For a PDF version of the below commentary please click here Weekly Letter 3-27-2017

Commentary quick take:

 

  • Major developments:
    • Healthcare bill failed
    • Streak of consecutive days with no declines 1 percent or greater has ended
    • Brexit Article 50 to be triggered this week
    • Oil declined

 

  • US:
    • President Trump’s healthcare bill failed
    • Freedom Caucus is very powerful
    • Campaign promises seem in jeopardy
    • Will we have continued gridlock in Washington DC?

 

  • Global:
    • Brexit
      • Article 50 to be invoked on March 29th
      • Labour tests revealed
    • Oil puts pressure on OPEC
    • Russia thinks $40 oil is here to stay

 

  • Technical market view:
    • All three of the major US indexes broke down
    • The streak ended at 109 days
    • New technical trading range has been drawn
    • VIX jumped higher

 

  • Hybrid investments strategy update:
    • Three changes were made
      • Sold half of SPHB
      • Sold RZV
      • Bought DXSSX
    • Changes lowered overall model risk

 

  • This week for the markets:
    • Aftermath of failed healthcare bill
    • Brexit
    • Political uncertainty

 

  • Interesting Fact: Congressional Bills

 

Major theme of the markets last week: The healthcare bill was not healthy

The attempted reform of the Affordable Care Act (Obamacare) took nearly all the financial media’s attention over the previous week. To start the week, the Republicans in power, mainly Speaker Ryan and President Trump, seemed optimistic that they would be able to get enough votes for the bill to pass the House of Representatives, pushing it along to the Senate. About mid-way through the week last week, however, it became clear that a relatively small caucus in the House, the Freedom Caucus, was going to be able to hold up the passage of the bill. The speaker, president and several other high ranking Republicans started working tirelessly to flip some of the Freedom caucus members from “No” to “Yes.” When the vote was canceled on Thursday evening, it became clear that there may not be a way forward for the legislation. On Thursday evening, President Trump announced that there would be no more negotiating and that a vote would be held on Friday for the bill. Even up until about 30 minutes prior to the scheduled vote, there was still talk on the Hill that the Republicans were going to bring it up for a vote. When the allotted time came for the bill to be voted on, President Trump asked Speaker Ryan to pull the bill. This was the first outright admission by the administration that it will be more difficult to get things done in Washington DC than initially thought. Repealing and replacing Obamacare was a cornerstone of the Trump campaign and now that the first attempt has been rebuked by both Democrats and many in his own party, a repeal of the plan at any point looks to be in jeopardy.


US news impacting the financial markets:

Politics in Washington DC last week managed to accomplish something that had proven difficult over the past several weeks—turn the financial media focus away from speculation about the Fed and onto the circus that is underway in DC. As mentioned above, the repeal and replace bill for Obamacare died a less than valiant death last Friday when it was pulled without a vote, since the Republicans knew the vote would turn out very badly for them. The financial markets toward the end of the week seemed to be hanging on to every random word coming out of DC, with the markets moving down when it looked like the Republicans did not have the vote and up when it looked like they did. The market movements were not so much about the bill itself, but more so about how Republicans are currently working or not working together in DC. If they cannot get their number one priority through their own party, the fear in the markets is that they won’t be able to get anything done. This could be a big problem for the financial markets here in the US, which have been betting on major changes ever since election night back in November. Without enough Republican support, items such as tax reform for individuals and corporations are called into question. The financial markets have already started counting on the corporate tax rate being lowered by a meaningful amount. This is seen in everything from the forward guidance from companies to the earnings estimates that are run in aggregate by analysts looking at the markets. This fear of the Trump bump trade unwinding was what led to the decline seen on Tuesday in the markets, resulting in the first day of a greater than one percent decline in a very long time. The markets will now turn their focus from healthcare reform to other items on the agenda, most likely items that can get more support from both parties in Washington DC.

 

One such item that could be a stepping stone for more policies in the US being passed will be the debt ceiling and a budget. That’s correct; we are once again just weeks away from another potential showdown with the debt ceiling. Last time politicians faced the debt ceiling, it was the conservative Republicans that shut down the government in protest of the debt ceiling being lifted without spending cuts. This time around it will likely be the same Republican Freedom Caucus looking to shut down the government to strengthen their hand at the negotiating table. This is the same group that just doomed the healthcare bill. The clock is certainly running because on March 16th, 2017, the US Treasury hit its legal borrowing limit ($19.81 trillion), which means that Treasury Secretary Steve Mnuchin is taking “extraordinary measures” to keep payments flowing from the Department of Treasury. Remember, this is a Treasury Secretary that did not even believe in the debt ceiling during his confirmation hearing, saying, “We’ve spent the money. So, the concept of the debt limit is somewhat of a ridiculous concept.” The budget will take a lot of challenging work if Congress is going to come up with anything close to the budget that President Trump sent over two weeks ago and there is bound to be a lot of market reaction to pieces of the budget while it is being worked on. The financial markets tend to dislike uncertainty and it looks like the US is heading into a very politically uncertain time in terms of what can and cannot get through Congress. Volatility in the markets is likely to increase as time passes with nothing actually being produced in Congress.

 

Global news impacting the markets:

 

The US is not the only country entering a time of political uncertainty as the UK last week announced it would be sending the letter triggering Article 50 to the EU on Wednesday the 29th. Once triggered, the negotiations between the UK and the EU are officially allowed to begin, but the clock for the negotiations also starts to count down from two years. If, at the end of the two years, no deal has been struck, the UK will be cut off from all aspects of the EU agreements and forced onto their own. While there has not been any definitive information about how the negotiations will unfold, the UK certainly cannot get everything it would like from the EU. The wish list of six “tests” that the Labour party would like to see from the Brexit will be outlined officially on Monday, but an advanced release of the test shows them as being:

 

-Fair migration system for UK business and communities

-Retaining strong, collaborative relationship with EU

-Protecting national security and tackling cross-border crime

-Delivering for all nations and regions of the UK

-Protecting workers’ rights and employment protections

-Ensuring same benefits currently enjoyed within single market

 

While the first five tests above may be extremely difficult to fulfill for the Brexit negotiators from the UK, they are at least possible. The last point, however, seems impossible to reach when dealing with the EU. If the last point were to be won by the UK, too many other countries would rebel against the establishment of the EU and want the same type of deal the UK got, thus leading to the EU being rendered useless. The EU will have to take a pretty hard line stance in negotiating with the UK to deter other countries from trying to do the same. Any country within the EU would like to have all the benefits of the EU and none of the responsibilities. The negotiations will be watched closely by many French politicians as the first round of Presidential elections in France will occur in the middle of April. With anti-EU/populist candidate Marine Le Pen looking like a strong contender, a weak start to the negotiations by the EU could help to boost her election-day prospects. In a blow to populism over the weekend, the German Social Democrats party lost by a much larger than expected margin to the Christian Democrats in the Saarland State elections. While small state regional elections in Germany typically do not impact the global financial markets, last weekend’s vote was seen more as a proxy for the upcoming national elections in Germany, which take place later this year, so this rather small state did have a little impact on the financial markets. The other aspect of the global news that impacted the financial markets last week was the price of oil, as it continued to slide.

 

Since the agreement of OPEC members to cut or freeze oil production late last year, oil had been moving higher, moving from about $43 per barrel prior to the announcement all the way up to near $54 per barrel. As you can see in the chart below, oil prices started to fall once again despite the ongoing production cuts. There are several reasons for why oil prices started to decline about a month ago, with the most prominent and impactful being that there is still an oversupply of global oil, despite the production freeze from OPEC, because US fracking operations easily picked up the slack in the market. Combine this development with the fact that the production figures among OPEC members and Russia are questionable and it becomes clearer that oil prices are likely higher than they should be. One confirmation came late last week when Russia’s central bank made an interesting announcement. The Finance Ministry on Friday announced that it saw the Russian Urals (their version of a barrel of oil) averaging $50 per barrel during 2017, but ending the year near $40 per barrel. While this statement alone would be concerning, the Finance Ministry added that it saw the $40 per barrel price staying through 2018 and 2019. $40 per barrel is also the figure being used to calculate the budget for Russia for 2017 through 2019. When asked about the low target price, Russian officials gave the politically correct answer of, “It’s better to be conservative and to be surprised on the upside than too optimistic and end up disappointed.” Whatever the reason, with Russia being such a large player in the global oil market and seemingly battening down the hatches for $40 oil, it does not bode well for OPEC, which has been targeting $50 or higher into the future. A continued decline in global oil prices could have a notably negative impact on the global financial markets as energy, and oil specifically, has such a significant weighting in many of the major indexes, including those here in the US.

Technical market review:

 

The technical charts below are busier than most weeks as I have redrawn a new trading range, while keeping the previous trading channels in place this final week so everyone can see the evolution of the technical indicators. In the charts below, the green lines are the major indexes, while the grey lines are the previous trading channels for each index. The yellow lines are the new trading ranges for each of the indexes. The red line on the VIX chart remains the 52-week average level of the VIX, which the index is currently solidly below.

The charts above were redrawn this week because each of the indexes over the past two weeks had broken down meaningfully below the previous trading ranges. Going into last week, both the S&P 500 (upper left pane above) and the Dow (upper right pane above) had managed to barely stay within their range, but the decline seen on Tuesday dropped the indexes well below. The NASDAQ (lower left pane above) failed to make it back into its previous trading channels despite making several attempts over the last two weeks. All three of the indexes have already broken down below the new trading ranges, but also pushed back into their respective ranges at the end of last week. While the indexes pushed lower last week, the VIX moved upward, as is expected in a market that is seeing volatility pick up, but the VIX remains very low when compared to the average level seen during the past year.

 

One other technical item occurred last week and that was the breaking of the streak of days without a 1 percent or greater decline. The streak came to an end on Tuesday after 109 consecutive days. The Dow and the S&P 500 posted declines of 1.14 and 1.24 percent, respectively. While it was a very good run of days, it was short by more than 50 days from setting a record. Now that a breakdown in the trend has occurred, it seems highly unlikely that the indexes will start to run another streak again, given the political uncertainty that is present around the world.

 

Hybrid model performance and update

For the trading week ending on 3/24/2017, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2017 YTD Since 6/30/2015
Aggressive Model -1.65% 2.02% 7.45%
Aggressive Benchmark -0.71% 5.52% 5.32%
Growth Model -1.27% 2.27% 6.84%
Growth Benchmark -0.54% 4.30% 4.45%
Moderate Model -0.87% 2.35% 6.04%
Moderate Benchmark -0.39% 3.08% 3.46%
Income Model -0.62% 2.60% 6.12%
Income Benchmark -0.18% 1.59% 2.07%
Quant Model -1.16% 6.93%
S&P 500 -1.44% 4.70% 13.61%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.

 

There were several changes to the hybrid models that occurred last week with all of the changes being defensive in nature. The first changes were the selling of the Small Cap ETF (RZV) and the second change of the week was selling half of the position in the S&P 500 High Beta ETF (SPHB). Both changes were made due to the heightened amount of volatility and downside risk that was starting to be seen in the two funds; the proceeds from the sales of the two funds were moved into cash. Toward the end of the week there was a new position purchased in the hybrid models and that was a position in DXSSX, which is an inverse S&P 500 mutual fund. What this fund does is provides two times the inverse return of the S&P 500, meaning if the S&P 500 goes down 5 percent this fund should be up 10 percent and vice versa. This fund was purchased as a counterbalance to the risk being taken in the individual equity positions within the Hybrid models. The position is a partial position when compared to the amount that would need to be owned within each model to fully offset the historical downside risk of the equity positions. Typically, we move into hedging positions, which DXSSX is, in multiple steps as the risk profile of the markets and the individual stocks evolve over time. Over the coming days and weeks, the risks bore in the models will be weighted and offset with inverse funds if further market deterioration is seen.

 

Market Statistics:

 

The rally on the three major US indexes moved lower by more than one percent last week, as politics seemed to have a larger than normal negative impact on the financial markets:

 

Index Change Volume
NASDAQ -1.22% Average
S&P 500 -1.44% Average
Dow -1.52% Average

 

When looking at the performance of the indexes last week and seeing them all down by more than 1 percent, it was interesting to see that the NASDAQ was the best performer. Typically, when the markets are down by more than 1 percent, the NASDAQ leads the way lower as it is the highest beta index and typically moves faster than the other two indexes. The Dow is typically the best performing index on downward movements, thanks to its heavy weighting toward more traditionally “safe” and less risky sectors of the markets. All three of the indexes were near the average weekly volume levels that we have seen over the past year.

 

The following were the top 5 and bottom 5 performers over the course of the previous week:

 

Top 5 Sectors Change   Bottom 5 Sectors Change
Utilities 1.73%   Oil & Gas Exploration -3.21%
Gold 1.61%   Aerospace & Defense -3.27%
Residential Real Estate 1.23%   Financial Services -4.13%
Infrastructure 1.16%   Broker Dealers -4.29%
Consumer Staples -0.02%   Regional Banks -5.35%

 

Sector performance last week was largely dictated by the standard risk-off trade when looking at the best performers last week and by political risks when looking at the negative performing sectors. In times of market uncertainty there are several classic sectors that perform well. Utilities, Gold, Real Estate and Consumer Staples are four of the better-known sectors for superior performance in bad markets and these made up four of the top five performing sectors last week. The fifth sector last week that made the top five performing sectors was the Infrastructure sector, which stayed up in a down market thanks in large part to bipartisan support for fixing the US’s aging infrastructure and the likelihood of appropriating the funds to do so. On the negative side, last week Financials bore the brunt of the negative press as they were still dealing with the prospects of three rather than four interest rate hikes during 2017 and the increased uncertainty over deregulation. Any significant deregulation of the financial industry would have to have Congressional support. After the debacle of the healthcare bill, it seems any work being done on financial reform is being called into question. Taking the other two negative spots last week was Oil and Gas Exploration and Aerospace and Defense, both of which were also politically motivated declines. Aerospace and Defense declined over uncertainty surrounding the budget inclusion of the $54 billion spending increase for the military that the Trump administration would like to see. The decline in Oil and Gas Exploration was largely due to uncertainty over deregulation of the industry by the EPA and other government agencies with the political gridlock being seen in Washington DC.

