The Markets This Week

It’s locked and loaded. Are we referring to the U.S. nuclear arsenal, or the stock market?

President Donald Trump found a way this past week to get under the market’s skin with his colorful comments directed at North Korea leader Kim Jong-un. The president promised to unleash “fire and fury,” then claimed that the U.S. military was “locked and loaded” and ready to respond to any provocation.

News that North Korea had been able to build a nuclear warhead small enough to place atop a missile likely would have sunk the market anyway—and sink, it did. The Dow Jones Industrial Average declined 234.49 points, or 1.1%, to 21,858.32 on the week, its largest one-week slide since March. The Standard & Poor’s 500 index fell 1.4% to 2441.32, and the Nasdaq Composite dropped 1.5% to 6256.56.

But pardon us for not quaking in our boots—at least when it comes to the market. Geopolitics has a way of shaking stocks, but rarely does the damage last. The S&P 500 dropped 1.1% the day Iraq invaded Kuwait in 1990, according to Strategas Research Partners data. The index fell further in the next three months, but was up 10% 250 trading days later. Even the Cuban Missile Crisis in 1962 resulted in only a 6%-plus drop that was quickly erased. “It’s a serious situation,” says Brad Neuman, investment strategist at fund-manager Alger. “But your best bet was to stay in equities.”

Stocks are driven by economic growth. For a geopolitical event to derail a bull market, it would have to hamper the U.S. economy as well. That’s very unlikely.

Ah, yes, the economy. As has been the story since President Trump’s election, confidence remains high. The NFIB Small Business Index rose to 105.2 in July, while the actual data remain sluggish. Productivity rose just 0.9% during the second quarter, and the consumer price index advanced just 1.7%, missing estimates for 1.8%. None of that is exciting, but it doesn’t point to a recession either—the one thing guaranteed to bring a bull market to its knees.

(Source: Barrons Online)

Heads Up!

Many investors use the Dow Jones Industrial Average (“DJIA”) as a barometer of the U.S. Stock market. The DJIA stood at 18,000 the day before the Presidential election on November 8th. Today, it has jumped to within a few points of 22,000. This increase equals 4,000 Dow points, or more than 22%. WOW!

Update – Washington

The U.S. stock market has jumped since the November 8th election. We identified 4 initiatives on which the U.S. stock market is speculating to be successfully accomplished early in the Trump administration. What will happen next? It’s still to be determined!

The 4 initiatives will have a tremendous influence on the “Heat Map” which forms the basis of our forward looking view of the U.S. economy. We consider the success or failure of the 4 initiatives to be “leading” indicators for the Heat Map.

Below are the 4 Trump administration initiatives upon which the stock market is speculating and what progress, if any, has been made:

  1. Tax cuts and tax reforms benefiting most individuals and businesses. NO PROGRESS RECENTLY.  CUMULATIVE PROGRESS TOWARD GOAL: 0%

  2. Infrastructure spending of up to $1 Trillion over the upcoming 7 to 10 years. NO PROGRESS RECENTLY.  CUMULATIVE PROGRESS TOWARD GOAL: 0%

  3. Affordable Care Act amendment, reform or reorganization. ON ITS SECOND ATTEMPT, THE HOUSE OF REPRESENTATIVES PASSED LEGISLATION TO REVISE IT. THE SENATE HAS FAILED TO BRING THE BILL HAS FAILED TO PASS THE HOUSE’S VERSION OR ANY OTHER. CUMULATIVE PROGRESS TOWARD THIS GOAL IS 0%.

  4. Roll back of government regulations and Executive Orders considered to be difficult for businesses. ROLL BACKS HAVE CONTINUED.  CUMULATIVE PROGRESS TOWARD GOAL: 40%

As the action happens in Washington on these 4 initiatives, don’t be surprised if the political “tug and pull” contest results in a wilder than normal stock and bond market.

We will continue to report in future issues on the progress on each initiative.

The “Heat Map”

Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.

CONSUMER SPENDING: This grade is a B+ (favorable).

THE FED AND ITS POLICIES: This factor is rated C- (Below average).  In the minutes from the June Federal Open Market Committee meeting, the Federal Reserve members expressed their desire to begin shrinking its balance sheet before the end of the year, while the European Central Bank’s minutes contained discussions of ending its pledge to buy more bonds if the economy weakened. Rate hikes, meanwhile, are suddenly on the table in countries besides the U.S.

BUSINESS PROFITABILITY: This factor’s grade is A- (very favorable). Of the S&P-500 companies which have reported second-quarter earnings so far, 74% have topped analyst expectations, according to Thomson Reuters I/B/E/S, above the four-quarter average of 71%. Sales have been nearly as strong, as 72% have topped expectations, well above the four-quarter average of 56%. All in all, second-quarter earnings are expected to grow by nearly 10%.

OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 6. These risks deserve our ongoing attention.

The Numbers

Last week, Foreign Stocks increased, Bonds decreased and U.S. stocks were little changed. During the last 12 months, STOCKS outperformed BONDS.

