Week Ending 8/11/2017


  • Equities fall around the world.
  • Consensus shifting to the view that a pullback is on the way.
  • Market falls by more than 1% for the first time in 58 sessions.
  • Coming into a rough time of the year.
  • Madman theory.
  • Lots of positives still in place.


The long overdue pullback/correction may be on the way. It has now been 410 days since the market fell by at least 5%, the longest such streak since at least 1995. And it seems like the market consensus is shifting to the view that now might be the time for this long overdue pullback. Or then again, maybe it is not.

The S&P 500 slipped 1.4% on the week, which was better than international equities, which dropped 2.1%. The S&P is down only 1.6% from its recent high, but underneath the surface the damage has been greater. On Thursday, the market fell by more than 1% for the first time in 58 sessions. The Russell 2000 which tracks small-cap stocks is down 5.2%. The declining dollar is also a problem. While it bumps up US earnings and that helps the market. An offset is the huge amount of investments held in the US by foreign governments and institutions. A declining dollar, coupled with a possible market pullback, could lead to a lower allocation to US assets which would drop equity prices further.

Another issue is the calendar, August, September and October have sometimes been rough months for the market.  But it is not only the “months” that might give one worry, the Leuthold Group has pointed out that years that end in the number “7”, dating back to 1887, have produced a drop during this time of year. We had the market crash, down 22%, in October of 1987. In 1997, we had the Asian currency crisis and hints of the forthcoming financial crisis started to appear around this time in 2007. Each of the above was set off by a financial or monetary event. Although the Fed is in tightening mode, their extra cautious pace would not indicate a crisis in the near term. However, the Fed does plan to begin unwinding their balance sheet sometime soon, a process that really has never happened before, at least to this extent.  The process will be gradual but it remains to be seen how the market will react when it starts. But maybe the biggest threat to this market might be a geopolitical event like North Korea.

President Trump could not hold back from the continuous prodding by North Korean leader Kim Joung-un and said clearly several times that North Korea better watch its step. The words he used to kick off the verbal storm were that the North Koreans would be “met with fire and fury like the world has never seen.” He told the Koreans to back down on their threats and actions, which of course, they refused to do and responded in like kind. Given that North Korea has threatened the use of nuclear weapons at various points, “fire and fury” might not be the best choice of language. But that seems to be what Trump intended.

Trump might be using a form of what was called in the 1970s the Madman Theory. Basically, the idea is that Trump wants North Korea to think he is crazy enough to engage in an all-out war or even a nuclear war. Of course, the worry for many is that no one really needs any convincing, Trump’s previous actions have already convinced many that he is somewhat unstable. On the assumption that the North Korean leader were to be convinced that indeed Trump is crazy enough to engage in a war, Joung-un would back down. Which North Korea hasn’t done. The Madman Theory only works when you have two rational actors, not two irrational ones.

A complicating factor is China. China holds the most leverage over North Korea, and is the one country that can influence North Korean policy. Now, while at the same time asking for Chinese help, Trump is about to begin investigating China for trade violations. Specifically, intellectual property violations.

There is also the threat of a government shutdown in late September or early October as Congress needs to reauthorize the debt ceiling. Getting Congress to agree on anything has been close to impossible.

Those are all the reasons why the market might fall. On the positive side, the market still has solid momentum, corporate earnings have been strong and the falling dollar adds to that. About 90% of companies have now reported Q2 earnings and earnings are up more than 10% over last year, according to FactSet. There is a chance for corporate tax reform which would give another boost to earnings. Economies around the world are in expansion mode and the US economy continues in its slow and steady growth mode, around 2%. The job market is very strong.  And interest rates are so low they provide an economic justification for higher equity valuations.



Week Ending 8/4/2017


  • The Dow Jones Industrial Average sets another record, breaking 22,000.
  • Broader indexes are flat, transports are down.
  • Solid payroll report
  • Late credit card payments increase


The Dow broke through another milestone, cracking the 22,000 barrier and ending the week at 22,092.81, plus 1.20% for the week. However, the broader indexes were closer to flat. The SP500 was up 0.19% and the Nasdaq Composite fell 0.36%. International equities rose by 0.82%.

