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Thursday, November 30, 2017

Despite hurricane disruptions, the U.S. economy grew 3.3% in Q3, the fastest rate of economic growth in three years. The components of GDP are consumption, investment, net exports and government spending. So what changed in this mix? Quite simply – investment, business investment. Companies are realizing they have to invest and spend on capital equipment in order to boost productivity and stay competitive. Non-residential investment increased 7.3% over the preceding quarter. In the recent past, it has been the consumer doing the heavy lifting. Don’t worry, consumer spending is still steadily increasing. The latest consumer spending readings reported a .3% increase in October after a strong 1% surge in September. Consumers are enjoying higher wages and record high household net worth. Personal income was up .4% in October, the second month in a row. But businesses are finally coming to the GDP table and that’s good news for sustained growth. The last time we saw two consecutive months of +3% readings was in 2004/2005. Now, it looks like we may have a chance of making it three in a row with Q4. All this good news makes you wonder why the bears don’t just go into hibernation already. Please watch Doug Cote’s unequivocal anti-bear spray on CNBC..

Wednesday, November 29, 2017

In the past year, there has been a major sea change in the US economic outlook following the election of President Trump. The main changes thus far have been twofold: an improved confidence in the economy and a major deregulatory push. The change in confidence began as early as November 2016 and is a key driver of the economy, it’s ‘animal spirits’. That pick-up can be seen in the NFIB Small Business Optimism Index (holding at 13-year highs); the Conference Board Consumer Confidence Index (holding at 15-year highs); and the University of Michigan Consumer Current Economic Index (holding at 15-year highs). ISM new orders are up some 10%. Since January, the Administration has gone on a deregulatory tear, reportedly withdrawing nearly 500 regulations per a Washington Post study, while promulgating virtually no new regulations.

And now the fruits of those labors are being seen. Real GDP has averaged 3.2% QoQ growth over the first two full quarters under the new Administration. Unemployment claims are at near 50-year lows, with the unemployment rate seemingly heading below 4%. Capital goods non-defense new orders (ex-aircraft) have risen by an annualized 9.6% rate over the past six months to October 2017. Capital goods shipments are up nine-straight months, and have melted up. Orders and capital goods shipments are the seed corn of an economic revival. Tax reform can be the fuel boost to lock it in. - Special Guest Blogger: Tim Kearney

Tuesday, November 28, 2017
The shale oil and gas revolution has made energy cheaper for U.S. manufacturers and spawned many high paying jobs. The recent drop in oil prices has caused the energy sector to cut back.

The U.S. has a glut of natural gas which has depressed prices below $3.00/btu. Fracking technology has opened up plentiful reserves and driven down extraction costs. This excess supply has created opportunities that are both economic and strategic. Over the next five years, the IEA (International Energy Agency) reported that the U.S. will begin liquefying and shipping gas all over the world and, by 2022, will produce more than a fifth of the world’s gas supply rivaling titans like Norway and Russia. In the liquefied gas market, the U.S. is expected to become the second biggest exporter. This will direct dollars into the U.S. economy. In addition, it will provide a strategic diversification benefit to many of the eastern European countries that rely on Russia for gas supplies. Remember a couple years ago when Russia threatened to put Ukraine in a deep freeze by cutting off supplies? Well, last week Louisiana announced that it will be exporting liquefied natural gas to Poland via the Sabine Pass terminal. Growing exports of LNG to eastern Europe will dull Russia’s influence and power. Diversification is good whether it’s across asset classes or energy sources. Please follow natural gas prices on page 75 of the Global Perspectives™ Book.

Wednesday, November 22, 2017

One reason that currency forecasts are a formidable challenge is that they don’t exhibit any form of cash flow to anchor their value. Bonds have coupon payments while equities have earnings or dividends as cash flows that can be discounted back to arrive at some present value for the asset. So what factors can we rely on to forecast the direction of currencies?

In the short term, we believe in a regime-dependent approach that incorporates momentum, sentiment, and other macro based factors to forecast near term currency direction. Over the intermediate term, we look at relative interest rates and growth rates which can make domestic assets attractive or unattractive versus foreign assets. Using a two factor model based on interest rate and growth rate differentials, we estimate that a 100-point shock in the relative Citi Economic Data Change Index for the U.S. versus a basket of its majors would push the dollar roughly 10% higher in a years’ time, while a 1% shock in 2-year rate differentials would also push the dollar higher by roughly 10% over a years’ time. We also rely on other longer term signals to help form our secular view. Looking at the long-term view for the dollar, we start with purchasing power parity (PPP), which compares relative prices for goods and services, as our valuation anchor. Knowing this can deviate from fair value for periods of time, we view this as useful once it reaches stretched levels while also looking at this in conjunction with metrics such as relative current account balances and productivity which can justify periods of sustained over/undervaluation.

Putting all this together, we believe that in the near term we could continue to see some modest dollar strength as relative economic momentum and interest rate differentials are supportive along with market positioning that is fairly dollar negative. Any positive announcement on the tax reform front will also support a higher dollar in the near term as well. However, looking at the longer term view, with the flat trend of relative productivity and expectations for an increasing deficit, the dollar has room to move lower as PPP vs. a basket of its majors is currently neutral and has room to move to the downside.

Please look at page 54 of the Global Perspectives Book to see how the dollar has fared against emerging markets.

Tuesday, November 21, 2017

M&A (merger and acquisition) activity is in the news and on the rise. Deals tend to correlate with business confidence so an uptick in activity is an affirmation of the accelerating economic growth, both in the U.S. and abroad. Companies seek deals to harness growth and innovation, combat disruptive technologies, navigate globalization, and maximize brand strength. Many firms have cash they need to put to use while others are taking advantage of low interest rates. Most deals tend to create synergies which boost earnings and shareholder wealth. So in case you needed yet another reason to believe in this bull market, here it is.

