From the Jan. 9 Monday Morning Kickoff Newsletter from Tematica Research
Despite the enthusiasm and hope that has overtaken the stock market about President-elect Trump jumpstarting the economy, we still have to navigate through the December quarter and most likely at least the first half of 2017 before his policies, whatever they wind up being, start to have an impact on the economy. Given warnings from retailers, as well as cautionary comments from Honeywell (HON) and Adobe Systems (ADBE) over the potential impact of continued dollar strength in 2017, there are reasons to look at the recent market moves and think it has gotten a bit ahead of itself, with the forward price-to-earnings ratio on the S&P 500 at levels not seen since 2002, which was quickly followed by a 30 percent decline in the market.
As Tematica’s Chief Macro Strategist Lenore Hawkins pointed out during a visit with Varney & Company on Fox Business last Friday, the market is not pricing in the level of political risk we face this year, with elections coming up in Germany, France, the Netherlands and potentially Italy. Those elections, that include the threat of euro-skeptics Marine Le Pen in France and the Five Star Movement in Italy gaining political momentum, could lead to serious weakening with the euro.
A fall in the euro currency would strengthen the dollar significantly, which would weigh on not only dollar-denominated commodities, but also export business for U.S. companies. In other words, the current currency headwind could get even stronger.
If we get more of the same commentary from Honeywell, Adobe, Macy’s, Sears, JC Penney, Kohl’s and even Fattening of the Population thematic contender Sonic Corp. (SONC) that shared it saw a “sluggish consumer landscape” in the December quarter, we could very well see the market pullback from current levels as the flow of December quarter earnings reports heat up. Should that come to pass, on the back of reset expectations, odds are stocks will be at much fall to more favorable prices than they stand now and that is likely to offer a buying opportunity.
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