PERFORMANCE

The US equity markets advanced by about 1%, and in the process, at least for now, broke the recent downtrend.  International equities were up 0.55%, bonds were about even, the dollar declined and crude fell by 6.7%.

This week will start on a positive note as France’s pro-growth candidate Emmanuel Macron finished first in the Sunday election and advances to the runoff with nationalist Marine Le Pen. Macron is favored and a win will keep the Eurozone intact.

The market has been advancing in a stair step fashion. It trades in a sideways manner, breaks out, then enters another consolidation phase, and then breaks higher again. That might be continuing.

Earnings appear to be on target for an approximate year over year increase of about 11%. Excluding energy, about 7.5%. Improving earnings will work down some of the excess valuation in the traditional ratios like price to earnings, price to sales and price to book.

GOVERNMENT FUNDING

Trump just complicated the process of keeping the government operating. The government runs out of money on Saturday and a deal must be passed to keep the US in business. Trump is now demanding that the legislation include funds for a border wall with Mexico. That is a deal-breaker with the Democrats and will make it more difficult to avoid a government shutdown next weekend.

ECONOMY

Initial jobless claims came in at 244k, a low number. Existing home sales were up 5.7% year over year. Industrial production rose by 1/2% month over month. The flash PMI composite estimate fell to 52.7 from 53.2 That is down but still above 50, indicating growth.

STEEL IMPORTS

The Trump administration announced that it is opening up a probe into steel imports, indicating that national security might require a cut in imports. The trade law cited to justify the cut in imports requires a study that will be submitted to the Commerce Department that assesses the legitimacy of the national-security claim.

It is one thing to retaliate against a company that is “dumping” product with the help of government subsidies, it is another to implement across the board cuts that impacts even those that compete fairly. Such an across the board cut would possibly result in retaliation against other US manufacturers.

Cutting imports would allow US manufacturers to increase steel prices even further. Manufacturers ramped up prices last year after the government imposed duties on imports from some companies in China and elsewhere. US steel prices are already among the most expensive in the world and impact a wide range of businesses that are the consumers of steel. There are about 60 workers in steel using industries for every steelworker in the US. A mismatch which shows that such an across the board cut might not past a true cost/benefit test.

TAX PLAN

Trump officials plan to release a tax overhaul plan soon. The plan would concentrate on business first (corporate and pass-through entities) and leave individual tax reform for after.

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PERFORMANCE/TREASURY RATES/GDP

Below are the numbers for the week. No commentary this week as we published our Quarterly Review/Outlook. Click here for the Review/Outlook.

PERFORMANCE

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%.

EMPLOYMENT

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.

FED

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.

GDP

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.

PERFORMANCE

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%.

TECHNICALS

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

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.

TRADE

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.

CONFIDENCE SURGES

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.

BREXIT

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

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.

ECONOMY

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.

PERFORMANCE/HEALTHCARE/TAX REFORM

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.

EARNINGS

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.

ECONOMY

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%.

PERFORMANCE

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.

EARNINGS

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.

COMPANY INSIDERS

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.

TRADE WAR

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.

EUROPE

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.

HAPPY BIRTHDAY

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.

FED

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.

JOBS

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.

TRUMP’S SPEECH

In many ways, this was the speech we have been waiting for. Trump leaned towards the optimistic side, gave a speech without insults and attacks, a speech that tried to bring the country together, instead of apart. Other than his short victory speech at 3 am the night of the election, it was the first time Trump actually acted sounded presidential, and because of that, his message was much more effective.

Trump proposed a $1 trillion infrastructure package, replacing Obamacare, lowering drug costs, lower tax rates and free and fair trade.

The market liked what it heard and the way it was said, and the Dow jumped 300 points the next day. For the week, US equities were up 0.63%. International stocks advanced 0.35%.

Interest rates, which had been falling recently, turned around and jumped about 20 basis points. That pushed the prices of the bond index down by 0.78%.

Unfortunately, by week’s end Trump was back to his old self. Declaring on Saturday morning, via Twitter, that Obama had tapped his phones, without presenting a shred of evidence. One has to wonder how long the markets can ignore the President’s bizarre behavior

GDP

For all the forward-looking optimism on the markets, the story is not so bright in real-time, at least according the the Atlanta Fed’s GDPNow model. Q1 growth fell to 1.8% from 2.40% on a lower forecast for personal consumption expenditures. The estimate from the NY Fed’s Nowcast was not as dreary, remaining steady at 3.10%. Lower than expected inventories for manufacturers and merchant wholesalers offset the negative news on personal consumption expenditures in their model.

But around the globe the economic outlook continues to look brighter. The global manufacturing PMI increase by 0.2 points to 52.9 in February. the index is now up six months in a row, that is the longest winning streak in three years and the index is at its highest level since May of 2011. 86% of individual countries are now in expansion territory.

