MARKET RECAP

US stocks fell by 4.80% and bonds were off by 0.95%. The 2-year Treasury yield increased by 29 basis points. International stocks dropped by 3.30%.

On Tuesday, the Bureau of Labor Statistics announced that CPI had increased by 8.3% since last year, higher than what was anticipated. The Core CPA, which excludes energy and food, was up by 6.3% compared to 5.9% in June and July, indicating that price pressures remain intense. The S&P fell by 4.3% after the news and the 10-year treasury yield increased to 3.42% from 3.297%. According to Ryan Sweet, senior director of economic research at Moody’s Analytics, the average household is spending $460 more each month to buy the same basket of goods and services as last year.

Markets are now anticipating a fed-funds rate of about 4.25% in December, implying 75 basis point increases in September and November, and then another 25 basis points in December. The terminal rate is anticipated to be 4.45% in April.

FedEx announced weak, very weak, preliminary earnings due to weak demand. The stock fell by 22%. Ray Dalio of Bridgewater writes that a 4.5% fed-funds rate could mean a 20% drop in equity prices.

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MARKET RECAP

Stocks were down by 0.73% in the US and 0.26% outside the US. Bonds fell by 0.63%. The yield on the 10-year treasury is now at its highest level since the pandemic began, closing at 1.34%. Bitcoin burst through $50,000 and is currently trading at about $56,000.

Helped by stimulus checks, retail sales advanced by the most in seven months in January, up by a seasonally adjusted 5.3%. The increase topped all estimates and indicates strong consumer demand. The Atlanta Fed’s GDPNow model now projects a 9.5% annualized growth rate in Q1, up from 4.5%. Industrial production was also up, for the fourth consecutive month, increasing by 0.9%.

While retail sales were surging, so were producer prices, which jumped by 1.3%. That was the biggest increase in the records that date back to 2009. The rising producer prices (PPI) haven’t spilled over into the CPI yet, but it is probably only a matter of time. Now it is only one month and maybe it is an aberration, but when the government throws trillions into the economy and then wants to add a couple of trillion more, the threat of inflation has to be considered. Higher inflation would mean higher interest rates, which would make it difficult for the government to do anything other than pay off interest in the future, it would also cut into p/e ratios which could cause the market to decline. Maybe none of this happens but for those of us that lived through the 70s, it is a threat not to be taken lightly.

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MARKET RECAP

Stocks had a big week as US equities advanced by 5.25% and international markets were up by 4.95%. US stocks ended the week at a record high. It was the best week since November as investors were looking forward to a $1.9 trillion stimulus package. For the same reason stocks were up, bonds were down, falling by 0.35% as the prospects of inflation lifted interest rates on the longer end of the curve. Oil jumped by almost 9%.

Dropping virus numbers are also helping. How much the vaccination program has helped no one is sure, but the huge second tidal wave of Covid seems to be slowing, similar to what happened to other waves in previous pandemics. The Super Bowl this weekend will be a test to see if social gathering around the country ignites a rebound, but for right now, recent numbers are very encouraging.

The Democrats are moving ahead without the Republicans on a stimulus plan valued at close to $2 trillion dollars. This is after a $900 billion plan passed in December and the trillions spent earlier in the year. There is simply no concern for the out of control deficits and the debt burden we are laying on future generations. We are putting the country in a dangerous situation at some future point when interest rates rise, but nobody cares. Biden should settle for a more reasonable plan that focuses on getting the country vaccinated, helping those who are truly in need, and for targeted infrastructure investments that will have a clear positive payoff. Even former Obama economic advisors Larry Summers and Jason Furman thinks the package is too big. Summers said, “stimulus measures of the magnitude contemplated are steps into the unknown.”

The economy just does not need a massive plan like this. Most of the spending will start to hit just when most of the country will have been vaccinated and a year-plus of pent up demand will start to be unleashed. All of this deficit spending, on top of more regulations, monetary expansion, and reduced international trade is a recipe for inflation, which potentially means much higher interest rates. And much higher interest rates on top of an out of control deficit will crowd out spending on needed programs in the future and threaten the value of the dollar. The government cannot act like the US dollar is monopoly money, because if they continue to do so, that is how it will end up.

