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Tuesday, April 3, 2018
The Fed funds target rate and Treasury yields remain historically low, even though the Fed increased the target rate in December 2016.

There are so many strategists and media moguls talking about the flattening of the yield curve that I feel compelled to straighten a few things out. No one is worried about the 10-year UST yield minus the 2-year UST yield per se. What they are worried about is if these two points on the yield curve invert. When it inverts or goes negative, it is a powerful predictor of a recession. In January 2000, the 10-year was 6.61% and the 2-year was higher at 6.63% or inverted yield curve signaling the impending bear market. In January 2007, the 10-year was 4.99% and the 2-year was higher at 5.00% or inverted yield curve signaling the impending bear market - aka the “Great Recession.” So it is ominous, but “this time it’s different." I put that in quotes because that tends to be the death knell of an analyst not respecting history. Regardless, I am sticking to it because of all of the positives. First of all we went about eight years at zero Fed Funds rate and we are now getting “back to normal.” That is good news, very good news. The 2-year yield has moved up in concert with this market normalization, albeit slightly higher. The 10-year yield had been in a downward trajectory for a couple years from 3% at the end of 2013 to 1.36% in July 2016. This 1.36% - the lowest in history - was indicative disinflation, recession or even depression. That the 10-year yield is a robust 2.77% today is a signal that Armageddon is far, far away. Yields this high are indicative of GDP growth hovering at around 3%, which is higher than the previous Administration’s entire two-term presidency. In other words, focus on the level of interest rates more than whether the yield curve is flat. The outlook for growth has not been this good in over a decade. Please review slide 34 of the Global Perspectives book entitled - Fed Funds Target Rates and U.S. Treasury Yields.

Thursday, March 29, 2018

After weeks of market ups and downs, risk assessment, risk reassessment and risk re-reassessment, I declare this last day of the quarter and the start of the holiday weekend to be No Bad News Day.

  • Last week initial U.S. jobless claims declined by 12,000 to 215,000, the lowest level since 1973
  • The economy added 313K jobs last month and the labor market is so red hot, it is starting to draw back some of the 95 million Americans not in the labor force
  • The U.S. and South Korea have negotiated a new trade pact which will notably benefit U.S. auto makers
  • Geopolitical risk has come down. North Korea has become chatty – meeting with China and scheduling potential summits and talks with Japan, South Korea and the U.S.
  • March consumer sentiment surged to 101.4, the highest level since 2004, despite concerns about trade, tariffs, and volatility
  • Durable goods orders jumped 3.1% in February, an indication of a brewing investment boom
  • GDP for Q4 was revised up to 2.9%, confirmation of the robust growth unleashed by the tax cuts and a precursor of the higher growth to come
  • Personal incomes were up .4% again for the third month in a row as wages and salaries increased .5% over last month
  • Q1 earnings reports begin in a few weeks and expectations are for more than 17% growth

Please take a look at slide 6 of the Global Perspectives Book. Fundamentals drive markets and those fundamentals sure look good.

Wednesday, March 28, 2018

What a roller coaster ride over the past week or so, seemingly driven by the Fed and rumblings of a trade war. First on the Fed. Seemingly good news that John Williams is the front-runner to take over the New York Fed Presidency and Rich Clarida the Vice Chairman position. Each is a bit on the more careful side of the ledger. At the March meeting, the FOMC outlook was marked upward: the unemployment rate was marked lower, the 2019 and 2020 dots were moved higher and the inflation rate was ticked to 2.1%. I read that inflation forecast as a genuflection towards the Philipps Curve oriented staff. Consider that they now anticipate the unemployment rate to move down to 3.6%, but with inflation just barely over 2% is not much of a reason to hike aggressively.

On the trade front, we had some better news. It appears that many countries will be spared from the metals tariffs. Over the weekend, Treasury Secretary and incoming-National Economic Council head Larry Kudlow said that the tariffs are open to negotiation – even for China, though problems with that country extend deeper – investment regulations, stealing intellectual property and mandated technology transfers. Thus far, China’s response has been muted – which is for the better.

As for the U.S., growth continues strong. Q4 GDP was revised up to 2.9%. ISM new orders are holding above 60, and up from 50 a year earlier. The run of February investment data, though, were strong. Durable goods orders were up 3.1% MoM vs 1.6% expected; ex transportation was up 1.2% vs 0.5% expected; non-defense cap goods were up 1.8% vs 0.9% expected; and non-defense shipments were up 1.4% vs. 0.5% expected. Non-defense cap goods shipments were up 9.8% YoY. It appears that the investment boom is just getting started.

To see how durable goods have progressed over the years, please go to page 69 of the Global Perspectives Book.

Webinar Alert: Doug will be part of the Financial Planning “Managing Volatility” webinar on March 28th from 2:00 to 3:00 pm.

Tuesday, March 27, 2018
Home values are still 6% below 2006 levels, but the 20 City Composite Index has shown signs of a sustainable recovery after promising year-over-year price increases.