Please watch Karyn Cavanaugh discuss the global synchronized expansion on CNBC Squawk Box.

Friday, November 17, 2017

Planning for retirement can be daunting. A 2017 Merrill Lynch survey estimates retirees will need an average of 738k to fund retirement. Studies by Fidelity have shown that and average 65-year old couple can expect to spend an average of 250k in retirement on soaring health care costs, not including nursing home care. As if these statistics aren’t sobering enough, approximately 65 million Americans – one in five children and adults – will experience a special need or disability during their lifetime, exacerbating uncertainty and requiring additional considerations, planning and saving. Last week marks the 47th week of positive flows into U.S. investment grade bonds. Bonds are the anchor of any portfolio, typically offering risk control, diversification and steady income. But in this continued low interest rate environment, equities may be needed to help provide your portfolio with growth boost to cushion against future uncertainty. Good old-fashioned diversification across bonds and stocks can help build wealth while mitigating risk.

To see an example of a diversified portfolio, please look at slide 5 of the Global Perspectives Book.

Read more about planning for those with special needs, visit Voya Cares, a website designed to help with the complex financial needs of the special needs community.

In addition, please see our Tumblr Page raising funds for the Special Olympics.

Thursday, November 16, 2017

Industrial production surged in October, up .9%, handily beating expectations. Previous months were also revised upward. In case you haven’t noticed, manufacturing has been enjoying a renaissance. In the U.S., ISM PMI levels are at a six year high, many regional indices breached levels not seen in decades and world industrial production is at all-time highs. Manufacturing is a significant creator of jobs and downstream economic activity. This latest report is, therefore, a testament to the firmness of the economy. On the consumer side, the latest retail sales for October also surprised on the upside. Consumers are now spending $486.5 billion a month – an all-time high – and expectations for the holiday season are being revised up. This good economic news is manifested in corporate earnings. The Q3 earnings season is winding down with growth in the 6%+ range, double expectations at the onset of the season. The fourth quarter looks even stronger with the materials sector in particular picking up in wake of the manufacturing resurgence. Wait a minute, this sounds like the ABC’s of the market, just in a different order. A= Accelerating Corporate Earnings, B= Broadening Manufacturing, C= Consumer Strength. No matter how you slice or dice it, BCA or ABC, it spells UP for markets. Hope you caught the mini dip yesterday.

Please watch Doug Coté pound the table on CNBC's Squawk Box this morning.

Wednesday, November 15, 2017

In thinking about the inflation outlook, is it possible that we are asking the wrong question? Theoretically, inflation should reflect an increase in “money”; however, economists cannot identify what “money” means. Looking at data back to 1948, a case can be made that inflation occurs only when major disequilibria persist. That is, the data implies that the ‘natural state’ for inflation is a flat, average inflation rate. Using the CPI, there are four regimes:

  • The immediate post-war eras to end of the Korean conflict, when lifting price controls led to double digit inflation
  • The low-inflation Bretton Woods working period of 1953-1966, when the gold-standard led to an average 1.4% inflation rate
  • The unhooking of the dollar from gold, as inflation hit double digits in 1974 and 1979 and averaged 6%from 1967-1992
  • The 1992- present Credible Fed period, when inflation averaged 2.3%
    • Economic theory says credibility is the key driver of inflation. Inflation appears to settle around 2% in the absence of the need to adjust to major problems (like, say, a war spiking oil prices). Why? Consider that this is part a function of a globalizing U.S. economy where outsourcing, capital investment, and import competition combine to keep inflation in check. Despite the size of the Fed’s balance sheet, it nonetheless does not appear to be a problem – and the Fed seems set to ensure it doesn’t become a problem. Discount the Philipps Curve, data shows that it is rising productivity that moves real wages higher. It’s not a low unemployment rate cost-push phenomenon. Inflation will likely remain in its current trend for longer than the Fed expects. - Special Guest Blogger: Tim Kearney

    Tuesday, November 14, 2017
    Despite declining import and export growth, recent GDP growth is reported at a 6.7% annual rate. China is attempting to tame excesses and sidestep a “hard landing”.

    Singles Day (11/11) in China started as an anti-Valentine’s Day holiday to celebrate singlehood. It has since morphed into a worldwide shopping day extraordinaire. This year more than $25 billion in sales were processed via the Alibaba e-commerce platform, up 40% over last year. Compare that to a paltry $4.9 billion in U.S. sales on Black Friday 2016 and $3.7 billion in U.S. sales on Cyber Monday 2016. China was not the only country benefitting from the singles’ retail therapy extravaganza. More than 60,000 international brands and 225 countries jumped on the party train to sell their wares. The top three countries selling to China were Japan, U.S., and Australia. Yet, Singles Day is still relatively unknown to many in the U.S. The latest record-breaking surge should encourage more U.S. retailers to participate in the huge surge in Chinese consumerism as China continues to shift from an export-driven economy to a consumer-driven economy. Please keep an eye on Chinese retail sales growth on page 48 of the Global Perspectives™ book.

    Friday, November 10, 2017
    Veterans Day

    We thank and recognize the patriotism and sacrifice of our U.S. military, veterans and their families this month in honor of Veterans Day. From the U.S. Veteran Affairs “For 98 years, Americans have remembered those who served our country in uniform on 11 November – first as Armistice Day, and then, since 1954 as Veterans Day. In this 99th year of commemoration, the Department of Veterans Affairs is broadening that tradition of observance and appreciation to include both Veterans and Military Families for the entire month of November.”

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