GET READY FOR SOME MORE FED WHIPLASH | CROUCH CONNECTION, July 2016

You might recall that only a month ago a very disappointing employment report (only 38,000 new jobs) removed all expectations that the Fed might raise interest rates in the near future. The feared Brexit, which fueled the fears of an imminent recession, encouraged the pundits who declared there would be no rate hikes before mid-2017.

Now we have received the June Employment Report showing a whopping increase of 287,000 jobs last month! Adding that news to the realization that the Brexit is behind us and that the short-term impacts apparently will be minimal, you can be assured that the Fed "Hawks" will be back on the road beating the drum for another rate hike right away.

STUCK IN A TRADING RANGE

Mike Gibbs, Raymond James Director of Equity Portfolio and Technical Strategy, summarized the current situation saying "that it is difficult to make a case here for a significant move to the upside or to the downside". We have been stuck in a range between 16,000 and 18,000 on the Dow for almost a year now, and it looks like we could be there for several more months.

Our friends at the Fed have been extremely adept at "kicking the can down the road". Every time it seems that the economy is slipping toward the next recession, the Fed will back off of their push for higher interest rates, and the market will respond with a rally back to about 18,000. When it seems like we are out of the woods and life is going to be peaceful again, here come the Fed "Hawks" again and start pressing for interest rate "normalization" (the next interest rate hike), and we go back to the lows around 16,000.

That may be an oversimplification, but you get the point…corporate earnings are not good enough to get us beyond the current highs, but they are good enough to keep us from crashing through the recent lows.

In the positive column, low interest rates continue to make new homes and automobiles attractive and the additional jobs being created in those industries allow the American consumer to continue to spend. We believe that the negative impact of the lower oil prices on employment and capital spending has run its course, and the drag on the economy will dissipate going forward. Low interest rates also mean that investors looking for income have limited options, so the dividend income from the stock market is an attractive income option for many people, providing demand for stocks.

In the negative column the list is longer…political uncertainty and unrest certainly provide plenty to worry about. Weak global growth continues to worry economists with the fears that China or the Euro will lose control of their economies and trigger the next recession. We are heading into the August to October time frame and the bad memories of all the market corrections that have occurred in October have market watchers nervous.

Last but not least, market technicians, who study the charts of the markets for clues to the underlying currents, are concerned by the action in the transport stocks and the financial stocks in particular. Recently neither sector is acting well, and that has not historically been a positive sign about the economy.

ALL ABOUT EARNINGS

As Gibbs stated in his weekly Market Guide:

"Earnings: This is most important, in our opinion. For the market to move out of this range-bound trading seen since late 2014, either the valuation multiple must expand or earning must resume growth. Expanding the multiple in a world facing sluggish economic growth and with numerous issues seems like a tall (and unjust) order. Therefore, earnings hold the key, in our opinion"

Earning season will have begun in earnest by the time you receive this epistle. We already know that the reports coming in this quarter will not be particularly good (consensus expectations for -5.3% growth, according to Factset). Certainly we hope that any surprises will be positive, but the most important factor will be the company guidance about what to expect the remainder of this year.

"In the business world, the rearview mirror is always clearer than the windshield."

Warren Buffett

WRAP UP

At this point, I would not expect any major surprises, positive or negative. A continued trading range will make dividend income even more important to us, as that will be an important source of our investment returns. We will also try to be opportunistic in our trading as we reposition our portfolios to be more focused on the U.S. and the U.S. consumer spending, as that is where we believe we will receive the most predictable results in the near future.

Sincerely,

Dave Crouch

Financial Advisor

Registered Principal

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