Gamestop (GME) came back to earth this week. GME closed at $63.77, down 80% on the week and down by 87% from its high last week. It is still way above where it was a couple of weeks back, but while many were smart enough to cash out, there were probably more who bought at higher prices expecting GME to go even higher and are now left with huge losses, or those that rode the stock all the way up and all the way down. Moreover, the Wall Street Bets Reddit page, where many of these “investors” got their inspiration, was encouraging/telling their followers to hold GME stock straight through and not to sell no matter what. Of course, as the losses piled on, the prevailing Reddit theme was that the system was rigged, failing to take personal responsibility for buying GME at simply ridiculous prices and without regard to any fundamentals. The GME saga is just a sign of the times.

As is Dogecoin, a cryptocurrency that is flying high and is now worth more than $6 billion. Dogecoin was created as a joke in 2013. Like it was literally created as a joke, the developer wanted to create a coin that couldn’t be taken seriously. The developer, Billy Markus, spent a grand total of three hours one Sunday afternoon creating the currency. But Elon Musk has tweeted about it a couple of times in recent weeks and it has increased in value by 80%. In addition, the Reddit crowd is aiming to push the coin to $1 from its current 8 cent value. People are buying something with an intrinsic value of $0 but that doesn’t matter. It is the same mindset that pushed GME to $500 per share, but even worse, at least GME has a business with some kind of prospects (if it can be turned around) of generating cash flow.

Payrolls increased by 49,000 in January, and the December job loss was revised up to 227,000 from 140,000. Lower labor force participation dropped the unemployment rate to 6.3% from 6.7%. All in all, the payrolls report was considered a disappointment.

Normally, home prices fall in a recession, but not this time. Prices are up sharply, rising by 9.1% year over year in November. Home prices have benefited from Covid, as city residents move to homes in the suburbs, but also by the Fed’s monetary policy, which has included buying $40 billion per month in mortgage securities. That has reduced mortgage rates which have increased demand and thus, more expensive homes. The problem is first-time home buyers and others are being priced out of the market. The other problem, which we allude to above, is that excessive monetary and fiscal stimulus is starting to lead to inflation which could be a big problem down the road.

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HIGHLIGHTS

• Stocks rally on a market-friendly Fed press conference.
• Another strong jobs report.
• Estimated earnings for 2019 continue to be sharply cut.
• Howard Schultz may run for President and Corey Booker is.

MARKET RECAP

Stocks advanced and were helped mightily by a Fed press conference mid-week. Fed Chairman Jerome Powell said, “I would want to see a need for further rate increases,” referring to an increase in inflation. And then to make it even better, the Fed signaled that they would maintain their balance sheet at a higher level than previously thought, indicating that the unwind of the balance sheet might be coming to a close. It was just about everything the market could ask for, and stocks shot up by 1.51% on the day. For the week, US stocks increased by 1.66% and international equities were up by 0.91%. Bonds were up on the week by 0.27% but fell on Friday on the news of a very strong jobs report.

The market has rallied by 15.9% off of the December low and is now at the midpoint between the range that was established through most of October and all of November.

JOBS / ECONOMY

The US job market made it 100 straight months of increased payrolls. Nonfarm payrolls  rose by 304,000. It was the biggest increase since February of 2018. Wages were up by 3% year over year. That is six months in a row of increases at or greater than 3%. The unemployment rate did increase to 4% from 3.9% in December, but the government shutdown probably impacted that number. The share of American adults working or looking for work increased to 63.2%, up 1/2% from last year. This indicates that the strong job market is pulling in workers that have been sidelined, a positive development for the economy.

In more good news, the ISM Manufacturing Index climbed 2.3 points in January to 56.6, the biggest increase in five months.

One weak datapoint was jobless claims. After falling to a stunningly low 199,000 last week, they shot up to 253,000 this week. That was the highest level since September of 2017. The government shutdown will get the blame for now.

Overseas, the economic reports are still coming in weak. The Markit January Manufacturing PMIs fell. Emerging markets are now at an even 50.0 versus 50.5 last month, and developed markets fell to 52.2 from 52.9, greater than 50 is considered expansionary. Italy fell into a recession.

FUTURE ESTIMATED EARNINGS

Analysts continue to aggressively cut future earnings estimates. 2019 estimates are now at $169.60, down from a peak of $178.90 in September. That is down 5.2% in about 5-months. Estimates have now been cut eight-weeks in a row and 16 of the last 17 weeks.

