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Friday, January 19, 2018

Oil prices are now $63/barrel, up more than 40 percent over last year’s low of $44/barrel in June. As a result, consumer gasoline prices are rising. The latest weekly reading shows that the average price of a gallon of gasoline is $2.72, up from $2.66 just three months ago. How high are prices going and at what point will they affect consumer behavior and potentially derail the economy? Oil prices have largely been dictated by supply levels. Shale oil changed the oil game and made the U.S. the relevant producer, not OPEC. The IEA forecasts that U.S. production will rise to its highest level since 1970, pushing past 10 million barrels a day. Meanwhile demand is growing, but the rate of increase has not changed significantly over the last year despite the accelerating global economy. This is because of the rise in alternative and more affordable sources of energy like natural gas. So, with the availability of plentiful additional supply, oil prices are not expected to continue escalating. But if they do, a recent study by Jeffries indicates that the average pain point across all income levels where consumers begin to change their behavior is about $4.00/gallon. Currently, the economy is continuing to strengthen and earnings are accelerating, with energy company earnings expected to grow 135% in Q4 reports. Please refer to the Voya Global Perspectives™ Investment Weekly to keep an eye on gas price trends.

Thursday, January 18, 2018
Return correlations below 1.0 indicate ways to combine investments and reduce overall risk; negative or near zero correlations offer the best diversification benefits.

After the quietest year for market volatility since 1964, the market is finally busting a move. In the last week, the Dow has experienced a few days of triple digit swings and the VIX (volatility index) jumped above 12. Wow. The historical average, mind you, is 20. Higher interest rates - and perhaps a potential government shutdown - are sparking a little investor attention. But with the S&P 500 up almost 5% and the NASDAQ up more than 10% in the first few weeks of the year, investors are unlikely to be heading for the hills anytime soon. In fact, retail investors are finally coming to the dance floor and equity mutual flows have turned positive after being negative every month last year despite a sizzling market. Ironically, as calls of irrational exuberance become more common, flows into generally less risky bond funds remain positive. Investors are still in need of steady income and confidence in corporate debt service ability is high. Investors may have moved to optimism but exuberance is still not on the play list. The new year is a good time to examine your portfolio to ensure it is properly diversified should volatility really pick up. Please see slide 79 of the of the Global Perspectives™ book for a table of asset correlations and notice that long U.S. Treasury bonds are negatively correlated to large cap stocks. So when the market is grooving up, they may not look so attractive. But if the market takes a downturn, they will be your wingman.

Wednesday, January 17, 2018
Core and headline inflation remain subdued with the Fed’s preferred measure of inflation, Core PCE, remaining slightly below target.

As noted last week, I expect inflation to remain quiescent. Important research recently implies that our current low-inflation environment (since at least 1992) represents a regime change. That is, the current situation relies on a credible Fed. The basic idea is that the economy operates in two different states – high vs. low inflation – and they are not symmetric. High inflation has historically been tied to fast money supply growth, but that does not mean that low inflation is a function of growth in the money supply. It’s the same for ‘slack’ which seems to operate differently in the two states. As a result, Phillips Curve type arguments that low inflation means there will be inflation will continue to be poor predictors of an inflation rebound.
Where does that leave 2018-19? Clearly, we should not slide into a Phillips Curve view of the inflation path, but the FOMC may and we need to be careful about that in our analysis of market dynamics. Former Fed Governor Janet Yellen often called import prices a factor in inflation, but December import prices slid to 3% from 3.3% YoY, despite the rise in energy prices. PPI final headline inflation slid to 2.6% YoY in December. Core PPI fell to 2.3% from 2.4% in November, CPI slid to 2.1% (off from a high of 2.7% YoY in February 2017) with core stubbornly below 2%. This doesn’t look like we are at risk of a take-off in inflation, nor does it look like the Fed has an argument to hike more than is currently expected. It’s a good background still for risk asset. Please take a look at page 60 of the Global Perspectives™ book for more information on inflation. - Guest Blogger: Tim Kearney, PhD

