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Thursday, March 9, 2017
Labor costs have climbed higher but productivity has lagged.

As Q4 earnings reporting season wraps up, investors will be paying closer attention to economic data until Q1 earnings reporting begins in mid-April. Initial jobless claims surged last week by 20,000 but it’s hard for investors to get jazzed up over a weekly number when the overall labor situation has been solid. One economic indicator that has been lacking is productivity. Productivity grew at a 1.3% annual pace in Q4, down from 3.3% in the Q3. For the year, the 2016 productivity gains inched up .2%, the smallest gain since 2011. Why does this matter? Well the Trump administration is predicting a higher GDP growth regime. Economic growth or GDP depends on hours worked multiplied by the output per hour (labor productivity). Lack of business spending and investment has been widely blamed for low productivity gains. Companies don’t want to commit to capital investment which is needed to make workers more productive and create long term sustainable economic growth. Business friendly policies should reverse this trend going forward but they are still in the pipeline. So while we are seeing reflation (in markets, rates, inflation) we will be watching closely for the seeds of future growth. Please follow productivity on page 63 of the Global Perspectives™ book,

Wednesday, March 8, 2017

The Fed has baked in a hike for March, and Wednesday’s outsized ADP report underscored it big league. ADP payrolls were up 298k versus 187k expected in February, on top of January being revised up by 15k to 261k. The consensus for non-farm payrolls is now 197k, up from 190k on Monday. The trailing five-year average NFP print (revised) is actually 204k, though there has been a 74k standard deviation. Over the past year there have been a two 100k+ overshoots, so there is room for surprise on the number. The implied probability of a hike has ramped up to basically 100%, up from just 24% one month ago. With claims at 40+ year lows, I’d think that we’d have to see a big miss on non-farm payrolls for the Fed to skip the March meeting. In fact, I’d expect the market to move lower if the Fed doesn’t go at this point, not least because the FOMC wants to normalize policy and move away from the zero interest rate policy. By pushing the door wide open for a March hike, it gives some room and credibility to the Fed’s stated stance of three hikes in 2017 if conditions warrant later this year. It’s important to remember that higher interest rates in the context of an improving economy is a reflection of a positive background to stocks. Even with three rate hikes this year, the Fed is still going to be ‘accommodative.' - Special Guest Blogger: Tim Kearney

Tuesday, March 7, 2017
Global REITS have consistently provided higher dividend yields than large cap stocks across almost all time periods — and better liquidity than most alternative investments.

A Fed rate hike is all but baked into the pie. Although the nonfarms payroll report on Friday is important, even a miss should not derail the Fed at this point because overall growth trends continue to come in better. ISM manufacturing hit 57.7 and the new orders component, an indicator of future strength, was the highest in three years. The Conference Board measure of Consumer Confidence continues to climb, reaching a 15 year high and factory and durable goods orders are up. In the wake of these higher interest rate expectations, Global REITS have been particularly hard hit. However, rising interest rates are indicative of economic growth and prosperity, which should lead to an increased demand for commercial and residential real estate. In the meantime, Washington continues to dominate headlines with a very preliminary healthcare repeal and replacement proposal. The new plan would remove the penalty for those who do not obtain insurance but would keep the popular provisions which allow children to stay on parents’ policies until age 26 and would continue the prohibition against denying individuals with pre-existing conditions. Please watch Global REIT Dividend Yields on page 78 of the Global Perspectives™ book, noting that they are higher than large caps across multiple economic scenarios.

Friday, March 3, 2017

Everyone knows that money can’t buy happiness but it can buy independence, security and the financial freedom to make lifestyle decisions without restraints, worries and sleepless nights. Retirement does not always equal financial freedom. Unfortunately, a 2015 study from the Center for Retirement Research at Boston College reports that about half of American households won’t be able to maintain the same standard of living they have today in their retirement. The first step is making a plan, a road map, a GPS guide to get you to your goal of financial freedom, not just retirement. No, money isn’t everything but in the wise words of my 10-year-old daughter, Maeve Cavanaugh (now aged 15), “Money can’t buy happiness, but it can buy marshmallows which are kinda the same thing.” See Voya’s Customer Solutions SVP, James Nichols' retirement planning tips for everyone, from millennials to late starters in their 50’s.

Thursday, March 2, 2017
Over the past 20 years the average asset allocation investor has significantly underperformed stock and bond markets and barely kept pace with inflation.

The U.S. labor market continues to show signs of strength as initial weekly jobless claims fell to 223K, the lowest level since the recession. In addition, the U.S. manufacturing PMI index rose to 57.7% in February, the highest in two years, illustrating the strength of the U.S. economy. Investors may be jittery about the market’s meteoric rise to all-time high levels but it’s important to remember that while the chances of a bear market (declines > 20%) are low, corrections (declines of ~10%) and pullbacks (declines ~5%) on average do happen a few times a year. Corrections are usually short lived (average duration 71 trading days) and most often don’t result in bear markets. But investor psychology can indeed hasten declines if mass panic selling sets in. These emotional reactions can be an investors worst enemy. In addition, many analysts are now comparing current markets to previous tipping points in history. At times historical references can be helpful but it may be beneficial for investors to channel their inner Warren Buffet who said, “If past history was all there was to the game, the richest people would be librarians.” Please see the impact of investor behavior on portfolio performance on page 74 of the Global Perspectives™ book.

