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 6/2/2017


Another week, another advance. The technology heavy Nasdaq composite was up 1.5% and the SP500 increased by about 1% to end the week at all-time highs. International stocks were uup 1.4%.

The payroll numbers this week were so so, but as interest rates continue to fall (see below), and coming off strong earnings reports, stocks continue to be the investment of choice.

Growth stocks have outperformed value stocks by about 11% year to date. The p/e on the S&P 500 Growth index now trades at 20x forward earnings, versus 15.4x on the value index. The ratio of the p/e of growth over value is now at 1.3, the highest level since 2013. Something that reversion to the mean fans might want to keep an eye on.

One cyclical industry that has been hit hard are the offshore oil drillers. Oil dropped by 4.3% on the week, supposedly because the US withdrawal from the Paris climate agreement would increase oil production. The IShares Oil and Equipment ETF (IEZ) is down 22% on the year.


The unemployment rate dropped to 4.3%, the lowest level in 16 years. Payrolls increased by 138,000, below consensus, and the two previous months payroll increases were revised down. However, the increase should be more than enough to absorb new entries in the work force. Economists estimate it takes about 100,000 more jobs per month to cover the new labor force entries. Initial unemployment claims rose by 13,000 to 248,000. That is the highest level in five weeks but it is still a historically low number.

Interest rates dropped in reaction to the job report. The 10-year treasury note fell to 2.15%, its lowest level since November.

The lower than consensus new hires report knocked down the GDPNow forecast for Q2 growth, falling to 3.4% from 4.0%.


The Institute for Supply Management reported that its index for manufacturing activity rose to 54.9 in May from 54.8 in April. Anything above 50 is considered expansionary.



The share of Americans with risky credit scores has hit a record low. At the same time, credit scores for consumers overall is at a record high, indicating that consumers are in good shape, are in a stronger position to borrow, and increasing the odds of a positive multiplier effect across the economy.


Week Ending 5/5/2017


The SP500 hit an all-time closing high on Friday, finishing at 2399.29. The index is now pushing up against its all-time intra-day high of 2400.98.

Overall US equities were up by about 0.60%. International equities continued to outpace US equities, +1.97%. Bonds fell as interest rates increased, the dollar was flat, and oil tumbled by over 6%. Volatility is ridiculously low, the VIX is at 10.97, close to a 10-year low. But investors are not overly optimistic. The AAII bullish sentiment is at 38.1%, less than the historical average of 38.5%. On the other hand, investors are also not pessimistic, the survey shows that bearish sentiment, expectations that prices will fall over the next six months, fell to 29.9%. The lowest reading since February 8.


The Atlanta Fed’s GDP model came out with their first estimate for Q2 growth on May 1 with a sizable increase over a weak Q1, projecting growth at 4.3%. That was revised down to 4.2% later in the week on light vehicle sales. The NY Fed’s Nowcast projects Q2 growth at 1.8%, down from 0.50% from last week on a weak ISM manufacturing report.


The unemployment rate fell to 4.4%, its lowest level since May of 2007. Non-farm payrolls increased by 211,000, a big improvement over the 79,000 increase in March. The hiring increase was broad-based but hospitality led the way adding 55,000 new jobs, 37,000 jobs were added in healthcare. Even retail managed to hire 6,000 new employees. The labor force participation rate remained low, at 62.9%, consistent with the past few years and just above a four-decade low. Average hourly earnings increased by 2.5% year over year, narrowly outpacing the 2.4% increase in the consumer price index.


The Fed kept interest rates steady at their meeting this week. The Committee said that the slowdown in growth in Q1 “as likely transitory.” That means, at least for now, the Fed still considers itself on track for two more rate increase this year. There is a good possibility the Fed will raise rates in June.


We said at our quarterly webinar that one risk to the market would be a collapse in oil prices. That was a contributing factor that led to the big market selloff at the beginning of 2016. Oil is down to about $46 per barrel from just north of $50 only a few weeks ago. Worries about weakening Chinese demand has hurt the pricing on all commodities. Options traders are starting to bet on fall below $40. The big spike in trades could be a sign of a peak in fear, and a contrarian would say this would be the time to get long for a recovery. But if oil continues to fall, especially if is breaks $40 to the downside, it might drag the market with it.


In the US, the ISM Manufacturing Index fell by 2.4 points to 54.8, the biggest drop since August. The decline indicates a small slow-down in manufacturing activity, but still up from last year.

The Chinese Caixin Manufacturing PMI fell to 50.3 from 51.2. The reading was the weakest since September of 2016, although a reading above 50 still indicates expansion, although very slight. New export orders fell, there was weakening business confidence and employment fell the most since January.

PMI readings were much more positive in Europe.

Sweden 62.5
Spain 54.5
Switzerland 57.4
Italy 56.2
France 55.1
Germany 58.2

Overall, 87% of countries reported growth.