Friday, January 12, 2018

Retail sales increased .4% in December to all-time high of $495.4 billion and October and November sales were revised up, capping the year with the strongest sales growth since 2014 and affirming robust economic momentum going into the new year. Now that tax cuts will be feeding additional income to consumers, investors can expect continued consumer strength. Many predicted tax cuts would help only shareholders via share buybacks and higher dividends. That is not turning out to be the case as every day companies are announcing wage increases, one-time cash bonuses and benefit enhancement packages for workers. The U.S. economy has not experienced substantial tax cuts in decades. And the moving pieces of the more-than-ever-global economy are so fluid, predictions cannot accurately encompass all the possibilities. One thing is for sure: the tax cuts have unleashed a Sharknado of growth. That growth may also extend to other countries with now higher tax rates, thus a competitive disadvantage. The proof will be in the pudding but so far the pudding is pretty darn tasty – once again the equity markets are breaching all-time highs.

Please read the Global Perspectives 2018 Forecast for more in-depth analysis of the economic changes ahead.

Thursday, January 11, 2018
Stocks look historically attractive based on their earnings yield (E/P) compared to the yield-to-maturity of 10-year Treasuries.

Yields are finally going up. Finally. Some may attribute the 10-year treasury yield rising to its highest level since March to the rumor that China may be scaling back its U.S. Treasury purchases. But that may be fake news. The reason yields are rising from the dead is because pro-growth business policies are unleashing economic growth. Finally. So will higher rates sink stocks? Well, higher yields are good for the Financials sector. Financial company earnings will increase when they can lend at higher rates. Financials are a significant contributor to the S&P 500 index, but are an even bigger heavyweight in Europe. In addition, the yield curve just got a little steeper. Wasn’t it the flattening yield curve that was bringing bears out of hibernation last month? Finally, bonds still have a way to go before they rival stocks in return attractiveness. Compare a 10-year treasury yield of 2.6% to the S&P index with a p/e = 18.2. To determine the earnings yield of the S&P500 calculate the reciprocal of the 18.2 p/e or 1/18.2. This equates to roughly a 6% yield. Therefore, stocks are still comparatively attractive to bond yields which are still in the early stages of reflating to normal. Stay tuned for Q4 earnings season on tap. Many of the big financials begin reporting tomorrow. Double digit growth is expected despite numerous expected one-time write offs attributable to the tax reform package. Compare stocks and bonds using the Fed Model on slide 20 of the Global Perspectives™ book.

Wednesday, January 10, 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.

The December NFP report seemed to underperform a bit at 148k (vs 190k expected), but November was revised up to 252k from 228k. Net/net, that’s about a two-month miss of just 18k - with the big hit coming from retail hiring, off 27k on a seasonally adjusted basis. Average hourly earnings growth was up 2.5% YoY, maintaining the drop from late 2016. On a three-month moving average basis, wages are up 2.4% YoY. That doesn’t look like a big risk of a wage-induced inflation run.

Yes, the ISM Business Prices index has been ratcheting higher, reaching 69 in December but actually down from 71.5 as recently as September. Note that there is a relatively reliable relationship between oil prices and ISM Business Prices – after all it’s a measure of prices facing business and oil prices are up by nearly 50% since summer lows. It’s likely that the Fed will remain focused on core prices. In the paradigm I follow, relative prices change but when monetary policy is stable there is no inflation. That is, rising oil prices (and we do have stable monetary policy if not tighter) should work to contain inflation in other sectors. So, higher energy prices are likely to keep down the core even if higher oil prompts an uptick in the headline rate. At any rate, Friday 1/12 brings the December CPI and real average weekly earnings readings. With the core below 2% and the latter below 1%, I doubt that we see pressure on the Fed to speed up its policy moves.

Please take a look at page 62 of the Global Perspectives™ book for more information on Oil Price and Intensity.

