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Thursday, June 28, 2018
Crude oil prices have rebounded to over $50/barrel, and gasoline prices have followed suit. Nevertheless, oil consumed per unit of GDP in the U.S. (oil intensity) has declined for many years.

Let’s take a break from trade and address some other investor concerns. Oil prices are the highest since 2014, just in time for summer driving season. Groan. Prices have surged despite OPEC agreeing to ramp up production last week. U.S. sanctions on Iran are the biggest factor in the higher prices but dwindling supplies from Venezuela, concerns about Libya exports and a Canadian supply outage are also applying upward pressure. The demand side of the equation is also favoring higher prices, as economic growth has pushed global consumption to record high levels of more than 99 million barrels a day. The U.S. has certainly ramped up drilling but there are still bottlenecks in the pipeline and refinery logistics chain. Low inventories, supply disruption and robust demand will keep prices high for the short term and through the summer, which is peak driving time as everyone hits the road for vacation. On the other hand, this does have positive implications for equities in the energy sector. Soaring energy company profits have encouraged investors and the energy sector is up more than 14% on the last three months, the best of any S&P 500 sector. Please watch oil prices on page 62 of the Global Perspectives Book and note that the long term average price of oil is about $43/barrel.

Wednesday, June 27, 2018

Rumors of trade wars are always problematic since they slow growth and capital flows and exacerbate problems. So it is important to see how the world economy is faring as the situation develops. Early PMI prints for the US, France and Germany were below expectations though the Eurozone was spot on. It is important to note that PMIs are still at high levels, well off the lows of 2016. US data have been very strong, but uncertainty generated by trade could hit the rebound’s “animal spirits” channel. The economy seemingly is going from strength to strength: claims edged to near 50-year lows; new home sales were up 6.7% in May and beat the consensus; the LEI rose 6.1% YoY. The upside risk of a 3+% Q2 continues to be mooted with Atlanta Fed GDPNow holding at 4.7%, though the St. Louis Fed is at 3.4% with the New York Fed at a more modest 2.9%. Much on the print will depend on net exports (C + I + G +(X –M)); either way it’s a strong quarter and 4% is not out of the question.

It’s a solid outlook but the direct effects of trade war uncertainty are drag enough. Fed Chair Powell is warning that trade uncertainty is a risk for investment and powerful enough for the Fed to “cause us to question the outlook.” The ECB chief Draghi echoed concern over higher uncertainty hitting the economy. Most straight forward was RBA chief Lowe who warned, “while the tariffs themselves might not derail the global economic recovery, the fallout could be magnified through financial markets,” and “I believe this is happening and is incredibly worrying.” H/T to Dr. Thierry Wizman of Macquarie, who notes that the global auto trade is especially at risk. - Special Guest Blogger: Tim Kearney, PhD

Tuesday, June 26, 2018

The trade uncertainty has shifted gears as companies are starting to take actions to mitigate tariff impacts. There is still a myriad of moving pieces but one thing is becoming crystal clear, the Trump Administration is determined to reset the trade relationship with China. Hence the rejection of China’s conciliatory offer in May to import more U.S. goods. Intellectual property rights and joint venture policies are the biggest sticking points. Adding to the already muddy waters, are the U.S. steel and aluminum tariffs imposed against our allies – Mexico, Canada and the European Union. These U.S. allies in turn are imposing their own retaliatory tariffs. But that does not mean our allies stand with China. The EU has long had issues with China and their steel dumping, imposing tariffs to combat unfair practices. The tension with U.S. allies is still clouded by noise but the China relationship is a separate issue. China has been a bad actor in the trade arena across the globe. Now, China is beginning to feel the heat. The Shanghai indices are in bear market territory. Last month’s Chinese industrial production, retail sales and investment were all below forecast. And the Chinese Yuan has been losing ground to the dollar which could spur capital outflows. The uncertainty of the trade landscape will slow the economy but it remains to be seen by how much. So far U.S. companies have not been guiding earnings downward (Q2, Q3 and Q4 estimates > 20% growth) and the impact is minimal. As always, diversification can help smooth market bumps. Please see page 4 of the Global Perspectives Book for an example of effective diversification.

