Update – Washington

The U.S. stock market has jumped since the November 8th election. Let’s identify and track the 4 initiatives upon which the U.S. stock market is speculating will be successfully accomplished early in the Trump administration.

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. BOTH THE HOUSE AND THE SENATE TOOK THE FIRST STEPS TO REPEAL THE ACT. NO REPLACEMENT HAS BEEN FINALIZED. CUMULATIVE PROGRESS TOWARD GOAL: 5%

  4. Roll back of government regulations and Executive Orders considered to be difficult for businesses. NO PROGRESS RECENTLY.  HEARINGS AND CONGRESSIONAL APPROVAL (OR NOT) ON TRUMP APPOINTEES FORMS A LITMUS TEST FOR FUTURE EFFECTIVENESS OF THE TRUMP ADMINISTRATION.  CUMULATIVE PROGRESS TOWARD GOAL: 0%

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.

Update On Washington

The U.S. stock market has jumped since the November 8th election. Let’s identify and track the 4 initiatives upon which the U.S. stock market is speculating will be successfully accomplished early in the Trump administration.

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. NO PROGRESS RECENTLY.  CUMULATIVE PROGRESS TOWARD GOAL: 0%

  4. Roll back of government regulations and Executive Orders considered to be difficult for businesses. NO PROGRESS RECENTLY.  HEARINGS AND CONGRESSIONAL APPROVAL (OR NOT) ON TRUMP APPOINTEES FORMS A LITMUS TEST FOR FUTURE EFFECTIVENESS OF THE TRUMP ADMINISTRATION.  CUMULATIVE PROGRESS TOWARD GOAL: 0%

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”
that support the stock market) to support its upward trend – let’s grade each
of the pillars. 


CONSUMER SPENDING:  I have
upgraded this factor to B
(above
average) based upon the increase in retail sales as reported in recent economic
reports.



THE FED AND ITS POLICIES:  I continue to grade this factor an A+ (extremely favorable) because the
FED cannot do much more than it is doing to support the stock market and asset
prices.



BUSINESS PROFITABILITY:  I rate this factor B- (slightly above average).



NOTE:  There
is no change from the last report.


The Markets This Week

A stun grenade seemingly landed in the stock market last week, with blinding light, noise, and smoke that disoriented equity investors but caused no permanent damage. The broad market indexes managed to set new all-time highs early on, only to suffer a big 1% drop Thursday.

The volatile trading occurred as small-cap stocks flirted with correction territory, continuing a bearish trend that began in March. Meanwhile, the continuing and surprising rally in the bond market is making some investors nervous about the strength of an expected U.S. economic recovery. Such anxiety was confirmed by mixed economic data released last week, with April housing starts and jobs data strong but industrial production and capacity-utilization weak.

Amid these cross currents, the broad indexes finished pretty much unchanged. The Dow Jones Industrial Average ended the week at 16,491.31, down 0.6%, and below an all-time high of 16,715.44 set Tuesday. The Standard & Poor’s 500 ended at 1877.86, flat on the week, but down from an all-time high of 1897.45, also set Tuesday. The Nasdaq Composite bucked the trend and rose 0.5%, or 19, to 4090.59. The Russell 2000 small-cap index fell 0.4% to 1102.91, and briefly dropped 10% from its high on Thursday—technically, a correction.

Despite the index highs, “there’s an incredible amount of pessimism and negativity” in equity markets, says Michael Marrale, head of research, sales, and trading at broker-dealer ITG. He says hedge funds have sharply reduced their equity exposure since March, but he views the selling as a pause, as there is money on the sidelines and people are nervous. “You want to be a contrarian to the pervasive pessimism,” he says.

The mixed data scared stock investors, as “most thought the economy was accelerating,” says Brian Reynolds, chief market strategist at Rosenblatt Securities. He, too, is sanguine, and observes that corporate bond prices are near all-time high.

The bond-market rally was caused by short-covering, the weak industrial-production number, and growing expectations that the European Central Bank will cut rates in June, says Quincy Krosby, market strategist at Prudential Financial. Investors continue to struggle, she says, with how to value stocks in a world where the Federal Reserve is winding down its quantitative stimulus program this year.

(Source: Barrons Online)


The “Heat Map”

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

CONSUMER SPENDING:  I have
upgraded this factor to
B (above
average) based upon the increase in retail sales as reported in recent economic
reports.

THE FED AND ITS POLICIES:  I continue to grade this factor an A+ (extremely favorable) because the
FED cannot do much more than it is doing to support the stock market and asset
prices.



BUSINESS PROFITABILITY:  I rate this factor B- (slightly above average). U.S.
corporations are in the midst of the first quarter’s earnings reporting season.  About 90 of the S&P 500 companies have
reported their earnings.  66% have
exceeded expectations but this is slightly below average.  We will continue to follow this closely.


The Markets This Week

“Mo” stumbled again. The once-popular momentum stocks continued their reversal last week, pressuring the broad market, which fell more than 2% in volatile trading.

