HIGHLIGHTS

• US stocks fall by 1.14% on continued trade worries.
• The 3-month/10-year spread has inverted again.
• Trade relations with China continue to deteriorate and Mexico/Canada could be next.
• Weak PMI and durable goods reports.
• May resigns as PM increasing the odds of a hard Brexit.
• Positive news in Japan.
• The Vancouver housing bubble is bursting.
• The ratio of copper to gold is falling.

MARKET RECAP

US stocks fell by 1.14% and international equities were off by 0.27% as trade war worries continue to rattle the markets. The Dow is on a five-week losing streak, the longest since 2011. The bond market was up by 0.35%, as demand for government paper has jumped. The 10-year yield fell to 2.327% and is back to being lower than three-month yields, creating another inverted yield curve.

TRADE

Trade relations with China continue to deteriorate. Not content to freeze Huawei from international markets, the Commerce Department is now putting together a list of other Chinese companies to blacklist. All of this will create long-term harm for US businesses. Going forward, why would any international company choose to do business with a US company, all other things equal, knowing their supplies could be cut off at the whim of a US President? Meanwhile, the White House is having problems getting Congress to approve the new trade deal with Canada and Mexico. If Congress does not approve the deal, Trump could follow through on his threat to withdraw from NAFTA, which would be another heavy blow to the economy.

PMI / DURABLE GOODS

The IHS Markit US manufacturing PMI came in at 50.6 for May, the lowest level since September of 2009. Overall business activity growth fell to a three-year low. “Growth of business activity slowed sharply in May as trade war worries and increased uncertainty dealt a further blow to order book growth and business confidence,” said Chris Willamson, Markit’s chief business economist.

Orders for durable goods fell by 2.1% in April, and the March numbers were revised down. A drop of 25% in civilian aircraft, impacted by the grounding of the Boeing 737 MAX, impacted the numbers.

The combination of weak PMI and durable goods reports has led to lower Q2 GDP estimates. Research firm Macroeconomic Advisers dropped its Q2 estimate to 1.7% from 1.9% and the NY Fed’s Nowcast fell from 1.41% from 1.79%.

BREXIT

Theresa May resigned as British Prime Minister after failing to get a Brexit deal through Parliament. May will remain in office until a replacement is named. Former foreign secretary Boris Johnson is the leading candidate to replace May. Johnson is much more of a hardliner and would be more apt to make a clean break with the EU without a deal. In general, businesses fear the economic shock of a no-deal Brexit.

JAPAN

The Japanese economy expanded at a 2.1% rate in the first quarter, that is up from 1.6% in Q4. The 2.1% also exceeded analysts expectations, who were expecting a flat to a negative number.

VANCOUVER

We have written about the problem with excessive housing valuations in Canada and it looks like the bubble has popped, at least in Vancouver, the epicenter of the excess. Stories abound of expensive homes and condos going for discounts of 25% to 50% off assessed value or recent transaction prices. A quarterly index of prices shows Vancouver values dropping by 14.5% year over year. Land sales were down by 54% in the first quarter.

COPPER/GOLD

The price of copper relative to gold has dropped recently. A falling ratio has been a precursor to some market declines in the past.

SCOREBOARD

You often hear how there has been no wage growth (inflation adjusted) since the 70s. But does that really make sense? Having been around since the 60s, I see way more prosperity in the US than ever before.

In this WSJ commentary, Phil Gramm and John Early tackle the question. Click here.

MARKET RECAP

The White House and China, falling right in line with the trade war playbook (that has led to economic declines), exchanged tariff threats on Monday, leading to the worst daily performance since December. The S&P dropped 2.4% and the Nasdaq fell 3.4%. Beijing said they would increase levies on $60 billion in US imports and Washington responded with 25% tariffs on $300 billion in Chinese imports to start this summer. Despite a good performance on Wednesday and Thursday, the Monday drop was too much to overcome, and US stocks ended down by 0.87% and international stocks were off by 1.58%. Bonds rallied by 0.33%.

HUAWEI

A White House decision to limit Huawei Technologies access to US markets has now ramped up the trade dispute to a much higher level. Huawei is perceived as the top technology company in China and one that the Chinese population takes pride in. Taking action against a specific Chinese company will probably lead to retaliatory action against specific US companies, maybe Apple to start.

LEADING ECONOMIC INDEX

The Conference Board’s Leading Economic Index for April increased by 0.2% while the Coincident Economic Index increased by 0.1%. The spread between the leading index and the coincident index has now increased just slightly the last three months. A spread that is falling has often been a sign of a recession down the road.

DOWNSIDE PROTECTION

According to a Bank of America Merrill Lynch fund manager survey, 34% have purchased protection against a sharp fall in stocks over the next three months. That is the highest percentage in the survey’s history and might be a contrary indicator.