Wednesday, March 1, 2017

As recently as the end of last week, the implied probability of an interest rate hike at the FOMC’s March meeting was at only 40%. As of writing that number has jumped to 82%. Capital markets have so far been skeptical of the Fed’s three-hike guidance for 2017, buoyed by a recent tick up in unemployment, missed average hourly earnings estimate, and still below-target core PCE (the Fed’s preferred inflation gauge) despite a spike in January to 1.9%. Maybe the markets are finally buying into the Chairwoman Yellen’s statement that all meetings are “live”, or were emboldened by recent hawkish rhetoric from multiple Federal Reserve Presidents. In his address to Congress last night, President Trump maintained his stance on fiscal stimulus and other key initiatives, but offered little in terms of details or timeline. In either case, focus has returned to U.S. monetary policy ahead of the March meeting, with the entire world watching. Special Guest Blogger: Pavel Dekhman

Tuesday, February 28, 2017

After an historic string of 12 up days, the markets may be in wait and see mode today ahead of President Trump’s presidential address to Congress tonight. Investors are looking for Trump to add a little more meat to the tax reform bone. The anticipation of pro-growth policies like tax cuts and less onerous business regulations has ignited animal spirits but investors are increasingly looking for more details. However, it is worth noting that the corporate earnings and economic data both in the U.S. and abroad has been accelerating, therefore the so called Trump rally is not as shaky, bubbly or as precipitous as the bears are warning. The market’s path up is not always straight but corporate earnings growth for Q4 is close to 5% and anticipated growth for Q1 is even higher at 9%. As for economic growth, today’s GDP revision for Q4 was slightly disappointing, remaining at 1.9%. Consumer spending was revised up but business investment and trade dragged the final reading down. Tonight’s address should provide some clues on how the administration is planning to break the low growth mode dogging the U.S. economy for many years. Please note this low growth trend on
page 32 of the Global Perspectives™ book.

Friday, February 24, 2017
It is not unusual for stocks to have prolonged periods of flat returns — sometimes punctuated by extreme volatility.

A story in the Wall Street Journal last week highlighted a huge problem with retirees in America. According to the story, people ages 65 to 74 hold more than five times the borrowing obligations Americans their age held two decades ago, (based on a study of federal data by the Employee Benefit Research Institute). Crushing debt, little savings and soaring healthcare costs are forcing retirees to alter their lifestyles significantly. Awareness and preparation are the keys to retirement success. Putting away for the inevitable rainy day is always a good idea. With market at all-time highs, it's important to remember that although over time markets generally go up, there are downturns. Please see a 100 year history of the Dow on page 15 of the Global Perspectives™ book.

Thursday, February 23, 2017
Stocks look historically attractive based on their earnings yield (E/P) compared to the yield-to-maturity of 10-year Treasuries.

The equity markets opened at all-time highs. But bond yields are trending lower. Are bonds smarter than stocks? No. Bonds yields have been melting in Europe as investors are worried about the upcoming elections in France and the latest Greece distraction – negative fourth quarter GDP after a fake out of two prior back to back quarters of positive growth. Hence, U.S. bonds become more attractive on a relative basis pushing prices up and yields down. U.S. stocks are rallying on better global economic growth, higher corporate earnings and potential for pro-growth reforms not seen in recent and not so recent history. The latest in a clear winning streak of economic data released this week was existing home sales. The 5.69 million sales pace (annualized) is the highest in 10 years despite higher rates and lean inventories. But what about stock valuations? The S&P is currently trading at 17.7 times its expected next twelve months of earnings. If you take the reciprocal of the 17.7 P/E, you get an earnings yield of 5.6%. Sounds relatively better than 2.4% yield for a 10-year treasury bond doesn’t it? And although many investors are warning that this is higher than historic averages, consider that this day in history in 1984 BankRate lists the relatively risk free short term 6-month CD yield rate at 9.84% when the average S&P500 P/E during the 80’s was 12.0 and at one point was higher than 18.0. Relatively speaking, today’s stock market doesn’t sound that expensive. Please see the stock/bond earnings yield comparison, The Fed Model, on page 19 of the Global Perspectives™ book and watch Karyn Cavanaugh justify the stock rally on CNBC.

Wednesday, February 22, 2017
U.S. consumer confidence hit a five-year high but is still off pre-crisis levels. Consumer confidence is typically backward-looking and has often been a contrary indicator for subsequent stock market returns.

This plateauing of bond yields appears to have sparked some housing activity, as January housing starts were better than expected despite a big upward revision to December. Importantly, building permits also outperformed expectations. Initial claims fell to 239k, holding at 40+ year lows. Another Federal Reserve Bank registered a sharp rise in expectations, this time Philadelphia. The Philadelphia Fed Business Outlook survey hit 43.3 (vs 18 expected); in November it was 9 and one year earlier was -4. This was the highest reading since 1983. Consider the run of regional expectations: Empire Manufacturing hit 18.7 in February vs 7 in January, the survey was below zero as recently as October. The Kansas City Fed Manufacturing index hit 9; it was -10 a year earlier. The Dallas Fed Manufacturing Activity index hit 22.1 vs 15 expected. It’s important to keep our eyes on expectations data. Neo-Keynesian models (like used at the Fed) can’t take into consideration animal spirits. It’s ironic, given that it was Keynes himself who wrote about the importance of said spirits to the economy and markets. It looks like we’ve had a turn to optimism. For more on consumer confidence, review page 56 of the Voya Global Perspectives™ book.


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