Key Points

  • U.S. stock indexes again hit record highs but sentiment and action below the surface may indicate a less bullish picture. The uptrend should continue, but risks have risen, and we believe the signal is for investors to have a neutral stance.

  • The economy looks strong, but are housing and autos sending a different signal? The Federal Reserve again boosted rates, and looks set to continue, but are they moving from removing accommodation to tightening?

  • Higher oil prices could benefit Canadian and emerging market stocks, but also have the potential to impact central bank actions.

“I’m not lost for I know where I am. But however, where I am may be lost.”
- Winnie-the-Pooh

Mixed messages

We know where we are: it’s easy to look at equity indexes in the United States hitting record highs and believe that all signs point to further bullish action. But below the surface there are some developments that we believe warrant a bit of caution. Investor sentiment is in the overly optimistic zone according to the Ned Davis Research Crowd Sentiment Poll, which can herald a near-term pullback. In contrast, investors’ actions don’t appear to match the sentiment, as money flows into equity mutual funds and exchange-traded funds (ETFs) remains negative according to Evercore ISI Research. Also, some of the former leading sectors, such as technology stocks—especially those in the social media space—have shown signs of weakness. This could represent a broadening of leadership, or a shift away from areas that are perceived as higher risk—or both. Meanwhile, the industrial sector has surged, perhaps bolstered by the recently weaker dollar, which has occurred despite 10-year Treasury yield again moving above 3%.

Weaker dollar could aid international sales

While rising yields haven’t hurt stocks…yet