Tuesday, January 9, 2018

On this day in 1776, Thomas Paine published the pamphlet “Common Sense” advocating American independence. Unfortunately, common sense is not always common. Today’s Wall Street Journal reported that many investors are emboldened by the market record highs and ultra-low volatility and, as a result, are abandoning many of their hedges designed to shield them against market downturns. Global Perspectives is forecasting a prosperous 2018. Accelerating corporate earnings, broadening manufacturing, and consumer strength and confidence in this continued low inflation environment are indeed a recipe for success. However, market pullbacks are normal and investors should remember that the lineup is not always a straight line. As market optimism builds, investors may feel a little FOMO – fear of missing out. But diversification to ride market bumps is plain old common sense. Meanwhile, the record high job openings (JOLTS) fell to a six-month low. Why? Because employers went on a hiring spree at the end of the year. Please read more about our 2018 market outlook in Global Perspectives 2018 Forecast - Pro-Business Economy Unleashes Growth.

Friday, January 5, 2018

Baseball great Yogi Berra lamented the trouble with forecasting saying, “It's tough to make predictions, especially about the future.” When it comes to the market, there is an additional monkey wrench in the mix. The better things get, the more bullish forecasts become – setting investors up for possible disappointment. Yes, earnings are expected to grow double digits in 2018 and the economy is accelerating. But positive surprises will become more rare as estimates are ratcheted up. If investors are expecting perfection, they may get rattled by a line up which is not always straight. And let’s face it, volatility can’t really go much lower than the basement levels of 2017 so it will likely be higher this year. Don’t let short term day-to-day events cloud your longer-term investing outlook. Today the non-farms payroll report was disappointing with 148,000 jobs added in December, but wages continue to trend higher and the lower than expected headline number may help keep aggressive Fed action at bay. The ISM nonmanufacturing was also a slight miss – down to 55.9% from 57.4%, but still firmly expansionary. Resolve to make 2018 the year when you don’t succumb to knee-jerk, reactionary behavior. Yogi Berra also said, “If the world were perfect, it wouldn’t be.” Please review the benefits of an effectively diversified portfolio on page 4 of the Global Perspectives™ book.

Thursday, January 4, 2018

The Trump tax cuts are the most significant pro-growth action in a generation. The impact is so profound and so pervasive that it’s hard to fully quantify. So to take a quip from CNBC’s Cramer “the current market is not bearish or bullish, it is a beast.” So why are economists so mixed on their assessment of the impact of tax cuts? I thought maybe others are confused too so here is a pedagogical analysis. Let’s look at the influence of corporate earnings - whereon the margin one dollar of earnings a week ago was worth 0.65 cents and now, after tax cuts, is magically is worth 0.79 cents as the tax rate subtracts only 0.21 cents. That is not a forecast, people, that is pure math. Suddenly, spending on labor and capital became more profitable. This spending translates into GDP growth and increased productivity. What if a corporation or small business doesn’t invest? You mean that they distribute their higher after-tax income to shareholders or business owners? Well, all the power to them then. Owners get to spend it as they see fit which becomes higher incomes to the providers of those goods and services that they purchase. This sounds like a virtuous cycle that will likely spread globally. How come the bearish economists don’t understand this? I don’t know, but sign them up for Voya Global Perspectives™ and have them read our 2018 Global Perspectives Forecast: Pro-Business Economy Unleashes Growth

Wednesday, January 3, 2018

The preliminary PMI reports show that the world continues to expand. With all but Japan clocking in from among major countries, we see that the December reports for manufacturing were up in 9 of 12 big economies. Germany and the Eurozone are above 60 and actually ticked higher from November. The JP Morgan estimate of the World Aggregate ticked up to 54.5 from 54. The U.S. printed an astounding 59.7, up from 58.2 in November. Most important was New Orders, an absolutely lovely 69.4 – above the 12-month moving average of 65.8. Fed Nowcasts look like Q4 will print another 3%: the New York Fed marks Q4 at 3.9% and Q1 at 3.2%, the Atlanta Fed GDPNow is at 2.8%, and the St. Louis Fed Economic News Index looks like 3%. As for concerns over the flattening of the yield curve this year, the New York Fed has a recession probability index based solely on the shape of the yield curve, and out 12 months that measure is at 11%. The Bloomberg Recession probability is just 3%, probably a better look given the unusual situation of U.S. interest rates. Here’s to a prosperous 2018! Please take a look at page 9 of the Global Perspectives™ book for more information on Global Manufacturing and Services.- Guest Blogger: Tim Kearney, PhD

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