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Thursday, September 14, 2017

Fed Chair Janet Yellen has done a great job holding the Fort down while a pro-business cyclical rebound has been building. It is here and will only get better – naysayers aside. Now it is time for QT or quantitative tapering to shrink the balance sheet, raise the Fed Funds rates, and let the free market reign – once again. The good news is widespread from “sea to shining sea”. Here is what you do not hear mentioned in polite company.
• All 45 of the OECD developed economies have positive second quarter growth.

• Japan’s Q2 annualized growth makes it the fastest growing economy in the G7 at 4.0% annualized.
• Eurozone GDP recorded its strongest YoY growth since 2011 in Q2 at 2.2%.
• The latest UK manufacturing PMI had the second-strongest rise in foreign demand in the series history lifts.
• France has the highest business confidence in 5 years.
• India is one of the fastest-growing major economies in the world.
• US Q2 GDP growth was revised up to 3.0% annualized.
• U.S. CPI today show a broad based rebound for August.
• U.S retail sales are at the highest level ever.
• S&P 500 Corporate EPS Growth in Q2 is 10.6%, the second double digit quarter in a row.

The fundamentals that drive markets clearly are flexing their muscle globally and markets are responding in-kind. Why is the Fed still in a fetal position? Please see page 7 and page 12 of the Global Perspectives™ Book regarding S&P 500 Earnings and Retail Sales respectively.

Wednesday, September 13, 2017
Average hourly wages have climbed unevenly higher, and productivity gains have been inconsistent.

Putting off the debt-limit debate for now opens the way for a serious run at tax cuts still in 2017. The Administration is pushing for a deep cut in business tax rates (perhaps as low as 15%), in repatriation (could bring in a trillion or more) and personal tax relief as well (perhaps doubling the standard deduction). Of course, opinions are divided on how to do it, but a low rate allows for a broadening of the tax base (i.e., reductions in exemptions) which is a positive for growth. With a major deregulation push already underway, it’s pretty clear that a return to a 3% growth rate is more than possible, given the right policies. Economic prospects for the U.S. continue to be positive. Q2 productivity was up 1.5% versus 1.3% expected. Interestingly, the four-quarter moving average is up to 1.5% from sub-zero a year earlier. A business tax cut, with an emphasis on capital formation, is very important to raising productivity growth. What’s more, increased productivity (basically, a raise in the capital/labor ratio) is the key to driving real wages higher as well. Over the last eight quarters, private investment growth has averaged just a 0.4% run-rate. Hard to improve productivity without giving workers more tools. Taken together, with the probability of recession in the next year low and with the manufacturing sector picking up, growth can hit 3% in Q3 again and into 2018. Please review "Labor and Productivity" on page 64 of the Voya Global Perspectives™ Book.

Tuesday, September 12, 2017
Doug Cote

As the market hits all-time highs, the bearish talk increases. The bull market is too expensive, the bull market is too old, the bull market is too narrowly focused on tech stocks. Yet, still the bull charges forward. Why? The forward P/E on the S&P500 Index is 17.6, not too far from the historic average and actually fair given the low interest rates and an “E” that keeps getting larger. In addition, bull markets don’t just keel over from old age but are usually derailed by a myriad of other events - recessions, bubbles popping, extreme geopolitical events, overzealous central bank actions which corrode market fundamentals (corporate earnings). And while some high flying tech stocks may be richly valued, the tech sector delivered a grizzly sized 15.2% earnings growth in Q2. All of these factors amid a backdrop of global synchronized expansion and the possibility of tax reform are creating a bear repellant spray for investors. A diversified portfolio may make your bear spray more effective and help when the bears do come calling. Please watch Doug Cote’ deliver his latest market synopsis on CNBC’s Squawk Box.

