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Wednesday, August 8, 2018

The market this year has been as gullible as Charlie Brown. Lucy, instead of pulling the football just screams “China tariffs” and the market, like Charlie, once again falls. Here is a rule of thumb that works pretty well. Whatever Armageddon scenario that the news repeats every hour, day and week tends not to be an issue to the market. The past couple of years have been rampant with examples of fears about Brexit, Russia, China, Trump, inflation and growth yet the market shrugs it off and moves higher. It does have a cost though – investors needlessly going too cautious or exiting equities altogether. Meanwhile, the fundamentals just continue to steamroll along and brings the market along kicking and screaming. Keep in mind the ABC’s that drive markets A-Accelerating Corporate Earnings; B-Broadening Manufacturing and C-Consumer as the game changer. The ABC’s are at all-time record highs and that matters more than regular geopolitical spats so ignore Lucy’s comical warnings. Please read more about our ABC’s in our Voya Global Perspectives 2018 Forecast.

Tuesday, August 7, 2018

The problem with an expanding economy is that economic data does not accelerate indefinitely and a deceleration in the rate of expansion is frequently viewed too negatively. Consumer confidence moved up in July to 127.4, close to an 18-year high but not quite as high as 130 a few months ago. The ISM manufacturing index showed very strong July manufacturing activity at 58.1, but the lowest in 4 months. The Case Shiller Home Index revealed prices moved up higher by .2% in June but the rate of price increases has slowed. Not every data reading can be a record high. Last quarter investors were rattled by comments about peak earnings growth. First quarter earnings growth was 25%. This quarter, it looks like earnings will grow a mere 24%. In addition, not only do we have tariff worries, a strong dollar and rising interest rates, we also have to deal with Iran sanctions, giving investors plenty to hate. Yet despite the negative headlines, the market keeps vexing the bears and notching gains. Are investors learning to shake off the overly pessimistic headlines and dig into the fundamentals – company earnings that just keep delivering? Could Taylor Swift offer some valuable investing advice – “players gonna play… haters gonna hate… I shake it off”? Meanwhile, there is one economic data point that keeps rocketing higher – the number of job openings soared to an all-time high of 6.662 million. Please read the Global Perspectives Mid Year Outlook for a deeper dive into the fundamentals driving markets.

Friday, August 3, 2018

Guest Blogger: Tim Kearney

Non-farm payrolls and private payrolls fell short of the consensus on the month – but when the upward revisions are factored in, the two-month numbers were right on top of consensus. That is, we had 157k total payrolls (193k expected), but July’s 213k was revised up to 248k. Net/net, two-month total of 405k on the headline. Manufacturing continues to grow nicely at 37k on the month (25k was expected). Participation rate was stable hence a dip back below 4% on the unemployment rate. But (big but) the underemployment rate of 7.5% is a 17 year-low. No movement yet, however, on wages with average hourly earnings stuck at 2.7%. We’ll need to see productivity rise before we see a big change in earnings. Maybe this is the cover the Fed will need to keep hikes at a moderate pace.

As for the trade report, June did not see any pre-tariff rush buying. That could take some time (a J-curve effect) as contracts are set a bit in advance before showing up in the data. FWIW, China is tariffing another $60bn of US goods. Perhaps a sign of weakening resolve on their part, the PBoC raised the reserve requirement on FX trades to support the CNY.

A Little Bear sort of report, the porridge continues to be just right.

Thursday, August 2, 2018

There is confusion about whether a correction and a bull market can coexist. The answer is unequivocally yes and it is in fact healthy to have not only corrections but swift rotations in equities between growth/value, large cap/small cap and domestic/international. This bull market was started, was fed and got fat on monetary accommodation and now is getting lean, mean and chiseled on animal spirits driven by pro-business tax cuts. China and Europe are still fat on accommodation and undoubtedly are going to be disrupted until they compete on a pro-business platform. This may cause corrections but ultimately is positive for the global markets as this double-header bull market begins - with USA in the lead. Look at page 64 of the Global Perspectives Book for today’s low unemployment claims that bode well for a blockbuster employment report tomorrow.

Wednesday, August 1, 2018

No need to rehash the Q2 GDP report, which was pretty good especially as nominal GDP grew by a strong 7.1%, up from 4.2% in Q1. First, if there were a binge in pre-tariff inventory buying it has not occurred yet; they dropped by the biggest amount since 2009. Investment growth (+9% H1) implies that the incentives from the tax bill may be acting on the economy. And the most interesting kernel in the report was the five-year benchmark revisions, which hiked 2017 personal savings rate to 6.7% with Q2 at 6.8%, putting a pall over the narrative that consumers are maxed out.