 

Fixed income markets moved higher last week, as investors continued to reposition following the rate hike by the Fed two weeks ago. With the gains seen last week, the fixed income market has now regained nearly the entire decline seen in early March leading up to the Fed rate hike:

 

Fixed Income Change
Long (20+ years) 1.89%
Middle (7-10 years) 0.72%
Short (less than 1 year) 0.00%
TIPS 0.56%

Global currency trading volume was average last week as traders seemed to take many of the changes around the world in stride. Overall, the US dollar declined 0.58 percent against a basket of international currencies as investors begin to wonder more openly if the Trump administration will be good for the US economy or bad. The best performing of the global currencies last week was the South African Rand for the second week in a row, which gained 2.3 percent against the value of the US dollar. The worst performance among the global currencies was the Icelandic Krona, as it declined by 1.6 percent against the value of the US dollar.

Commodities were mixed last week as Gold and Silver moved higher, while most other commodities pushed lower:

Metals Change   Commodities Change
Gold 1.60%   Oil -2.32%
Silver 2.06%   Livestock 1.51%
Copper -1.95%   Grains -3.42%
      Agriculture -0.74%

The overall Goldman Sachs Commodity Index declined 1.1 percent last week, thanks to the decline in the price of oil. After stabilizing a little two weeks ago, oil resumed its downward trend that has been in place for about a month, last week declining by 2.32 percent. As mentioned above, the decline in the price of oil was mainly driven by the negative outlook on oil prices by Russia and the continued global oversupply of the commodity. Metals were mixed last week as Gold advanced 1.60 percent, while Silver increased 2.06 percent in a flight to the perceived safety of the hard assets. The more industrially used Copper declined 1.95 percent. Soft commodities were mixed last week, with Agriculture falling 0.74 percent, while Livestock advanced 1.51 percent and Grains posted a loss of 3.42 percent.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Santiago IPSA Chile 2.06%   BUX Hungary -2.08%
PSI 20 Portugal 1.61%   WIG Poland -2.27%

Last week was a difficult week for global financial markets as only 31 percent of the markets posted gains over the course of the week. The best performing index last week was found in Chile, with the Santiago based IPSA Index turning in a gain of 2.06 percent for the week. The gains in Chile seemed to be due to the country’s large exposure to the mining sector. The worst performing index last week was found in Poland, the WIG Index, which turned in a loss of 2.27.

As mentioned numerous times in this commentary over the years, the VIX can be a very finicky measure of volatility for the markets. Last week the VIX gained nearly 15 percent, but the intraweek and intraday movements of the VIX were even larger. Much like the markets, the VIX seemingly moved on political rumors and the very short sighted news media last week. Spring break may have had something to do with this movement as many financial professionals from the east coast were taking time off from work to be with their families, leaving a junior team in place at the office. Whatever the reason, the movement in the VIX came back in full force last week. The current reading of 12.96 implies that a move of 3.74 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was a slow week for economic news releases, as there were only four releases during the week, none of which came in much different from expectations:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 3/22/2017 Existing Home Sales Feb 2017 5.48M 5.54M
Slightly Positive 3/23/2017 New Home Sales Feb 2017 592K 560K
Neutral 3/24/2017 Durable Orders Feb 2017 1.7% 1.3%
Slightly Negative 3/24/2017 Durable Goods -ex transportation Feb 2017 0.4% 0.7%

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

The economic news releases last week started on Wednesday with the release of the existing home sales figure for the month of February, which came in very close to expectations at about five and a half million units. On Thursday, the second US housing related release of the week was released, that being the new home sales for the month of February, coming in better than the market anticipated by about 30,000 units. These two releases taken together continue to show that the housing market here in the US has been doing well in the current stage of the economic cycle. It will be interesting to see if there is any negative impact on the housing figures starting in March, now that the Fed has increased rates. On Friday, the durable goods orders figures for the month of February was released, both overall and excluding transportation. Overall, durable goods orders increased by 1.7 percent during the month, but much of this was due to transportation sales being better than anticipated. When transportation was removed from the calculation, the remaining durable goods orders increased by about half of what was expected, indicating a less positive view on large ticket purchases during the month.

 

This week is a more average week in terms of the number of economic news releases than last week. The releases that have the largest potential to move the markets on the day they are released are highlighted in green below:

 

Date Release Release Range Market Expectation
3/28/2017 Consumer Confidence March 2017 113.80
3/29/2017 Pending Home Sales February 2017 2.1%
3/29/2017 Crude Inventories  Q4 2016 4.954 M
3/30/2017 GDP – Third Estimate Q4 2016 2.0%
3/31/2017 Personal Income February 2017 0.4%
3/31/2017 Personal Spending February 2017 0.2%
3/31/2017 PCE Price Index February 2017 -0.3%
3/31/2017 PCE Prices – Core February 2017 0.2%
3/31/2017 Chicago PMI March 2017 56.50
3/31/2017 University of Michigan Consumer Sentiment Index March 2017 97.60

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

This week the economic news releases start on Tuesday with the release of the March Consumer Confidence figure, as estimated by the government. Expectations are for confidence to remain elevated, as we saw in February, as Americans continue to have faith in the economy and the changes the new administration is trying to undertake. On Wednesday, the final US housing related figures for the month of February is set to be released, that being the pending home sales, which are expected to have increased by 2.1 percent during the month of February, with some homes likely pulled forward so purchasers were able to lock in an interest rate prior to the Fed raising rates. This week I kept an economic news release that I typically remove due to the lack of attention the market gives it on any given week. Crude oil inventories have made the table this week because it seems that every time the US has released inventory numbers in the last several months it has applied a lot of downward pressure on the price of oil; the US inventories seem to keep growing as supply continues to outpace demand. On Thursday, an important economic news release comes out before the market opens—the third and final estimate of fourth quarter 2016 GDP. Expectations are for a slight upward revision to the 1.9 percent released for the second estimate, which if it comes to fruition, would signal a slow, but steadily growing US economy. Friday will be a busy day this week for economic news releases as personal income and spending kick things off before the market opens. Personal income and spending are both expected to show a slow but steady increase, the same magnitude of change that we have been seeing the past few months, and this should not have a notable impact on the market if it turns out to be the case. Later during the day on Friday, the figures for the PCE price index, both overall and core, are set to be released with both figures potentially impacting the market more than usual. The Fed will be watching closely for any signs of inflation in the figures, which could lead to shifting expectations of when the next rate hike should occur. The Chicago area PMI for the month of March is also released on Friday but will likely have a minimal impact on the markets since little is expected in terms of change from the level seen in February. Wrapping up the week this week is the University of Michigan’s Consumer Sentiment Index for the month of March (final March estimate), which is expected to show no change over the level seen during the middle of the month reading. Much like the high number of Fed officials making comments last week, this week is another week with many Fed officials speaking. While some of the topics are much less related to rate movements than others, the markets will likely be keeping track of who is sounding hawkish or dovish and any notable changes in the language being used when discussing future rate movements.

 

Interesting Fact Healthcare bill failed; is a bill failure in the House common?

 

With the failure of the healthcare bill in the House of Representatives last week, I thought it would be interesting to see just how many bills are presented to the House during any session. In analyzing the Congressional Legislative productivity data going back to 1980, I found that on average there are 6,322 bills brought before each session of the House (two year sessions). Of these, on average only about 829 are approved during each session of the House, a13 percent passage rate.

Source: Brookings and own calculations

 

For a PDF version of the below commentary please click here Weekly Letter 3-20-2017

Commentary quick take:

 

  • Major developments:
    • The Fed increased rates here in the US
    • 108 consecutive days of no declines 1 percent or greater
    • Populism failed in the Netherlands

 

  • US:
    • As expected, the Fed raised rates last week
    • Fed outlook still calls for 3 hikes in 2017
    • Fed projected growth rate for 2017 remains 2.1 percent
    • President Trump’s budget didn’t get much fanfare

 

  • Global:
    • Europe
      • Geert Wilders lost in the Netherlands
      • Bank of England held rates steady
      • Swiss National Bank held rate steady
      • G20 meeting unsuccessful?
    • Asia
      • Bank of Japan held rates steady

 

  • Technical market view:
    • Dow is near the lower bound of its trading channel
    • S&P 500 and Dow extended their streak to 108 days
    • VIX pushed slightly lower

 

  • Hybrid investments strategy update:
    • No changes to the models last week
    • Transportation sector looks intriguing

 

  • This week for the markets:
    • Slow week
    • Budget debate likely to heat up

 

  • Interesting Fact: How “skinny” was Trump’s budget?

 

Major theme of the markets last week: Several central banks held meetings last week

Last week saw several of the major central banks from around the world hold meetings, with only the US Federal Reserve acting. The US Fed held the first of the meetings last week, with the meeting starting on Tuesday and concluding on Wednesday with the announcement of a rate hike and a press conference from Chair Yellen (addressed further in the national news section below). Following the conclusion of the US FOMC meeting on Wednesday, the Bank of Japan (BoJ) released its monetary policy statement and rate decision; rates were left alone. On Thursday, the Swiss National Bank (SNB) held its quarterly interest rate meeting, at which it decided to leave rates untouched, much like the BoJ. Later during the day on Thursday, the Bank of England (BoE) held its quarterly policy meeting and, following in the SNB’s and the BoJ’s footsteps, decided to hold rates steady in the UK. The BoE meeting was closely followed by the global markets as many investors are still trying to determine the economic impact the Brexit could have on the economy. We do not have another week with as many potentially meaningful central bank meetings for another three months.

US news impacting the financial markets:

 

Last week, the March FOMC meeting was held. After months of speculation about whether the Fed would raise interest rates at the meeting or not, we finally got the answer—rate hike. Looking back at the end of February, there was a less than 20 percent chance of a rate hike at the March meeting, per the Fed Watch numbers. However, following some historically dovish members of the Fed sounding more hawkish in early March and Chair Yellen changing her “Fed speak” on several different occasions, the likelihood of a rate hike was all but certain going into the meeting last week. On Wednesday, the Fed officially decided to raise the Fed Funds rate by 0.25 percent, from a range of 0.50 to 0.75 percent up to 0.75 to 1 percent. Being expected, the markets’ response to the announcement on Wednesday was muted as investors seemed more interested in the Fed’s projections and Chair Yellen’s press conference following the conclusion of the meeting on Wednesday.

Chair Yellen’s comments were surprisingly upbeat as she said things like, “it is finally safe to feel good about the US economy,” and, speaking for most of the Fed members, “We have confidence in the robustness of the economy and its resilience to shocks.” One of the major driving forces behind the confidence in the economy that she spoke about during the press conference was the labor market here in the US. She pointed out that people are optimistic about the job prospects and that there is an increasing amount of job security. When talking about inflation, Chair Yellen pointed out that the Fed would “tolerate” a temporary overshooting of the 2 percent target rate as the PCE price index has been close to 2 percent now for the past several months. If this overshooting of 2 percent were to occur now, it does not seem that it would automatically cause the Fed to take swift action to raise rates again. Considering the future for 2017 and 2018, the Fed released a lot of data about its forward expectations following the conclusion of the meeting. The GDP growth rate in the US is still expected to be 2.1 percent in 2017 and 2018, per the Fed. Inflation is expected to remain near 2 percent and the unemployment rate is expected to remain near 4.5 percent. In total, according to the dot plots projections, the Fed is still thinking there will be a total of three rate hikes during 2017 and a total of three rate hikes in 2018. The table to the right depicts the odds of a rate hike at each of the next four meetings. Currently, it looks like there is a high likelihood of a rate hike at the September meeting and again at the end of year meeting in December. One curious part of the Fed’s statement and projections is the very low expected value for GDP growth here in the US for 2017 and 2018; 2.1 percent is well below the target of the White House and many economists. When asked about this phenomenon in the press conference, Chair Yellen responded that it is “still too early to know how these policies [some of the White House’s announced plans that have yet to pass Congress] will unfold.” While Chair Yellen would not comment on any specific policies that she would like to see enacted, she did toss out the blanket statement that she would certainly urge Congress and the administration to “consider policies” that could boost growth.

 

With last week being very narrowly focused on the Fed meeting, there was little other US financial news that made any headlines. President Trump sent his budget over to Congress during the first part of the week, proposing a large $54 billion increase in defense spending, while cutting many of the other government agencies. Democrats cried foul and pointed out items such as defunding National Public Radio and PBS, while Republicans quickly said this was just an outline of what the President would like to see, but that ultimately Congress writes the budget. Having to work with Congress will likely be a tough task for the current administration as there are several Republicans in Congress that are breaking from party lines and not supporting some of the ideas the administration has recently floated. With no earnings announcements of potential impact for about a month and the March Fed meeting now behind us, we should enter a lull for the markets as there will be a general lack of information that should move the markets in any significant direction.

 

Global news impacting the markets:

 

The focus of the global news impacting the financial markets last week was on three main topics: the election results in the Netherlands, several central bank meetings that followed on the heels of the Fed meeting and the G20 meeting held at the end of the week. March 15th was a big day for Europe as it was the date the very contentious elections in the Netherlands were finally held. Prime Minster Rutte won the vote and handed primary rival Geert Wilders the first defeat of the populist movement in Europe. While Wilder’s party (Party for Freedom) did move up in terms of overall vote totals, coming in second, it is unlikely that the party will have much say after the new government is formed, as no other political party has agreed to form any kind of coalition government with the party that is seen by many as being very extreme. This election was a kind of first test for European politics in 2017 to see if the populism movement that started in the UK and spread to the US would be able to continue pushing forward in Europe, potentially leading to the EU falling apart. With the passage of the election in the Netherlands and no harm being done to the EU, the financial markets in Europe rallied on the outcome of the election. The next big test will be in France during the middle of April when Marine Le Pen makes a run at the Presidency, running on an anti-EU platform. The vote in France comes at a very curious time as the UK is still expected to trigger Article 50 by the end of March and there will surely be some negative headlines around the time of the French election about how the EU is going about negotiating with the UK. There were a few stalling tactics set forth in the UK over the past week to delay the trigger of Article 50, but they all failed and the government headed by Theresa May still has the go ahead to move forward by the end of this month.

