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Wednesday, June 20, 2018
U.S. consumer confidence hit a five-year high but is still off pre-crisis levels.

The past week has been dominated by policy/political issues, overriding good economic data. On the latter, the U.S. registered a blowout NFIB Optimism reading. Inflation readings were as expected, with real average hourly earnings sub-1%. Export prices are rising smartly (+4.9%) despite the strong USD. Initial unemployment claims are pushing towards the 1968 record low. With unemployment low, household wealth rising and confidence levels brimming, retail sales are outperforming at all levels and up 5.9% YoY. CPI inflation clearly has taken away deflation risk, but the charge up does open the Fed to a risk that they will see inflation rates edge above the FOMC’s comfort zone. Core CPI is now up 2.2% YoY with the six-month change at 2.4% annualized BUT the 3-month change is just 1.6%. Not enough for an aggressive Fed for sure, especially with real average hourly earnings up just 0.3%. The Fed will most likely tread carefully. Please watch lofty consumer confidence levels, so far not impacted by trade tensions, on page 58 of the Global Perspectives book - Special Guest Blogger: Tim Kearney, PhD.

Tuesday, June 19, 2018

The President stated his intention of escalating a trade war with China and the markets summarily dropped. A real trade war with China or any other country tends to lead to a downward spiral and bring to mind events like the “Smoot-Hawley” trade tariff that arguably triggered the Great Depression. This along with rising rates and a rising U.S. dollar is hitting international and Emerging Markets hard. In fact in June so far MSCI EAFE and MSCI Emerging Markets have underperformed the S&P 500 by -3.8% and -5.0% respectively. This is bad...real bad, unless this is gamesmanship as in the so called “Art of the Deal”. Either way, US companies are more protected from market fallout from trade barriers than other developed countries, which has allowed the US to take charge on these tariffs. It is in the interest of the Chinese not to match the tariffs or increase them even more, as it is their shares who fell to their lowest level in nearly two years as a result of this emerging trade war. Not to mention, the US has great domestic exposure, as 73% of the revenue produced from its companies comes from home. The U.S. seems to have the upper hand, but negotiating is more art than science.

Please see page 47 of the Voya Global Perspectives Book to see where total world imports and exports are at all-time record highs.

Thursday, June 14, 2018
Over the past 20 years the average asset allocation investor has significantly underperformed stock and bond markets and barely kept pace with inflation.

Retail sales smashed expectations surging .8% in May, double expectations. In addition, March and April sales were also revised up. Fed chairman Jerome Powell in his post-meeting Q&A sounded a lot more optimistic than his “dot plot” indicated, saying “I can say that the tax cuts will provide meaningful support to demand, significant support to demand over the next three years” and “encourage greater investment, that should drive productivity, that should increase potential output.” A supply and demand boost, now that is something. Consumer spending is almost 70% of GDP so this bodes well for second quarter GDP to be released in July and Capex increases bode well for solid productivity increases. Estimates have been steadily rising and economists are now mentioning a four handle. Higher gas prices accounted for some of the increase in the retail sales figure but even if gas is excluded, retail sales are up 5% over a year ago. Tax cuts, robust employment conditions and increased household wealth are the reasons for the boost in retail spending. GDP is calculated as C (consumption) + I (Investment) + G (Government Spending) + X (Exports-Imports). Investment is also accelerating as companies are fast-tracking their capital expenditures in response to tax cuts, deregulation and a tight labor market. Tax cuts are not a one and done. Meanwhile, the dollar surged and the euro dropped due to the ECB comments from a less optimistic Mario Draghi, stating that there will be no rate increase until summer 2019. Maybe Europe needs tax reform too. Please refer to the components of GDP on page 71 of the Global Perspectives Book.

Wednesday, June 13, 2018
The Fed funds target rate and Treasury yields remain historically low, even though the Fed increased the target rate in December 2016.