SCOREBOARD

HIGHLIGHTS

• US stocks fall by 1.73% and international stocks were down by 2.33%.
• Trump hikes tariffs on China.
• Uber’s IPO turns negative.

MARKET RECAP

The market rally since the December 24^th low had been powered by a dovish turn by the Fed and the anticipation of a trade deal with China. Well, you can take the trade deal with China off the table, at least for now, as President Trump surprised the markets on Monday by tweeting that he was going to increase tariffs because of backtracking by China in trade negotiations. That set off a rough week, with the S&P 500 falling by 2.2%. About $2 trillion in equities values vanished according to Refinitiv with the loss. Trump followed through on his promise implementing a 25% tariff on $200 billion in Chinese imports. The market did manage to finish up on Friday after being down by about 1.5% on hopes that the two countries would eventually reach a deal.

UBER

Uber turned in one of the worst IPO’s in recent memory. Closing at $41 after being priced at $45 per share. Investors are not so keen on a company that is generating $1 billion in quarterly losses.

SCOREBOARD

HIGHLIGHTS

• Stocks around the world were up for the week.
• A very strong jobs report.
• Best productivity report since 2010.
• The Fed holds steady on interest rates.
• ISM numbers are down.
• Eurozone reports better growth.
• Chinese PMI falls

MARKET RECAP

US stocks advanced for the by 0.33% and international stocks were up by 0.56%. A strong jobs report on Friday helped the market finish in the black for the week. It was the best first four months of the year since 1999.

JOBS

It was another strong jobs report as 263,000 jobs were added in April and the unemployment rate dropped to 3.6%, the lowest rate since December of 1969. Average hourly earnings were up by 3.2% year over year. On the downside, the US workforce fell in April.

PRODUCTIVITY

Nonfarm worker productivity improved at the fastest rate since 2010, up by 2.4% year over year. Normally, productivity rises earlier in an expansion, not later, so the acceleration 10-years into the cycle is a positive sign that the economy might be able to go longer without a recession. Higher productivity also means that the economy can grow at a faster pace without kindling inflation.

WAIT AND SEE

The Federal Reserve did not change interest rates at their meeting this week. Chairman Jerome Powell said, “Overall the economy continues on a healthy path, and the committee believes that the current stance of the policy is appropriate.” Core inflation was up by just 1.6% in March, lower than the 2% target. Powell said that temporary factors kept inflation lower than the target. Lower inflation would give room for the Fed to cut rates.

ISM

The Institute for Supply Management’s Purchasing Managers Index fell to 52.8 in April, the lowest reading since October of 2016. That means that manufacturing is still growing (above 50 is expansionary) but the pace of growth is slowing. The trend is down. “We’re coming down faster than I would really like,” said Timothy Fiore, chairman of the ISM’s Manufacturing Business Survey Committee. Concerns include tariffs on China and Trump’s threat to close the US-Mexico border. There is some hope that with global economic activity stabilizing, manufacturing in the US might see some improvement.

EUROZONE GROWTH INCREASES

Eurozone’s GDP increased by 1.5% for the first three months of the year, up from 0.9% in Q4. That is now two consecutive quarters of improving growth. The 1.5% does not match the US rate of 3.2%, but at least it moving in the right direction.

CHINA PMI IS DOWN

While the Eurozone had some positive news, that was not the case in China this week. The official manufacturing purchasing managers index fell to 50.1 in April from 50.5 in March. The number still shows expansion (above 50) but raises questions if China’s policies to stimulate growth will be effective.

SCOREBOARD

HIGHLIGHTS

• US stocks are up and end the week at a record.
• International stocks fall.
• Q1 GDP comes in at 3.2%, exceeding estimates.
• Social Security to go into the red.

MARKET RECAP

US stocks were up by 1.25% and international stocks fell by 0.54%. US stocks finished at an all-time high. Earnings estimates increased for 2019, 2020 and 2021 this week. That was the first time since September that estimates were increased for the next three years (back in September it was 2018-2020).

GDP

US GDP growth surprised to the upside for Q1, expanding at a 3.2% annual pace. That is up from 2.2% in Q4 and better than the consensus estimate of 2.5%. Stronger spending by state and local governments, up by 3.9%, probably due to the federal government shutdown, helped accelerate the growth. A build-up of inventories also added to the number. On the downside, consumer spending slowed to a 1.2% pace, the lowest increase in a year, and business fixed investment dropped to 2.7% from 5.4%. Investment in new housing dropped for the fifth straight quarter.

The interesting part about the result is that the outlook for Q1 was bleak at the beginning of the quarter. The initial Atlanta Fed GDPNow estimate was 0.3%. Normally, the estimates fall as the quarter goes on, but this time it went higher.