 

Aside from the elections in the Netherlands last week, there were several rate meetings held by central banks outside of the US, with two of them being in Europe and one being in Asia. The Bank of England (BoE) held its quarterly rate decision meeting last week, the day after the US Fed, at which the bank decided to leave the rate unchanged at 0.25 percent. The BoE also noted uncertainty over the future for the British economy following the triggering of Article 50, but noted that the impact would be hard to determine in the near term as it is a two-year process for the country to negotiate leaving the EU. The Swiss National Bank (SNB) also held its latest rate decision meeting on Thursday and announced no change in its current stance, leaving the negative rate policy in place at -0.75 percent. The SNB was not the only central bank last week that kept rates in negative territory, however, as the Bank of Japan (BoJ) decided to leave its key rate at -0.1 percent. While there were few changes from Central banks last week outside of the US, there were some very noticeable changes at the G20 meeting held late last week and was Treasury Secretary Steve Mnuchin’s first real test as Treasury Secretary.

 

The G20 meeting was held last week in Baden–Baden, Germany, and the outcome was very different depending on the perspective the individual asked. Germany’s finance minister Wolfgang Schauble seemed “frustrated” by the meeting, as were other members of the G20 who were present. The US, however, seemed to do almost exactly what it intended, as Treasury Secretary Mnuchin managed to block any attempt at a commitment to “free trade” by the group and get the group to leave out any specific mention of global warming. Left in the air with the final statement from the meeting was also the definition of protectionism, something the US seemed to want left very vague. For the US, it appears the first G20 meeting under the new administration could not have gone a whole lot better as the US delegation seemed to be playing from the position of a bully and did in the end get their way on nearly every point. For the financial markets around the world, however, the meeting was a bit concerning and it was clear that a consensus agreement by the G20 on any topic with the new US delegation will be very difficult to achieve.

 

Technical market review:

 

NASDAQ made two attempts last week to break back into its most recent trading range, with both attempts falling short as the index bounced twice off of the lower bound of its most recent trading range. In the charts below, the green lines are the major indexes, while the yellow lines are the most recent trading channels for each index. The red line on the VIX chart remains the 52-week average level of the VIX, which the index is currently solidly below.

The S&P 500 (upper left pane above) remains the strongest of the three major US indexes as it is in the middle of its most recent trading range. The Dow (upper right pane above) is currently in second place as it is right at the lower edge of its most recent trading range, while the NASDAQ is currently in third as it remains below its most recent trading range. The slow and steady march continues for both the Dow and the S&P 500 as we have now seen 108 consecutive trading days on each index without a decline of more than 1 percent on any given day. As has been mentioned previously, we are still a significant way away from setting the record for the number of consecutive days without a one percent decline, but the streak remains intact. While the markets have been pushing higher, the VIX has seemed to be content meandering aimlessly near the lower end of its range from the past year, signaling that the melt up that we have been seeing in the markets could very well continue in the near term.

 

Hybrid model performance and update

For the trading week ending on 3/17/2017, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

 

Last Week 2017 YTD Since 6/30/2015
Aggressive Model 0.71% 3.73% 9.28%
Aggressive Benchmark 1.16% 6.27% 6.07%
Growth Model 0.58% 3.60% 8.24%
Growth Benchmark 0.90% 4.87% 5.02%
Moderate Model 0.38% 3.25% 6.99%
Moderate Benchmark 0.65% 3.48% 3.86%
Income Model 0.29% 3.25% 6.79%
Income Benchmark 0.32% 1.78% 2.26%
Quant Model 1.11% 8.19%
S&P 500 0.24% 6.23% 15.28%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.

 

There were no changes made to the hybrid models over the course of the previous week as they were already positioned for the eventual outcome of the Fed meeting. The models remain engaged with the current markets, but there remains an eye toward caution given the lofty valuations and current high expectations of many key policy items being carried out expeditiously in Washington DC. One area of the markets that is currently being evaluated for a potential initial investment is the transportation sector, which has been lagging the growth rates seen in the major indexes so far this year. In general, the sector should be well poised to see strong results over the coming near-to-intermediate future as oil prices seem to have topped out and look likely to push lower, which should help the sector’s bottom line as a whole.

 

Market Statistics:

 

The rally on the three major US indexes moved higher last week, during a week that held very few surprises:

 

Index Change Volume
NASDAQ 0.67% Above Average
S&P 500 0.24% Average
Dow 0.06% Average

 

Volume last week was average on two of the three major US indexes (Dow and S&P 500) and slightly above average on the NASDAQ. As mentioned above, the March meeting of the Fed had the most impact on the markets and even this was muted compared to what we have seen previously from the markets when the Fed has raised rates. We now begin a time when there will likely be very few catalysts for the markets moving in a big way in either direction.

 

The following were the top 5 and bottom 5 performers over the course of the previous week:

 

Top 5 Sectors Change Bottom 5 Sectors Change
Materials 2.83% Financial Services -0.77%
Telecommunications 2.63% Regional Banks -0.85%
Semiconductors 2.53% Pharmaceuticals -1.24%
Real Estate 2.47% Transportation -1.55%
Multimedia Networking 1.96% Biotechnology -1.77%

 

The list of sector performance last week is very interesting. On the one hand, the disappointment of the Fed not leaving the door open to four rate hikes in 2017 seemed to negatively impact several subsets of financials, with Financial Services and Regional Banks getting hit the hardest. However, we also saw two of the riskier sectors of the markets, Pharmaceuticals and Biotechnology, also make the bottom five performing sectors last week, due to a few key announcements, such as Pershing Square abandoning its position in Valant Pharmaceuticals. One concerning sector that came in second worst last week was Transportation, which is typically seen as a leading indicator for the overall health of the US economy because the sector touches so many different industries. On the positive side, Materials led the way higher last week, thanks to a boost in commodity prices. Telecommunications and Real Estate, two historically conservative sectors of the markets also made it into the top 5, with Real Estate moving higher on positive notes from home builders and low inventory numbers for home sales here in the US. Telecommunications got a nice bump, thanks to a gain of more than 2 percent from Verizon, which makes up a large percentage of the sector. In the high technology market, Semiconductors and Multimedia Networking both saw strong returns last week as the sector seemed to be favored following the Fed announcement, for an unknown reason.

 

Fixed income markets moved higher last week, as investors dealt with the Fed’s first rate hike of 2017 and seemed to cheer the fact that it still looks like there will be only three rate hikes in total during 2017. The gains seen last week in the fixed income market offset about half of the declines seen over the previous three weeks in the lead up to the Fed meeting:

 

Fixed Income Change
Long (20+ years) 1.19%
Middle (7-10 years) 0.72%
Short (less than 1 year) 0.00%
TIPS 0.75%

Global currency trading volume was above average last week as traders adjusted their positions to both the outcome of the election in the Netherlands and the Fed officially raising interest rates. Overall, the US dollar declined 0.99 percent against a basket of international currencies, as investors’ knee jerk reaction to the Fed’s increase was to move toward other currencies, such as the Euro, as it got past one of the big political hurdles of the year last week. The best performing of the global currencies last week was the South African Rand, which gained 3.6 percent against the value of the US dollar. The worst performance among the global currencies for the second week in a row was the Egyptian Pound, as it declined by 2.8 percent against the value of the US dollar. The Egyptian Pound continues to struggle with the large capital inflows from foreign investors wanting to invest within the newly opened up country.

Commodities were mixed last week as Grains declined, while every other commodity moved higher:

Metals Change Commodities Change
Gold 1.98% Oil 0.39%
Silver 1.98% Livestock 1.35%
Copper 3.70% Grains -0.07%
Agriculture 0.85%

The overall Goldman Sachs Commodity Index gained 0.55 percent last week, a great improvement from the large decline seen two weeks ago in the index, due to the decline in oil prices. Oil stabilized last week and gained 0.39 percent after falling nearly 9 percent two weeks ago on increasing global supplies of oil. However, we could be in for an increased amount of volatility in oil prices as OPEC is trying to figure out what it can do to keep prices higher, while at the same time working to keep market share from US fracking. Metals were positive last week as Gold advanced 1.98 percent, while Silver increased 1.98 percent and the more industrially used Copper jumped 3.70 percent. Soft commodities were mixed last week, with Agriculture gaining 0.85 percent, while Livestock advanced 1.35 percent and Grains posted a loss of 0.07 percent.

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
RTS Index Russia 5.30% KSE 100 Pakistan -1.59%
Santiago IPSA Chile 3.97% Caracas General Venezuela -1.71%

Last week was a good week for global financial markets as 81 percent of the markets posted gains over the course of the week. The best performing index last week was found in Russia, with the RTS Index turning in a gain of 5.30 percent for the week. The gains in Russia last week seemed to be nothing more than value investors moving in following the decline we have seen on the index over the past month. The worst performing index last week was found in Venezuela, the Caracas General Index, which turned in a loss of 1.71 percent as the price of oil failed to recover much of the declines seen two weeks ago when it fell almost 9 percent. With the general recovery in oil prices that we have seen now for about a year, President Maduro has been able to fend off his political rivals and remain in office longer than most pundits though he would. With inflation still out of control, however, and most the people in Venezuela suffering from its effects, it still seems like only a matter of time before he is overthrown.

As we moved past one event last week that was certain (the Fed rate hike) and one that was less so (the election in the Netherlands), the VIX calmed down a little as it moved slightly lower for the week. The VIX declined 3.26 percent and remains low when looking at the average level of the VIX over the past year. We are now within the 30-day window for the French elections and the trigger of Article 50 by the UK, which the VIX seems to be taking in stride and having almost no adverse reaction to. The current reading of 11.28 implies that a move of 3.26 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was a busy week for economic news releases. In addition to the Fed meeting there was a large number of other releases throughout the week. In the table below, releases that significantly beat market expectations are highlighted in green, while releases that fell significantly short of expectations are highlighted in red (there were none last week):

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 3/14/2017 PPI February 2017 0.3% 0.1%
Neutral 3/14/2017 Core PPI February 2017 0.3% 0.2%
Neutral 3/15/2017 CPI February 2017 0.1% 0.1%
Neutral 3/15/2017 Core CPI February 2017 0.2% 0.2%
Neutral 3/15/2017 Retail Sales February 2017 0.1% 0.1%
Slightly Negative 3/15/2017 Retail Sales ex-auto February 2017 0.2% 0.7%
Slightly Positive 3/15/2017 Empire Manufacturing March 2017 16.4 15.0
Neutral 3/15/2017 FOMC Rate Decision March 2017 Hike Hike
Neutral 3/16/2017 Housing Starts February 2017 1288K 1260K
Neutral 3/16/2017 Building Permits February 2017 1213K 1253K
Slightly Positive 3/16/2017 Philadelphia Fed March 2017 32.8 30.0
Neutral 3/17/2017 University of Michigan Consumer Sentiment Index March 2017 97.6 97.0

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

The economics news releases started on Tuesday last week with the release of the Producer Price Index (PPI) for the month of February. Both the overall PPI and core PPI both came in at 0.3 percent, which is slightly higher than the market was anticipating, but still low enough that inflation is not a major concern in the US economy. On Wednesday, the Consumer Price Index (CPI) was released, coming in exactly at market expectations, but also signaling (much like the PPI) that inflation is not currently an issue for the US economy. Retail sales were also released on Wednesday and, overall, came in as expected, but this was only due to stronger than anticipated auto sales during February because when retail sales were calculated without the effect of auto sales, they came in a half of a percent lower than anticipated. The Empire Manufacturing index for the month of February also came out on Wednesday, showing that strong growth continued in the greater New York area during the month of March for the manufacturing sector. These releases on Wednesday were largely overshadowed by the Fed statement and press conference by Chair Yellen, as discussed above. On Thursday, housing starts and building permits for the month of February both came in close to market expectations, as did the Philadelphia Fed index for the month of March, which indicated continued strong growth in the region. Wrapping up the week on Friday last week was the released of the University of Michigan’s Consumer Sentiment Index for the month of March (end of February data), which came in very close to market expectations.

 

This week is a slow week for economic news releases, following such an eventful week last week. The releases that have the largest potential to move the markets on the day they are released are highlighted in green below:

 

Date Release Release Range Market Expectation
3/22/2017 Existing Home Sales Feb 2017 5.54M
3/23/2017 New Home Sales Feb 2017 560K
3/24/2017 Durable Orders Feb 2017 1.30%
3/24/2017 Durable Goods -ex transportation Feb 2017 0.70%

Data for table from Econoday.com, Bloomberg and Yahoo Finance

This week the economic news releases start on Wednesday with the release of the existing home sales figure for the month of February, which is expected to show little change from where they were in January. On Thursday, a second piece of US housing information is set to be released with the new home sales figure for the month of February, which is also expected to be very close to the same figure we saw in January. On Friday, the releases that could impact the overall movement of the markets are released in the form of the durable goods orders for the month of February, both including and excluding transportation. If the retail sales figures from last week are any indication, we could see the durable goods orders excluding transportation miss estimates by about a half of a percent, which would add even more pressure to the new administration to start taking actions to get the economy moving faster. In addition to the above-mentioned news releases, there are 10 speeches scheduled to be given this week by Fed officials. The markets will be paying attention to these speeches to try to glean any additional information about upcoming Fed rate hikes during 2017.

 

 

Interesting Fact How “skinny” was Trump’s budget?

 

Trump’s budget, a mere 53 pages, is the skinniest budget compared with the 40 years of presidential budgets in transition years tracked by the Congressional Research Service (CRS). When President Jimmy Carter took office, his first budget document was 101 pages. President George H.W. Bush’s first take was 193 pages and President George W. Bush’s was around the same length, at 207 pages. President Bill Clinton’s first budget document was 145 pages, while President Barack Obama’s initial take was a leaner 134 pages.

Interestingly enough, the page count of the final budget can vary drastically from the page count at its inception. The Federal Budget in 2012 was 2,403 pages long.