Returns through 7-28-2017

1-week

Y-T-D

1-Year

3-Years

5-Years

10-Years

Bonds- BarCap Aggregate Index

-.2

2.7

-.5

2.7

2.0

4.4

US Stocks-Standard & Poor’s 500

.0

11.6

16.0

10.8

14.8

7.7

Foreign Stocks- MS EAFE Developed Countries

.5

17.1

17.8

2.8

9.1

1.5

Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.

“Your Financial Choices”

The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®.  This week Laurie will discuss: “Financial terms defined – advisors, accounts, trusts”

Laurie will take your calls on this topic and other inquiries this week.  Questions may be submitted early through www.yourfinancialchoices.com by clicking Contact Laurie.  This show will be broadcast at the regular time. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area– or listen to it online from anywhere on the internet.  For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.

The Markets This Week

Newton’s third law of physics states that for every action there is an equal and opposite reaction—but sometimes that can lead to no action at all.

Take the so-called FANG stocks. Three of the four reported earnings last week, with Facebook (ticker: FB) gaining 4.9% last week, Amazon.com (AMZN) slipping 0.6%, and Google parent Alphabet (GOOGL) dropping 3.6%. In the end, they netted out to a 0.2% decline to 6374.68 for the Nasdaq Composite, and virtually no change for the Standard & Poor’s 500 index, which closed the week up 0.4 point at 2472.10.

The Dow Jones Industrial Average was the exception that proved the rule. With none of the FANGs among its 30 component stocks, the blue-chip benchmark rode huge gains in Boeing (BA) and Caterpillar (CAT) to a 250.24 point, or 1.2%, gain to 21,830.31, an all-time high.

Still, it’s hard to ignore just how on edge the market seems to be, as every drop, no matter how small, is analyzed for signs that it’s the one that marks the end of the long bull market. And every gain is an opportunity for handwringing. The muted CBOE Volatility Index, or VIX, which traded as ridiculously low as 8.8 last week, has only added to the consternation, prompting talk that a tumble is looming.

“There’s a sense that many things are coming together that make you feel like you’re headed for a correction,” says Jim Paulsen, chief investment strategist at the Leuthold Group. “There’s so much of that right now, that it almost would surprise me if it happens.”

And for good reason. The S&P 500 has suffered two 15% drops since the bull market got going in earnest, says Tony Dwyer, chief market strategist at Canaccord Genuity. The first occurred in 2011, when the European Central Bank raised interest rates as it wrestled with its own financial crisis and the global economy struggled to grow again. The second occurred at the end of 2015 and into 2016, when China’s currency depreciation and the collapse in oil prices caused markets to tumble. Dwyer sees few similarities today. The global economy continues to recover, and U.S. gross domestic product grew at a 2.6% clip during the second quarter; earnings are growing at a 10%-plus clip; and a weak dollar should provide a boost for U.S. multinationals and commodity prices. “This will end badly at some point,” Dwyer says. “But the underpinnings for a major drop are just not there right now.”

Which doesn’t mean there won’t be sudden bouts of volatility. Two events in particular have the potential to shake things up. On Friday, we’ll get the June payroll data, which could provide evidence of whether the Federal Reserve, which left interest rates unchanged last week, is ahead of or behind the curve. And then there’s Apple (APPL), which is scheduled to release earnings on Tuesday—and this time the Dow won’t be above the fray. A surprise from either could upend stocks.

Just don’t bet on it. “The market appears bulletproof,” says Ian Winer, head of equities at Wedbush Securities.

Enjoy it while it lasts.

(Source: Barrons Online)

Heads Up!

If it wasn’t clear that the world’s central banks had begun to shift away from easy-money policy, last week should leave little doubt. This discussion came a week after Fed Chief Janet Yellen openly questioned whether asset valuations have gotten too high for their own good. The S&P 500 now trades at 17.6 times 12-month forward earnings, and while we can debate how much easy money has helped inflate those prices, there’s little doubt that it’s played a role.

Did You Know? TAX TIP

If you have any old U.S. Savings Bonds tucked away somewhere, now might be the time to review them for the current interest rate, maturity date and accrued interest. One advantage of owning U.S. Savings bonds (Series I or EE) is the tax deferred treatment of the interest.  However, if you have owned the bonds for a long time, there could be significant interest accrued which is taxed as ordinary income upon liquidation.

One lesser known advantage is the tax free treatment when used for college education expenses upon meeting certain IRS requirements.  You might think, “But my children don’t have any current education expenses.” Fortunately, a 529 education savings plan falls under the scope of “qualified” education expenses. Therefore, qualifying bond proceeds used to fund a 529 plan will exempt the interest from tax. An additional benefit is available for those living in a state which gives tax deductions for 529 education plan contributions. This strategy has income limitations and additional requirements per IRS and state guidelines, so please contact your advisor to review if you qualify for the tax free treatment of the interest and state deduction.

For more information, visit treasurydirect.gov.