Weekly Trends

Ryan Lewenza, CFA, CMT, Private Client Strategist

April 22, 2016

Market Update

Equity Market YTD Returns (%)

Global equities have been on a tear since mid-February. Both the S&P 500 Index
(S&P 500) and S&P/TSX Composite Index (S&P/TSX) are up 15% since the
February low. In our view, the rebound has been driven by an improvement in
economic data which has allayed concerns of a US/global recession.

S&P/TSX Comp
S&P/TSX Small Cap

In our view, for the equity markets to move higher from current levels we will
need to see an improvement in the underlying fundamentals, notably corporate
profits. On that front we believe earnings growth is set to trough this quarter,
and strengthen in H2/16.
While we maintain our bullish stance over the next 6 to 9 months, we do believe
the equity markets are due for a breather following the strong rally. With the
S&P 500 technically overbought (see Chart of the Week), at resistance, and
approaching the weak seasonal period of May to October, we see the potential
for market weakness through the summer which could then set us up for
strength into year-end with the equity markets delivering decent gains this year.

S&P 500

0.3
1.7

MSCI Europe

-4.1

MSCI EAFE

0.0

MSCI EM

7.5
-15 -10

-5

10

15

20

Canadian Sectors
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Technology
Materials
Communications
Utilities

Weight
6.7
4.7
18.3
38.1
3.0
8.0
3.2
9.5
5.9
2.5

Recommendation
Underweight
Market weight
Market weight
Market weight
Underweight
Overweight
Overweight
Market weight
Overweight
Underweight

Technical Considerations
S&P/TSX Composite
50-DMA
200-DMA
RSI (14-day)

Level
13,901.8
13,248.8
13,403.8
69.6

Reading

16,000

The S&P 500 Recently Recorded Its Most Overbought Reading Since Jan 2013

15,500

Uptrend
Uptrend
Neutral

15,000

100

14,500

90

Overbought

80

14,000

70

13,500

60

13,000

50

12,500

40

12,000

30

11,500

Oversold

20

0
Dec-12

1.9

MSCI World

Chart of the Week

10

17.9

Russell 2000

In the US weve seen a rebound in the labour market and manufacturing. Canada
has benefited from a surge in exports, higher oil prices, and stronger job growth.
Chinas economy slowed further in Q1/16, but experienced a notable
improvement in industrial production, manufacturing, and exports.
While the economic data has improved as of late, this has not yet translated into
stronger corporate fundamentals. The 15% gain in the S&P 500 since the
February low has been driven by multiple expansion rather than an increase in
corporate earnings. For example, the S&P 500 forward P/E has jumped from
15.2x at the February low to 16.9x currently.

6.9

11,000
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

% of S&P 500 Stocks Above 50-day MA

Jun-13

Dec-13

Jun-14

Dec-14

S&P/TSX
50-DMA
200-DMA

Jun-15

Dec-15

Source: Bloomberg, Raymond James Ltd.

Please read domestic and foreign disclosure/risk information beginning on page 5

Raymond James Ltd. 5300-40 King St W. | Toronto ON Canada M5H 3Y2.
2200-925 West Georgia Street | Vancouver BC Canada V6C 3L2.

Source: Bloomberg, Raymond James Ltd.

Sectors are based on Bloomberg classifications

Weekly Trends

April 22, 2016 | Page 2 of 5

Market Update
Global equities have been on a tear since bottoming in mid-February. Both the S&P
500 and S&P/TSX are up roughly 15% since the February low. In our view, the
dramatic rebound has been largely driven by an improvement in economic data
which has allayed concerns of a US/global recession. This improvement is best
illustrated in the Citigroup Economic Surprise Index for G10 nations. This indicator,
which measures whether economic data is coming in above or below expectations,
bottomed in January and has risen steadily since then. As economic data continued
to improve and come in above expectations, so did the equity markets, with global
equities on a one way move to the upside. In this weeks publication we provide an
update on our strategic outlook.
Starting first with the economic environment, below we summarize the key economic
trends seen year-to-date. They include:

US: In the US, weve seen a solid rebound in two key indicators nonfarm
payrolls and ISM Manufacturing. Following a disappointing jobs print in
January, the US labour market bounced back with gains of 245,000 and
215,000 in February and March, respectively. More importantly, as we
predicted in our February 12 Weekly Trends report, US manufacturing has
rebounded following five months of contraction in the sector. In March the
ISM Manufacturing Index jumped to 51.8, driven by a strong rebound in new
orders. With the index now above 50 this indicates expansion in the US
manufacturing sector, which is a big positive for the US economy.
Canada: As we covered last week, the Canadian economy bounced back in
Q1/16, with strength coming from the labour and housing market, and
exports getting a boost from the weaker CAD. All told, the Canadian
economy is expected to grow by 2.8% in Q1/16, according to the Bank of
Canada.
China: While Chinas economy slowed further in Q1/16 with GDP growth of
6.7% Y/Y, from 6.8% in Q4/15, there was a notable improvement in some key
areas. For example, industrial production rose 6.8% Y/Y, up from 5.9% in
Q4/15. Manufacturing rebounded with Chinas official PMI rising 1.2 pts to
50.2 in March, while exports rose 11.5% Y/Y, up from -25.4% in February.
Chinas economy is benefitting from the stimulus of lower interest rates and
an increase in spending which was injected into the economy last year.