After peaking on July 14, transport stocks have been down. The IShares Dow Jones Transportation Average Index Fund (IYT) has fallen by 4.78% while the Dow (DIA) has increased by about 1.99% during that time. A divergence between the two signifies a market warning based on the 117-year-old Dow Theory. The Dow Theory states that a rally in an index like the Dow should be confirmed by a rally in the transports (the Rails back in 1900). Times have changed since then and there have been several times in this market rally over the last few years where we did not get this confirmation, but it is worth a mention.

Bonds were up by 0.19% as the treasury yield curve going out from five years fell a few basis points.


The first look at Q3 growth from the Atlanta Fed’s GDPNow model came in at a strong 4.0%. However, by week end it had dropped to 3.70%. The New York Fed’s Nowcast has Q3 growth at a much milder 1.98%.


Non-farm payrolls increased by 209,000 in July, higher than the consensus estimate of 180,000. It was the 82nd straight month of job creation, the longest such streak ever. As shown in the chart below, this expansion has been noteworthy for a slow but very steady and long pace.

The May and June non-farm payroll numbers were also revised higher. The unemployment rate fell to 4.3% from 4.4%, the lowest number in 16 years. The labor force increased to 62.9%, up 0.1%. Average hourly earnings were up 2.5% year over year. Almost half of the gains were in bars and restaurants, and healthcare.


Credit-card issuers are starting to have collection problems. The average net-charge off for large US card issuers increased to 3.29%, the highest level in four years. Losses are still low based on historical levels. Around 2014 banks started relaxing underwriting standards, which led to a big increase in credit-card spending. That might have led to the higher charge-offs now.


Week Ending 7/28/2017


  • Equities are flat as strength in industrial’s offset weakness in tech.
  • VIX hits all-time low.
  • Q2 GDP up 2.60%.
  • Fed to begin to unwind its balance sheet sometime soon.
  • Inflation under the surface?
  • Dysfunction in Washington.


US equities were roughly flat on the week which was quite a feat since market leaders Amazon and Google fell after they released earnings. Amazon dropped 0.6% and Google 3.6%. The market was helped by some old-time blue chips like Caterpillar (+7.04%), and Boeing (+13.7%). Caterpillar, which is a good gauge of global growth, raised its outlook for the year.

The VIX, a measure of volatility that is often called the fear index, fell to its lowest level ever on Tuesday. The current “fear” is that when volatility does break out, so many traders are short volatility related instruments, that the short covering will explode the VIX to the upside and take equities with it (but in a negative direction). However, the VIX has been declining for years now and this is not a new argument, although the all-time low is new.

Bonds declined by 0.20% as the curve steepened. The dollar was down by 0.46% and crude had a big rally.


Real GDP increased by 2.6% in Q2, up from 1.2% in Q1 and better than than 1.40% in Q2 of 2016. Consumer and government expenditures were up, capex growth moderated and residential fixed investment was down.


The Fed announces that it will begin to unwind its balance sheet “relatively soon.” In FedSpeak, that normally means within a month or two. The unwinding process will be a slow, gradual affair that might not finish for about five years, assuming no recession.


Inflation is supposedly under control as we constantly hear that the Fed can’t reach their two percent inflation target. But numerous industrial companies, including Ingersoll-Rand, Lennox and United Technologies have been citing high commodity prices and cost pressures. Oil was up 8.6% this past week. Copper is up 14% so far this year and is at its highest level since May of 2015. The labor market also appears tight. One must wonder if there is inflation is beginning to brew just under the surface.


Things have gone from bad to worse in Washington. North Korea shot off another ballistic missile that experts said could reach Chicago. Some very hard decisions have to be made and possibly soon. The conventional wisdom is that tighter economic sanctions and more political pressure are the way to go, but that hasn’t worked with North Korea in the past. Trump’s patience with China is beginning to wear thin, and his natural inclination to brand China as a trade manipulator can now come conveniently into play as an offset of the North Korea problem.

Newly installed White House Communications Director Anthony Scaramucci, brought on-board after the press secretary Sean Spicer left last week, gave an interview with the New Yorker magazine filled with profanity and went after Chief of Staff Reince Priebus and others. Scaramucci was impressive at his initial press conference and seemed like a solid and sane addition, until the interview.

Later in the week, Trump fired Priebus and replaced him with Home Security Secretary and former Marine general John Kelly. Hopefully Kelly can get the White House under control.