 

Sources: Reuters, CNN

For a PDF version of the below commentary please click here Weekly Letter 3-13-2017

Commentary quick take:

 

  • Major developments:
    • The Bull market in the US turned 8 years old last week
    • 103 consecutive days of no declines 1 percent or greater
    • Fed watch is fully underway

 

  • US:
    • Fed is now 91 percent likely to raise rates this week
    • Employment data came in very strong
    • Lowest unemployment rate since December of 2007
    • President Trump is starting to see how Washington works—or doesn’t
    • Fourth quarter earnings season has come to a close

 

  • Global:
    • ECB
      • Rates unchanged
      • Outlook for Eurozone improved
      • Standing behind the Euro as a common currency
      • Austerity needs to be further implemented
    • European elections

 

  • Technical market view:
    • NASDAQ broke down
    • Weekly gains streak ended
    • S&P 500 and Dow streak without a1 percent or greater decline continues
    • VIX was little changed

 

  • Hybrid investments strategy update:
    • Single change in models

 

  • This week for the markets:
    • Fed March meeting and rate hike
    • G20 Meeting

 

  • Interesting Fact: Saint Patrick’s BLUE?

 

Major theme of the markets last week: Happy Birthday Bull Market!

Last Thursday marked a very interesting anniversary for the US financial markets as it was eight years to the day since the bull market commenced following the Great Recession. During that eight year time frame we have had a few declines of 10 percent or more on the three broad indexes, but there have been no corrections of 20 percent or greater that would be designated as a technical bear market. This eight year stretch is the second longest run that the S&P 500 has ever seen, with the longest bull market run being between October 1990 and March 2000, a run that ended in the technology bubble bursting. There is an abundance of speculation about how much longer this bull can run with some clever headlines on Thursday, such as “The bull market: 8 years old—and ready to Collapse?”and Happy Birthday, Bull Market! It May Be Your Last.” Sam Stovall, chief investment strategist for CFRA, points out that historically the longest bull markets “went out with a bang and not a whimper. Like an incandescent light bulb, they tend to glow brightest just before they go out.” Inflation is another area of concern that has started to make more headlines; when inflation creeps into the US economy in earnest, it typically spells trouble for the stock market. While inflation remains subdued, the implementation of all plans introduced on the campaign trail would likely be very inflationary, potentially causing many issues, not the least of which would be forcing the Fed into raising rates much faster than the Fed would like. This thought was echoed in a speech by Fed Chair Yellen two weeks ago. Will the current bull run the longest of them all? We have about 17 more months to go for the longest bull market record to fall; only time will tell.

US news impacting the financial markets:

The upcoming US Federal Reserve’s meeting this Tuesday and Wednesday was the focal point of the financial media here in the US last week, aside from the anniversary of the bull market discussed above. As you can see in the table to the right, all of the Fed speak two weeks ago and the strong employment related figures released last week have led the markets to believe a rate hike is nearly certain at this week’s meeting. With the odds of a hike at this meeting being more than 90 percent, the market will likely react very little to a rate hike. A bigger and potentially more disruptive move could occur if the Fed decides not to raise rates at this meeting. Barring the Fed not increasing rates for some reason, the markets will likely be listening for and reacting to any indication regarding the number of rate hikes Chair Yellen portrays as possible during the remainder of 2017. Remember that going into the year three rate hikes was the prediction. However, with the economy doing so well from an employment standpoint and with inflation remaining so subdued, there are now an increasing number of economists and investors speculating that we could be in for four rate hikes during 2017. Four rate hikes in 2017 would certainly give the Fed more wiggle room in the future should an economic shock occur that warranted the Fed lowering the Fed Funds rates, as it did in 2008. Chair Yellen’s press conference is where she may shed some light on future increases, but she is very smart and will likely hedge her words well in saying that the Fed remains data dependent and will make appropriate adjustments at the appropriate time. One topic she will likely touch on ever so carefully is politics and the new administration’s agenda.

 

Politics has recently been playing an outsized role in the movements of the financial markets. Expectations are for a near perfect culmination of ideas, leading to large amounts of growth in the economy. Government spending on things like infrastructure is expected to boost earnings and the repatriation of funds held offshore by large multinational companies are expected to drive further growth when brought back to the US under lower taxation. The corporate tax rate is supposed to be lowered from 25 percent to 20 percent or maybe even 15 percent and personal income taxes are expected to be lowered as well. The Affordable Care Act is expected to be repealed and replaced quickly with something better and the economy is supposed to march forward, putting America first. These were largely the driving forces behind the rising markets since President Trump was elected. However, we are now 50 days into the new President’s term and things are starting to get bogged down in the Washington malaise of politics. Last week, the President sent his plan for altering the Affordable Care Act to the Hill and it was met with members of both parties saying it was dead on arrival. House Speaker Paul Ryan initially said the Republicans would be able to get the bill through the House and on to the Senate where the fight would be more difficult. As the week came to a close, however, it appears there is enough of a split in the House Republicans that it is unlikely the bill would make it through the House unscathed. This bill represents just the first of many hard pieces of legislation that the President would like to get through Congress in an attempt to fulfill his pledge to get the economy growing faster. The next big fight will likely be a budget that takes into account changes in the tax code in terms of lower revenues for the government and increased spending on things like the military and infrastructure. Appropriating funds will be one of the things that could completely derail the market rally if Washington becomes even more gridlocked with fighting between parties and within the Republican Party itself. While much was going on in Washington DC last week, earnings season for the fourth quarter of 2016 officially drew to a close without much fanfare.

 

Earnings season drew to a close last week as all but 2 of the S&P 500 component companies have now posted results for the fourth quarter of 2016. Below is a table of the well-known companies that released earnings last week, with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Buckle -11% Express 0% Stein Mart 0%
Dick’s Sporting Goods 2% H & R Block 31% Vail Resorts 7%

 

For this small final earnings results table, the results were very mixed. High end retailers were split with Buckle posting surprising declines, while Express posted results that were in line with market expectations. The strong positive number from H&R Block is a little misleading as the company is struggling, but struggling less than the market expected. Tax return volume for the firm was down 8 percent on a year-over-year basis, but this was seen as positive as the IRS reported that there was a 13 percent decline in overall filings during the quarter.

 

According to Factset Research, we have seen 498 (99 percent) of the S&P 500 companies release their results for the fourth quarter of 2016. Of the 498 that have released their earnings, 65 percent have beaten earnings estimates, while 12 percent have met expectations and 23 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 53 percent of the companies have beaten estimates, while 47 percent have fallen short. The overall growth rate that we have seen so far for S&P 500 earnings for the fourth quarter currently stands at 4.9 percent. Of the 108 companies that have released forward guidance, 78 have issued negative earnings expectations, while only 30 have issued positive guidance. In looking at historical data for how this quarter stacks up against previous quarters, the 65 percent of companies beating expectations on earnings is below both the 1- and 5-year average figures for companies beating expectations. The 53 percent of companies beating revenue expectations is in line with the 1- and 5-year historical levels. This week is the last week that earnings for the fourth quarter of 2017 will be reported in this commentary.

 

Global news impacting the markets:

 

Global news last week focused primarily on Europe as there was a meeting of the ECB’s governing council and a lot of political rhetoric around the EU with the upcoming elections. The ECB governing council met on Wednesday and Thursday last week and concluded with no change in its benchmark interest rate, which remains at zero. ECB President Draghi also said the asset buying program (80 billion euros per month) currently being utilized by the ECB will stay in place until at least the end of 2017, but will move down to 60 billion euros per month starting in April. He mentioned that inflation is likely to be a little higher at 1.6 percent, compared to previous ECB estimates, and he increased the projected GDP figure for the Eurozone from 1.7 up to 1.8 percent for 2017. He did, however, caution that reforms still need to be made in terms of austerity to ensure that “stable growth” is able to continue in Europe. The financial markets took the ECB President’s comments to mean that there is currently less urgency at the ECB to take more action to help the Eurozone grow. ECB President Draghi was also very upbeat in a lot of the figures and assessments he made in his prepared remarks as well as in the ensuing question and answer session with the media. One topic that surfaced twice in the Q&A was the Euro’s potential demise due to political changes within the EU. He unequivocally said the Euro is here to stay and he does not see the need to speculate about its demise. When asked about a potential breakup of the Eurozone itself due to political pressures, he said it was highly unlikely and that despite the troubles of the EU over the past few years, there have been countries joining and still others that would like to join the union. Politics, however, remains a wildcard that could throw the whole situation within the EU into jeopardy.

 

As discussed at length last week, there are two key elections coming up this next month within Europe; the first being in the Netherlands and the second being the first round of elections in France. The polling numbers have not really changed over the past week, but as we all found out during the US elections, it is unwise to put too much weight into the polling numbers anyway. Geert Wilders and his party continue to look like they will have a strong showing in the Netherlands’ elections, moving his party from a “fringe party” into a more mainstream, but still politically extreme, party. In France, the race in the Presidential election remains too close to call, but for the time being it looks like Marine Le Pen still stands a good chance of making it through the first cut. A win by either of these two parties could lead to the Euro declining in value and potentially even hitting parity with the US dollar as both groups are considered Euro skeptics and ride the populism and nationalism movements within their respective countries.

 

Technical market review:

 

The NASDAQ finally reached the point where the slope of its most recent trading channel was too much for the index to handle and it broke down last week. In the charts below, the green lines are the major indexes, while the yellow lines are the most recent trading channels for each index. The red line on the VIX chart remains the 52-week average level of the VIX, which the index is currently solidly below.

Currently, the S&P 500 (upper left pane above) is the strongest of the three major indexes as it remains slightly above the half way point of its most recent trading range after having briefly broken above two weeks ago. The Dow (upper right pane above) is currently in second place, as it is right at the half way point of the trading channel. The NASDAQ (lower left pane above), which had been the strongest of the three major indexes going into last week, broke down the most in terms of technical charting last week, falling through the lower bound of the trading channel. The VIX moved higher to start the week, but pulled back over the final two trading days to close the week with a small gain, remaining very low by historical standards of the past year. Despite the S&P 500 and the Dow moving lower for the week, they both managed to extend their steak of consecutive days without a 1 percent decline or greater to 103 days, each continuing to march toward the record of 166 days.

 

Hybrid model performance and update

For the trading week ending on 3/10/2017, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2017 YTD Since 6/30/2015
Aggressive Model -0.66% 3.00% 8.50%
Aggressive Benchmark -0.19% 5.05% 4.85%
Growth Model -0.52% 2.99% 7.60%
Growth Benchmark -0.14% 3.93% 4.08%
Moderate Model -0.31% 2.86% 6.57%
Moderate Benchmark -0.10% 2.81% 3.19%
Income Model -0.14% 2.95% 6.48%
Income Benchmark -0.04% 1.45% 1.93%
Quant Model -0.98% 7.00%
S&P 500 -0.44% 5.97% 15.00%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.

 

There was a single change made to the hybrid models last week and that was to sell the one-third of a position owned in ENPIX (Profunds Energy fund). The position was initiated several months ago on the thesis that the deregulation the Trump administration promised would be faster coming than it is turning out to be. The position was also a play on US oil production, with production increasing as the number of rigs operating in the US has increased. The biggest factor that went against the position was the continually increasing supply glut of oil, despite the oil production freeze called for by OPEC late last year. In the end, the position hit my downside trigger and was sold. The proceeds from the sale went into cash and will be invested when an opportunity presents itself.

 

Market Statistics:

 

The rally on the three major US indexes stalled last week, ending the weekly streak of gains at six weeks in a row:

 

Index Change Volume
NASDAQ -0.15% Average
S&P 500 -0.44% Average
Dow -0.49% Average

 

Last week, all three of the major US indexes moved lower as investors seemed to take a pause to reassess the new landscape of a rate hike being almost certain at this week’s FOMC meeting. There did not seem to be a prevailing trade theme last week other than a casual move away from the fixed income and equity markets. Volume overall was about average on all three of the major US indexes, as expected given the lack of individual stock catalysts such as earnings being released or other major events during the week.

 

The following were the top 5 and bottom 5 performers over the course of the previous week:

 

Top 5 Sectors Change   Bottom 5 Sectors Change
Home Construction 2.28%   Gold -2.44%
Semiconductors 1.74%   Natural Resources -2.68%
Software 0.83%   Energy -2.73%
Technology 0.61%   Oil & Gas Exploration -3.43%
Consumer Discretionary 0.26%   Real Estate -4.35%

 

Home Construction took the top spot in the sector performance last week, thanks in large part to a jump in the home builders on Friday following the stronger than anticipated employment data and strong wage growth figure. Semiconductors, Software and the more broad-based Technology sector made up positions two through four in the top performing sectors last week as technology held up better during the down days than the other sectors. This may be because technology has been generally lagging behind many of the other sectors since the election. Consumer Discretionary took the final spot on the top five list as the sector is defensive in nature relative to many other sectors. On the negative side, Real Estate took the top spot, thanks to the ever increasing rates on home mortgages and the thought that increasing borrowing costs could put a lid on the real estate market. Oil and Gas Exploration as well as Energy, Natural Resources and Gold rounded out the rest of the bottom performing sectors of the markets. The energy related sectors all tanked last week, thanks in large part to the nearly nine percent decline seen in the price of oil due to the persistent glut of oil around the world.

 

Fixed income markets moved lower last week, as investors adjusted their holdings and positions to the reality that a rate hike by the Fed at its upcoming meeting is imminent, following the final pieces of the equation (the employment numbers) coming out in favor of raising rates. We have now seen two weeks of steep losses in fixed income investments, but the downside move in the market appears a little overdone.

 

Fixed Income Change
Long (20+ years) -1.76%
Middle (7-10 years) -0.56%
Short (less than 1 year) -0.01%
TIPS -0.79%

Global currency trading volume was above average last week as traders adjusted their positions going into the elections in Europe and the reality that a Fed rate hike is coming very soon. Overall, the US dollar declined 0.08 percent against a basket of international currencies. The best performing of the global currencies last week was the Bulgarian Lev, which gained 1.1 percent against the value of the US dollar. The worst performance among the global currencies was seen in the Egyptian Pound, as it declined by 7.9 percent against the value of the US dollar. Both the Egyptian Pound and Egyptian stock market have been on a very wild ride as the government continues to try to change fundamental aspects of how it works with foreign investments.

