Week Ending 1/10/2020


  • Stocks advance as the Iranian conflict fades.
  • Valuation measures are tilting towards the expensive side.
  • A decent jobs report.


Iran retaliated for the killing of Iranian general Qassem Soleimani by firing several missiles that resulted in no deaths, and some minor property damage. The market viewed that as a plus, as it appeared that Iran was “standing down”, in the President’s words, and there would be no further escalation, at least for now. That bit of good news was enough ammunition to move the markets up by 0.7% for the week.

We have written in recent weeks that valuation measures have been getting expensive. That was brought up several times this week in the media and is discussed in today’s Barron’s. The chart below from Charles Schwab shows that by most measures, stocks are expensive.

However, there are a couple of measures in the bulls’ corner. The Rule of 20 states that if the sum of the p/e ratio and inflation is equal to 20, stocks are fairly valued. Less than 20 is undervalued and greater than 20 is overvalued. With a forward p/e of about 19 and inflation at about 2%, the market would be about at fair value. When looking at the earnings yield (earnings/price) of 5.29%, less the yield on the 10-year treasury of 1.83%, the difference of 3.46 indicates an undervalued market.

So of the six valuation measures shown, three are very expensive, one is expensive, one is fairly valued and one is inexpensive. We lean to the expensive side. But given the technical strength of the market both in the US and overseas, the rally can certainly continue.


The Bureau of Labor Statistics reports that 145,000 jobs were created in December, less than the projection of 160,000. The two previous months were revised down by 14,000.  While less than consensus and less than last month, employment increases of around 150,000 or so indicate solid growth. The disappointing number was wage growth, which was up by only 1%. That was the lowest number since Q4 of 2017 and among the weakest in the last five years. However, net-net, this is still a decent report.


Week Ending 1/3/2020


  • Stocks close out 2019 with a 30.67% gain in the US and 21.75% outside the US.
  • A small fall for the week after news that a US drone takes out an Iranian general.
  • US and China to sign the phase-one trade deal on January 15.
  • The ISM manufacturing index falls for the fifth month in a row.
  • The Fed’s increase in assets since late August has coincided with a 13% market advance.
  • Shiller warns about the CAPE ratio.


Stocks closed out 2019 with a 30.67% gain in the US and 21.75% outside the US. Bonds were up 8.46%. It was an amazing year.

For the week overall, stocks lost a little bit of ground, down 0.09% in the US and 0.50% x-US. The market got off to a good start on Thursday, the first trading day of the year, setting a new high and up 0.83%. But on Friday stocks closed down by 0.64%, on news that a US drone killed a top Iranian general, Qassem Soleimani. It was reported that Soleimani was planning further attacks on US forces.

In other news, the US and China are set to sign the phase-one trade deal on January 15th and to begin talks on phase-two shortly thereafter. The ISM manufacturing index fell to 47.2 in December from 48.1 in November. It was the fifth consecutive decline.

The Fed has increased its assets by $410 billion since late August. That is about when the market went on its run to close out the year, the S&P500 was up by 12.75% during that period.

There seems to be a lot of complacency in the market, there is almost no fear. The CNN Fear & Greed Index was up to 97 out of a possible 100 on Thursday but closed at 93 on Friday, still in the Extreme Greed category, but valuations, at least by one measure, are very high.

Robert Shiller, Nobel Prize winner and developer of the Cyclically Adjusted Price Earnings (CAPE) ratio wrote in the New York Times on Thursday, that the CAPE ratio currently stands at 31, just short of the recent high in January of 2018. Only two times in history has the ratio been higher, 1929, just before an 85% crash, and in 1999, before a 50% drop. Shiller attributes today’s high values to a “trust your gut” kind of mentality, versus an evaluation based on science and math. Shiller writes, “We have a stock market today that is less sensible and orderly than usual, because of the disconnect between dreams and expertise.”







Week Ending 12/27/2019


Stocks advanced again, by 0.48% in the US and 1.10% outside the US. International stocks have outpaced their US counterparts so far in December, up 4.8% versus 3.1% in the US.