Friday, June 22, 2018

In a meeting of OPEC ministers, officials issued a statement boosting production but by much less than anticipated by the market sending WTI Crude Oil prices surging by over five percent. I am not sure how a cartel – which no longer is a monopoly - still has such influence in a global market like crude oil. The U.S.A. is now the swing producer with its massive capacity to drill at a moment’s notice and freedom to export globally. In our mid-year update our 2018 forecast of $60 per barrel will be maintained. Please review our 2018 Forecast and original forecast of $60 per barrel for WTI Crude oil.

Wednesday, June 20, 2018
U.S. consumer confidence hit a five-year high but is still off pre-crisis levels.

The past week has been dominated by policy/political issues, overriding good economic data. On the latter, the U.S. registered a blowout NFIB Optimism reading. Inflation readings were as expected, with real average hourly earnings sub-1%. Export prices are rising smartly (+4.9%) despite the strong USD. Initial unemployment claims are pushing towards the 1968 record low. With unemployment low, household wealth rising and confidence levels brimming, retail sales are outperforming at all levels and up 5.9% YoY. CPI inflation clearly has taken away deflation risk, but the charge up does open the Fed to a risk that they will see inflation rates edge above the FOMC’s comfort zone. Core CPI is now up 2.2% YoY with the six-month change at 2.4% annualized BUT the 3-month change is just 1.6%. Not enough for an aggressive Fed for sure, especially with real average hourly earnings up just 0.3%. The Fed will most likely tread carefully. Please watch lofty consumer confidence levels, so far not impacted by trade tensions, on page 58 of the Global Perspectives book - Special Guest Blogger: Tim Kearney, PhD.

Tuesday, June 19, 2018

The President stated his intention of escalating a trade war with China and the markets summarily dropped. A real trade war with China or any other country tends to lead to a downward spiral and bring to mind events like the “Smoot-Hawley” trade tariff that arguably triggered the Great Depression. This along with rising rates and a rising U.S. dollar is hitting international and Emerging Markets hard. In fact in June so far MSCI EAFE and MSCI Emerging Markets have underperformed the S&P 500 by -3.8% and -5.0% respectively. This is bad...real bad, unless this is gamesmanship as in the so called “Art of the Deal”. Either way, US companies are more protected from market fallout from trade barriers than other developed countries, which has allowed the US to take charge on these tariffs. It is in the interest of the Chinese not to match the tariffs or increase them even more, as it is their shares who fell to their lowest level in nearly two years as a result of this emerging trade war. Not to mention, the US has great domestic exposure, as 73% of the revenue produced from its companies comes from home. The U.S. seems to have the upper hand, but negotiating is more art than science.

Please see page 47 of the Voya Global Perspectives Book to see where total world imports and exports are at all-time record highs.

Thursday, June 14, 2018
Over the past 20 years the average asset allocation investor has significantly underperformed stock and bond markets and barely kept pace with inflation.

Retail sales smashed expectations surging .8% in May, double expectations. In addition, March and April sales were also revised up. Fed chairman Jerome Powell in his post-meeting Q&A sounded a lot more optimistic than his “dot plot” indicated, saying “I can say that the tax cuts will provide meaningful support to demand, significant support to demand over the next three years” and “encourage greater investment, that should drive productivity, that should increase potential output.” A supply and demand boost, now that is something. Consumer spending is almost 70% of GDP so this bodes well for second quarter GDP to be released in July and Capex increases bode well for solid productivity increases. Estimates have been steadily rising and economists are now mentioning a four handle. Higher gas prices accounted for some of the increase in the retail sales figure but even if gas is excluded, retail sales are up 5% over a year ago. Tax cuts, robust employment conditions and increased household wealth are the reasons for the boost in retail spending. GDP is calculated as C (consumption) + I (Investment) + G (Government Spending) + X (Exports-Imports). Investment is also accelerating as companies are fast-tracking their capital expenditures in response to tax cuts, deregulation and a tight labor market. Tax cuts are not a one and done. Meanwhile, the dollar surged and the euro dropped due to the ECB comments from a less optimistic Mario Draghi, stating that there will be no rate increase until summer 2019. Maybe Europe needs tax reform too. Please refer to the components of GDP on page 71 of the Global Perspectives Book.