The Republican’s attempt to repair/replace the US healthcare system failed again. When you have a slim majority with just 52 Senators, and you are not interested in working with the Democrats (as the Democrats routinely would do with the Republicans in years past), you need to be close to perfect to pass legislation and the Republicans came up short. Maybe it is time for a radical (old-fashioned) approach as Senator McCain alluded to in his dramatic speech earlier this week, try to work together, Republicans and Democrats to come up with a solution that moves the debate and policy to the center.

One bipartisan effort that did succeed was the passing of sanctions on Russia, despite White House objections. The bill passed 419-3 in the House and 98-2 in the Senate.

The truth is, Trump has turned out to be what so many feared during the campaign. In Saturday’s Wall Street Journal, Peggy Noonan writes “He’s not strong and self-controlled, not cool and tough, not low-key and determined; he’s whiny, weepy, and self-pitying. He throws himself, sobbing, on the body politic. He’s a drama queen.”

Trump does have some good economic ideas, and he brought on some excellent advisers, but all his side acts and his crazy behavior are making it impossible to make real progress. He needs to get off Twitter, stop talking and start leading like a normal President.



Week Ending 7/21/2017


It was another good week for investors as equity and fixed income markets were generally up by about 1/2%. The US markets increased by 0.57%, international +0.36% and the bond aggregate +0.50%. The US dollar fell by 1.60% and crude dropped by 1.65%.

The markets have been helped by strong earnings, which in turn have been helped by a lower dollar. The dollar is now down about 7% on the year. A lower dollar provides a tailwind to earnings. According to Dubravko Lakos-Gujas from JP Morgan, S&P500 earnings increase by about 1% for every 2% decline in the dollar. Overall, 19% of S&P 500 companies have reported earnings this quarter, and they have come in 7.8% above estimates (per FactSet).

Interest rates generally declined but at the short-end of the curve, they increased. The 5, 10 and 30 year bonds all had lower yields. But the two-year was up by 1 basis point and the 3-month yield increased by 12 basis points. Bond investors are worried about the up-coming battle over the debt ceiling, probably sometime in October, 3-months away.


While the market continues to advance, the political environment continues to deteriorate. Special Counsel Robert Mueller expanded his investigation into Trump’s Russia connections, including historical personal transactions. White House Press Secretary Sean Spicer resigned and Trump criticized his attorney general. The Republicans cannot pass a healthcare bill and cannot even figure out how to take a vote on one. That was just this week.


The Conference Board’s Leading Economic Index was up by the most since December of 2014, increasing 0.6%. A strong report on building permits led the way.

Initial jobless claims fell to 233,000. Down 15,000 from last week.


Week Ending 7/14/2017


The market broke out to another high, continuing the stair-step pattern of consolidation, then another step higher. Fed Chair Janet Yellen testified before Congress and emphasized that rate hikes would be very deliberate and moderate. The market took that as good news and shot equities higher.

Bonds moved up by 0.43% as interest rates dropped on the testimony. The 10-year fell to 2.33% from 2.39%. Crude rallied by 5%.

Investors now view the probability of another interest rate hike this year as less likely. Yellen’s testimony, coupled with less than sanguine economic reports, makes it more likely that a September hike is off the table and lowers the probability of a December increase.


Our quarterly webinar was this weekend, click here.


Week Ending 7/7/2017


US equity markets were basically even, +0.06% while international markets fell by almost 1/2%. Bonds declined as interest rates continued to rise and the yield curve steepened. The dollar was up and crude was down.


It was one year ago, on July 6, 2016, that the 10-year treasury bond hit its all time-low yield of 1.367%. One year later, we are one point higher at 2.37%. The 10-year has traded in a range between 2.1% and 2.6% since the election and we are back in the middle of that range now.

Over the last couple of weeks, consensus has tilted back towards higher rates going forward. Minutes released from the June Federal Reserve meeting showed that members want to begin reducing the balance sheet before year-end. And European Central Bank minutes indicate that there were discussions of ending their pledge to buy bonds if the economy weakened. Depending upon the rate of increase, higher interest rates at some point would likely put pressure on equities. The interplay between higher earnings and interest rate will have a lot to do to determine the direction of the equity markets.


The June employment report came in strong. Non-farm payrolls increased by 222,000 and the two prior months were revised higher by 47,000. The unemployment rate increased to 4.4% from 4.3% due to more entries into the workforce, which is considered a positive sign. The average workweek rose by 0.1 hours to 34.50 and average hourly earnings were 2.50% higher year over year.