Friday, September 8, 2017

Are you kidding me? My friend’s family in Houston is struggling with a disaster; My neighbor’s Dad is in Key West bracing for impact; and what about the thousands of Americans left destitute with no means to leave Houston or southern Florida? The press is concerned about House Speaker’s Paul Ryan’s feelings or whether U.S. Senate Minority Leader Chuck Schumer should be teaming up with President Trump to quickly give aid to the Americans slammed by dual Hurricane’s Harvey and Irma? To paraphrase a quote from Helen Thomas - “Hurricanes Make Strange Bedfellows.” Well then, give it up for Harvey and Irma for compelling Washington into bipartisanship. We are the richest country in the world, the forty-five countries of the OECD (developed economies) are all, yes all, experiencing positive economic growth – a rare event indeed and if today you woke up in a warm bed and got the kids off to school, you are lucky, and if your biggest concerns today are tax cuts or Russia, you have issues. God bless those in the path of Irma and those struggling in the wake of Harvey. My recommendation today is to donate to the Red Cross.

Thursday, September 7, 2017
China and India are growing rapidly, and China is second only to the U.S. in total economic output, while Germany’s export-driven economy is the runaway euro zone leader.

The ECB left policy rates unchanged and declined to expand on details regarding the tapering the euro zone’s quantitative easing program. Tapering seems inevitable. The euro zone economy is getting stronger. In fact, the ECB raised 2017 GDP forecasts to 2.2% - the fastest since 2007. Although inflation is still weak, deflation is no longer looming large and corporate profits are surging. European corporate profits grew 18% on Q2 and are on track for 20% growth in 2017 (MSCI Europe Index). However, ECB President Mario Draghi is tiptoeing through the tulips when it comes to monetary tightening because the euro has also been surging, up 14% YTD against the US dollar. A rising euro is a headwind to exporting nations like Germany where 37% of their GDP is attributable to exports. The below target inflation readings and slack in the employment market give Draghi some breathing room for now. Please keep an eye on international economics including many euro economies on page 55 of the Voya Global Perspectives™ Book. Our thoughts and prayers are with everyone bracing for Hurricane Irma.

Tip: To combat scarcity and price gouging of bottled water, fill zip lock bags with tap water and stock them in the freezer.

Wednesday, September 6, 2017

Despite jitters from North Korea and a poor August from President Trump, the global economic rebound just keeps on gathering pace. The August PMI reports are essentially uniformly positive, many outperforming expectations and/or hitting multi-year highs, and well above August 2017 results. Even with the unnerving reports from North Korea, the RoK picked up some momentum and is basically at 50. India enjoyed a major bounce back from the 47.9 recorded in July, to 51.2. Key for global growth, the U.S. hit 58.8 (a five-year high), Germany remained at 59, the Eurozone and UK both (basically) at 57.

Beyond the PMI report, economic signs from the Eurozone continue positive. As in the U.S., soft-data are moving higher. EU Economic Sentiment continues the sharp rise over the past year, reaching 111.9 from 103 a year ago as did the Euro Area Business Confidence Index. Industrial confidence hit a six year high, with consumer confidence holding a 10-year high. The Sentix Investor Confidence index is holding at a 10 year high.

Which clearly brings the ECB into play. CPI inflation in August hit 1.5% YoY, down from 2% in February. Core CPI is ticking higher (to 1.2%), but slowly. The strength of the EURO (+9% on a TWI basis in 2017) and weakness of commodities (oil down 20% YTD in Euro terms) militate against tightening just yet. And nota bene, using the OECD measure of the Eurozone NAIRU, there is still a bit of slack in the labor market (9.1% actual vs. NAIRU estimate of 8.6). Look for just modes stirrings towards less accommodation on Thursday when the Governing Council meets, under a strong Euro. - Special Guest Blogger: Tim Kearney

Friday, September 1, 2017
Total payrolls, including all non-farm employment, have inched steadily upward with private job creation leading the way.

