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Thursday, November 9, 2017

The latest market wobbles are due to anxiety about the proposed tax plan. However, if you take a look at the economic headlines on MarketWatch, you'd be hard pressed to be find a wiggle much less a wobble.

  • Four week jobless claims lowest since 1973
  • Job openings top 6 million for fourth month in a row
  • ISM service index improves to a 12-year high
  • U.S. exports surge to 3-year high
  • U.S. productivity hits 3-year high
  • Manufacturing still growing like gangbusters
  • Home prices close in on new all-time highs
  • Consumer confidence climbs to 17-year high
    • Additionally, the backbone of markets - corporate earnings - have continued to impress and support markets. Once again, the biggest risk investors have faced this year has been sitting on the sidelines and missing the bull run. Please watch earnings growth on page 5 of the Global Perspectives™ Book.

    Wednesday, November 8, 2017
    Average hourly wages have climbed unevenly higher, and productivity gains have been inconsistent.

    U.S. Labor productivity has showed signs of improvement over the past four quarters. As of September, the year-over-year rate of growth in labor productivity was 1.5%. Historically, productivity growth has fluctuated between high and low rates as cycles of innovation and investment in new technologies take time to show an impact. The current productivity growth rate remains closer to a low productivity regime with average productivity growth of about 1% rather the 3.5% high productivity regime. But the duration of this low productivity phase - which is over 7 years - makes it more likely that the economy is close to switching to a period of high productivity. Apart from government policy, which has the potential to raise productivity, there are a number of underlying forces in the economy that make it likely such a transition may be approaching.

    Exciting new technological opportunities exist in at least four areas. First, healthcare, via data analytics and large scale data sharing and also the increased use of clinical decision support systems. Second, robotics, as robots become a complement to labor in manufacturing and services - which is equivalent to an increase in the capital stock - labor productivity increases. Third, education, via the application of software based on models of human learning that analyze errors and provide students with personalized practice problems. Fourth, the technology of invention which makes global collaboration easier via our ability to now quickly access large amounts of data via the internet.

    Lee Branstetter and Daniel Sichel*, who have made the case for a productivity revival in the U.S., estimate the productivity gains from the above factors have the potential to raise trend productivity growth from the current 0.75% to 2.25% which, assuming no change in the US labor force growth rate of 0.75%, would raise the trend GDP growth rate from 1.5% to 3%. For more on productivity, please see page 64 of the Global Perspectives™ Book.- Special Guest Blogger: Elias Belessakos, Ph.D

    * L. Branstetter and D. Sichel “The Case for an American Productivity Revival” The Peterson Institute for International Economics, June 2017.

    Tuesday, November 7, 2017

    The battle over federal tax reform continues to dominate headlines. One of the stumbling points is the plan to eliminate deductions for state and local taxes. Many high tax states are, of course, opposed to this deduction as it will hit their states proportionately harder. These states are already facing budget woes due in part to their inability to cut spending. Elimination of the deduction may encourage an exodus of taxpayers to more tax-friendly states, exacerbating the situation. All the more reason to bone up on your local budget issues and get out and vote today. Yes, we are anticipating higher economic growth as global growth continues to accelerate. But while higher growth can ease fiscal woes, it cannot cure financial mismanagement. So make sure you are keeping an eye on your local budget. Let your voice be heard where it counts – not on social media but in the voting booth. Meanwhile, the market is taking a breather today as it keeps a watchful eye on the unfolding tax plan. You can keep an eye on the markets with our latest weekly commentary.

    Friday, November 3, 2017

    Tax cuts are on the table. Who would have thought it possible? Of all of the issues, this one matters most by far. All future economic growth depends on it. That is why they call it a pro-growth economic reform and, along with deregulation, has a lot of bang for the buck to the growth and reflation. The big items include:

    • Corporate tax rate at 20% - permanent
    • Full business expensing of capital investments – immediately deductible, expires after five years
    • Repatriation of profits – one-time tax repatriation of cash at 12% and illiquid assets at 5%
    • Individual tax brackets – three regular and one to soak the rich
      • What does all this mean?

        • Economic growth goes back to trend at 3.5% or potentially higher
        • Reflation gets a boost, but many other forces to keep it under 3%
        • The Fed admits the failure of its easy money policies to grow the economy and raises rates in December
        • Unemployment goes down continuing today’s blockbuster 351,000 NFP report, including positive revisions
        • Capital investment booms bring more jobs, better jobs, and higher wage growth
          • Please see further explanation of the impacts of tax cuts, the Fed, and unemployment in the Global Perspectives™ Quarterly Market Outlook: The Teflon Markets, Growth and Reflation.

        Thursday, November 2, 2017
        Corporate earnings growth is the barometer for the health of the global economy.

