It has been a big week for high-profile events. The summit meeting between US President Trump and North Korea Supreme Leader Kim went as well as could be hoped amid talk of working toward denuclearization and potential future meetings.
It’s also a big week for central bank meetings. The Fed raised the Fed Funds rate by 0.25% to 1.75%-2.00%. The central bank raised its 2018 GDP forecast to 2.8%, raised its Core PCE inflation forecast to 2.0% and cut its unemployment rate forecast to 3.6%. The Dot Plot of FOMC member forecasts indicated the majority of members expect another 2 rate hikes this year and 2-4 in 2019 with a longer run Fed Funds target of around 3.00%. Later this week the European Central Bank and the Bank of Japan are also holding meetings.
Supporting the move toward higher interest rates in the US is the combination of a strong domestic economy and rising inflation. With some political tensions easing in Asia this week and Europe last week, it appears to be a positive environment for corporate earnings as long as trade actions don’t escalate further.
In this week’s issue of Equity Leaders Weekly, we look at the Amex Composite Index as another sign of positive market breadth and at the recovery of Retailer stocks this year.
AMEX Composite Index (AMEX.I)
While large cap indices like the Dow Jones Industrial Average and the S&P 500 consolidate short of their winter peaks following corrections, the breadth of the underlying bull market continues to improve.
New all-time highs for the Russell 2000, S&P 600 and NASDAQ Composite lately indicate that even though the generals have paused for a rest, the troops continue to advance, a sign of capital moving broadly into stocks, not just concentrating in a few big cap names.
The AMEX Composite Index, which is comprised of small, mid cap and emerging companies, also broke out to a new all-time high this week. This move indicates that investors remain willing to take on risk and enthusiasm for stocks remain strong. Investors moving down the ladder from the big cap stocks that drove the first phase of the bull market out toward catch up and recovery situations indicates a healthy appetite for returns even if it means taking on additional risk. It looks like capital coming out of defensive havens is being put to work in risk markets like stocks with investors seeking out relative value and shining the spotlight into previously neglected areas.
SPDR S&P Retail ETF (XRT)
Speaking of recovery situations, US retail stocks have been on a roll lately. A year ago, talk of Retail Apocalypse was all the rage with Amazon.com and other online retailers seen as totally destroying the old school brick and mortar retailers. This year, the tone has changed a lot with many of the survivors crawling out of the carnage a lot stronger and with improving results. Although some retailers are still struggling, many retailers have either learned how to compete against the likes of Amazon or partner with them.
Since late 2017, the retail sector has been recovering and this week, the SPDR S&P Retail ETF (XRT) broke through its 2015 peak and then the $50.00 level to indicate that the nearly three years the sector spent stuck in a sideways channel has ended and a new advance is underway. The sector can benefit from anticipation of continued growth in US consumer spending and perhaps also an increased focus on sectors more sensitive to the US domestic economy and less exposed to trade policy risks.
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