However, the 3.2% headline number may not be as good as it looks. Take away the increase in inventories, the higher government spending, and trade figures, the growth was only 1.3%.

SOCIAL SECURITY TO GO RED

Social Security’s costs will be greater than its income in 2020 as more and more baby boomers begin to retire. The fund currently has a trust fund of $3 trillion. By 2035, the trust fund will be depleted. What we have here is a problem that everyone has known about for decades, but was pretty much completely ignored by our political leaders. And whenever a politician was brave enough to actually recommend a solution, they were immediately attacked, harassed and shot down. Well, the day of reckoning is on the way.

SCOREBOARD

HIGHLIGHTS

• Watch our Quarterly Webinar here.
• US stocks fall slightly and are just under all-time highs.
• International stocks advance.
• A very good retail sales report.
• Industrial production in China was up 8.5% for March.

MARKET RECAP

US stocks fell slightly, down by 0.28%, failing to break through the September 20th high. The market is less than 1/2% from that closing high. International stocks managed a gain of 0.32%. Bonds fell by 0.07%.

There was some good economic news this week. A solid retail sales report and good industrial numbers for March in China, see below.

QUARTERLY MARKET REVIEW

Our quarterly market review/outlook was published today on YouTube. You can view it here at this link.

RETAIL SALES

Retail sales for March were up 1.64%, the increase was much higher than the consensus and it was the largest increase since September of 2017. The high number helped increase the Atlanta Fed’s GDPNow estimate of Q1 growth to 2.8% from 2.3%.

CHINA

Industrial production in China jumped by 8.5% in March from a year earlier and the economy grew by 6.4% in the first quarter. The 6.4% increase even with Q4 and just below prior quarters but gives hope that China is beginning to stabilize. Lower taxes and regulation from the Chinese government spearheaded the improvements

SCOREBOARD

HIGHLIGHTS

• US stocks were up by 0.61% and international stocks by 0.38%
• IMF cuts growth outlook
• Jobless claims hit the lowest number since 1969.
• Brexit postponed until October 31.
• ECB ready to move if need be.
• US budget deficit up by 15% at the halfway mark.

MARKET RECAP

The market finished up for the third straight week. Financials led the market higher on Friday after strong earnings by JP Morgan Chase and Wells Fargo. US stocks were up by 0.61% and international stocks advanced by 0.38%. Bonds fell by 0.11% as rates moved slightly higher.

IMF CUTS GROWTH OUTLOOK

The IMF dropped its 2019 estimate to 3.3% from 3.5% in January and 3.7% in October. Forecasts for Germany, Italy, and Mexico dropped by 0.5%. Latin America dropped by 0.6%, Canada by 0.4%, and 0.3% for the UK.

JOBLESS CLAIMS

Jobless claims dropped to 196,000. This represents the lowest seasonally adjusted number since October of 1969. Claims have now been less than 300,000 for 214 consecutive weeks, the longest streak ever.

BREXIT

The EU has agreed to postpone Brexit until October 31. The extension gives Prime Minister Theresa May more time to get Parliament to approve a deal.

ECB

ECB President Mario Draghi said that the bank is ready to take new actions if the economic outlook worsens. Draghi said the European economic slowdown will continue this year, blaming uncertainty due to threats of US tariffs on imports from Europe.

US BUDGET

The US deficit continues to blow up. Spending has been rising faster than revenue. The deficit for the first half of the fiscal year came in at $691 billion and is 15% higher than last year. As we have written before, the deficit should be going down as the economy expands, not up.

SCOREBOARD

HIGHLIGHTS

• US stocks were up by 2.12% and now less than 1% off the all-time high.
• A pair of positive manufacturing reports gave investors hope that the worldwide slowdown might be reaching a turning point.
• The inverted 3m/10yr yield curve reverts to normal status.
• Trump nominates Herman Cain to the Fed, making it two political partisans in a row.
• Still no Brexit deal, another extension requested.
• A solid jobs report.

MARKET RECAP

Stocks had a big week, advancing by 2.12% and finishing up on four of five days. International equities moved up by 2.39%. Bonds declined by 0.39% on slightly higher interest rates. The week got off to a good start on Monday on a pair of positive manufacturing reports that gave hope that the worldwide slowdown might be reaching a turning point. The US ISM and the Chinese PMI both turned up (details further below). US stocks are now only 0.76% off their all-time high.

Stocks were also helped when the spread between the 3-month treasury bill and the 10-year bond reverted back to a normal status where the 10-year yield is greater than the 3-month.

ISM

The Institute for Supply Management’s (ISM) purchasing managers index (PMI) increased in March to 55.3 from 54.2 in February. A number higher than 50 is considered expansionary. New orders jumped to 57.4 from 55.5. The ISM report is considered positive in that the big decline from the August peak of 61.3 appears to have stabilized over the last few months and has now turned slightly up.

