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Friday, August 24, 2018

With the market at all-time highs, many investors on the sidelines face a psychological barrier. No one wants to jump in at the peak. So investors are now questioning how long the market can climb. In short: a while. Earnings drive markets and current 25% growth levels may not be sustainable, but growth rates for 2019 are about 10%. The Fed is not worried about inflation and will raise rates very cautiously. Economic growth has been vastly underestimated. The new tax code is not merely a sugar high. U.S. GDP has shifted to a higher gear based on higher business investment. Today’s durable goods report was a miss with headline orders down 1.7% on notoriously volatile aircraft orders. However, a surge in business investment was affirmed with core durable goods orders up 1.4% MoM, 7.2% YoY and June core revised up to .9%. This bodes well for a potential positive revision to Q2’s 4.1% GDP and the Atlanta Fed just posted a 4.6% GDP estimate for Q3. Investor psychology unfortunately motivates behavior, which may be detrimental to a portfolio. There is more than $10 trillion in cash on the sidelines, barely keeping up with inflation. The current bull market’s climb is a testament to the underlying strength of the economy and earnings. Yes, there are risks but the market’s ability to plow through them in the past should increase investor confidence, not rattle them. Please see the Dalbar study regarding investor behavior on page 77 of the Global Perspectives Book.

Thursday, August 23, 2018

Let’s add housing to the wall of worry. The wall is already crowded with worries regarding Fed rate actions, dollar strength, political drama and the biggest worry of all – trade battles, particularly with China, the second biggest economy in the world. Although nationwide mean home prices rose 4.5% in July helping household wealth, many of the latest housing numbers have been less than spectacular:

  • New home sales trended down 1.7% in July to the slowest pace in nine months, although still up 12.8% year over year.
  • Existing home sales were down for the fifth month in a row and are down 1.5% from a year ago.
  • Housing starts have barely budged and the annual number of homes being built is only 1.168 million, far below the 2006 peak of 2.273 million.
  • Hindered by affordability and limited inventory, first time buyers account for only 32% of home sales.

A wobbly housing market is indeed a concern. However, demand is still strong because unemployment keeps falling and mortgage rates are not rising significantly faster. In fact, mortgage rates are down for the third week in a row. Although some potential home buyers have decided to sit on the sidelines and take a breather, it is supply that is the problem when it comes to housing. Limited supply is slowing sales, relentlessly driving up prices and reducing affordability especially for first time home buyers. The strong economic outlook will continue to fuel demand and housing price increases until supply meaningfully increases. Please view the latest housing stats on page 67 of the Global Perspectives Book and read the latest comments about the overall robust global economy.

Wednesday, August 22, 2018

Consider that the USD is up against all currencies, basically, save the JPY this month. So if we consider some conventional measures of monetary policy as expressed in the marketplace, we see that conditions have tightened: yield curve famously has been flattening, 10-year UST yields have slipped from 3% to 2.8% and commodity prices are falling. There have been no big movements in prices over the past month. ISM Prices Paid, Core PPI, Core PCE Deflator and PCE Deflator all underperformed expectations (though it can be classified as a plus/minus 0.1% YoY in the main). Clearly, US growth numbers continue to be strong which aids currencies. The Atlanta Fed GDPNow forecast for Q3 is 4.3%. ISM new orders remain at 60, capacity utilization is 78% and unemployment rate is 3.9%. The issue is stagnant wages; July real average hourly earnings were off 0.2% YoY, part of a long ebb. This is not an outlier; the Atlanta Fed Wage Tracker likewise shows stagnant wages. What to make of this? I’ll propose that dollar strength has come around as markets have digested a December hike and still strong growth. I suspect this channel will stand down. While the Fed may have room to hike in December, I doubt that the Fed will sneak in much more unless we see wages moving higher. With developed country growth continuing, the global engine is available for EM to stabilize and begin to move back higher.