Commodities were mixed last week as livestock managed to pull out a gain, while nearly every other commodity moved noticeably lower:

Metals Change   Commodities Change
Gold -2.37%   Oil -8.86%
Silver -4.89%   Livestock 1.64%
Copper -4.31%   Grains -3.89%
      Agriculture -1.67%

The overall Goldman Sachs Commodity Index declined 5.10 percent last week. Much of the overall decline in commodities last week was due to a decline of 8.86 percent in the price of oil. Oil dropped precipitously on Wednesday as the US reported its latest stock pile figures and showed continued growth in oil and gasoline reserves. With this and OPEC still not fully following through with its freeze plans, the global supply of oil continues to outstrip demand. Metals were negative last week as Gold declined 2.37 percent, while Silver fell 4.89 percent and the more industrially used Copper dropped 4.31 percent. Soft commodities were mixed last week, with Agriculture falling 1.67 percent, while Livestock was the sole advancing commodity, gaining 1.64 percent, and Grains posted a loss of 3.89 percent. The much warmer than expected start to Spring in many regions of the US continues to worry farmers.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
CASE 30 Egypt 4.41%   Sao Paulo Bovespa Brazil -3.16%
Caracas General Venezuela 2.52%   RTS Index Russia -4.72%

Last week was a mixed week for global financial markets as 45 percent of the markets posted gains over the course of the week. The best performing index last week was found in Egypt, with the Case 30 Index turning in a gain of 4.41 percent for the week. The gains in Egypt were largely a function of the decline in the Egyptian currency attracting more foreign investors into the market. The worst performing index last week, for the second week in a row, was found in Russia, the RTS Index, which turned in a loss of 4.72 percent as the relationship between Russia and the new administration continues to be called into question. This week there was a lot of speculation about whom met with whom before the inauguration and the secrecy surrounding a small group within the FBI that has been tasked by Congress to look into the situation of Russia meddling in the US election.

With the market posting its first weekly decline in six weeks last week, I was expecting to see the VIX move significantly higher, but a significant move did not materialize. For the week, the VIX gained 5.84 percent and remains very low by historical standards. The current reading of 11.60 implies that a move of 3.35 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was a slow week for economic news releases, with the only substantial releases of the week being related to the US labor market. In the table below, releases that significantly beat market expectations are highlighted in green, while releases that fell significantly short of expectations are highlighted in red:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Positive 3/8/2017 ADP Employment Change February 2017 298K 190K
Positive 3/10/2017 Nonfarm Payrolls February 2017 235K 186K
Positive 3/10/2017 Nonfarm Private Payrolls February 2017 227K 197K
Neutral 3/10/2017 Unemployment Rate February 2017 4.7% 4.7%

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

Overall, the data last week about the US labor market was very strong. The ADP employment change figure for the month of February showed the strongest reading (298,000 jobs) since April of 2014 as it beat expectations by more than 100,000 jobs. Unlike most weeks, this beat was so large that many economists actually changed their projections for the payroll figures that were released later in the week and they ended up being correct in doing so. On Friday, the payroll figures, both public and private, handedly beat markets expectations coming in at more than 225,000 jobs on each figure. As expected, these figures were able to drive down the overall unemployment rate here in the US by one tenth of a percent down to 4.7 percent, the lowest rate since December of 2007. In addition to the above mentioned employment figures, the government also released a lot of other data about the labor market, most of which was positive. The labor force participation rate increased from 62.9 up to 63 percent, while average hourly earnings increased by 0.2 percent. The less publicized U6 unemployment rate fell from 9.4 down to 9.2 percent, which is tied for the lowest rate that we have seen since prior to the Great Recession. All of these labor market figures combined seemed to give a green light to the Fed raising rates at next week’s meeting and erased any thought that the Fed may need to hold off on account of the labor market in the US.

 

This week is a busy week for economic news releases with many of the releases for the month of February being released. The releases that have the largest potential to move the markets on the day they are released are highlighted in green below:

 

Date Release Release Range Market Expectation
3/14/2017 PPI February 2017 0.1%
3/14/2017 Core PPI February 2017 0.2%
3/15/2017 CPI February 2017 0.1%
3/15/2017 Core CPI February 2017 0.2%
3/15/2017 Retail Sales February 2017 0.1%
3/15/2017 Retail Sales ex-auto February 2017 0.7%
3/15/2017 Empire Manufacturing March 2017 15.0
3/15/2017 FOMC Rate Decision March 2017 Hike
3/16/2017 Housing Starts February 2017 1260K
3/16/2017 Building Permits February 2017 1253K
3/16/2017 Philadelphia Fed March 2017 30.0
3/17/2017 University of Michigan Consumer Sentiment Index March 2017 97.0

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

This week the economic news releases start on Tuesday with the release of the Producer Price Index (PPI) for the month of February, which is expected to show little change in the overall PPI number and little change when looking at just the core PPI calculation. On Wednesday, the Consumer Price Index (CPI) for the month of February is set to be released and much like the PPI, it is expected to show very little change and a very low rate of inflation. Retail sales for the month of February are also expected to be released on Wednesday with expectations that sales will have increased at a slower pace during the month than in January. The Empire Manufacturing index for the month of March is set to be released on Wednesday with expectations of growth in manufacturing in the greater New York area, but growth that is slightly slower than it was in February. However, the retail sales figures, the manufacturing figure and the CPI numbers will be overshadowed by the US Federal Reserve on Wednesday as it is the concluding day of the FOMC March meeting, at which a rate hike is expected. This FOMC meeting also has a press conference held by chair Yellen directly following the Fed’s statement and this will be very closely followed by Wall Street for any signals as to when the Fed is likely to raise rates again. On Thursday, two pieces of US housing market data are released with the housing starts and building permit figures for the month of February; both are anticipated to remain very close to the levels we saw in January. The Philly Fed also releases its latest business conditions and manufacturing index on Thursday afternoon, which, like the Empire release earlier in the week, is expected to show continued expansion, but at a slower rate than we saw in January. Wrapping up the week on Friday is the release of the University of Michigan’s Consumer Sentiment Index for the month of March (end of February data), which is expected to show very little change from the level seen during the middle of January. Only Chair Yellen is providing remarks this week during her press conference; the other members of the Fed will be out in full next week.

 

Interesting Fact Saint Patrick’s BLUE?

 

Saint Patrick himself would have to deal with pinching on his feast day. His color was “Saint Patrick’s blue,” a light shade. The color green only became associated with the big day after it was linked to the Irish independence movement in the late 18th century.

 

Source: www.mentalfloss.com

For a PDF version of the below commentary please click here Weekly Letter 3-6-2017

Commentary quick take:

 

  • Major developments:
    • Rally continues, but stalled
    • Dow broke 21,000 for the first time
    • S&P 500 broke 2,400 for the first time
    • Fed seems very likely to move rates at the March meeting
    • 98 consecutive days of no declines 1 percent or greater

 

  • US:
    • Fed speak
      • Many Fed speeches last week
      • Chair Yellen spoke on Friday
      • Rates very likely to increase at the March meeting
    • Earning season is nearly finished
      • Q4 2016 growth rate 4.9%
      • Q1 2017 projected earnings growth rate 9%
    • Trump’s speech on Tuesday was well received

 

  • Global:
    • China’s People Congress meeting
    • China projects slower growth in 2017
    • Europe
      • Elections in The Netherlands
      • Elections in France
      • Nationalism movement continues to grow

 

  • Technical market view:
    • All three indexes remained in new trading channels
    • All three indexes made new all-time highs during the week
    • VIX pushed lower

 

  • Hybrid investments strategy update:
    • No changes last week

 

  • This week for the markets:
    • Waiting for the Fed decision
    • Waiting on European elections

 

  • Interesting Fact: Valuing Snap Chat

 

Major theme of the markets last week: Another week, another first for the markets.

Last week saw most of the markets around the world move higher, thanks in large part to a speech given by US President Trump on Tuesday evening before a joint session of Congress, during which he “sounded and looked” presidential. Following the President’s remarks about what he would like to see Congress do with the rest of 2017, the markets jumped higher (gaining more than 340 points for the Dow at one point on Wednesday) and pushed the index over the 21,000 level for the first time ever. The S&P 500 and NASDAQ also reached new highs, with the S&P 500 moving over 2,400 for the first time and the NASDAQ moving past 5,900 for the first time. The week was not all positive for market trends, however, as the Dow finally had a negative day of performance, ending its positive day streak at 12, a streak not seen since January of 1987. Despite this, the Dow and the S&P 500 are still on a very long string of consecutive days without a 1 percent decline or more: 98 days. While we are still a long way from the record of 166 days for the Dow, we are at least still on the path. All of this positive movement in the markets was pretty remarkable last week given the drastic increase in the likelihood of a rate hike by the Fed at the March meeting, which is less than two weeks away. Previously, the markets dove lower when it looked like the Fed was going to raise rates (e.g. taper tantrum and August 2015). This time around, it seems to be different as the market seems to be cheering on a rate hike by the Fed. We will have to wait and see if this change in thinking holds for the markets as we get closer to the March meeting of the FOMC.
US news impacting the financial markets:

 

Members of the Federal Reserve made the majority of the financial related headlines last week that were not related to the financial market rally. Last week was a very busy week for speeches by Fed officials as there were 13 different speeches given, as well as a number of interviews that were printed in the media. The first Fed official that really moved the likelihood of a rate hike in March was William Dudley, the President of the New York Fed. Mr. Dudley has historically been dovish in that he has wanted rates to stay low and has been very cautious on increasing rates. In a CNN interview, Mr. Dudley said, “It seems to me that most of the data we’ve seen over the last couple months is very much consistent with the economy continuing to grow at an above-trend pace, job gains remain pretty sturdy and inflation has actually drifted up a little bit as energy prices have increased.” This statement was taken as very hawkish from a typically Fed dove and sent the odds of a rate hike at the March meeting moving higher. In the interview, Mr. Dudley was asked about US growth and potential actions the new administration could undertake. While he walked tepidly around the political side of the question, he did say he thinks the projected GDP growth rate here in the US is 2 percent and could possibly—though it is a very long shot—get to 3 to 4 percent. The interview with Mr. Dudley was looked at in combination with speeches by Dallas Fed President Kaplan and San Francisco Fed President Williams, whom also made it seem like a March rate hike is highly probable. Chair Yellen had the final speech of the week on Friday.

Chair Yellen’s speech at the Economic Club of Chicago made it very clear that a rate hike in March was highly likely, provided there were no drastic changes in the data between Friday and the meeting. With only one set of data being released this Friday—the jobs data—it was seen as a very low probability that a rate hike would not occur. Chair Yellen outlined the Fed’s thinking from past meetings to show how the Fed thinks about raising rates, in an effort to show how the March meeting could lead to a rate hike. Chair Yellen also addressed the topic of the Fed being too slow to increase rates by saying, there is “No evidence that the Fed has fallen behind the curve.” With the Fed done speaking for at least the next week, the question Wall Street seems to be mulling over is the number of hikes to be anticipated during 2017: two, three or even four?

 

Earnings reports took a backseat last week to the coverage of the Fed and President Trump’s Tuesday evening address to Congress. Below is a table of the well-known companies that released earnings last week, with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Abercrombie & Fitch -7% Costco -13% Ross Stores 3%
Autozone -1% Dollar Tree 5% Salesforce.com -50%
Barnes & Noble -15% Domino’s Pizza 4% SeaWorld Entertainment -8%
Best Buy 17% Kroger 0% Sotheby’s 13%
Big 5 Sporting Goods 3% Noodles & Co 43% Staples pushed
Big Lots 2% Office Depot 10% Target -3%
Burlington Stores 5% Progressive pushed TASER International 9%

 

One of the biggest moves following earnings being reported last week was Target, which saw its stock decline by more than 12 percent the day following its release. While the company missed earnings expectations by only 3 percent, the company admitted it was going to have a difficult time seeing growth in 2017 and its online sales continued to be a major problem for the company. Numerous discount retailers reported earnings last week and, unlike Target, turned in positive results, with Big Lots, Burlington Stores, Dollar Tree and Ross Stores all beating expectations by low single digits. Higher end retailers last week turned in mixed results, with Abercrombie & Fitch missing expectations, while Best Buy beat expectations.

 

According to Factset Research, we have seen 491 (98 percent) of the S&P 500 companies release their results for the fourth quarter of 2016. Of the 491 that have released their earnings, 65 percent have beaten earnings estimates, while 12 percent have met expectations and 23 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 53 percent of the companies have beaten estimates, while 47 percent have fallen short. The overall growth rate that we have seen so far for S&P 500 earnings for the fourth quarter currently stands at 4.9 percent. Of the 105 companies that have released forward guidance, 75 have issued negative earnings expectations, while only 30 have issued positive guidance. With quarterly reporting statistically over, it is highly unlikely that the numbers above would change with the remaining 9 companies that have yet to report. In looking at historical data for how this quarter stacks up against previous quarters, the 65 percent of companies beating expectations on earnings is below both the 1- and 5-year average figures for companies beating expectations. The 53 percent of companies beating revenue expectations is in line with the 1- and 5-year historical levels. In looking at analysts’ projections for the first quarter of 2017, expectations seem high as earnings are expected to grow by 9 percent and revenues are expected to grow by 7.3 percent during the quarter.

 

This is the ninth week for fourth quarter earnings being released. The table below has been getting smaller and smaller by the week. The company that has the greatest potential to move the markets is highlighted in green:

 

Buckle Express Stein Mart
Dick’s Sporting Goods H & R Block Vail Resorts

 

Dick’s Sporting Goods will be closely watched by Wall Street this week as it is the last big box nationwide sporting goods retailer following the demise of Sport Authority last year. If the trend in higher end retailers showing mixed results persists, we should see mixed results this week out of Buckle, Express and Stein Mart.