CHINESE PMI

The Chinese Caixin manufacturing PMI showed an increase in March, jumping to 50.8 from 49.9 the prior month. New orders rose to their highest level in four months. The report is a hopeful signal that the global economy will start to level off and begin to turn up again. It is only one report and European PMIs have been negative but it is a possible beginning.

FED

The administration continues to set a bad precedent that will come back to haunt the nation down the road. This week, Trump nominated Herman Cain, the former 2012 presidential candidate, to the Fed Board. Cain was active at the Kansas City Fed from 1989 to 1994, but he lacks the technical expertise that is normal for a Fed Governor. Plus, the nomination of Cain, following the earlier nomination of Stephen Moore, presents two choices that are influenced by short-term politics instead of long-term economics. No matter if the President is Trump or Elizabeth Warren, nominees should have expertise in economics and should not be hardcore partisans.

BREXIT

The Brexit disaster continues. April 12 is the deadline and the House of Commons voted down four different alternative plans this week. Prime Minister May has now asked the EU for an extension until June 30.

JOBS REPORT

The US added 196,000 jobs in March. The unemployment rate remained at 3.8%, just above a 49-year low. Average hourly wages increased by 3.2% year over year.

SCOREBOARD

Highlights

• Stocks end the week, the month and the quarter on an up note.
• Equity trends are mixed while bond trends are up.
• Conference Board confidence turns down.
• The ratio between the leading and coincident indexes is narrowing.
• Lyft goes public.
• Q4 growth is revised downward.
• Trump makes a bad political move on healthcare.

Market Recap

US stocks were up by 1.35% for the week and finished March up by 1.42%. For the first quarter, US stocks advanced by a blistering 14%. International stocks were up by 0.96% on the week, 0.77% for the month, and 10.3% for the quarter. While the markets had a spectacular 1st quarter, the last few weeks there has been a lot of back and forth between the ups and the downs. This week was positive. The markets finished the week in good shape technically. The VTI held above the support line. And on Tuesday we got a golden cross, that is when the 50-day moving average crosses above the 200-day moving average (see point 10 on the chart below).

However, as the table below illustrates, the trend in the equity indexes (VTI – US overall stock market, SPY – S&P 500, and VXUS – international stocks) are mixed. Compare that to the trend for bonds as measured by the AGG which are all positive.

While the stock market finished the week strong and had a spectacular run in the first quarter, the economic signals are still pointing to a slowdown and a possible recession down the line. Q4 growth came in at 2.2%, lower than the original 2.6% estimate (see below). The Conference Board Consumer Sentiment Survey has turned down, in the past, that has often been a precursor to a recession.

Another negative signal from the Conference Board is the ratio between the Leading Economic Index (LEI) and the Coincident Index (CEI). On the chart below the LEI is flattening while the CEI continues to increase. While still early, a declining LEI and an increasing CEI have in the past been a leading indicator for a recession.

But not everything is negative. There are some positive signs. Jobless claims fell again, dropping to 211,000. Central banks around the world, including the Fed, have turned dovish, and are not increasing rates. It is possible that the banks are making the turn just in time to forestall a recession. With the fall in interest rates, new home buying is increasing, that will have a positive multiplier effect on the economy.

Declining interest rates are now a factor in higher equity values. Declining rates will increase the value of future cash flows, and all other things equal, that increases the value of stocks.

Lyft IPO

Lyft went public on Friday at $72 per share, which was at the top end of the expected range and closed up by 9% for the day.

Q4 Growth Revised Downward

GDP growth for Q4 was revised downward to 2.2% from 2.6%. Corporate profits after tax adjusted for inventory valuation and capital-consumption showed no growth in the quarter. Consumer, businesses, and local and state governments spent less than was originally estimated. On the positive side, growth in exports was revised higher and business investment contributed 0.73% to the 2.20% growth.

Healthcare

The Trump administration put in a legal request to strike down the Affordable Care Act (ACA). This does not seem like a good electoral strategy for the Republicans and it unleashed some dissent in the Republican ranks. Trump and the Republicans have offered no alternative to Obamacare, and this move plays into the Democrats hands. Given the extreme left-wing tilt by the Democratic party in recent months, many centrist voters that detest Trump, and who would have been happy to vote for a traditional Democrat, have been realizing that the left-wing Democrats will be forcing them to make a vote they don’t want to for Trump. And then Trump makes a move like this that will swing some voters back to the Democrats. Playing to the center, keeping the ACA intact and building around it would be the much smarter approach for the administration. Americans don’t want to lose their insurance, and they don’t want higher premiums. To eliminate the ACA without even an alternative does not make sense.

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