        The new fed chair nominee has been announced. Jerome Powell is considered somewhat hawkish and is expected to continue gradually increasing rates. However, he is expected to ease financial regulations - which is a positive for markets. With all the news about the proposed tax plan unveiled today and a new Fed chair, investors may have missed a few key data points. Initial jobless claims fell again - to the lowest level in 45 years -, auto sales surprised on the upside in October following an unusually strong September, manufacturing continued to post lofty levels coming in at 58.7 and productivity jumped by 3%, the strongest in three years. Perhaps the productivity numbers are indicative of more business spending spurred by anticipated tax reform. All this good news can make investors dizzy. The markets are struggling a little too, but the strong earnings season will guide the way. Please see slide 5 of the Global Perspectives™ Book to learn more about corporate earnings.

        Wednesday, November 1, 2017
        Projected market volatility spikes in times of crisis then drops as fears subside. Current levels are below average, but the Fed’s path to normalization of rates may lead to more typical volatility levels.

        At its November meeting that concluded today, the FOMC, as expected, chose to hold the federal funds rate at 1-1.25%. The committee's statement labeled economic activity “rising at a solid rate”, an upgrade on the previous meeting’s statement that said activity had been “rising moderately”, but also admitted that core inflation remains soft. The statement keeps the FOMC on track to raise the federal funds rate at its December meeting, evidenced by the market implied probability of a December hike inching higher after it was released. Equities were mixed and bond yields were down slightly post announcement. We would expect greater volatility around the announcement of the new federal reserve chair and non-farm payroll numbers, both expected later this week. The balance sheet normalization program initiated in October 2017 is proceeding. Please see page 25 of the Global Perspectives™ Book: “Market Volatility”. - Special Guest Blogger: Pavel Dekhman

        Tuesday, October 31, 2017

        It looks like the Teflon market is back to its old tricks. After teasing investors with a slight dip, it opened higher based on the strong earnings which continue to treat shareholders. The lack of spooky monsters under the geopolitical and economic bed is rattling investors. Is the economic landscape really that good? Yes. In fact, the latest U.S. economic data point - consumer spending - surged 1 percent in September, the biggest jump since 2009. But if you are looking for something to worry about, Halloween candy can be deadly. Just 2,250 pieces of candy corn ingested in one sitting could be lethal to a 250 lb. man. And by the way, contrary to my kids' insistence, candy corn is NOT a vegetable. Please reread the Global Perspectives™ Quarterly Market Outlook for some perspective on the tricky Teflon market.

        Friday, October 27, 2017

        Third quarter GDP rocketed past expectations to deliver another 3.0%+ quarter. But that is not the whole story since inflation (GDP deflator) also crushed expectations, resulting in a nominal GDP (GDP + Inflation) of 5.2%. Overnight some notable companies crushed earnings expectations sending the market - once again - to new record highs today. Meanwhile, Germany’s business climate index surged to a new record high and, as the biggest economy in Europe, may be why the Eurozone’s consumer confidence hit a 16 year high. To put icing on the cake, risk is on the wane as the U.S. military was instrumental in capturing the Syrian city of Raqqa from ISIS in a major blow to its self-declared caliphate. Who knew since this “good news” is hardly reported? Investors should venture out of their “safe rooms” and join the worldwide bull market and invest accordingly. For more on what is to come in the markets, please review 4Q Market Outlook: The Teflon Markets, Growth and Reflation.

        Thursday, October 26, 2017
        The strength of the dollar has moderated, although the British Pound remains weak post-Brexit.

        ECB President Mario Draghi has done it again. He has managed to be dovish and hawkish at the same time. The ECB will begin tapering its bond buying program in January 2018, reducing its purchases form 60 billion euros per month to 30 billion euros per month. However, the bond buying will continue at least through September 2018 and the ECB will still be reinvesting any proceeds from the maturing securities it already holds. The latest announcement illustrates the ECB’s commitment to be as cautious and measured as possible. While the euro initially dropped on the news of the extension and open end of QE, it has been strengthening all year on better European economic data. The stronger euro is a headwind to European corporate earnings and one of the reasons for Draghi’s dovish tilt to his hawkish statements. Meanwhile the U.S. market is rebounding after a slight dip. Investors are pleased with the solid Q3 earnings performance and future guidance. Please view the latest currency movements of the U.S. dollar, Euro, Japanese Yen and British Pound on page 53 of the Global Perspectives™ Book.

        Wednesday, October 25, 2017

        Nervous Nellie investors don’t need to just listen to the pundits to feel comfortable with the market. They need to remember their ABC’s. A = accelerating corporate earnings. Check. Earnings are getting stronger in the U.S. and overseas. And tax reform will just add to the bottom line for U.S. companies. B = broadening manufacturing. Check. Not only was the September ISM manufacturing number the second highest in 30 years, the latest durable goods orders surged 2.2% - more than double expectations. C = consumers as the economic game-changers. Check. Consumers are enjoying an exceptionally strong labor market with a near record 6.1 million job openings - the lowest initial unemployment claims in 44 years - and green shoots of long awaited wage gains. And they are buying – houses at least. New home sales soared a whopping 19% in September to a 10 year high rate of 667K.

        Please watch Voya’s Head of Asset Allocation, Barbara Reinhard, discuss the potential boost to earnings when we do see tax reform.


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