As they have since late February, investors shed highly valued shares of mostly small and mid-sized biotech and social media companies, market leaders in 2013. Last week weakness spread to big “old” technology stocks considered safe havens such as Microsoft (ticker: MSFT), which fell 1.7%, to $39.21.

While first-quarter earnings released Friday from banking bellwether JPMorgan (JPM) were weaker than expected, and its stock fell 7.5%, there appears to be no discernible reason for the downdraft other than high valuations of stocks leading the retreat.

“There’s been a core of momentum stocks like Tesla Motors (TSLA) and others that nobody could find [satisfactory] valuation methods for,” says Scott Colyer, CEO of Advisors Asset Management. Without traditional value measures for these stocks, some investors began to balk, then it snowballed.

The Dow Jones Industrial Average fell 386 points, or 2.3%, to 16,026.75, and the Standard & Poor’s 500 index lost almost 50 points to 1815.69. The technology-heavy Nasdaq Composite index, plunged 3.1%, 128 points, to 3999.73. The small-cap Russell 2000 fell the most, down 3.6% to 1111.45.

It’s been 18 months since investors have experienced this kind of volatility, and many view the pain as a healthy corrective after a huge run-up. “I hope it gets ugly, but not too ugly,” adds Colyer, who thinks the market might test its 200-day moving average, down to about 1760 on the S&P 500.

Speaking of technical moves, one divergence that bears watching is the weekly number of individual stocks making new highs, which peaked at 925 on May 10, 2013, according to Ned Davis Research. Adds Frank Gretz, a technical analyst for Wellington Shields, that number dropped to 700 late last year and more recently close to 500, even as the broad stock market indexes continued to make new highs.

“It’s a bad sign,” Gretz notes, considering that in bull market history, the peak in the number of stocks making new highs comes roughly a year before the bull itself peaks. But there’s a divergence from the divergence: The stocks leading the bull market are usually the last ones to hang on. (Barrons Online).

Heads Up!

Since 1990, the month of April
has been the 2nd best performing month during the year.  Its average rate of return equals 1.8%. (The
best performing month – December; the worst performing month – August).

NOTE:  The data above is based upon the S&P 500
Index which is a group of 500 U.S. stocks weighted as to each stocks’ market
capitalization proportionate to the other stocks within the group.  Investors cannot invest in the S&P 500
Index.

The “Heat Map”

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

CONSUMER
SPENDING:
  I grade this factor a C- (below average)

THE
FED AND ITS POLICIES:
  I continue to grade this factor an A+ (extremely favorable) because the
FED cannot do much more than it is doing to support the stock market and asset
prices.

BUSINESS
PROFITABILITY:
  I have
downgraded this factor to a B- (above average). We
have reached the end of the first quarter and it showed little sign of the
acceleration many are expecting.  We can
expect more stock market volatility from lower-than-expected first quarter
earnings reports, out in April and May. One well known analyst issued a consensus
first-quarter earnings-per-share growth projections for S&P 500 companies declining
to 1% to 2% from 6% to 7% as the year began. The severe winter weather that
gripped much of the U.S. in January and February may yet be seen again in many
first-quarter reports.  The question
remains whether the warming weather will bring the economic acceleration stock
market analysts expected to occur starting in January.

The Markets This Week

It was a good week to be out of U.S. stocks as broad market indexes here gave up ground. That was in marked contrast to major markets around the world, which posted solid rises. After American stocks smoked foreign equities last year, this was a rare week of role reversal.

In sympathy with overseas equities, the largest U.S. companies—which tend to get a good chunk of their sales from international sources—did better. Small-company stocks, typically more domestically focused, fell sharply. Among them, technology and biotech did especially poorly.

Don’t mistake this for the return of the “risk off” trade, since even the MSCI Emerging Markets index—a beaten-down but riskier set of stocks—rose more than 3% last week. World equities, not including the U.S., were up 1.8%; German stocks rose nearly 3%, Japan was up 1.5%.

On these shores, the Standard & Poor’s 500 index dropped nine points to 1857.62. The Nasdaq Composite index lost 121 points, or 2.8%, to 4155.76. The Russell 2000 small-company index dropped 42 points, or 3.5%, to 1151.81. Only the Dow Jones Industrial Average gained, up 0.1%, 20 points, to 16,323.06.

With the quarter about to end, the S&P 500 is essentially flat, a far cry from the 10% rise in the same year-ago period. The bond market continues to confound. Though many have expected interest rates to rise since the Fed announced the tapering in mid-December, bond prices are higher and rates lower. The long end of the Treasury yield curve has flattened a little bit, suggesting bond investors don’t see much in the way of U.S. economic growth. Maybe that’s why some have put their money to work overseas.  (Barrons Online).

The “Heat Map”

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

CONSUMER SPENDING:  I grade this factor a C- (below average).

THE FED AND ITS POLICIES:  I continue to grade this factor an A+ (extremely favorable) because the
FED cannot do much more than it is doing to support the stock market and asset
prices.

BUSINESS PROFITABILITY:  I continue to grade this factor an A (very favorable). 

NOTE:  no change from prior week.