The Fed is widely expected to raise interest rates today and that hike is already priced into the market. It is unequivocally good news when the U.S. Fed Funds rate can be lifted to 2% after being stuck in the .25% basement from 2008 to 2015 due to a lackluster recovery. Investors will be looking for clues as to future Fed actions. Sure, the economic data is coming in strong. In fact, the U.S. is now considered the developed country leader in the still very much intact global synchronized expansion after some first quarter softness in Europe and Japan. That strength has manifested itself in the U.S. dollar and as a result, some emerging markets have been struggling. Emerging economies frequently have dollar denominated debt, which becomes more burdensome when the dollar strengthens. In addition higher rates in the U.S. constrain global liquidity and spur an outflow of funds from emerging markets and back to the U.S. Brazil is 7% of the MSCI EM index and recently experienced an 8% drop in their markets. But their problems are also domestic, as 2018 GDP forecasts are being cut and political turmoil is failing to provide positive economic direction. Fed action and a stronger dollar can only take partial responsibility for the EM turmoil if just uncovering weakness that was already there. There is still plenty of opportunity in EM as the global economy expands. Moreover, emerging markets typically offer more compelling p/e ratios in equities and higher bond yields than those available in developed nations. And remember a relatively weak currency makes trade more attractive and boosts the local economy. Please follow the Fed on on page 34 of the Global Perspectives Book.

Tuesday, June 12, 2018

The National Federation of Independent Business small business optimism index rose to 107.8 the highest in 34 years; the second highest in 45 years and just below the record of 108. "Main Street optimism is on a stratospheric trajectory thanks to recent tax cuts and regulatory changes. For years, owners have continuously signaled that when taxes and regulations ease, earnings and employee compensation increase," said NFIB President and CEO, Juanita Duggan.
The May report hit several records:

  • Compensation increases hit a 45-year high at a record net 35 percent.
  • Positive earnings trends reached a survey high at a net three percent.
  • Positive sales trends are at the highest level since 1995.
  • Expansion plans are the most robust in survey history.
  • “Probably the biggest and most unappreciated part of the tax package is the small business tax cut - the first ever." This was our quote from the Voya Global Perspectives® 2018 Forecast: Pro-Business Economy Unleashes Growth.

    Friday, June 8, 2018
    Lower personal savings rates and household net worth tend to increase the burden on future savings to fund retirement security; rising stock and housing markets have driven household net worth upwards.

    The Fed reported that U.S. household wealth reached an all-time high milestone in Q1, surpassing $100 trillion for the first time. The robust employment landscape and a rising stock market helped; however, the biggest contribution to the boost in wealth was home prices. Housing prices have recovered and are now higher than their 2006 pre-bust high water mark. Last month the S&P Case Shiller index reported overall YoY price increases of 6.8% for the 20 metro area with some cities like Seattle, San Francisco and Las Vegas soaring by double digits. The reason behind rising prices is limited supply. Less than 1.3 million new homes are being built per year across the country. Compare this to 2006 when 2.3 million new homes were constructed. Household formation has slowed but still 400,000 new households were established in 2017, (down from 2.4 million new households in 2011) and all of the excess supply from the bubble years has been absorbed. Nationwide higher rental rates are encouraging home ownership. In addition, it turns out Millennials are not content to live in their parent’s basement. The biggest change in home ownership rates was among the millennial generation last year with an increase from 34.7% to 36%. In addition, 80% of Millennials report wanting to own a home. The increase in wealth will flow into consumer spending although consumers are more cautious since the recession and are expected to spend only ~1% of their newfound wealth. Watch the sharp rebound in U.S. household wealth since 2009 on page 59 of the Global Perspectives book .

    Thursday, June 7, 2018
    Troubling projected budget deficits are driven by large mandatory entitlement programs, defense spending and interest payments, making it difficult to reduce government spending.

    You may have missed this in the news. For the first time since 1982, the federal government is going to have to dip into the social security trust fund in order to pay out benefits this year. In other words, the social security program will pay out more this year than it collects through the 6.2% payroll tax plus earned interest. The reasons for the shortfall are quite simple. People are living longer and the overall population is aging, shifting the balance between the working population paying into the program and the retirees collecting benefits. There are currently 61.5 million Americans collecting social security and 58.4 million using Medicare. The solution is not quite as simple. The government can cut benefits, raise the retirement age, raise the payroll tax, eliminate the earnings cap on payroll deductions, increase immigration or combine a mix of some or all of these options. In addition, a boost in the below trend U.S. economic growth and productivity would certainly take some of the heat off the program. We are not yet at Chicken Little conditions but this is a serious burden. Payments to individuals were 67% of the 2017 federal budget. Surprisingly investors seem relatively unruffled. However, on the other hand, the interest on the federal debt, which was only 6% of the federal budget, is frequently being labeled the elephant in the room. Please see page 73 of the Global Perspectives book for a breakdown of the federal budget.