Overall, weve seen an improvement in global economic momentum following a soft

patch late last year. This has led to, and supported the rally, in the equity markets.
Global PMIs Have Started to Rebound
Global PMIs
Global
U.S.
Canada
Japan
U.K.
Euro zone
Germany
France
Italy
Brazil
China
Note

Current
50.5
51.8
51.5
49.1
51.0
51.6
50.7
49.6
53.5
46.0
49.7
<= 50

1 Month
Ago
50.0
49.5
49.4
50.1
50.8
51.2
50.5
50.2
52.2
44.5
48.0
52 to 50

Source: Bloomberg, Raymond James Ltd.

3 Months
Ago
50.7
48.0
47.5
52.6
51.8
53.2
53.2
51.4
55.6
45.6
48.2
>= 52

Global Economic Data Beat Expectations In Q1/16

6 Months
Ago
50.4
50
48.6
51
51.7
52
52.3
50.6
52.7
47
47.2

100
80

Citigroup G10 Economic Surprise Index

60
40
20
0
-20

-40
-60
-80
-100
Apr-14

Jul-14

Oct-14

Jan-15

Apr-15

Jul-15

Oct-15

Jan-16

Weekly Trends

April 22, 2016 | Page 3 of 5

Fundamental Update
While the economic data has improved as of late, this has not yet translated into
stronger corporate fundamentals. As weve recently written about, the 15% gain
since the February 11 low has been driven by multiple expansion, rather than an
increase in corporate earnings. For example, the S&P 500 forward P/E has jumped
from 15.2x at the February low to 16.9x currently. That leaves the S&P 500 at a 7%
and 21% premium to its 15- and 10-year averages, respectively. In fact, the S&P 500
is now at its highest P/E valuation level since 2004. In our view, for the equity
markets to move higher from current levels we will need to see an improvement in
the underlying fundamentals, notably corporate earnings. On that front we believe
earnings growth is set to trough this quarter, and strengthen in H2/16. This view is
predicated on the following factors:

US Q1/16 GDP growth is projected to be 1.1% Q/Q annualized but is then

expected to accelerate in H2/16 with growth averaging 2.4%. This should
help support higher S&P 500 sales growth in H2/16, which should support a
rebound in earnings. We continue to forecast 4% Y/Y sales growth for the
S&P 500 in 2016.

The two major headwinds of weak oil prices and the strong US dollar have
weighed on US corporate profits. These trends have started to reverse with
the strong rebound in oil prices and weakness in the US dollar. As such,
these headwinds may reverse and become tailwinds for corporate earnings
in future quarters.

Lastly, with the recent weaker quarterly results, comparisons will become
easier to beat given the low bar. Any uptick in economic growth should
translate into higher earnings growth, aided by the low Y/Y comps.

If were correct on higher earnings growth in H2/16, this should provide a strong
support for the equity markets, and possibly lead to the S&P 500 making a new alltime high this year. As such, we are maintaining our S&P 500 and S&P/TSX year-end
price targets of 2,170 and 14,220, respectively.
S&P 500 Earnings To Reaccelerate In H2/16
10%

9.2%

8.5%
7.7%

6.6%

20

5.9%

5.4%
4.5%
3.7%

5%

S&P 500 Forward P/E Is Near A 12-Year High Of 16.9x

11.2%

10.5%
9.4%

3.6%

18

4.8%

2.3%

16

0.6%
0%

14

0.0%
-1.5%

-2.0%

12

-5%
-5.2%

S&P 500 Quarterly EPS Growth Y/Y

2016/4C

2016/3C

2016/1C

2015/4C

2015/3C

2015/2C

2015/1C

2014/4C

2014/3C

2014/2C

2014/1C

2013/4C

2013/3C

2013/2C

2013/1C

2012/4C

2012/3C

2012/2C

2012/1C

Source: Bloomberg, Raymond James Ltd.

-8.7%

2016/2C

10

-10%

S&P 500 P/E (NTM)

10-Year Average

8
'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

Weekly Trends

April 22, 2016 | Page 4 of 5

Technicals And Seasonality

While we maintain our bullish stance over the next 6 to 9 months, and see the
potential for further gains this year, we do believe the equity markets are due for a
breather following the large rally. This view is based on the following:

First, with the rally in the equity markets, stocks have become technically
overbought, and as such, need to work off this overbought condition. As
illustrated in our Chart of the Week on the front page, the percentage of
stocks in the S&P 500 above their 50-day MAs hit a high of 94% on March
30, which is the highest reading since January 2013. Typically, when the S&P
500 registers such extreme readings, we see a subsequent pullback in the
equity markets.
Second, the S&P 500 is approaching stiff technical resistance around the
2,130 level. This level has proved to be resistance a number of times over
the last year and a half.
Finally, the equity markets are quickly approaching their weak seasonal
period which starts around mid-May and lasts until October.

Putting it all together, while we see further gains this year, we expect the equity
markets to go through a period of consolidation through the weak spring/summer
months to help work off the overbought condition and as our US Chief Strategist Jeff
Saut likes to say, rebuild the markets internal strength. We expect an increase in
market volatility and potential market weakness through the summer, which could
then set us up for strength into year-end with the equity markets delivering decent
gains this year.
S&P 500 Is Approaching Stiff Technical Resistance

While The Weak Seasonal Period Quickly Approaches

2.5%
S&P 500 Seasonality (1990 to present)
2.0%

1.8%

1.6%

1.5%

1.7%
1.4%

1.3%
1.0%

1.0%

0.7%
0.3%

0.5%
0.0%
-0.5%

-0.2%
-0.5%

-0.5%
-1.0%

-1.0%
-1.5%
Jan

Source: Bloomberg, Stockcharts.com, Raymond James Ltd.

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Weekly Trends

April 22, 2016 | Page 5 of 5

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