The Markets This Week

The market should be facing a disaster of biblical proportions.

We have hurricanes and earthquakes, a nuclear-armed dictator in North Korea threatening to unleash fire and brimstone, and yes, even a Republican president working with Democrats in Congress. Or as Bill Murray put it in Ghostbusters, “Mass hysteria!”

Not quite. Despite the suffering brought by a trifecta of natural disasters, and the shock of seeing President Donald Trump teaming up with Nancy Pelosi to extend the debt-ceiling deadline, only nuclear tests by North Korea really shook the markets. And even then, it wasn’t much of a shock. The Standard & Poor’s 500 index declined just 0.6%, to 2461.43, last week, while the Dow Jones Industrial Average fell 189.77 points, or 0.9%, to 21,797.79. The Nasdaq Composite dropped 1.2%, to 6360.19. Despite the declines, the S&P 500 sits just 0.8% below its all-time high.

Why have stocks held up as well as they have? Dubravko Lakos-Bujas, head of U.S. equity strategy and global quantitative research at JPMorgan, observes that the S&P 500 has dropped about 2% when hurricanes make landfall, as sectors that get slammed—think insurance companies, hotels, and cruise lines—are offset by ones that benefit, like autos, energy and equipment services, and basic materials for construction. A failure to raise the debt ceiling or pass a budget, though, has typically caused the market to drop 3% to 5%. “In essence, the market risk associated with the failure of passing the budget and addressing the debt ceiling has been pushed out for now,” Lakos-Bujas says.

There’s another reason for optimism: earnings. Yes, we know that second-quarter earnings season just ended, but investors are already looking ahead to the third quarter. And despite some recent negative guidance associated with Hurricane Harvey, earnings revisions appear to be holding up well. Bank of America Merrill Lynch strategist Jill Hall notes that the three-month earnings estimate revision ratio—a measure of companies guiding higher versus those guiding lower—sat unchanged at 1.23 at the end of August, its highest level in six years. “It suggests strong near-term S&P 500 returns,” she says.

More importantly, that means earnings expectations aren’t coming down. Andrew Slimmon, a portfolio manager at Morgan Stanley Investment Management, notes that earnings forecasts generally drop by about 7% from the start of the year. But with earnings coming in close to expectations, the market might start viewing next year’s S&P 500 earnings estimate for $145 as achievable. At Friday’s close, that puts the index’s valuation at a more reasonable 17 times earnings. “I don’t think that’s all that expensive,” Slimmon says. “We have a setup for a decent rally in the fourth quarter.”

Of course, not everyone is ready to buy into such arguments. For them, the market’s strength is simpler. “It’s a bull market,” says Vincent Deluard, global macro strategist at INTL FCStone Financial. “Good news is celebrated; bad news ignored.” Until it isn’t.

(Source: Barrons Online)

Heads Up!

Imagine you were and I were employed as part of an executive team at a major corporation – and we reported the current state of affairs of our corporation to the Board of Directors the day before the entire executive team left for vacation for a month. Can you imagine the consequence if we said: Sorry, but we were not able to complete the budget for your review. Sorry, we did not have time to reach out to our bankers to renew our line of credit, and we will run out of money next month. Sorry, we were not able to fix the company’s healthcare plan, which will soon spiral out of control. And, sorry, we did not get to figure out or tax situation either. But, we are all going on vacation for the entire month of August. Yes!  We would all be fired.

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 AND 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).

BUSINESS PROFITABILITY: This factor’s grade is A- (very favorable).

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, U.S. stocks and Foreign stock and Bonds all increased. During the last 12 months, STOCKS outperformed BONDS.

Returns through 8-25-2017

1-week

Y-T-D

1-Year

3-Years

5-Years

10-Years

Bonds- BarCap Aggregate Index

.2

3.4

.3

2.7

2.2

4.4

US Stocks-Standard & Poor’s 500

.7

10.6

14.8

9.2

14.0

7.4

Foreign Stocks- MS EAFE Developed Countries

.6

16.8

16.3

2.7

8.3

1.8

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:

“Education Tax Benefits – what you need to know.”

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

Remember the days of risk on/risk off? Well, welcome to the world of Trump on/Trump off.

The market, remember, had been in the throes of a two-week losing streak, one that had a lot to do with what President Donald Trump said. Last week, that streak came to an end because of what his administration might do. On Tuesday, reports of progress on tax reform helped push the Standard & Poor’s 500 index up 1%, and while the major benchmarks stalled after the president called for a government shutdown if money wasn’t allocated for a border wall, it rose 0.2% on Friday as tax reform became the focus once again. “That helped underpin the market,” says Quincy Krosby, chief market strategist at Prudential Financial.

And underpinned it was. The S&P 500 finished the week up 0.7% at 2443.05, while the Dow Jones Industrial Average rose 139.16 points, or 0.6%, to 21,813.67. The Nasdaq Composite gained 0.8% to 6265.64.

Don’t be surprised if the market bounces back and forth as the focus shifts between pro-growth policies such as tax reform and deregulation, and fears of a debt-ceiling standoff or a government shutdown. Keith Lerner, chief market strategist at SunTrust Advisory Services, observes that while a shutdown has an economic impact, it’s more like a winter storm, and the effect is generally short-lived. There have been 18 shutdowns since 1976, he says, with the S&P 500 dropping 0.6%, on average, when the government is closed. The largest decline—a 4.4% drop—came in 1979 when President Jimmy Carter vetoed a bill that included funding for a nuclear-powered aircraft carrier. The takeaway: “Political showdowns tend to be short-lived and generate little permanent effect on the stock market,” he says.

Still, a standoff over the debt ceiling or budget would come at an inopportune time. Despite the S&P 500’s rally last week, the percentage of stocks trading above their 200-day moving average dipped below 50% early last week, a sign that “fewer stocks are supporting the overall index,” says Thomas Lee, head of research at Fundstrat Global Advisors. That’s happened 24 times since 1996, Lee says, and in 23 of those cases the S&P 500 fell to just below its own 200-day moving average. That suggests the S&P 500 could drop to 2300, Lee says, down around 6% from Friday’s close. If something goes wrong with tax reform or other policy issues, it could be just the catalyst the market needs for a selloff. “It’s unpredictable,” Lee says. “We don’t know how the market will react to anything.”

Federal Reserve Chair Janet Yellen’s speech at Jackson Hole, Wyo., was supposed to be the event of last week, but instead was overshadowed by tax-reform talk. But make no mistake: The Fed is still looking to shrink its balance sheet, and even hike interest rates again this year. This Friday’s U.S. payrolls report could go a long way toward determining whether the Fed will sit on its hands—as the futures market is currently predicting—or keep on tightening. “It could certainly push up the odds for a hike in December,” Prudential’s Krosby says.

And that, of course, would bring risks of its own.

(Source: Barrons Online)

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!