HOWARD SCHULTZ / CORY BOOKER

Howard Schultz, a lifelong Democrat, announced that he might run for president as an independent in 2020. The reaction was instantaneous and vicious. Democrats and the media establishment went on a rampage trashing Shultz in every way possible, from his intellect to his wealth to the way he ran Starbucks. Most of the “comments” and accusations were caricatures and inaccurate. But that is what goes for public discourse nowadays. With both parties currently ruled by the extremes, it would appear there is an opening for someone close to the center. Schultz will test the waters and consider filling that gap.

Cory Booker announced that he will run for president. Booker’s initial comments were positive and focused on uniting the entire country, “We used to be a people who could look at the sky, point at the moon and change it from a dream to a destiny. There’s no Democratic or Republican way to get there. You definitely don’t get there by fighting each other, tearing each other down or dividing people against each other.” Booker joins a field that includes Kamela Harris, Elizabeth Warren and Kirsten Gillebrand.

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Past performance does not guarantee future results.

The purpose of this commentary is to provide readers with a summary of recent market and economic news. It is not intended to provide trading advice. Investors should have a long-term plan and should consider working with a professional investment advisor. Any discussion of investments and investment strategies represents the presenter’s views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. The information and opinions contained in this material are derived from sources believed to be reliable, but they are not necessarily all inclusive and are not guaranteed as to accuracy. Any forecasts may not prove to be correct. Economic predictions are based on estimates and are subject to change. Reliance upon information in this material is at the sole discretion of the reader.

Our Quarterly Market Outlook/Review Webinar, titled “Crazy Mr. Market”,  was just published on January 20. Please view the link below as we discuss.

1. Market Performance
2. Current economic conditions.
3. Equity valuations.

As always, feel free to contact us with any questions.

Link to the Webinar

HIGHLIGHTS

• US stocks up by 3% and international stocks by 2%.
• The V-shaped recovery is now at an important technical point.
• High-yield spreads have fallen by almost 1%.
• Earnings continue to decline week by week.
• Some brick and mortar stores sales were much less than originally thought.
• Ford to cut jobs in Europe.

MARKET RECAP

It was another strong week in equity markets around the world. US stocks advanced by 3.06% and international markets rose by 2.06%. Stocks closed higher than they opened every day this week, and on Thursday and Friday, the market closed at the high for the day.

So far it has been a sharp “V” shaped recovery in prices, but we are now essentially back to the point where stocks fell through support on December 14 (see 8 below). The support level of about $133 (on the VTI) now is resistance. This is an important technical level and how the market reacts to it may give a hint to where we go from here. Although stocks did close at the high on Friday, they could not crack the Thursday high.

When stocks fell on December 24th by about 2.7% the S&P 500s 10-day advance/decline line was measured at -2,440 according to the Bespoke Investment Group, the lowest level since 2011 and indicative of extreme negative sentiment. As of Wednesday, the level was at 1,938. The positive change of 4,378 was the largest ever.

After the market fell through support on December 14, the drop accelerated the following week when investors perceived that they did not get the “dovish” increase in interest rates that they were hoping for. Since then, the Fed has walked back on those comments and is now in the camp of responding to the data, watching the markets and being patient.

Another big drag on stocks has been the threat of a trade war. News on that has also improved. The US and China have continued recent talks on settling the dispute.

While news on the Fed and China have improved, the government shutdown continues and is now the longest ever. Expect the heat on that to begin to ramp up quickly. Merrill Lynch estimates that the shutdown costs the economy 0.1% in growth every two weeks.

HIGH-YIELD

The recovery in equities has been matched, may be exceeded, by that in high-yield. The US High Yield Option-Adjusted Spread which ballooned to a high of 5.44% on January 2, has now fallen by almost 1% to 4.54%. The dramatic fall in rates is reflected in the rally by the Invesco Senior Loan ETF (BKLN) that we highlighted back on November 23.

EARNINGS

Earnings estimates for the S&P 500 (source: Refinitiv) continue to fall week by week. 2019 estimates are down by 3.8% since the September 7 peak.

RETAIL

Initial reports of a strong holiday season for some brick and mortar retailers turned out to be false. “The holiday season began strong – particularly Black Friday and the following Cyber Week, but weakened in the mid-December period,” according to Macy’s Chief Executive Jeff Gennette. Macy’s said same-store sales were up by 1.1% for November and December but lowered their sales and profit forecasts for the current year ending in February. The stock fell 2.64% on the news and was joined by retailers like Kohl’s, L Brands and JC Penny.  The news from Target was positive, sales were up by 5.7% from November 4 through January 5 and Costco had a 7% increase for the five weeks ended January 6.