Tuesday, August 21, 2018

Tomorrow the current bull market will be the longest on record. It will be 3,453 trading days without a 20% correction in the S&P500 Index. However, the current bull market is not the highest in terms of market returns. This bull market started on March 9, 2009 and is up more than 320%. The prior longest bull run was November 1990-March 2000, accompanied by returns of 417%. But the current bull market is the highest in terms of earnings growth. Earnings are up more than 1600% since the low. And earnings are not showing signs of slowing down. In fact, projections for the current year have moved up in the last month, not down. Aggressive Fed action could slow the bull but most bull markets are killed by recessions. The robust path of the U.S. economy, driven by tax cuts is breathing life into our current bull and calling an end would be premature, similar to the demise of retail that was widely broadcast last year. Lo and behold, the consumer discretionary sector is up more than 15% YTD after posting 25% earnings growth in Q2. So don’t count this bull out yet, 3,453 may just be the new 2,000. Age is just a number. Please see page 15 of the Global Perspectives Book for the history of the current bull run, which is up more than 80% from the prior peak in 2007.

Friday, August 17, 2018

The market is wrapping up a roller coaster week, which ultimately looks like it will end flat. It was not just the Turkish currency crisis that was weighing on investors. Global growth concerns specifically regarding China were front and center. China’s fixed investment, industrial production and retail sales all undershot expectations. In addition, China’s high flying tech stocks were hammered, increasing unease. However, let’s end the week with the significant positives investors often choose to ignore. The Chinese government is embarking on massive stimulus – cutting rates, loosening credit and increasing government spending 10% YoY. The Chinese stock market is also somewhat disconnected from the economy and not indicative of an overall economic decline. Here in the U.S., productivity surged to the highest level in three years, 2.9% in Q2. Productivity is simply output-hours worked. Companies have finally been upping their capital investment, providing workers with the tools needed to become more efficient. Higher productivity is needed for sustained higher GDP growth, and although the four quarter moving average productivity remains around 1.3%, this is a promising first indication for a potential break from the below trend 2%ish GDP environment plaguing the economy since the recession. Retail sales surprised on the upside and rose to their highest level ever, up .5% in July to $507.5 billion, affirming the strength of the consumer. Indeed, consumer discretionary multiline retailers reporting earnings this week have been generally smashing expectations. Despite tariffs, small business optimism bounced back to an NFIB reading of 107.9, the second highest ever. Finally, the leading economic indicators index rose .6% in July indicating the U.S. economy continued its brisk pace, moving into the second half of the year. So as you take off for a well-deserved weekend, please stow negativity underneath the seat in front of you or in an overhead bin. Please follow productivity on page 65 of the Global Perspectives book.

Thursday, August 16, 2018

Yes, I bring back a retro term to describe the perennial lackluster Eurozone. Germany’s growth has been a bright spot but it is hard to get excited about yesterday’s report of its quarterly (annualized) 1.8% GDP growth when America grew at a 4.1% clip. The WSJ reports “Germany has pulled off an impressive feat”, said Oliver Rakau, chief German economist at Oxford Economics. “In contrast to the performance of its Eurozone peers, growth has picked up slightly in the second quarter”. Talk about a downer. I guess if you set the bar low enough anything is good. The simple fact is that the success of the U.S is squarely attributable to pro-business fiscal policies emanating from slashing tax rates and crushing blows to the regulatory framework. In other words, these pro-business policies have unleashed growth. I feel bad for the European people since their leaders do not clearly articulate that every single time pro-business policies are enacted more growth and more jobs result. Eurosclerosis will continue until the European Union gets the memo that U.S. pro-growth policies have made them uncompetitive on the world stage. Please read our 2018 Forecast: Pro-Business Economy Unleashes Growth for further insight.


Wednesday, August 15, 2018

Emerging market currency turmoil is at top of mind this week, led but not limited to the Turkish lira. The August currency swoon is a tiresome trope but tiresomeness is nonetheless still a problem. The past couple of months has been especially hard on the Turkish Lira (down 30%) but not limited to it considering that the USD has risen by 3.4% against the Euro too. While it is often said that EM currencies do not float they sink, generally they do not sink without some weight put on them by either the global economy or their own weak spots. In the case of Turkey, Russia and Iran sanctions from the U.S. are not helping. Nor is the global pressure (likely also Fed induced) from commodity markets.