According to a report by Mastercard Spending Pulse, holiday shopping from November 1st to December 24th was up by a strong 3.4%. And Customer Growth Partners, a retail firm that provides research on retailers, calculates that the Saturday before Christmas was the biggest single shopping day in US retail sales, totaling $34.4 billion.

There was also good news for workers. Wages are rising a the fastest pace in more than a decade. Pay for the bottom 25% of wage earners was up by 4.5% in November according to the Federal Reserve of Atlanta.

The risk is that higher wages are sometimes a leading indicator of future inflation.



Week Ending 12/20/2019


  • US stocks hit a new record every day this week, up 1.77% for the five days.
  • Market sentiment is extremely positive, the exact opposite of one year ago.
  • But some traders are betting on a decline in the S&P 500 in a few months.


Stocks continued their relentless advance, hitting record highs every single day of the week. In the US, equities were up by 1.77% and outside the US, +0.88%. Since October 28th, when the US stock market broke through resistance, stocks are up by 7.7%.

However, one year ago at this time, it was just the opposite. US stocks hit their low on 12/24/2018, having fallen by 16.3% since 12/3/18. Market sentiment was about as negative as possible. CNN’s Fear and Greed Index showed extreme fear at the time, measuring a 5 out of a possible 100. That is in contrast with the reading on Friday of 91, indicating extreme greed.


One place that isn’t showing extreme optimism is the Skew Index. Bearish bets on the fall of the S&P 500 have been increasing in recent months. The CBOE Skew Index, which measures trader expectations of extreme moves in the stock market, reached its highest level since September. Likewise, the cost of options betting on a falling market versus those betting a higher market has been near the highest levels of the year.


Week Ending 12/13/2019


  • US stocks up by 0.65% and international stocks by 1.74%.
  • The p/e on the S&P 500 is almost at the year-end record set in 2017.
  • US and China reach a “phase one” trade deal.
  • Democrats agree to support the North American trade pact.
  • Boris Johnson wins in the UK.
  • Retail sales fall short.
  • Volker’s final note.
  • Spending spree by governments around the world.


Stocks were up again on several positive developments. The US advanced by 0.65% and international stocks jumped by 1.74%. The US and China reached a “phase one” trade deal, the Democrats have agreed to support the North American trade pact (with some minor changes), Boris Johnson’s Conservative Party had a runaway victory in the UK, and both the Federal Reserve and the European Central Bank announced that low-interest rates would continue. Now it is true that the market had anticipated most of this, but at least they are in the bag now. We will see if the market “sells on the news.”

Stock prices have gone up, but earnings estimates haven’t. The estimate for earnings on the S&P 500 is now $162.06, down 6.8% from the projection at the end of 2018. The S&P is now selling at a price/earnings ratio of 19.55, just shy of the highest year-end ratio of 20.25 level (since 2004) reached at the end of 2017, indicating that stocks are getting expensive based on this metric.


The US and China agreed to a limited trade deal. Existing tariff rates on Chinese goods will be reduced by about half, the new levies that were set to start on Sunday will be canceled, and China will buy $200 billion over two years of agricultural goods, along with energy and other products, in 2020. If China fails to follow through, the tariffs will be reinstated.

Key US issues such as subsidies to Chinese businesses and technology transfer do not appear to be part of this deal.


Retail sales fell short of estimates in November. Sales were up 0.2% compared to an expected 0.5%. Take out autos and gas and sales were flat. The disappointing report follows an October when sales exceeded expectations.


Paul Volker, the legendary former Federal Reserve Chair who broke the back of inflation in the 1980s, passed this week. In an essay published in the Financial Times posthumously, Volker said, “When I was writing my book, I observed that President Donald Trump had not attacked the independent U.S. Federal Reserve, for which I was grateful. To say that is no longer true would be an understatement. Not since just after the second world war have we seen a president so openly seek to dictate policy to the Fed. That is a matter of great concern, given that the central bank is one of our key governmental institutions, carefully designed to be free of purely partisan attacks. I trust that the members of the Federal Reserve Board itself, the members of Congress responsible for Fed oversight, and indeed the public at large, will maintain the Fed’s ability to act in the nation’s interest, free of partisan political purposes.”


The election of Boris Johnson as UK Prime Minister will bring along a surge in government spending. Johnson has promised voters $128 billion in infrastructure spending and billions more on healthcare.