FORD CUTTING JOBS IN EUROPE

Ford has begun talking to trade unions about cutting thousands of jobs in Europe as it cancels production of unprofitable models. The move is part of a company-wide cost-cutting program to help adapt to the fast-changing dynamics of the auto industry, specifically electric vehicles and autonomous driving. The move has been amplified in Europe with a slowing economy that has been impacted by Brexit and an economic slowdown in China.

In addition, Jaguar Land Rover, is expected to cut 5,000 jobs due to weak demand from China and a decline in diesel sales in Europe.

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Past performance does not guarantee future results.

The purpose of this commentary is to provide readers with a summary of recent market and economic news. It is not intended to provide trading advice. Investors should have a long-term plan and should consider working with a professional investment advisor. Any discussion of investments and investment strategies represents the presenter’s views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. The information and opinions contained in this material are derived from sources believed to be reliable, but they are not necessarily all inclusive and are not guaranteed as to accuracy. Any forecasts may not prove to be correct. Economic predictions are based on estimates and are subject to change. Reliance upon information in this material is at the sole discretion of the reader.

Meb Faber on the CAPE ratio.

HIGHLIGHTS

• Another up and down week but stocks end in the black on a powerful labor report.
• Chinese PMI falls below 50.
• US PMI for manufacturing has a big drop to 54.1.
• A very strong payroll report in the US as nonfarm payrolls increased by 312,000.
• Economic growth in Q4 should be about 2.5%.

MARKET RECAP

2018 closed out on Monday with a 1% advance on news that the US and China were talking trade. When markets reopened on Wednesday after the New Year, a dreadful Chinese PMI report had the market fall by 1.5% on the open. But the market staged a strong comeback and closed just above the Monday close fueled by an oil price rally. Having somehow managed to withstand the poor PMI report from China, stocks took another punch on Thursday when Apple preannounced that sales had fallen sharply in Q4, by about $6 billion. That was followed by a US ISM Manufacturing report that showed the PMI at 54.1%, down from 59.3% in November, the market fell sharply by 2.31%.

The news going into the release of the Friday unemployment report was downright depressing, as it appeared the economy was beginning to accelerate much faster to the downside than anticipated. That is when economists were surprised with a much stronger than anticipated employment report. Investors loved the news as it put the threat of a recession on hold, at least for one day, and stocks rallied by 3.31%. For the week, US stocks were up by 1.95% and international markets were up by 2.14%

Looking back at the year 2018, the US was down by 5.21% and international markets fell by 14.43%.

PAYROLL

Nonfarm payrolls jumped by 312,000 in December, blowing out the consensus number of 176,000. It was the biggest increase since February. Even better, the prior two months were revised up by 58,000. The average workweek increased by 0.1 hours to 34.5 hours and average hourly earnings were up by 3.2% year over year. The unemployment rate did go up to 3.9% from 3.7%, but that was because more people were attracted to enter the labor market.

Institute for Supply Management PMI

The PMI for the US for the manufacturing sector fell to 54.1% in December from 59.3% in November. That is a large drop and was well below the consensus of 58%. The report indicates that while manufacturing is still growing, the pace of the increase slowed in December. A reading above 50 is considered expansionary.

CHINA

The trading year got off to a bad start on Tuesday morning when the China Caixin manufacturing purchasing managers index fell to 49.7 in December. It was the first drop below 50 since May 2017. A reading below 50 is considered contractionary.

ECONOMY

Q4 growth is estimated to come in around 2.5% or so. The Atlanta Fed GDPNow model has growth at 2.7% and the NY Fed NowCast model is projecting 2.48%.

SCOREBOARD

Past performance does not guarantee future results.

The purpose of this commentary is to provide readers with a summary of recent market and economic news. It is not intended to provide trading advice. Investors should have a long-term plan and should consider working with a professional investment advisor. Any discussion of investments and investment strategies represents the presenter’s views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. The information and opinions contained in this material are derived from sources believed to be reliable, but they are not necessarily all inclusive and are not guaranteed as to accuracy. Any forecasts may not prove to be correct. Economic predictions are based on estimates and are subject to change. Reliance upon information in this material is at the sole discretion of the reader.

HIGHLIGHTS

• 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.

PERFORMANCE

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.

ECONOMY

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.

FED TO UNWIND BALANCE SHEET SOON

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.

IS INFLATION OUT THERE, SOMEWHERE?

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.

WASHINGTON GOES FROM BAD TO WORSE

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.

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