The huge stock rebound doesn’t mean that the trade war worries are over and everything is rainbows and unicorns. Markets are still struggling with uncertainty. The trade tensions with China continue. Recently, trade focus has been on Chinese foreign ownership restrictions. These requirements force U.S. companies to create joint ventures in order to do business in China and have often resulted in the theft of U.S. company intellectual property and trade secrets. In addition, rapidly rising short-term rates (especially LIBOR) have heightened concerns that companies and financial institutions could face funding pressures. Meanwhile, the latest U.S. economic data shows that consumers are mostly taking the stock market volatility in stride. The Conference Board’s consumer confidence index level of 127.7 remains near 18-year highs and the latest Case Shiller Home Price Index confirms that home prices continue to steam roll ahead. The 20 metro area index reported a monthly uptick in home prices of .8% In January and a 6.2% increase over a year ago. Home prices have now surpassed the April 2006 high achieved during the housing bubble.
Overall, market fundamentals remain strong but that won’t deter investors from analyzing every tidbit of economic data, looking for assurance after the recent stock slide. I hate to break it to you, but volatility is likely to be the in-law who won’t get off your couch. And market certainty, well, that is a mermaid. Nonexistent. Please follow the rise and fall and rise of the U.S. housing market on page 66 of the Global Perspectives Book.

Friday, March 23, 2018
Corporate earnings growth is the barometer for the health of the global economy.

Unequivocally we are in the most profound pro-business environment in thirty years. Yet, the market doesn’t go up every day. In fact, the Dow Jones Index goes down nearly 1,000 points every other week – like yesterday. This must be a bad sign right? Time to sell? Isn’t the Federal Reserve going to rush in and support the market when it goes down? An investor may think, “This is nerve-wracking because I have lost a lot of money in the stock markets in the past few weeks.” Well, essentially that would not be true. Investors only lose money when they actually sell their investments and lock-in losses. Let’s call them weak investors – the human condition is that we are subject to emotional outbursts or behavioral biases – but taking action of your investment portfolio during intense volatility destroys value.
A strong investor has a clear plan that is used to guide decisions – especially during difficult times. A typical plan should be based on facts such as fundamentals based on the economy and the stock’s underlying financial health and well-being. Another pillar that has been empirically found to be superior is “rules-based investing” which clearly diagrams what actions will be taken in every environment and for every contingency. A well-constructed plan has the remedial effect of instilling confidence and turning a weak investor into a strong investor. During all of this, corporate earnings are hitting all-time record highs; the Jolts reports on job availability hit an all-time record high and the Federal Reserve is so confident in the economy that they raised the Fed Funds rate and indicated it would continue to do so. All good news indeed. Please see page 6 in the Global Perspectives Book “Fundamentals Drive the Market” for an example of one of the pillars of a solid investment plan.

Thursday, March 22, 2018

Who can we blame for the latest market malaise? The Fed raised short-term rates a quarter point as expected. Fed Chair Powell affirmed stronger economic growth, anticipated higher inflation and likely lower unemployment. Comments were slightly more hawkish, but most of the Fed speak was priced into the market. Big tech has been all over the headlines and has admitted to mistakes in handling private data. But most users are cognizant of the fact that these firms make boatloads of money selling our personal data, buying habits and browsing preferences. So that is likely not the reason the market opened sharply down this morning. Investors are most likely worried about tariffs. Exceptions for allies have already been announced so now we are down to the nitty-gritty – China. China stands ready to retaliate with their own set of tariffs should the U.S. move forward with their $50 billion proposed new taxes on Chinese imports. Already this has weighed heavily on the U.S. agriculture and livestock markets, with a high concentration of exposure to China. Risk averse investors are not only selling stocks but have also sent bond prices up and yields down. Both China and the U.S. know the stakes are high. China has offered to open markets and drop foreign ownership limits but no one is blinking quite yet.
Meanwhile, today is World Water Day. As you reach for your bottle of Fiji water (Who drinks that cheap store brand?), consider these facts from www.water.org.
1. Today, 844 million people are living without access to safe water, while 2.3 billion people are living without access to improved sanitation.
2. Each year, 1 million people are killed by water, sanitation and hygiene-related diseases.
3. Ninety-five percent of the water used daily is wasted.
4. The world’s total water supply equates to 332.5 million cubic miles.
5. In 2015, the U.N. agreed to a set of 17 Sustainable Development Goals to be achieved by 2030 for the improvement of water.

Wednesday, March 21, 2018

The global economic rebound is reaching all regions. The usually careful International Monetary Fund (IMF) estimates that 120 countries, representing 75% of global GDP, enjoyed stronger year-over-year growth in 2017 than in 2016. The 2017 upside surprises were especially noteworthy in the Eurozone and Asia. The good news continues, as 2018 is likely to see above-trend growth in the United States, Eurozone, and Japan. Policy is accommodative; even with Fed and ECB moves, both central banks will be far from ‘tight,' though there is risk of central banks being emboldened by good growth and moving to tighten too quickly.

