The US stock market made another all time high last week amid more mediocre – at best – US economic data. Much of the gain was credited to positive developments in the geopolitical arena as a ceasefire was announced in Ukraine and negotiations continued on Greek debt relief with some positive signs that an agreement might be reached. Whether either of those things are important for the value of US stocks is questionable at best but the bulls managed to convince themselves that they are and that is all that really matters. From a technical and fundamental perspective I’m a bit skeptical of this move even if it does make a new high. The rally was on fairly light volume, stocks have been struggling for months and this doesn’t change much in that regard. The S&P is up less than 2% on the year and less than 4% since September. Not exactly ripping even if it does go into the record books.

The economic data for the week was not very good but stock buyers managed to ignore it in favor of believing that Vladimir Putin is a man of his word. From whence that faith comes I am hard pressed to say and I don’t count myself among the suckers crowd that believes he’ll honor the ceasefire. The sum total of the positive reports was one – the JOLTS report which showed a growing number of job openings. The rest of the data was fairly negative but with enough room to see some glimmers of hope if one squints. Small Business Optimism fell with seven of ten components down on the month and economic outlook the most negative. Still it was at 97.9 which isn’t a particularly worrisome level.

Mortgage applications turned lower again after the recent surge, down 9% on the week. Jobless claims moved back above 300k as some of the oil sector layoffs started to show up in the numbers but again not at a particularly elevated level. Retail sales were down a more than expected 0.8% and yes a lot of that was from lower gas station sales. The bulls say that doesn’t matter and that if you exclude autos and gas stations, sales were up 0.2%. I would just point out that if you exclude the bad stuff you can make any number look good. Auto sales have been a big part of this recovery and last I checked gas station owners are consumers too. I’ve said it before and I’ll say it again, lower energy prices are good for a lot of people but at best it changes the composition of spending not the total. That may still be good for the economy in the long run – and I think it is – but in the short term it doesn’t mean much.

Some of the worst news was on the inventory front where both wholesale and total business inventories rose while sales fell. That drove the total inventory to sales ratios to a level last seen in October of 2008 and doesn’t bode well for near term production. This is exactly the same mini cycle we went through last year when businesses got overoptimistic about future sales. The polar vortex may have had an impact on Q1 GDP but the inventory vortex was the real culprit and it will likely drag again this year at least at the first of the year. The last reports of the week were also negative with both import and export prices falling hard and consumer sentiment dropping from January’s very positive level. One can’t help but look at those import and export prices and not think that someone is winning the currency wars and it isn’t us.

In addition to the weak economic data, stocks have also been able to overcome the most negative earnings estimate revisions I’ve seen in years. In fact, I can’t find a bigger negative revision in the numbers I have where we didn’t end up in recession in fairly short order. That doesn’t mean it will this time but the estimates for 2015 earnings are now down across the board. While energy does get a lot of the blame for that I find it notable that estimates have been reduced for every sector in every quarter of 2015. It isn’t just energy. One caveat is that analysts don’t have any better track record at predicting the future than anyone else but they are also a preternaturally optimistic bunch so if they are turning dour that really says something.

As I said at the beginning though, none of this seems to matter to US stock investors. Seemingly everybody loves US stocks and the news flow doesn’t seem to change that. With the dollar rising US stocks are the only game in the world or at least it seems that way. A recent Legg Mason poll found that 85% of those polled believed that US stocks “offered the best opportunities over the next 12 months”. With sentiment so lopsided in favor of the US there may be an opportunity for contrarian minded investors.

Similarly lopsided sentiment can be found in the currency markets where everyone loves the US dollar and hates most everything else, a consequence of the perception/reality of the ongoing race to ease monetary policy everywhere but here. It is interesting though that while I hear something every day about the strong dollar it hasn’t done much in the last month. I suppose it could just be resting before another run higher but I suspect there is a bit more going on here. It is interesting – at least to me – that the EAFE index has outperformed the S&P 500 since the turn of the year. With the ratio of EAFE to S&P scraping along at levels last seen at the end of the great 90s bull run in US stocks, a reversal, even if only short term, would not be that surprising.

I think at least as interesting is the performance of emerging market stocks which outperformed strongly in January before a recent relative performance pullback. Still EM stocks are ahead of US stocks for the year by a couple of percent. Obviously not much to hang your hat on but considering the perception that a rising dollar was bad for emerging markets (a sentiment I also expressed) it is still surprising. But the underperformance of emerging market equities is quite long in the tooth with the index essentially flat since 2010. It may be that the past episodes of crisis during rising dollar periods taught emerging markets something. In fact, it may be that the rise in the dollar was as much about foreigners with large US dollar debts hedging their exposure as it was about relative economic performance. That’s at best a theory though and having watched so many of these EM blowups in my career I am a bit skeptical. However, markets are pretty good at discounting these things and neither EM stocks nor bonds are acting as if crisis is in the offing.

The current consensus is that the US is the best place to be. US economic growth is better than most of the rest of the world and the dollar is rising. But in the age of currency wars and deficient aggregate demand, countries that weaken their currencies first appear to gain an advantage over those who act more responsibly. Indeed, the falling import and export prices reported last week would seem to indicate that growth is being redistributed away from the US to other parts of the world. China, with its currency pegged (softly) to the dollar appears to be seeing the same effect. There are still big risks outside the US (and within if you ask me). Greece may yet default (although I doubt it) and emerging market debtors may not have adjusted sufficiently to a rising dollar. But those risks, those fears are pretty well known and probably not the black swans everyone is looking for. So as everyone continues zagging along with last year’s winners, it might be time to consider zigging and adding some international exposure to your portfolio.

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For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Joe Calhoun can be reached at: jyc3@4kb.d43.myftpupload.com or   786-249-3773. You can also book an appointment using our contact form.