Between a Rock and a Hard Place

I borrowed this title from Raymond James Chief Market Strategist Jeff Saut. He used this phrase to describe the market in recent weeks… stuck between the proverbial rock and a hard place. As he described it, “The Bulls and Bears have been fighting a prolonged war of attrition ever since the beginning of March, confusing impatient investors while at the same time forming a pretty symmetrical triangle, which is a graphical representation of narrowing price action (i.e., higher lows and lower highs).”

He goes on to explain that these narrowing struggles between the Bulls and the Bears usually end up with a burst in one direction or the other, as the battle is finally won by one side or the other. This unique situation is driven this year by the cross currents resulting from the drop in oil prices as well as the impact of a much stronger dollar.

OIL PRICE IMPACTS. Any company associated with the oil industry has seen their revenues drastically reduced by the severe cutbacks in the industry. These cutbacks have come very quickly. On the other side of the equation are the benefits we enjoy as consumers of oil and its byproducts… primarily the benefit of cheaper gasoline and diesel fuel for our vehicles. Since consumers are responsible for about 70% of the money spent in our economy, this savings on fuel will be multiplied many times over as it is spent on automobiles and new homes and furnishings and even candy bars and beef jerky at the convenience stores. It will just take a while for these benefits to filter back to the companies which sell these products.

THE DOLLAR IMPACT. Another factor having a big impact on U.S. companies this year is the strength in the U.S. Dollar. The U. S. Dollar Index has rocketed up about 25% over the past year, suddenly causing U.S. products to be 25% more expensive to consumers in Europe, Japan, Mexico and Brazil, and causing the products produced in those regions to now be 25% cheaper for us to buy in the U.S. As you can imagine, this is very challenging to U.S. companies who export their products abroad, and also challenging to our companies who must compete with imports from those areas. The side benefit (again to U.S. consumers) is that we will be able to save money on the products imported into the U.S. (anyone for a new Mercedes?). Again, the challenges will be reflected almost immediately and the benefits will take a little longer to materialize.

BOTTOM LINE. We believe this bodes well for the markets later this year, but may prove challenging over the next several weeks. As the markets sometimes reflect what is expected to happen several months from now, we believe it is wise to remain positioned primarily in high quality U.S. equities that may benefit from an increase in consumer spending.

Note: This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Dave Crouch and not necessarily those of Raymond James. Past performance may not be indicative of future results.

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