The market was positive in August despite the geopolitical turmoil, Washington drama and a spike in volatility. Meanwhile, today’s non-farm payrolls report was below consensus showing only 156k jobs were added in August. June and July were also revised downward. Manufacturing and construction jobs led in job gains, the labor participation rate held steady at 62.9%, wages increased by .1% and the unemployment rate ticked up to 4.4%. As a result, the U.S. dollar and treasury yields weakened slightly. Despite the headline disappointment, this report is actually an affirmation that the economy continues to move forward. It is estimated that the economy needs only 80K jobs to hold steady so even though the jobs number was below consensus it is still supportive of economic improvement. In addition, today,s U.S. manufacturing PMI reading of 58.8 is a six year high. But even more importantly, the global economy is on the same page. The August Eurozone manufacturing numbers accelerated to the highest levels since 2011. It would be nice if Washington passed some pro-growth policies, but it is significantly more important that the global economy is broadly expanding. Please watch job creation on page 62 of the Voya Global Perspectives™ Book.

Thursday, August 31, 2017
Returns for a globally diversified strategy over the last 10 years refute the notion of a “lost decade”.

“Cadillac Surges – in China.” Yup, another WSJ headline that anecdotally tells a powerful story. In today’s page one Wall Street Journal article, Mike Colias points out that “Cadillac sales are growing at the fastest clip since the Reagan Administration” and “By tripling its China sales in five years, Cadillac has vaulted past Lexus, Land Rover and Volvo to become the country’s No. 4 luxury player according to research firm LMC Automotive.” My favorite sentence “Shanghai entrepreneur Zhenyu He sees Cadillacs as a symbol of American grandeur.” It turns out that this is showing up in the extraordinary strong contribution of globally tilted companies to the S&P 500 earnings growth with their 14% growth rate compared to the 8.5% growth rate of domestic only companies. But a better play might be to actually invest in these Emerging Markets directly. It may surprise investors that are thrilled with the +10% plus return in the S&P500, that they have potentially been missing out on the enormous +28% plus return that has been achieved by Emerging Market investors. The rotation that actually began last year toward overseas tends to have long legs. It is never too late to move toward broadly global diversification that can increase return and reduce risk. Please see page 4 of the Voya Global Perspectives™ Book for an ‘Effectively Diversified” global portfolio.

Wednesday, August 30, 2017

The second print of Q2 GDP today showed that the U.S. economy grew at 3.0%, rather than the 2.6% originally reported. The revised estimate was buoyed mostly by stronger consumer spending, while business investment also contributed. In addition to the revision of headline growth, the report showed corporate profits rose 1.3% QoQ in 2Q, after falling 2.1% last quarter. This supports the narrative of increased momentum in the U.S. economy for the second-half of 2017. The market implied probability of an interest rate hike in December moved up to 33% from 30% on the news, as investors speculate whether stronger growth could allow the Fed to look through below-target inflation when considering the next hike. Looking ahead to economic releases later this week, economists estimate that 180k jobs were added in August, continuing the strong trend in hiring we have seen, and that the unemployment rate remains at 4.3%. For more on GDP, please see page 69 of the Global Perspectives™ Book. - Special Guest Blogger: Pavel Dekhman

Tuesday, August 29, 2017

The devastating effects of Hurricane Harvey continue to impact Texas and Louisiana, closing the port of Houston - the second busiest in the nation - and throwing a monkey wrench into the supply chain for many goods including oil and automobiles. It is estimated that auto sales will be dinged by about 200K units and it is still unclear how oil will be impacted given that 10 of Texas’s 25 refineries remain offline for now. A snap back can be expected as business investment, auto sales and construction spending will surge to repair and replace the damage, but that is little consolation to residents watching water levels continue to rise. Heavy hearts were then jolted by a North Korean missile launch over Japan, increasing geopolitical tension and creating destabilizing uncertainty. Investors are flocking to safe havens like U.S. treasury bonds and, accordingly, prices jumped up, driving yields down to late 2016 lows. Gold, another perceived refuge, is also up 14% this year. Geopolitical tension rarely has long term lasting impacts on the market especially when fundamentals remain strong, but holding bonds can help investors ride out the short term storm. Our thoughts and prayers are with everyone impacted by Hurricane Harvey. Please review the Voya Global Perspectives™ Weekly for all of the latest market statistics.

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