There are other signs of Fed excess tightness beyond the stronger dollar and faltering commodities, not least the flattening yield curve. In this case, it seems policy induced as ten- year UST yields haves been stable despite a pick-up in CPI inflation to 2.9%. I see this as a resulting clash of a tight fed pulling down on yields meeting the need for yields to move higher due to higher trend growth, hence this stalemate. In addition, while there has been much discussion about the flattening yield curve, it is not clear that it has been enough to drive the U.S. into recession. The Fed has presented an alternative recession probability model based on the near-term slope and should be free from some of the complications relating to the term premium. As such, it sees a 15% recession probability over the next 12 months versus a 20% probability implied by the ten-year minus two-year model. Certainly global PMIs are still showing expansion, albeit at a slower rate, but with some major emerging market countries stumbling. - Special Guest Blogger: Tim Kearney, PhD

Tuesday, August 14, 2018

Turkey and Greece. I think there is a joke there but will leave it alone. Greece fanned the flames of the Euro-Crisis in 2010 leading to widespread panic due to scary media headlines, while the underlying data was sanguine. The end result was missing the beginning of one of the great bull markets. Let’s see if investors run for the exits again – this time with record GDP, corporate earnings and small business on a “stratospheric trajectory” as stated by the NFIB’s CEO. Granted that Turkey is bigger than Greece about the size of the Netherlands or seven percent of Eurozone GDP. We take a global perspective and recommend investors use a simple rule of thumb we call the 'Big Three'. That is, if the U.S., Europe and China are all marching upward and onward in concert with their economic statistics as they are in manufacturing, services and employment, then buckle up and stay invested. Please read my 2018 Forecast: Pro-Business Economy Unleashes Growth.

Friday, August 10, 2018

Don’t say goodbye to summer just yet! It’s about to get hotter, especially in the currency markets. The Turkish lira has plunged more than 20% against the U.S. dollar over the last week and more than 40% against the dollar year-to-date, rattling global equity markets. Turkey’s significant borrowing in U.S. dollars to fund growth caused the rout. The high external debt has made Turkey especially vulnerable to any movements in the dollar. What’s more, the Turkish central bank’s refusal to raise interest rates, to stem the nosedive in its currency, has made a bad situation worse. As a result, the dollar index (DXY) has soared to +96, the highest level of the year. Investors are sweating on fears of contagion to other emerging markets. Therefore, they are flocking to safe havens such as the U.S. Treasury market, which is driving the 10-year Treasury yield below 2.9%. Emerging markets are down about 0.5% YTD, but the broader impact from Turkey likely will be small. Meanwhile, core CPI index increased 2.4% year-over-year, in line with expectations but the highest reading since 2008. Inflation is not surging and is in fact showing signs of moderating. Nonetheless, we believe the steady pace of price increases and the robust U.S. economy, support additional Federal Reserve rate hikes and a stronger dollar, which will put additional pressure on emerging markets. Please see EM currencies on page 55 of the Global Perspectives book.

Thursday, August 9, 2018

The market is nearing all time peaks, and investors are realizing the strong fundamental economic narrative is not crumbling despite the many negative headlines. But are you participating in what will soon be the longest bull market in history or are you playing it “safe” in cash? Men who are 65 years old today can expect to live to age 83 and women who are currently 65 can expect to live until 86. Most people have not saved enough to fund their retirement years and need their money to work for them while they are sleeping. According to Bankrate, an investment in a money market fund is likely to pay about 0.2%. A one-year CD currently offers an average yield of 1.28%. These options do not keep up with inflation and therefore are eroding your purchasing power. Retirement investors need to consider tapping the potential of the equity markets to build the wealth they need to cover healthcare costs, let alone the silver fox sailing lifestyle generally depicted in retirement brochures. Although it is wise to save as much as possible, the market may be able to do some of the heavy lifting to grow your nest egg. Markets do have ups and downs. Diversification can help with the inevitable bumps, and often detrimental investor knee-jerk reactions, when market volatility spikes. The key to saving is starting early. Consider this example: Jim saves $5,000 a year from age 25 to age 35 before quitting his job to travel the world, terminating his contributions. Alternatively, Joe travels the world after college and finally gets a job at age 35, diligently saving $5,000 a year from age 35 to age 65. Assuming a realistic 6% rate of return, at age 65 Jim will have $401,230 and Joe will have $419,008. Joe’s nest egg is only marginally higher even though he saved for 20 more years than Jim. Ah, the power of compound interest. Einstein called it the eighth wonder of the world.

Please see an example of effective diversification on page 4 of the Global Perspectives book.

This hypothetical example is for illustrative purposes only and does not represent an investment in an actual product. It does not take into account the effects of taxes or withdrawals.

Diversification does not guarantee against a loss, and there is no guarantee that a diversified portfolio will outperform a non-diversified portfolio.


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