The UK will be the latest government to go on a wild spending spree. The US is a leader of the pack, as the US budget deficit topped $1 trillion in the fiscal year ended 9/30/2019.  Japan just approved a $120 billion stimulus plan.

Adam Posen, from the Peterson Institute for International Economics, thinks the public spending is needed. Low-interest rates and investing in infrastructure that needs improvements could bring a positive payoff. But Ken Rogoff, an economics professor at Harvard, says that governments need to be aware that low-interest rates may not last forever, “The notion that it’s just free, that we can just spend more money and no one’s going to pay for it, is very naive,” he said. We agree.


Week Ending 12/6/2019


  • Stocks were down by 2.71% early in the week but rallied from there to finish up by 0.17% in the US helped by a strong jobs report.
  • International equities were up by 0.96%.
  • The US added 266,000 jobs, and the unemployment rate hit the lowest level since 1969.
  • The recent rise in copper and fall in gold reflect the change in economic expectations.
  • The ISM PMI falls to 48.1.


It was a tale of two halves (to use a sports cliche), at the low midday Tuesday US stocks were down by 2.71% from the prior week close, but then rallied into the close and then again on Wednesday. Prices were steady on Thursday and then finished up by .89% on Friday on the blockbuster jobs report to scratch out a 0.17% gain for the week. International stocks fared better, +0.96% for the week, and bonds were off slightly, down by 0.08%.


There were 266,000 jobs added in November, the biggest increase since January, and 100,000 more than what economists had forecast. The unemployment rate dropped to 3.5%, the lowest level since 1969. Initial unemployment claims also are historically low at 203,000 for last week. And to top it all off, wages increased by 3.1%. Jobs were added in health care, transportation, and leisure and hospitality.

The strong payroll numbers affirm the Fed’s recent decision to hold rates steady, instead of cutting further. If anything, a strong report like this would normally give the Fed a lean towards raising rates. But Fed Chair Powell has indicated that the Fed would need to see inflation at or above the 2% target for an extended period of time before the next increase.


The recent rise of copper versus the fall of gold has been reflective of market sentiment. As fears of a recession began to fade, and the forecast for a stronger economy began to pick up, copper, an industrial metal has rallied. Meanwhile, gold, which is considered a market hedge, has been falling.


Despite the upbeat news outlined above, manufacturing is still at a weak point. The Institute of Supply Management’s (ISM) Purchasing Manager’s Index was measured at 48.1% in November, down from 48.3% in October, and a decent amount less than the 50% breakeven level that represents the difference between expansion (greater than 50%) and a contraction (less than 50%).

Timothy Fior, Chair of the ISM, said “Comments from the panel were consistent with the previous month, with sentiment improving compared to October. November was the fourth consecutive month of PMI® contraction, at a faster rate compared to the prior month. Demand contracted, with the New Orders Index contracting faster, the Customers’ Inventories Index remaining at ‘too low’ levels and the Backlog of Orders Index contracting for the seventh straight month (and at a faster rate). The New Export Orders Index returned to contraction territory…consumption (measured by the Production and Employment indexes) contracted…Inputs — expressed as supplier deliveries, inventories, and imports — were again lower in November, due primarily to a contraction in inventories that was partially offset by supplier deliveries returning to ‘slowing.’… Overall, inputs indicate (1) supply chains are meeting demand and (2) companies are less confident that materials received will be consumed in a reasonable time period. Prices decreased for the sixth consecutive month, at a slower rate.”


Week Ending 11/29/2019


  • US stocks increase by 1.19% for the week and 3.79% for the month.
  • The GDPNow estimate for Q4 growth increased markedly higher.
  • Q3 GDP growth is increased to 2.1% from 1.9%.
  • The spread between the Present Situations Index and the Expectations Index might indicate an economic turning point.


US stocks moved 1.19% higher for the week while international stocks barely broke even (+0.07%) and bonds were flat. The consensus is that odds of a recession in the next year or so are declining. Q3 growth was revised higher and Q4 estimates also were increased this week on better economic news.

For the month, US stocks were up by 3.79% and international stocks managed a 0.99% gain.