This is a great history but what can we expect going forward? 1) In the July employment report, watch average hourly earnings, which are basically zero in real terms. It will be tough for the Fed to become more aggressive without more inflation confirmation from the core level. 2) It is clear there will be an inventory-build in H2 and I expect to see the H2 GDP consensus move above 3%. 3) The key to the longer-term outlook is productivity, with increased Labor Force Participation Rate (LFPR) to a lesser extent. The consensus expectation for Q2 is a 2.3% increase (SAAR), which would deliver a four-quarter rise of 1.4%. That is not a breakout by any means, but since 2010, productivity has averaged just 0.7% growth, so at least it's a start. That data comes out on 8/15. - Special Guest Blogger: Tim Kearney, PhD

Tuesday, July 31, 2018

Today’s Federal Reserve’s Open Market Committee (FOMC) is expected to end tomorrow benign with no rate increase. Despite the dog days of summer solid economic data is rolling in with July’s Consumer Confidence (US Conference Board) at 127.4 a near an 18-year high; June’s PCE Core inflation y/y at a tame 1.9%; Chicago Manufacturing PMI rose to 65.5 a six month high in July; and Q2 GDP at booming 4.1%. Meanwhile Q2 S&P 500 corporate earnings growth and revenue, with half the companies reporting, are at 21.4% and 8.3% respectively. Solid growth with inflation back to trend is as close to Goldilocks as you get and does not raise concerns for the FOMC. Please see our 2018 Mid-Year Outlook: Confident Economy, Cautious Markets for further insight into our view.

Friday, July 27, 2018

GDP in Q2 hit its highest level in four years, expanding 4.1%. The increase was due to both a snap back in consumer spending hitting a robust 4% and to a continued strength in business investment (CAPEX) climbing 7.3%. The tax cuts will take time to work through the economy, but the rise in business investment is indicative of the foundation needed for long-term higher growth and increasing productivity. As a bonus, first quarter GDP was revised up to 2.2% from 2.0%. Indeed, there are many investors that are wholly surprised by this stunning report that we referred to as a “stealth economic boom” and aptly take a victory lap on our call for Q2 GDP to have a “4-handle” in our Voya Global Perspectives Mid-Year Outlook.

Thursday, July 26, 2018

The tone on trade shifted yesterday with President Trump’s meeting with the EU. Both sides agreed to hold off on further tariffs. The EU is a U.S. ally and working together should be a given. Some of the tariffs in place may not necessarily be fair, but there is no allegation of unfair trade practices. In addition, trade talks with North American allies have also stepped up. The trade headache is far from over but it is good news when allies are working together and can potentially create a united front to combat the unfair trade practices they all experience with China. This pause comes just as some companies are beginning to dial back forecasts on earnings because of higher prices resulting from the recently enacted tariffs on steel and aluminum, which raised prices even on domestic sources. Meanwhile the market is grinding higher on the continued stellar earnings growth but is still keeping a wary eye on the Fed, the dollar and further possible trade tensions. Please review the Global Perspectives Mid-Year Outlook: Confident Economy, Cautious Markets.

Wednesday, July 25, 2018

Dollar strength seems to be relentless and that is bad for emerging markets and currencies. While there is a rates advantage between the U.S. and Europe/Japan, that doesn’t work for emerging market currencies. Over the past three months, the best performing currency, surprisingly, has been the Mexican peso. The peso is off by less than 1% versus 2.4% for the yen and 4.4% for the Euro. Enter the tariff wars, which in a sense are proxy wars for trade (and other) difficulties. The International Monetary Fund (IMF) projects that following through on current trade threats could drop global growth “by 0.5% percent below current projections by 2020”. The IMF actually believes that while the U.S. does face trade discrimination it has a lot to lose in a trade war; go figure. As we head into this round of difficulties, a weaker Chinese Yuan appears to be both the right response to the trade threat but the absolutely wrong step in terms of a trade war. The reason is that China has lurked for a long, long time as a potential currency manipulator. There are various assumptions on both the direct impact of U.S. tariffs on China (seems to run around 0.3%) and the secondary impact on confidence, investment, capital flows etc. – and that is unknowable. Nevertheless, it is difficult to see, with the threat of being labelled a currency manipulator, that the PBoC is not only content with a weaker exchange rate but is seeing it as a strategy. Big mistake. For more on emerging market currencies, please see page 55 of the Global Perspectives Book. - Special Guest Blogger: Tim Kearney, PhD

Tuesday, July 24, 2018

Earnings are stealing the show, coming in even better than expected. But, investor reaction has been somewhat muted. Investors should always remember their ABC’s: A=Accelerating Corporate Earnings, B=Broadening Manufacturing, C=Consumers, the economic Game-Changer. The ABC’s are forging ahead but the negative news gets more clicks – a stronger dollar threatening earnings, trade tariffs throwing a monkey wrench into manufacturing, higher gas prices and interest rates impeding consumer spending. The short-term headline risks are easier to see than the long-term underlying green shoots of true economic growth. But, the U.S. economy is growing at the fastest pace in a decade. Pay close attention to investment spending when the Q2 preliminary GDP report is released on Friday. It is crucial that companies up their CAPEX spending now to enhance productivity and promote future growth above the sickly 2% trend. An exceptional GDP report will be downplayed as a one-off tax cut boost. A disappointing GDP report will be touted as an “aha, I told you so” opportunity. Don’t succumb to short termism. Look for the underlying trends. See Karyn Cavanaugh’s comments on the market.


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