Wednesday, June 13, 2018
The Fed funds target rate and Treasury yields remain historically low, even though the Fed increased the target rate in December 2016.

The Fed is widely expected to raise interest rates today and that hike is already priced into the market. It is unequivocally good news when the U.S. Fed Funds rate can be lifted to 2% after being stuck in the .25% basement from 2008 to 2015 due to a lackluster recovery. Investors will be looking for clues as to future Fed actions. Sure, the economic data is coming in strong. In fact, the U.S. is now considered the developed country leader in the still very much intact global synchronized expansion after some first quarter softness in Europe and Japan. That strength has manifested itself in the U.S. dollar and as a result, some emerging markets have been struggling. Emerging economies frequently have dollar denominated debt, which becomes more burdensome when the dollar strengthens. In addition higher rates in the U.S. constrain global liquidity and spur an outflow of funds from emerging markets and back to the U.S. Brazil is 7% of the MSCI EM index and recently experienced an 8% drop in their markets. But their problems are also domestic, as 2018 GDP forecasts are being cut and political turmoil is failing to provide positive economic direction. Fed action and a stronger dollar can only take partial responsibility for the EM turmoil if just uncovering weakness that was already there. There is still plenty of opportunity in EM as the global economy expands. Moreover, emerging markets typically offer more compelling p/e ratios in equities and higher bond yields than those available in developed nations. And remember a relatively weak currency makes trade more attractive and boosts the local economy. Please follow the Fed on on page 34 of the Global Perspectives Book.

Tuesday, June 12, 2018

The National Federation of Independent Business small business optimism index rose to 107.8 the highest in 34 years; the second highest in 45 years and just below the record of 108. "Main Street optimism is on a stratospheric trajectory thanks to recent tax cuts and regulatory changes. For years, owners have continuously signaled that when taxes and regulations ease, earnings and employee compensation increase," said NFIB President and CEO, Juanita Duggan.
The May report hit several records:

  • Compensation increases hit a 45-year high at a record net 35 percent.
  • Positive earnings trends reached a survey high at a net three percent.
  • Positive sales trends are at the highest level since 1995.
  • Expansion plans are the most robust in survey history.
  • “Probably the biggest and most unappreciated part of the tax package is the small business tax cut - the first ever." This was our quote from the Voya Global Perspectives® 2018 Forecast: Pro-Business Economy Unleashes Growth.

    Friday, June 8, 2018
    Lower personal savings rates and household net worth tend to increase the burden on future savings to fund retirement security; rising stock and housing markets have driven household net worth upwards.

    The Fed reported that U.S. household wealth reached an all-time high milestone in Q1, surpassing $100 trillion for the first time. The robust employment landscape and a rising stock market helped; however, the biggest contribution to the boost in wealth was home prices. Housing prices have recovered and are now higher than their 2006 pre-bust high water mark. Last month the S&P Case Shiller index reported overall YoY price increases of 6.8% for the 20 metro area with some cities like Seattle, San Francisco and Las Vegas soaring by double digits. The reason behind rising prices is limited supply. Less than 1.3 million new homes are being built per year across the country. Compare this to 2006 when 2.3 million new homes were constructed. Household formation has slowed but still 400,000 new households were established in 2017, (down from 2.4 million new households in 2011) and all of the excess supply from the bubble years has been absorbed. Nationwide higher rental rates are encouraging home ownership. In addition, it turns out Millennials are not content to live in their parent’s basement. The biggest change in home ownership rates was among the millennial generation last year with an increase from 34.7% to 36%. In addition, 80% of Millennials report wanting to own a home. The increase in wealth will flow into consumer spending although consumers are more cautious since the recession and are expected to spend only ~1% of their newfound wealth. Watch the sharp rebound in U.S. household wealth since 2009 on page 59 of the Global Perspectives book .


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