Microsoft and J&J as the sole remaining AAA rated companies in the country. Which, by the way, happens to be a better rating than that held by the country's own government. Love it when the government holds companies to standards that it itself cannot meet.
Now, a quick aside about gold.
Last week we discussed how gold and gold miners appear to be catching a bid. Following an extended bear market, gold and gold-related companies are seeing a confluence of events help to propel values higher. Moreover, the declining value of the U.S. dollar has been a boon. Because typically, when the dollar drops, gold rises.
Despite recent moves, gold and the dollar have trended sideways these last 15 month. Recently, the dollar index dropped below 94. A level where it has rallied in the recent past. If it holds beneath 94, gold will likely rally to new highs. Meaning, this will be a critical week for both gold and the dollar.
Saudi Arabia announced plans to be free of oil dependence by 2030. Part of an aggressive plan to develop its sovereign wealth fund and develop other economic means of supporting the kingdom. The plan, created by a 30-year old Deputy Crown Prince, was initiated with the partial sale of its the kingdom's largest state-owned oil conglomerate.
Not sure how the Saudi's do things. But, I don't believe that America would be comfortable leaving the very existence of the nation up to a 30-year old. Not that our 54-year olds are knocking the ball out of the park...
Which leads us to politics.
Last weekend, two of the three remaining GOP presidential contenders decided to employ some Game Theory in order to nullify Trumps' chances at the nomination. Theorized by mathematician John Nash Jr. and popularized by the bio-pic on Nash, "A Beautiful Mind," game theory revolves around players in a game attempting to achieve a equilibrium, or stale mate, by making decisions that aren't solely good for them, but for them and the group of players.
Accordingly, Cruz and Kasich announced last weekend that they will divide up the remaining primary states. Allowing each to focus on specific primaries in order to negate Trumps' opportunity to capture all available delegates and so the early nomination.
All's fair in love and war, right?
Weekly Results
Major markets finished down last week. The DJIA lost -1.28%, while the S&P 500 fell -1.26%, and the NASDAQ fell -2.67%. Small cap stocks dropped -1.38%. The 10-year Treasury bond yield fell 5 basis points to 1.83%. Gold finished up $60.46 per ounce, or 4.91% last week.