The 2018 outlook is especially notable in rising world trade and investment spending – two main pillars of sustainable growth. The era of good feelings can be seen in strong animal spirit readings. For example, the U.S. NFIB (a 35-year record), EU Manufacturing Confidence (a 21-year high), the German ZEW index (a 37-year high) and Australian Business Confidence (a 21-year high). Confidence readings are up in countries as disparate as Korea (15% YoY), Brazil (8%), Mexico (8%), Indonesia (6%), and South Africa (4%). Leading Economic Indicators (as measured by the OECD) are down a bit from 1Q17 levels in the U.S. and Japan, but are up nicely in the Eurozone, the OECD as a whole, as well as non-members like Brazil, India, Indonesia, and China. Yes, a turn to protectionism may be in the making but it’s not clear that a full-blown global trade war is likely. I’m cheered by the appointment on this front of Larry Kudlow as the head of the Economic Security Council. Net/net, with the G-3 growing above trend, this is still a good scenario for risk assets. - Special Guest Blogger: Tim Kearney, PhD

G.A.M.E. VIII Forum - Doug Coté will be speaking on the Global Markets Keynote Panel on Thursday, March 22 from 8:00-9:30 a.m. at the New York Hilton Midtown Hotel (1335 Avenue of the Americas, New York, New York).

Tuesday, March 20, 2018
Returns for a globally diversified strategy over the last 10 years refute the notion of a “lost decade”.

The S&P500 tech sector is still leading in performance for the year despite some companies getting slammed over privacy concerns and misuse of personal data. Political agents have been purchasing consumer data long before social media was created. But in the last decade, big tech firms upped the game in monetizing consumer information and have been handsomely rewarded with high revenues and earnings. Investors began to think the sky was indeed the limit when it comes to big tech stocks. The tech sector posted double digit earnings growth in each quarter of 2017, is forecasting 16% growth in earnings for 2018, and returned more than 30% in the last 12 months – justifying its higher than average valuation.
However, this should be a wakeup call to investors who were heavily concentrated in FAANG giants. Global diversification is always a good idea to help mitigate volatility. In fact, diversification is the only free lunch you’ll ever get, because when it comes to the internet, if the service is free, you are the service. Data mining will continue to be profitable for marketers, politicians, and merchants and technology will continue to get better and, hence, more invasive. Perhaps the next tech growth opportunity will be oriented toward shielding personal data stalking. Please see an example of a globally diversified portfolio on page 4 of the Global Perspectives book.

Friday, March 16, 2018

It’s no myth that student debt is rising and, in many cases, impeding younger workers from saving for retirement. Americans now hold more than $1.5 trillion in student debt. While this has been primarily broadcast as a millennial generation problem, the shamrock is being passed. The oldest members of Generation Z (the generation younger than millennials) are now turning 23. Unfortunately, recent studies show that these students are just as unprepared to navigate higher education costs, loans, and repayments. An often underutilized but valuable asset class called a 529 Plan began to gain recognition in 1996 as part of the Small Business Job Protection Act, section 529 of the IRS code, to allow parents and relatives a tax-advantaged way to save for college. To encourage savings, investment gains on 529 accounts are deferred and gains are tax free if used for college. Yes, tax-free. That’s like finding a pot of gold at the end of a rainbow.
However, the luck o’ the Irish this weekend can’t top the new laws passed on January 1, 2018 by the Trump Administration. Investors can now use money in 529 plans to pay for not only college but K-12 tuition up to $10,000 at private, public, and religious schools. This opens the door to additional clients and creates a more valuable benefit for companies to offer to their employees. These new uses introduce a whole new group of potential investors who previously may have shied away from 529 plans, given their college-only prior use. A 529 plan is an easy add on to any company’s offering lineup, making this a “March Madness slam dunk.” That’s no blarney – a recent survey showed 41% of employees would use a 529 but only 10% of companies offer one. Please watch Karyn Cavanaugh’s latest take on the markets. - Special Guest Blogger: Rob Tirrell

Thursday, March 15, 2018
Over 90% of the world’s consumers reside outside the U.S., making global trade imperative for growth. The global growth slowdown corresponds with an overall slowdown in trade..

For the zillionth time – trade protectionism is not a good idea. Tariffs and quotas lead to retaliatory actions by other countries and the net result is higher prices (inflation) and lower economic growth. Lower growth will reduce company earnings and possibly lead to job cuts. So investors are correct to be wary of a trade war. One of the reasons for the OECD’s revised estimate of 2017 global growth of 3.7% and forecast for 2018 of 3.9% was based on an increase in global trade of more than 5%. The OECD also mentioned the U.S. pro-business tax cuts for its higher estimates. It is still unclear how far the Trump administration will move in the quest for fair trade. The EU imposes a 10% tariff on U.S. car imports while the U.S imposes only a 2.5% tariff on EU cars coming into the U.S. But everyone knows that it is China and its massive trade surplus that is in the Trump trade cross-hairs. The potential losers in a trade war have already seen their stock prices punished. This is an example of investors attempting to Washington-proof their portfolios. If this trade war never materializes and this is actually a negotiating ploy that improves trade conditions for U.S. companies, investors will once again be caught on the wrong side. Please watch global trade on page 47 of the Global Perspectives book.

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