The Atlanta Fed’s GDPNow model estimate for Q4 growth shot higher to 1.7% on the November 27th reading from 0.4% on November 19th. The 1.3% jump is about the largest we can recall in such a short period. Part of the move was due to the increase in durable goods orders, which were up by 0.6% due to higher defense spending.


The second estimate of real GDP growth for Q3 came in at 2.1%, up from 1.9% in the original estimate. The 2.1% growth tops the 2.0% growth in Q2.


Two components of The Conference Board’s Consumer Confidence Survey are the Present Situation Index, which measures consumers’ assessment of current conditions, and the Expectations Index, which measures consumers’ short-term outlook for income, business and labor market conditions. When the difference between the Present Situation Index and the Expectations Index has peaked, it has often preceded a recession. Of course, there is no way to know if the graph below represents a peak or a short-term pause, but it does indicate a possible turning point.


Week Ending 11/22/2019


  • Stocks fall slightly, by 0.23% in the US and 0.52% x-US.
  • Reports earlier today that China will increase penalties on IP theft.
  • The increase in the Fed balance sheet since September has coincided with the recent market rally.
  • Strong reports on residential real estate.
  • Higher threat of leveraged loan defaults.


The market rally went on hold this week as US stocks declined by 0.23% and international equities fell by 0.52%. Bonds rallied as the longer end of the curve saw interest rates fall. The spread between the 2 and 10-year treasuries declined by 7 basis points. Progress on the trade dispute between the US and China also seemed to stall, but it was reported just a couple of hours ago (Sunday – 11/24/2019) that China has agreed to increase penalties on the theft of intellectual property, a major sticking point in the trade talks.


The Fed has increased the size of its balance sheet from about $3.76 trillion in early September to about $4.03 trillion currently. That is an increase of $270 billion in just 2-1/2 months. The purpose of the increase was to stabilize the repo market, and the Fed has claimed that this is not quantitative easing, but the effect is the same. More assets in the system provide more fuel to push equity prices higher. Not coincidentally, the market has been moving higher since the change in policy.


Good news on the residential front, existing-home sales increased 4.6% year over year. That was the fourth consecutive month of higher sales which followed a 16 consecutive month decrease. Building permits for privately-owned housing units were up 5% in October from September and 14.1% year over year.


Analytics firm Credit Benchmark says that a recent survey of data collected from banks, insurers, and asset managers has raised the average probability of defaults on leveraged loans to about 6% in September versus 5.4% one year prior. Leveraged loans are often used by private equity for financing the buyouts of companies. Given the recent run of low-interest rates over the last decade, many companies are now loaded up on such loans. Almost 60% of companies purchased in leveraged buyouts carry debt of more than 6x earnings before interest, taxes, depreciation, and amortization (ebitda). A turn in the economy could lead to trouble for these companies quicker than normal.


Week Ending 11/15/2019


  • US stocks are up by 0.86% as the indexes hit a new record.
  • The Dow breaks 28,000.
  • Kudlow says progress on trade talks.
  • Fed says rates to remain steady.
  • Retail sales up 0.3%.
  • Q4 growth is barely above breakeven according to two Fed bank models.


US stocks managed another advance, +0.86%, but international stocks were unable to follow, declining by 0.07%. Bonds advanced by 0.54% as interest rates fell slightly. The Dow Jones Industrial Average closed above 28,000 on Friday for its eleventh record high of the year. There continues to progress in the US/China trade talks according to White House economic adviser Lawrence Kudlow and the Fed said rates would remain steady for now. US retail sales were up by 0.3% in October, showing that the US consumer is still going strong.

Outside of the markets, the impeachment investigation of President Trump went public this week, with hearings in the House. Bolivian President, and socialist Evo Morales resigned and fled the country.


Stocks have been going up, but GDP forecasts have been headed in the other direction, down. The Q4 forecast for GDP growth comes in at 0.30% for the Atlanta Fed’s GDPNow model, and the NY Fed’s Nowcast registers a gain of 0.39%, both barely above zero.


Federal Reserve Chairman Jerome Powell does not see the need for further rate cuts, in testimony to lawmakers this week. “We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth.” Powell went on to state that the Fed, at this time, does not have the ammunition it did in the past to fight a future recession given that interest rates are so low.