Week Ending 4/7/2017


US equities fell slightly, down 0.36%, but that was a good performance given the market was hit with a batch of negative news. On Wednesday, North Korea launched another test missile, on Thursday, the US fired 59 Tomahawk missiles into Syria in response to deadly chemical attacks against its own citizens, and on Friday, in another example of our dysfunctional government, the Republicans eliminated the filibuster rule for Supreme Court nominations.  Then there was the payroll report that came in much less than consensus. This market continues to show good resilience in not falling in the face of negative news. But while the market has not been falling, it has also been having a hard time going higher. There were only 72 NYSE stocks at new highs this week, compared to 338 on March 1.

International stocks were down 0.48%, bonds were up slightly, the dollar was up by 0.61% and crude, helped by the missile strikes, advanced 2.83%.


Non-farm payrolls increased by 98,000, well below the consensus estimate of 175,000 and down from a revised 219,000 in February. Weather might have been a factor as the northeast suffered from a major blizzard.  There might be a seasonal factor at work, the March report has missed consensus number in five of the last six years. The unemployment rate dropped to 4.5% from 4.7%. Average hourly earnings were up by 2.7%

Initial claims for unemployment dropped by 25,000 to 234,000. Claims as a share of the labor force hit a record low in February. Even with the lower hiring number, the labor market continues to be tight.


The Federal Open Market Committee’s March minutes show that the Fed may begin to work down its $4 trillion balance sheet later in the year. This would be accomplished by reinvesting less as issues mature. As of now, the Fed has been reinvesting the proceeds from all maturing issues. The aim would be to accomplish this in a “passive and predictable” manner. However, this would put upward pressure on interest rates.


The Atlanta Fed’s GDPNow continues to sink, estimating growth at 0.60% for Q1, that is down from 0.90% last week and from 2.30% at the beginning of the quarter. The GDPNow estimate continues to diverge from the NY Fed’s Nowcast, which is forecasting more solid growth at 2.80% for the first quarter and 2.60% for the second quarter.

Week Ending 3/31/2017


The quarter ended on a positive note as US equities advanced by almost 1% for the week. For the quarter, US equities were up 5.7% and international (x-US) equities advanced 8.66%. The bond aggregate was up 0.81%. The dollar actually declined for the quarter by 2.75% as did crude, -5.44%, although it moved higher on the week by almost 6%.

While the consensus was for value to be the place to invest in 2017, so far it has been large cap growth, especially technology, which dominated the first quarter. The QQQ was up 12%.


It might be nothing or it might be the start of a sell-off. The market is overdue for a correction of 5 to 10%. On Monday, the market was off 2.27% from its March 1 peak but had a small rally since. If the market turns down over the next few days, that would be two successive “lower highs”.


Treasury rates were flat for the week. For March, rates rose about five basis points across the curve and year to date, there has been a slight flattening, with the 2-year note up seven basis points and the 10 and 30-year down about five.


The Trump administration indicated it will seek only modest changes to NAFTA. A major push to cut back on international trade via protectionism would be a negative for growth in the US and around the world. A more modest approach to trade was what the market had anticipated when this rally began in November, and that might turn out to be the case. Although the threat of more aggressive action could still happen as the administration irons out its policies.


The Conference Board’s Consumer Confidence Index surged to the highest level since December of 2000. A high level of confidence has traditionally been associated with better than average growth.


On Wednesday, the UK made it official by triggering Article 50 and letting the EU know that it will be leaving. This begins a two-year period for the UK to negotiate its exit.


Margin debt hit a record in February. More than $500 billion is currently borrowed against accounts. High levels of margin debt indicate investor confidence but is often a contrary indicator that reveals that investors are ignoring fundamentals and concentrating on making a quick dollar. Margin debt peaked before declines in 2000 and 2008. But margin debt as hit record levels several times previously during this bull run with no negative impact.


2016 Q4 real GDP was revised up to 2.1% from 1.9%. Year over year, GDP was up 2% for 2016 compared to a 3.1% average historical gain.

The GDPNow model forecasted growth for Q1 dropped to 0.9% on declines in estimates for consumer spending growth. The NY Fed’s Nowcast dropped by 0.1% to 2.9% for Q1 and to 2.6% for Q2.

Initial claims for unemployment came in at 258,000.



Week Ending 3/24/2017


The Republicans could not put together sufficient support to pass the American Healthcare Act, thereby leaving Obamacare in place for the at least the near future. The uncertainty of the legislation passing and the possible negative implications for policy proposals that have energized the market since November, made for a rocky week, at least by recent standards. Equities dropped by over 1% on Tuesday, the first time in 160 days the market fell by more than 1%. For the week, US equities were down about 1.4%.

With the ACHA out of the way for the time being, tax reform becomes front and center. That, along with deregulation and repatriation are really tops on investor’s agenda and that is the fuel that has propelled a lot of this market rally. If the healthcare debacle foreshadows potential problems with Trump’s more business oriented proposals, the justification for a good portion of the recent really will come into question, thereby threatening values.


Higher expected earnings has also helped the rally. For Q1, the estimated earnings growth rate, according to FactSet, is a whopping 9.1%. If it happens, that would be the highest year over year increase since Q4 of 2011 when earnings jumped by 11.6%. Much of that increase will be due to the energy sector, where the average price of oil is 50% higher than a year ago. Excluding energy, earnings estimates are for a 5.2% advance.