 

Politics also made headlines and moved the markets last week. President Trump gave a one hour address to a joint session of Congress on Tuesday evening. While not technically a State of the Union Address, the address carried just as much weight as the President outlined potential items for Congress to work on during 2017. There was nothing new of substance presented in the speech, as it was more of a review of topics the President has been speaking about for the past month, asking Congress to get to work on a number of items. The highlight of the night was when President Trump spoke about a fallen member of the Special Forces who died in a raid in Yemen and recognized his window, who was in the First lady’s box. Commentators on both sides of the aisle thought this moment was the first truly Presidential moment seen nationally by the President. For its part, the financial markets really liked the speech, pushing the markets higher by more than 340 points at one point on Wednesday and propelling the Dow easily past 21,000 for the first time.

 

Global news impacting the markets:

 

Late last week the National People’s Congress got underway in Beijing for its annual meeting. The meeting is closely watched by the international financial markets because it is the first time the government publically releases a lot of data about the upcoming year, including the economic report card. The economic report card at this year’s meeting shows that China now expects its economy to grow at a rate of 6.5 percent during 2017, not the original range of 6.5 to 7 percent. Chinese Premier Li Keqiang also laid out a list of items the government would like to work on during 2017, which included things from tackling smog and air pollution to laziness in government officials and “zombie enterprises” in the coal and steel industries. In total, the speech on the economy shows that China, while still experiencing some growth, is slowing down dramatically when compared to the growth rates of a few years ago, as the country attempts to move from an export driven economy to an internal consumption driven economy. There was also a thinly veiled warning to US President Trump in several of the addresses given at the meeting, which said that protectionism is a threat to the global economy. While China was outlining 2017, Europe is starting what could turn out to be a very interesting political season.

 

The Netherlands has the honor of being the first of the European countries to hold elections in 2017 and it could be a very interesting election. Currently, there are 5 political parties, representing a broad range of views, with a legitimate chance of winning the elections that are now only 9 days away. The parties range from hardliners like Geert Wilders, who wants out of the EU, strong borders and no Muslims; to much more liberal candidates like Prime Minister Mark Rutte, who is touting that the current government has grown the economy and things should remain largely the same going forward. One thing is clear: no party is likely to get a majority in Parliament and thus a coalition government will likely need to be formed with as many as five parties, given how fractured Parliament will likely be after the elections. Adding to the difficulty of forming a coalition government is the fact that all political parties have said they will not form a coalition with Wilder’s Freedom Movement party, which currently looks to be winning the most seats in the election. A large populist win in the Netherlands could add further fuel to the situations in France and Germany, which have elections later this year and look ripe for political change. In France, far right leader Marine Le Pen has continually been polling high enough to emerge either first or second from the first round of elections in France, with her call to move off the Euro and onto France’s own currency, along with several other very populist ideas. While the Netherlands is a very small percentage of the overall GDP of Europe and the EU, it could be the start of a political fire storm that could ultimately lead to the demise of the Euro as a common currency and the EU in general.

 

Technical market review:

 

The recent rally continues to push onward. All of the trading channels (yellow lines below) for the three major US indexes are sloped upward, with the fastest slope seen on the NASDAQ, while the slowest slope is seen on S&P 500. The red line on the VIX chart remains the 52-week average level of the VIX, which the index is currently solidly below.

After having both the S&P 500 and the Dow (upper left and right charts, respectively) break out above their most recent trading channels following President Trump’s Tuesday evening address, both fell back into their trading channels on Thursday. The NASDAQ (lower left pane above) stayed within its very steep trading channel, even with the Trump bump on Wednesday. From a technical standpoint, all three of the major US indexes look like there is still some upside potential in the markets given how strong the movement has been over the past several weeks. However, we are starting to see the number of potential catalysts diminish. Earnings season has largely drawn to a close. In US politics, there seems to be a need for significant work to pass any meaningful changes to existing legislation or propose new legislation. China looks to be slowing down even further. The potential for a trade war is increasing. The political situation in Europe looks ripe for a major change, which could lead to a lot of economic uncertainty. The markets here in the US are very resilient and have been known to continually climb the proverbial wall of worry, so I’m not saying they will certainly move lower, just that there seems to be an unusually large number of potential land mines for the market to wade through currently.

 

Hybrid model performance and update

For the trading week ending on 3/3/2017, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2017 YTD Since 6/30/2015
Aggressive Model 0.32% 3.68% 9.22%
Aggressive Benchmark 0.23% 5.25% 5.05%
Growth Model 0.19% 3.53% 8.17%
Growth Benchmark 0.18% 4.08% 4.23%
Moderate Model 0.05% 3.17% 6.90%
Moderate Benchmark 0.14% 2.92% 3.30%
Income Model -0.06% 3.09% 6.63%
Income Benchmark 0.07% 1.49% 1.97%
Quant Model 1.84% 8.06%
S&P 500 0.67% 6.44% 15.51%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.

 

There were no changes to the hybrid models over the course of the previous week. The models remain almost fully invested with a tilt toward asset classes and positions that can be sold quickly, if necessary, should the markets look ready to turn significantly lower.

 

Market Statistics:

 

The market rally continued last week, despite Fed officials suggesting a March rate hike is more certain:

 

Index Change Volume
Dow 0.88% Average
S&P 500 0.67% Average
NASDAQ 0.44% Above Average

 

As mentioned above, all three of the major US indexes advanced for the week last week, posting gains on almost average volume. We have now seen six straight weeks of weekly gains on the three major indexes as the markets continue to price in very positive developments from the new administration.

 

The following were the top 5 and bottom 5 performers over the course of the previous week:

 

Top 5 Sectors Change   Bottom 5 Sectors Change
Biotechnology 4.34%   Software -0.42%
Home Construction 3.76%   Commodities -0.84%
Financials 1.81%   Real Estate -1.52%
Financial Services 1.70%   Telecommunications -2.30%
Healthcare 1.48%   Multimedia Networking -2.72%

 

Healthcare and Biotechnology, after being beaten down for the past several weeks, both made it into the top 5 performing sectors last week with solid performance driven by investors looking for relatively cheap deals. Financials and Financial Services both got a bump higher due to the increased likelihood of a rate hike coming in two weeks and the tail wind of deregulation on the horizon with the Trump administration. Home Construction was the remaining sector to make the top five last week as the US housing market remains strong and the inventory of homes to purchase remains very low in many areas of the US. When looking at sectors that pushed lower last week, three were technology related as Software, Telecommunications and Multimedia Networking all made the list for different reasons. Commodities pushed lower as a sector, driven primarily by the decline in the price of oil driving stock prices lower. Real Estate moved lower as the sector is primarily made up of REITs, which rely heavily on financing. With the prospects of a rate hike on the near horizon, their cost of doing business is likely to increase.

 

Fixed income markets moved lower last week, as investors adjusted their holdings and positioning to the reality that a rate hike by the Fed at its upcoming meeting was highly likely, following all of the “Fed speak” that occurred last week.

 

Fixed Income Change
Long (20+ years) -1.99%
Middle (7-10 years) -1.29%
Short (less than 1 year) -0.05%
TIPS -0.96%

Global currency trading volume was average last week as there were no major stock market holidays on any of the major exchanges around the world last week. Overall, the US dollar gained 0.15 percent against a basket of international currencies as investors around the world adjusted their positions to take into account the high likelihood of a rate hike in two weeks’ time at the FOMC March meeting. The best performing of the global currencies last week was the Icelandic Krona, which gained 2.1 percent against the value of the US dollar. The worst performance among the global currencies was seen in the Colombian Peso, as it declined by 2.9 percent against the value of the US dollar.

Commodities were mixed last week as precious metals and oil declined, while Copper and some soft commodities advanced:

Metals Change   Commodities Change
Gold -1.83%   Oil -1.48%
Silver -2.41%   Livestock -0.14%
Copper 0.81%   Grains 1.88%
      Agriculture 0.15%

The overall Goldman Sachs Commodity Index declined 0.84 percent last week. Much of the overall decline in commodities last week was due to a decline of 1.48 percent in the price of oil. Metals were mixed last week as Gold declined 1.83 percent, while Silver fell 2.41 percent and the more industrially used Copper advanced 0.81 percent. This is the first week in the past two months that we have seen the more industrial Copper post gains, while the more precious metals of Gold and Silver posted losses. Soft commodities were mixed last week, with Agriculture gaining 0.15 percent, while Livestock declined 0.14 percent and Grains posted a gain of 1.88 percent, as the much warmer than expected start to Spring in many regions of the US could have a notable impact on the growing season for crops in 2017.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
FTSE MIB Italy 5.74%   Hang Seng Hong Kong -1.72%
Caracas General Venezuela 5.29%   RTS Index Russia -1.84%

Last week was a good week for global financial markets as 76 percent of the markets posted gains over the course of the week. The best performing index last week was found in Italy, with the FTSE MIIB Index turning in a gain of 5.74 percent for the week. The gains in Italy were primarily due to the banking system in Italy looking like it will be able to get the required bailout funds to keep operating and that the damage from the bailouts will be less than originally thought. The worst performing index last week was found in Russia, the RTS Index, which turned in a loss of 1.84 percent as the relationship between Russia and the new administration continues to be called into question. Last week, the focus was on Attorney General Jeff Sessions who had contact with Russians while performing Senate duties, but is thought to have potentially misled Congress about the contact. There has also been rumbling about a building up of Russian forces near Ukraine again, which Russia has said are only military exercises within Russia and nothing more.

The VIX had a bit of a wild week last week, swinging at times by more than 10 percent as the markets attempted to figure out the odds of a Fed rate hike in March. With the political uncertainty in Europe that seems to be building up to the elections in two key countries, we could start to see a bit of a political risk premium start to be built into the VIX, artificially pushing it up slightly. We have not seen any uncertainty in the fear gauge yet, as complacency seems to be the name of the game. The current reading of 10.96 implies that a move of 3.16 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was a packed week for economic news releases, with the results being mixed. In the table below, releases that significantly beat market expectations are highlighted in green, while releases that fell significantly short of expectations are highlighted in red:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 2/27/2017 Durable Orders January 2017 1.80% 1.80%
Negative 2/27/2017 Durable Goods -ex transportation January 2017 -0.20% 0.50%
Slightly Negative 2/27/2017 Pending Home Sales January 2017 -2.80% 0.90%
Slightly Negative 2/28/2017 GDP – Second Estimate Q4 2016 1.90% 2.10%
Positive 2/28/2017 Chicago PMI February 2017 57.4 53.0
Positive 2/28/2017 Consumer Confidence February 2017 114.8 111.5
Neutral 3/1/2017 Personal Income January 2017 0.40% 0.40%
Neutral 3/1/2017 Personal Spending January 2017 0.20% 0.30%
Neutral 3/1/2017 PCE Prices – Core January 2017 0.30% 0.20%
Neutral 3/1/2017 ISM Index February 2017 57.7 56.1
Neutral 3/3/2017 ISM Services February 2017 57.6 56.5

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

Last week the economic news releases started on Monday with the release of the durable goods orders for the month of January, which came in at 1.8 percent overall, but at -0.2 percent when orders excluded transportation. This -0.2 percent in orders excluding transportation missed market expectations of 0.5 percent growth by a large amount and caused some concerns about corporate and consumer spending going forward. On Tuesday, the second estimate for Q4 2016 GDP was released and came in slightly lower than the first estimate at 1.9 percent versus the original estimate of 2.1 percent. This negative figure was overshadowed by very positive developments in both the Chicago PMI figures and the Consumer Confidence figure, both for the month of February. Personal income and spending were released on Thursday and these two releases continued to show an interesting trend in that income increased, but spending lagged expectations. We seem to be slowly moving toward a situation where spending is being muted, while confidence is increasing, causing a bit of a conundrum for the economy. PCE prices were released on Wednesday as well and gave no indication that the Fed should wait on increasing rates from an inflation standpoint. Later during the day on Wednesday and in the afternoon on Friday, the ISM index, both overall and the services side, posted solidly gaining figures for the month of February.

 

This week is a relatively slow week for economic news releases as there are only four releases and they are all related to the current employment situation here in the US. The releases that have the largest potential to move the markets on the day they are released are highlighted in green below:

 

Date Release Release Range Market Expectation
3/8/2017 ADP Employment Change February 2017 190K
3/10/2017 Nonfarm Payrolls February 2017 186K
3/10/2017 Nonfarm Private Payrolls February 2017 197K
3/10/2017 Unemployment Rate February 2017 4.7%

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

This week the economic news releases start on Wednesday with the release of the February ADP employment change figure, which is expected to show an increase of 190,000 jobs during the month. If this number turns out to be correct, it will represent more than 50,000 fewer jobs being created during February, when compared to the January figure. The payroll figures released on Friday are also expecting to post the same size declines as both public and private figures declined from near 230,000 in January down to around 190,000 in February. Despite these declines, however, the overall unemployment rate here in the US during the month of February is expected to have declined by one tenth of a percent, moving from 4.8 percent down to 4.7 percent. This week is known as a quiet period for Fed officials as it is the week right before an FOMC meeting and typically Fed officials are not allowed to make speeches during this period leading up to the meeting.

 

Interesting Fact Snap Chat valuations are very high!

 

Snap Cart started trading last week with its IPO pricing well above market expectations as the company is now valued at more than $29 billion. This valuation comes despite the company losing money every year. In 2016, the company lost $514.6 million in 2015 it lost a reported $372.9 million; it has lost money every year since it started in 2011, according to filings. What makes matters worse is that the company has publically said it “may never achieve or maintain profitability” as the company plans to continue to plow money into the business in an attempt to grow. Just how big is Snap Chat in terms of market cap? Currently SNAP is double the size of Twitter and $5 billion more valuable than Kroger or Hershey Chocolates.

 

Source: Business Insider and own calculations

For a PDF version of the below commentary please click here weekly-letter-2-27-2017

Commentary quick take:

 

  • Major developments:
    • Rally continues
    • Fed minutes suggest that rate hike is more possible
    • 93 consecutive days of no declines 1 percent or greater

 

  • US:
    • Fed minutes hinted at rate hike
    • Minutes held concerns about new administration policies
    • Treasury Department thinking about 100-year bond
    • Treasury will not label China a currency manipulator—for now
    • Earnings season is drawing to a close
    • Corporate tax rate seems headed toward 20 percent, not 15 percent

 

  • Global:
    • IMF’s Lagarde threw Greece a life line
    • German 2-year bond yields decline further
    • Can the Euro survive the next round of elections in Europe?