    Wednesday, June 6, 2018
    Core and headline inflation remain subdued with the Fed’s preferred measure of inflation, Core PCE, remaining slightly below target.

    U. S. economic data continue to roll strong. Non-farm payrolls at 223k outperformed expectations, with the two-month net revisions moved up by 15k, manufacturing outperforming, and upwardly revised to boot. The Chicago Purchasing Manager report hit 62.7, turning up from the Q1 swoon. The ISM report was chock full of good news: employment rose, manufacturing rose and new orders rose, were above 60 and above the 12-month moving average. Price movements remain moderate. Yes, ISM Prices Paid ticked higher and are closing in on 80, but that is likely a response to rising oil prices that have come off the boil and are down 10% from the late-May highs. More systemic measures are quiescent: The April PCE deflator was up 2% YoY while core was up 1.8% (with March revised down by 0.1%). Average hourly earnings remain the “dog which isn’t barking” at 2.7% YoY in May, but that’s barely above the 2.5% CPI inflation rate and has to be twinned with the 1.2% YoY increase in productivity.

    This is a beautiful picture of low inflation/rising growth – unless you are wedded to Phillips Curve type analysis, an indicator which continues to be revived – despite a lack of ability to predict inflation ex ante. Nevertheless here we are, with the better data leading to a revival of a December Fed Funds hike. While I continue to believe that the inflation data will not provide the Fed enough cover to hike I also believe that pricing a hike fully into the market (now about 45%) won’t be enough to derail the U.S. or global economy on its own. Probably the pricing-in of a December hike has likely done most of its damage to the USD, which could unwind as the Italians stand down a bit from creating a Pan-European mess. Please check out page 60 of the Global Perspectives book for more on inflation - consumer price index.

    Tuesday, June 5, 2018
    After two bull and two bear market cycles, the S&P 500 is now 51% above its 2007 peak.

    Sure, if you can avoid a bear market by selling before the big downturn you look like a hero. But if you in fact bail on a bull market, you look like a zero. And it could be very detrimental to your portfolio. An opportunity cost is still a cost. The latest bout of trade tensions and some misguided talk of global slowdowns have led investors to lean bearish. Who can blame them? Tariff talks, geopolitical on again, off again summits, emerging markets’ ability to navigate a stronger dollar and the ever-looming Fed at the rate hike trigger may seem pretty ominous. Time to remember your ABC’s. Corporate earnings are ACCELERATING. Estimates for 2018 profit growth have been raised to 19.5% from ~10% in December. Manufacturing is BROADENING. ISM manufacturing and non-manufacturing accelerated in May and CAPEX surged in Q1 by 9.2%. CONSUMERS are spending. And why not? The jobs market is the best in more than 18 years with 3.8% unemployment and 6.698 million job openings (JOLTS). Using a disciplined approach to manage your portfolio, based on fundamentals, is a two way street. The fundamentals can indicate when the bear is growling but more importantly - investors need to heed the fundamentals when the bull is running especially when day-to-day distractions may obscure the view. The market dropped 52% from 10/9/2007 to 11/20/2008. Ouch. However, the S&P 500 index is up almost 300% since its lowest low. Bailing on a bull market may be bigger mistake than failing to outrun the bear. Please see page 15 of the Global Perspectives book for a breakdown of the bull and bear market returns.

    Friday, June 1, 2018

    The astounding economic statistics just keep rolling in. Today was an especially big day for economic releases led by the blockbuster Non-Farm Payrolls and Manufacturing. It was of the highest quality, beating all metrics with the unemployment rate at a low of 3.8%, the second lowest reading since 1969 when Neil Armstrong landed on the moon. We are watching manufacturing very closely because it is a jobs machine in that every manufacturing job produces three jobs to support it. May’s ISM Manufacturing blew out the consensus with a 58.7 led by New Orders, Shipments and Backlogs. Manufacturing and the associated capital investment that is taking place now in the second quarter won’t be officially reported until July 27th but is undoubtedly building around a huge 3.6% Q2 GDP growth rate with upside potential.  We are in a virtuous cycle that will lead to higher real wages and higher productivity, a game changer sparked by pro-growth economic policies. The U.S. is leading the pro-growth charge with low taxes and deregulation policies but make no mistake, every country in the world will have to jump on the bandwagon – especially Europe – in order to stay competitive. It looks like this not so “stealth” economic boom is taking us into the “double-header” of this bull market.

    For more information on U.S Manufacturing, please see page 10 of the Global Perspectives book.

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