The Markit Flash US Services PMI fell 0.9 points to 52.9. That is the lowest level in six months. Service orders were the weakest in 12 months and new manufacturing orders were the weakest since last October.

New home rose 6.1% in February. The sales rate is now at its highest level since August of 2008 on a 12-month average basis, a positive sign for the housing market.

Initial claims for unemployment rose 15,000 to 258,000. Still at a historically low level but up from recent weeks.

The Atlanta Fed’s GDPNow model is forecasting growth of only 1% in Q1. This contrasts with the NY Fed’s Nowcast that currently forecast Q1 growth of 3.0%.

Week Ending 3/10/2017


The equity markets fell last week, dropping 0.58% in the US, but international equities were about at break even. Bonds were also down by 0.58% as interest rates continued to rise.

The price of oil fell below $50 for the first time since November as inventories increased to record levels. More negative movement on the oil price is likely to have a spillover effect on the equity and high-yield markets. Oil had rallied in the last several months on news of OPEC production cutbacks. But US shale producers have moved quickly to cash in on the higher prices. That has increased supply in the US at a faster rate than demand. However, demand around the world is increasing and US exports of oil and gas should also increase as time goes on, and that should alleviate some of the excess supply.


Almost all of the SP500 companies have now reported Q4 earnings. 65% beat the mean EPS estimate and 53% beat the mean sales estimate. The blended earnings growth rate is +4.90%. The estimate at year end was for a 3.0% increase. The forward 12-month P/E ratio is now at 17.7, above the five-year average of 15.0 and the 10-year average of 13.9.


Insider buying has fallen to a 29-year low. There were 279 insider buys in January, the lowest number since 1988. The ratio of buyers to sellers in February also hits its lowest level since 1988.


As we have stated many times, the biggest threat to the economy is a possible trade war. Trump’s protectionist leanings are misguided and the “facts” that he relies upon are sometimes wrong. If he misplays his hand and new policies or taxes invite trade retaliation, the result will be less growth or possibly negative growth. German Chancellor Angela Merkel will be talking to Trump about that at their upcoming meeting on Tuesday, according to Der Spiegel magazine. The Spiegel article says that documents provided to Merkel label a US border-adjustment tax as a “protective tariff” and in violation of World Trade Organization rules. Responses from Germany could include higher duties on US imports, or setting up their own “border-tax” for US companies alone. Merkel also plans to call on Europe to pursue trade deals with other countries, to take advantage of the void that the US is no longer filling.


Economic news has been much improved in Europe recently, and their equity market trades in line with historic norms, but there is some major political uncertainty. Here is a look at what is coming up:

Dutch Parliamentary Election – March 15, 2017

The Freedom Party, an anti-EU and anti-immigrant party leads in the polls but is losing ground. The political system would make it difficult to turn that lead into a political majority. The Freedom Party would have to form a coalition with others, that would likely be difficult.

Brexit/Article 50

The break from the EU won’t be so clean. Britain must trigger Article 50 to open up a two-year window for Brexit negotiations, but political infighting is delaying the implementation of Article 50. The transition period will mean more uncertainty for Britain.

French President Election  – April 23 (first round) and May 7 (second round)

Marine Le Pen is the leader of the National Front, an anti-EU and ant-immigrant party. The majority of French view the EU unfavorably. Le Pen is expected to advance to the second-round election, where polls show her losing by a wide margin. Her likely opponent, Emmanuel Macon, has been short on details but is running on a pro-EU and pro-business agenda.

German Federal Election – September 24

Recent polls show a close race between the center-right party (CDU) and the center-left (SPD). Merkel leads the CDU. If the SPD wins, they could form a coalition with left-wing parties.


Thursday marked the 8th birthday of this bull market. The market hit its low on March 9th, 2009 and that set off this 8-year run. The market has not had a 20% pullback since (20% is often defined as a bear market). That is the second longest stretch of all time, only the 1987 to 2000 market went longer without a bear market.


The Fed has made it pretty clear in recent weeks that a March rate hike is likely. The question now shifts to how many hikes in 2017, will it be two or three? Fed voters seem split between two and three. Fed Governor Tarullo resigned effective in April, and he was likely in the two-vote camp. That would tilt the sentiment to three likely rate increases in 2017 (at this time). The latest jobs information (below) also would lean expectations to three hikes in 2017 as of now.


Nonfarm payrolls increased by a solid 235k in February. The unemployment rate fell to 4.7%. Average hourly earnings increased by 0.2%, but the year over year change was 2.8%. Initial claims for unemployment insurance were up 20k last week to 243k, but that is a historically low number. All these data points indicate a very tight labor market and gives the Fed the go ahead for a rate increase next week.

The big negative in the report was retail. Jobs were down 26k in the retail sector, the most since December of 2012. This reflects the shift to on-line retail as brick and mortar stores continue to get hit. This will have some negative impact on the high yield market down the road.