 

  • Technical market view:
    • All three indexes remained in new trading channels
    • All three indexes made new all-time highs
    • VIX had a boring week
    • Time continues to be against the market rally

 

  • Hybrid investments strategy update:
    • One new purchase last week

 

  • This week for the markets:
    • Trump: Speech on Tuesday to joint session of Congress
    • Wrapping up earnings season for Q4 2016

 

  • Interesting Fact: Hard to guess the best performing country stock index since 1900.

 

Major theme of the markets last week: “Trump Drunk” rally pushes onward

 trump-drunk-12-12-16

In recent weeks I have commented that the current bull rally is getting very long in the tooth. However, the markets have proven very resilient. Last week, the S&P 500 and Dow extended their run of avoiding a 1 percent or greater decline to 93 days. Only four days were counted this last week because Monday was a market holiday here in the US with all stock and bond markets closed in observance of President’s Day. The last time we saw this long of a run without a 1 percent decline on the Dow and the S&P 500 was November 24th, 2006 when the streak ended at 94 days. Also unusual last week was the string of days the Dow had without a single day or declines. Going into Friday last week the Dow had seen 10 consecutive positive days. It looked like the Dow would close negative on Friday, but with less than 1 minute to go before the close, the Dow rallied hard and managed to close positive for the day, making 11 days in a row. Posting 11 consecutive days of gains for the Dow is rare. In fact, the last time it was done was January 3rd 1992.
US news impacting the financial markets:

 

Last week, there was a general lack of new information about the economy and no major progress to announce on any policies in Washington DC. The FOMC meeting minutes released on Wednesday received more press than is typical; there were a few notable wording changes. The term “fairly soon” was used to describe the timing of when it could be appropriate to raise interest rates. Being the Fed, this language was offset with language that the Fed would still be watching incoming data about the labor markets and inflation. If the incoming data is in line with or better than expectations, it looks more likely that we could see a rate hike prior to summer. In a speech on Wednesday, Fed Governor Powell reiterated that a rate hike was on the table at the upcoming March meeting, much like Chair Yellen said before Congress two weeks ago. The last main point the meeting minutes covered was the uncertainty over the new administration. If all of President Trump’s campaign promises were to be put in place it would likely be very inflationary. However, the members of the Fed are still very uncertain, with the minutes saying, “participants again emphasized their considerable uncertainty about the prospect for changes in fiscal and other government policies as well as about the timing and magnitude of the net effects of such changes.” On Wednesday following the meeting minutes, the odds as measured by the CME of a Fed rate hike in March moved from 17 percent up to 22 percent. However, there is still a lot of time between now and the March meeting, with several key data points along the way that could sway members of the FOMC to vote one way or the other. In addition to the Fed meeting minutes, the markets were paying attention to earnings releases by numerous companies throughout the week last week.

 

Earnings reports were one of the drivers of market performance last week and the results were very mixed. Below is a table of the well-known companies that released earnings last week, with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Advance Auto Parts -8% J C Penney 5% Red Lion Hotels pushed
Dillard’s -21% Jack in the Box -5% Red Robin Gourmet Burgers 21%
DISH Network 6% Kohls 9% Sanderson Farms -12%
Foot Locker 4% La-Z-Boy 4% Seadrill pushed
Gap 0% Macy’s 3% Sears pushed
Genuine Parts Co 1% McDermott Intl 300% Six Flags Entertainment 0%
Herbalife 9% Medtronic 1% Splunk 26%
Hewlett Packard 2% Newmont Mining -15% Sprouts Farmers Market 0%
Home Depot 8% Nordstrom 21% Tesla -5%
Hormel Foods -4% Papa John’s 5% TJX Companies 3%
HP 3% Pinnacle Foods 0% Toll Brothers 20%
Intuit 17% Public Storage 1% Wal-Mart Stores 1%

 

Wal-Mart made headlines last week after the company posted its results for the fourth quarter, which beat expectations. More importantly for Wal-Mart, store sales increased the most since July of 2012 and the company saw a 29 percent increase in its e-commerce business during the fourth quarter. This means that Wal-Mart is indeed making incremental headway against online competitors such as Amazon. Tesla, on the other hand, reported earnings that missed expectations by 5 percent and the outlook, while it sounded good in terms of production of the Model 3 sedan, left Wall Street wondering if the company will have to tap Wall Street again in the near future for financing.  Ongoing operations during the fourth quarter of 2016 burned through a billion dollars, which means the three billion dollars that Tesla currently has on hand will not fund operations that much longer. Combine this shortage of cash with the ever increasing competition from other auto manufactures in the electric vehicle (EV) space and the new administration’s seeming contempt for EVs and it is not hard to see why the stock fell more than 5 percent following the earnings results. Retailers turned in mixed results last week with Dillard’s missing expectations, while Nordstrom easily beat expectations. JC Penny, while beating expectations, painted a weak outlook for the company in 2017 and announced that it would be closing between 130 and 140 stores in the near future. Luxury home builder Toll Brothers reported a great fourth quarter as the company was able to operate for a much longer than expected time in several areas of the US that saw a late start to winter.

 

According to Factset Research, we have seen 462 (92 percent) of the S&P 500 companies release their results for the fourth quarter of 2016. Of the 462 that have released their earnings, 66 percent have beaten earnings estimates, while 11 percent have met expectations and 23 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 52 percent of the companies have beaten estimates, while 48 percent have fallen short. The overall growth rate that we have seen so far for S&P 500 earnings for the fourth quarter currently stands at 4.9 percent. Of the 98 companies that have released forward guidance, 67 have issued negative earnings expectations, while only 31 have issued positive guidance. With such a large percentage of companies having already reported earnings and a very light docket of companies yet to report, it is becoming more difficult for the above mentioned numbers to change in a material way. In looking at historical data for how this quarter stacks up against previous quarters, the 66 percent of companies beating expectations on earnings is below both the 1- and 5-year average figures for companies beating expectations. The 52 percent of companies beating revenue expectations is in line with the 1- and 5-year historical levels.

 

This is the eighth full week of trading during which fourth quarter earnings are being released. With the typical reporting season running only 10 weeks, we are very near the end. This week there continued to be a focus on retail companies reporting results. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Abercrombie & Fitch Costco Ross Stores
Autozone Dollar Tree Salesforce.com
Barnes & Noble Domino’s Pizza SeaWorld Entertainment
Best Buy Kroger Sotheby’s
Big 5 Sporting Goods Noodles & Co Staples
Big Lots Office Depot Target
Burlington Stores Progressive TASER International

 

This week the focus of the earnings releases will once again be on retailers as Target, Costco, Ross and Best Buy all release results, as well as a myriad of other smaller chains. Big 5 Sporting Goods will be closely watched by Wall Street to see if it has enjoyed any benefit following the demise of one of its main competitors—Sports Authority. Target is always compared to Wal-Mart and so the bar has been set very high for the company given the strong results of Wal-Mart last week. If Target misses on earnings, the stock will likely tumble.

 

Politics played a small role in the markets last week as President Trump took to the microphone several times on a wide variety of topics, as is usual for him. Treasury Secretary Steve Mnuchin said he would not immediately label China as a currency manipulator, but that he may do so in the future. This pushed the value of the US dollar slightly higher during the middle of the week. Mnuchin also brought up the prospect of the Treasury department floating a 100-year bond. Secretary of State Tillerson continues to make the round with foreign countries and had a very testy meeting in Mexico with his counterpart as the disagreement over the border wall being built continues to heat up. It looks at this point like the tax changes President Trump wanted to accomplish quickly will take longer to design than first thought and potentially be a little less than promised. Despite Trump’s goal of dropping the tax rate on corporations to 15 percent, Speaker Ryan’s plan reduces the current rate of 35 percent to 20 percent. With the market already pricing in a drop in the rate to 15 percent, this 5 percent difference could present a little downward bump for the markets. The other big fight brewing in Washington DC is about a border adjustment tax, also known as a BAT tax. This is the tool the President seems to want to pursue to have Mexico “pay for the wall,” as it is a tax levied on imported goods as they cross over the border into the US. The tax is designed to “even out” imbalances in money flows across the US border and reduce corporations’ incentive to off-shore profits, as companies could also no longer deduct the cost of importing goods as a business expense. Discussions surrounding BAT in DC negatively impacted the stocks of large multinational importing companies here in the US.

 

Tuesday will be very important this week as it is the evening that President Trump speaks before a joint session of Congress to outline what he would like to see accomplished over the remainder of 2017. While he could give many pie-in-the-sky ideas, the markets will be watching and listening for concrete, actionable items that both the White House and Congress can actually get behind and achieve. Thus far for the administration, everything has been done in a going-at-it-alone fashion. At some point, the new administration will have to get the input and approval of Congress to implement many of the meaningful changes. If President Trump goes on the offensive during the speech like he has been doing recently, it could prove negative for the financial markets on Wednesday as some of the gains due to pending political actions could be discounted or at least delayed.

 

Global news impacting the markets:

negative-german-yields-2-27-17

Global financial news was slow again last week with most of the world continuing to watch the US to see what, if any, impact the new administration will have around the world. Some of the news that made headlines last week came out of Europe and pertained to Greece. On Wednesday, IMF President Christine Lagarde announced that there did not need to be any haircuts from Greece to secure their next tranche of bailout funds. While no haircuts are needed, there will need to be significant changes undertaken in terms of debt restructuring and other reforms. While Greece still has a long way to go to fully unlock the needed bailout funds, at least at this point it does not appear that Germany and the IMF are at odds with each other. Germany also made headlines last week when its bond yields dipped further into negative territory. The chart to the right depicts the yield on the 2-year German Bund, which is pushing down near -1 percent yield. The negative yield on the 2-year Bund has been accelerating downward over the past month as rising political risks have been driving investors toward the safety of the Bunds, despite knowing that they will get back less than they put in. The biggest political risk in the EU right now is France as the government looks to potentially change hands during the upcoming elections. The negative yielding trade on the Bund even has a name that came from French politics, the “redenomination trade,” in a nod to French candidate Marine Le Pen’s idea that debts of European governments should be changed to be repaid with currencies other than the Euro. If this type of an action were to occur, it would essentially be the end of the common currency as it is known today. France, however, is not the only country calling for changes such as these as there are groups in Germany and Spain calling for similar changes, with once obscure political movements trying to ride the waves of populism and nationalism currently sweeping across Europe.

 

Technical market review:

 

It seems the technical trading channels of the three major US indexes have to be redrawn nearly every week at this point as the recent rally continues to push onward. All of the trading channels (yellow lines below) are sloped upward, with the fastest slope seen on the NASDAQ, while the slowest slope is seen on S&P 500. The red line on the VIX chart remains the 52-week average level of the VIX, which the index is currently solidly below.

4-charts-combined-2-27-17

Technically, this market looks like it could continue to push higher for the near term, but it remains highly unlikely that the indexes will be able to keep up the current pace of increase for any significant period of time. As mentioned above, Tuesday evening could prove to be a pivotal point in the market rally with President Trump having the ability to take some of the hype out of the markets if plans and pledges appear to change. For the time being, most technical indicators are showing green lights for the rally, but the light has been green for a significant period of time, so it is only a matter of time before the light changes from green to yellow and ultimately red. As previously mentioned, the VIX has been signaling that things may be near a top for the markets as we have not seen the VIX push meaningfully lower during the most recent upward movements of the markets. However, the flip side of the VIX’s interesting movement is that we are at very low levels for the VIX, meaning that complacency remains in the markets.

 

Hybrid model performance and update

For the shortened trading week ending on 2/24/2017, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2017 YTD Since 6/30/2015
Aggressive Model 0.47% 3.37% 8.88%
Aggressive Benchmark 0.24% 5.01% 4.81%
Growth Model 0.63% 3.36% 7.98%
Growth Benchmark 0.19% 3.89% 4.04%
Moderate Model 0.76% 3.14% 6.87%
Moderate Benchmark 0.13% 2.78% 3.15%
Income Model 0.95% 3.18% 6.71%
Income Benchmark 0.06% 1.41% 1.89%
Quant Model -0.22% 6.90%
S&P 500 0.69% 5.74% 14.75%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.

 

There were a few changes to the hybrid models last week, with the primary change being the addition of a new ETF into the holdings. The Guggenheim Equal Weight materials funds (RTM) was purchased early last week in the models. Materials are one area of the market that seems to have some good value left in the component stocks. While the sector did jump initially after Trump’s election night victory, the sector has faded back a bit since then, unlike the rest of the market. The investment is a theme based investment on the infrastructure spending the new administration will try to undertake. While the theme may take a while to get rolling, it seems money will at some point be spent on infrastructure and when it is, materials companies stand to benefit. The ETF was bought with no transaction fee and there is no required holding period for the fund, meaning if the markets start to turn downward the position can be sold quickly without any penalties. While the purchase of RTM was taking place last week, we also took the time to go through and rebalance all accounts to target models, trimming some points and adding to others, mostly in small increments, just so that everyone is synced up with the models as we move into March.

 

Market Statistics:

 

The rally continued last week, despite the Fed meeting minutes suggesting a rate hike may be closer than the markets had anticipated:

 

Index Change Volume
Dow 0.96% Average
S&P 500 0.69% Average
NASDAQ 0.12% Average

 

Volume was below average last week, as one would expect with Monday being a stock market holiday. Taking that market closure into account, volume was average. While the rally technically continued, the rally slowed down a lot when compared to the significantly higher returns we had seen over the previous three weeks. Despite the slowdown in pace, it did not stop the three major US indexes from making multiple new all-time highs during the trading week.