FED

The Fed has been more aggressive in sending the message that a rate hike will happen sooner, rather than later. A March rate hike is now likely.

JOBLESS CLAIMS

Initial claims for unemployment dropped by 19k to 223k, the lowest amount since March of 1973. The four-week average now stands at 234,250 and that is the lowest number since April of 1973.

PERFORMANCE

It was another winning week on Wall Street, as US equities rose by about 0.60%. The Dow is now on an 11-session winning streak, that is the longest stretch since January of 1987 when the index put together 12 wins in a row.

The market has had the wind to its back, and either this big run will turn out to have correctly anticipated an improved economy and higher profits in the near future, or, we will continue with more of the same slow to moderate growth path. If the ladder scenario turns out to be correct, then the market has gotten ahead of itself and it will have to likely correct through either time (via a somewhat flat performance) or by price (as in a correction of some type).

There are some positive signs that the economy is accelerating. And if we get positive corporate tax reform, roll back on regulations that do not meet cost/benefit tests, and repatriation, then maybe this run up is justified. However, all of that happening is a big “if”. We will learn more when Trump rolls out his plans and what the response in Congress is. Treasury Secretary Steve Mnuchin is aiming for a tax-reform package to be passed by August. The market will also need a friendly Fed and no negative surprises on the geopolitical front.

FIXED INCOME

The bond markets are not exactly in sync with equities. Rates were lower across the curve this past week. A much improved economy would likely see higher, not lower, interest rates. The 10-year treasury yield is now at the lowest level since November. The German two-year note now yields -0.95%, close to a record low.  However, unless lower interest rates are foretelling a recession down the line, they do help provide support for higher equity values.

EARNINGS

According to FactSet, 92% of SP500 companies have now reported. 66% beat the mean earnings estimate and 52% have beaten the mean sales estimate. The blended earnings growth rate is up by 4.90%. For Q1, 67 companies have issued negative guidance and 31 have issued positive guidance. The forward p/e now stands at 17.7.

WARNING LIGHT

The US auto loan market has risen at a faster rate in recent years than most other types of consumer credit and now those loans are showing signs of stress. Delinquencies are up to the highest level since 2009 and are expected to get worse. Auto loans outstanding total about $1.1 trillion, significantly less than the $8.9 trillion US mortgage market. About 1/4 of auto loans are considered subprime. Most of the pain will be felt by smaller tier lenders, but companies like Capital One and Ally have exposure.

HOME SALES

Existing home sales rose to the highest level since February of 2007 in January. Sales were up in three of four regions across the US. Sales only fell in the midwest. Inventories hit an all time low, at 3.6 months, indicating a tight market.

JOBS

Jobless claims rose by 6k to 244k, but that is still a very low number and shows that the labor market is close to full employment.

DEBT CEILING

The debt ceiling comes up for renewal in March. No one is talking about it but this is a complication that the Trump will have to get through.

PERFORMANCE

US equity markets continued their advance, adding about 1.5% for the week. The markets are up almost 5% year to date and up about 10% since the election. International markets were up about 0.5% on the week, bonds were down slightly, the USD was flat and crude was down.

The VIX (the volatility index) is at multi-decade lows. The SP500 has now gone 89 days without dropping more than 1%.

From a technical standpoint, the market is overbought. There all kinds of indicators out there detailing that, but one that we follow is called Wilder’s RSI. This metric is an oscillator that looks at recent price action and turns that data into a number from 0 to 100. The number 70 is often used to indicate an overbought condition. We use a 21-day RSI and it cracked the 70 level this week. Getting north of 70 has been a rare occurrence this decade, and it has sometimes led to a selloff in the market (see the blue vertical lines below).

We are also overdue for some kind of sell off. By our count, it has now been 235 days since the end of the last sell off of greater than 5%. That is the second longest streak since 2005. The longest was 252 days in 2007.

VALUATION

The forward P/E ratio now stands at 17.6. That is the highest level since June of 2004.

ECONOMY/GDP

The Atlanta Fed’s GDPNow model forecasts 2.40% for Q1. That is down 0.30% from last week. The NY Fed’s Nowcast model remained steady at 3.10%. Negative news from industrial production and capacity utilization was offset by positive news from surveys and housing and construction data.

The Conference Board’s Leading Economic Index increased by the most in two years, up 0.6% for January. The six-month rate of change in the LEI was up 1.6%, the most since July of 2015. This indicates a strengthening economy later this year.

Greek Debt Crisis

The next chapter of the Greek debt crisis is on the way. Another bailout program is needed and some European governments are hesitant to give more money to Greece without IMF support. But the IMF won’t help unless Greece commits to a budget to its liking. Something Greece is not inclined to do at this time. If the IMF does not participate, that is considered a signal that the Greek budget doesn’t add up. And that could mean trouble for the Euro.