 

The following were the top 5 and bottom 5 performers over the course of the previous week:

 

Top 5 Sectors Change   Bottom 5 Sectors Change
Utilities 3.82%   Multimedia Networking -1.25%
Residential Real Estate 2.96%   Materials -1.41%
Healthcare Providers 2.53%   Energy -1.49%
Home Construction 1.76%   Biotechnology -1.51%
Healthcare 1.54%   Oil & Gas Exploration -2.72%

 

The sector performance last week was interesting because 2 of the top 5 sectors in terms of performance are considered defensive sectors of the markets. Utilities led the way higher with a gain of almost 4 percent as the sector seemed to move in tandem with the fixed income market. Residential Real Estate got a few bumps last week from housing related data points and enjoyed the second best performance of the week. One of the driving forces behind the upward bumps in Residential Real Estate last week was home builders, which turned in positive fourth quarter building figures, pushing the home construction sector into the top 5 sectors last week as well. Healthcare and Healthcare Providers took two of the top 5 performing sectors last week as “repeal and replace” now looks like it will take a lot longer and be a lot less impactful than was first feared.

 

On the down side last week, Energy had a second poor week in a row, led by Oil and Gas Exploration, with both sectors declining by more than 1.5 percent as there seems to be a very persistent oversupply of oil here in the US that is starting to have a  negative impact on the sector. Materials moved lower last week on the thought that infrastructure spending here in the US could be slower than first thought due to hang ups in DC. Multimedia Networking and Biotechnology rounded out the bottom five performing sectors as investors seemed to be pulling short term profits from these positions.

 

Fixed income markets moved higher last week, thanks in large part to a flight of foreign money coming into the US as global yields on many foreign governments’ fixed income debts continued to move further into negative territory.

 

Fixed Income Change
Long (20+ years) 1.40%
Middle (7-10 years) 0.85%
Short (less than 1 year) 0.03%
TIPS 0.70%

Global currency trading volume was below average last week thanks to the holiday on Monday here in the US. Overall, the US dollar gained 0.19 percent against a basket of international currencies as many global investors continue to wait on actions from the new administration. The best performing of the global currencies last week was the Mexican Peso as it gained 2.7 percent against the US dollar, thanks to the persistent remarks from the Mexican government that it will not support any new US policies it believes could negatively impact its country. The worst performance among the global currencies was seen in the Swedish Krona, as it declined by 1.3 percent against the value of the US dollar. The decline may have had something to do with President Trump calling out the country in a very awkward way during a speech.

Commodities were mixed last week as precious metals advanced, while oil declined in value:

Metals Change   Commodities Change
Gold 1.72%   Oil 0.61%
Silver 1.99%   Livestock -1.26%
Copper -1.34%   Grains -1.81%
      Agriculture -1.46%

The overall Goldman Sachs Commodity Index declined 0.19 percent last week. Oil gained 0.61 percent, breaking the slide of consecutive weeks in a row of declines. Metals were mixed last week as Gold advanced 1.72 percent, while Silver gained 1.99 percent and the more industrially used Copper declined 1.34 percent. In looking at the movement of the metals last week, there seemed to be the resurgent theme of safe haven assets moving higher, despite the overall equity markets also making new highs. Soft commodities were mixed last week, with Agriculture falling 1.46 percent, while Livestock declined 1.26 percent and Grains posted a loss of 1.81 percent.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Caracas General Venezuela 1.92%   Merval Argentina -2.87%
Shanghai Composite China 1.60%   CASE 30 Egypt -3.25%

Last week was a difficult week for global financial markets as only 34 percent of the markets posted gains over the course of the week. The best performing index last week was found in Venezuela, with the Caracas General Index turning in a gain of 1.92 percent for the week. With the gains last week in Venezuela, the market has now been up more than 26 percent over the course of just the past three weeks, in large part due to the price movement of oil and prices staying much higher than they were 18 months ago. The worst performing index last week, for the second week in a row, was found in Egypt, the CASE 30 Index, which turned in a loss of 3.25 percent as foreign investors continued to adjust their positions in the their holdings within the country.

The VIX had a boring week last week, giving up 0.17 percent overall for the week. During the week there were some notable intraday movements in the VIX, but when the end of the day came around the VIX was right back near where it started the day. The current reading of 11.47 implies that a move of 3.31 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was a relatively slow week for economic news releases aside from the FOMC meeting minutes:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 2/22/2017 Existing Home Sales January 2017 5.69M 5.57M
Neutral 2/22/2017 FOMC Minutes February Meeting N/A N/A
Slightly Positive 2/24/2017 University of Michigan Consumer Sentiment Index February 2017 96.3 95.8
Neutral 2/24/2017 New Home Sales January 2017 555K 566K

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

Last week the economic news releases started on Wednesday with the release of the existing home sales figures for the month of January, which came in a little higher than anticipated, but not high enough for the markets to really take notice. The home sales data was, of course, overshadowed by the release of the FOMC meeting minutes from the previous meeting, discussed in depth above. On Friday, the University of Michigan’s Consumer Sentiment index for the month of February (mid-month reading) was released and showed a little improvement over the end of January reading. If consumer confidence remains high going into the spring, we could see a nice bump for the US economy as people start to work on their homes, while at the same time inadvertently increasing spending. Wrapping up the week last week was the release of the existing home sales figures for the month of January, which came in a little lower than expected, but not low enough for the markets to react negatively. Related to the US housing market, last week there was also a report out that showed that Denver saw the fastest year-over-year growth of any major city in the US through the month of January.

 

This week is a typical week for economic news releases, with the highlight of the week being the second estimate of fourth quarter GDP here in the US. The releases that have the largest potential to move the markets on the day they are released are highlighted in green below:

 

Date Release Release Range Market Expectation
2/27/2017 Durable Orders January 2017 1.80%
2/27/2017 Durable Goods -ex transportation January 2017 0.50%
2/27/2017 Pending Home Sales January 2017 0.90%
2/28/2017 GDP – Second Estimate Q4 2016 2.10%
2/28/2017 Chicago PMI February 2017 53.0
2/28/2017 Consumer Confidence February 2017 111.5
3/1/2017 Personal Income January 2017 0.40%
3/1/2017 Personal Spending January 2017 0.30%
3/1/2017 PCE Prices – Core January 2017 0.20%
3/1/2017 ISM Index February 2017 56.1
3/3/2017 ISM Services February 2017 56.5

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

This week, the economic news releases start on Monday with the release of durable goods orders for the month of January, overall orders and orders excluding transportation. Overall orders are expected to have grown by 1.8 percent, but this number seems low when you take into account the airplane orders during the month. Orders excluding transportation are more important to the markets and these are expected to post slow growth at 0.5 percent, which is certainly not indicative of a fast growing economy. Pending home sales for the month of January, also released on Monday, will largely be ignored. On Tuesday, the second estimate of fourth quarter GDP is set to be released by the government. Expectations are for an upward revision from last month’s first estimate of 1.9 percent, with a print of 2.1 percent this time around. It would take a big change for the markets to react much to this release, but it could set the tone for growth here in the US going forward and this could impact the Fed’s thinking when it considers raising rates at the next meeting. Later during the day on Tuesday the Chicago PMI will be released as well as the consumer confidence index, both for the month of February and both expecting to show nice gains during the month. March starts on Wednesday and with it comes the release of personal income and spending for the month of January as well as the latest reading on the PCE price index. The PCE index will garner a lot of attention if it is not close to the 0.2 percent expected level because deviations from this reading could alter the Fed’s thinking about inflation here in the US. Wrapping up the day on Wednesday is the release of the ISM index for the month of February, which is expected to print at 56.1, well above the inflection point of 50, meaning that manufacturing in the US increased during the month of February. This week wraps up on Friday with the release of the services side of the ISM, which is expected to post a reading much like the overall ISM, slightly above 56.

 

Interesting Fact South Africa has enjoyed a high rate of growth since 1900

 

According to data compiled by Bloomberg that looked at the 23 countries that have stock and bond market data going back to 1900, South Africa has seen the highest annualized growth rate at 7.2 percent. Denmark has seen the best fixed income performance with a 3.3 percent reading.

best-maret-since-1900

For a PDF version of the below commentary please click here weekly-letter-2-20-2017

Commentary quick take:

 

  • Major developments:
    • Rally continues
    • Fed Chair Yellen seems to be turning Hawkish
    • 89 consecutive days of no declines 1 percent or greater
    • 4th quarter earnings season hit a little bump with AIG
    • All three indexes closed at all-time highs this week

 

  • US:
    • Chair Yellen’s testimony
    • Economy improving enough to warrant a rate hike
    • Chair Yellen still cautioned that a lot could change over the next few months
    • Three rate hikes likely this year
    • Awkward movement in the VIX

 

  • Global:
    • GDP figures have been low in Europe
    • Japan continues to struggle with meaningful growth
    • Trouble could be brewing in the UK
    • The world is steeping closer to having to deal with North Korea

 

  • Technical market view:
    • All three indexes broke above new trading channels
    • All three indexes made new all-time highs
    • VIX had an interesting week
    • Time is starting to be against the market rally

 

  • Hybrid investments strategy update:
    • Several minor changes
    • Earnings results for equity holdings was mixed

 

  • This week for the markets:
    • Trump: what will he do next?
    • Slow holiday shortened week
    • Earnings season winds down further

 

  • Interesting Fact: Presidential Golf

 

Major theme of the markets last week: Is Chair Yellen Hawkish or Dovish?

funny-2-20-17

The major theme of the markets last week focused on the Federal Reserve chairwoman as she gave her twice yearly economic update to Congress on Tuesday and Wednesday. Speculation on Capitol Hill was that there would not be a rate hike until the second half of 2017, but after her testimony it seems that March may be on the table. Chair Yellen was the focus of the markets because there was little other movement during the week on a wide variety of topics. In politics, almost everything remains at a virtual standstill until more nominations are completed and bills actually start to be rolled out. Earnings season, while typically a catalyst for stock market movement, was mediocre last week, except for a big miss by AIG. In looking around the world there were very few developments as most countries are still taking a wait and see approach to policies as they wait for actions coming out of Washington DC and the new administration. While there seemed to be a lull in new information, aside from the Fed last week, the US financial markets continued to march higher, pushing the rally onward and making several new all-time highs along the way.
US news impacting the financial markets:

hawk-dove

Fed Chair Janet Yellen was the primary focus of the US financial markets last week as she spoke with Senators and Members of the House on Tuesday and Wednesday. She started each day with prepared remarks followed by several hours of Q&A with members of Congress. Her prepared remarks held some interesting insights when compared to the latest FOMC statement released earlier this month. Some even think she is turning from a Dove into a Hawk. The biggest clues in her prepared remarks that rates may be increasing soon was her saying, “The Federal Reserve will likely need to raise interest rates at an upcoming meeting” and “delaying rate increases could leave the Fed’s policymaking committee behind the curve and eventually lead it to hike rates quickly, which could cause a recession.” Chair Yellen went on to discuss the current employment situation, which she said is in line with the median FOMC estimates at the current level of 4.8 percent. When looking at inflation, she noted that inflation indicators had been very low during the first half of 2016, but that they were increasing at the end of the year and during the first two months of 2017. She said that the target inflation rate of 2 percent remains the target rate and that she expects inflation to “gradually” move toward that level in 2017. She also took time to call out the uncertainty in the US economy surrounding all of the promised economic policies of the new administration that have yet to be officially drawn up and implemented. When asked about the potential changing composition of the Federal Reserve, since there are currently three open seats including her own opening up early next year, she took the politically correct path in saying that President Trump will pick qualified people to nominate to the board. She also said that it is her intention to stay on as Fed Chair through the entirety of her term. When asked by one member of congress if the March meeting “was on the table” for a potential rate hike, Chair Yellen commented that yes, the March meeting is very much live and a rate hike could be on the table. These comments made the odds of a rate hike at the March meeting increase, as noted in the table to the left. In talking about the longer run rate decisions this year, Chair Yellen still wants to undertake multiple hikes, which the market seems to be taking as three rate hikes this year. Despite what Chair Yellen said, many of the large institutional fixed income managers have recently come out saying the markets are pricing in one or two rate hikes this year.

fed-watch-2-20-17

 

Earnings reports were the secondary driver of market performance last week and the results were very mixed. Below is a table of the well-known companies that released earnings last week, with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Agilent Technologies 8% CubeSmart 3% J M Smucker 0%
Barnes Group 5% Dean Foods -7% Molson Coors Brewing -48%
Bloomin’ Brands 0% Deere & Co 22% Owens & Minor 4%
Cabela’s -14% Dennys 31% PepsiCo 3%
Caesars Entertainment 0% Dr Pepper Snapple -2% Time -3%
Campbell Soup 3% First Data 13% T-Mobile 55%
CBS 2% Flowserve 11% VF Corp 0%
Cisco Systems 6% Fossil Group 12% Waste Management -3%
Cooper Tire & Rubber 38% Groupon 250% Wendys -11%

 

The biggest surprise in terms of percentage above expectations last week was Groupon, but the 250% surprise is a little misleading. Expectations had been for the company to post a loss of 2 cents per share for the fourth quarter, but the company did very well during the quarter and posted a gain of 3 cents, hence the 250 percent beat of expectations. Deer & Co made headlines last week when the company announced earnings that were significantly above expectations, thanks to increased heavy machinery sales in several different business lines during the quarter as many companies appear to be gearing up for a faster moving economy. T-Mobile handedly beat market expectation last week by 55 percent as the company saw many new subscribers during the quarter due to some of its larger data plans such as the unlimited data plans; the company also got a boost from several of the new phones it is now carrying, from Apple and Samsung. Molson Coors Brewing posted a gain for the fourth quarter, but it was well below analysts’ expectations as beer volumes both here in the US and in Canada continued to decline for the manufacturer. The trend of microbrews seems to be building and doing so at the expense of the larger operation beer makers.

 

According to Factset Research, we have seen 412 (82 percent) of the S&P 500 companies release their results for the fourth quarter of 2016. Of the 412 that have released, 66 percent have beaten earnings estimates, while 11 percent have met expectations and 23 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 53 percent of the companies have beaten estimates, while 47 percent have fallen short. The overall growth rate that we have seen so far for S&P 500 earnings for the fourth quarter currently stands at 4.6 percent, which represents a decline of 0.4 percent when compared to last week. Financials were the primary reason behind the decline in overall EPS on the S&P 500. Over the course of the last two weeks, the sector as a whole has seen its earnings growth rate fall from 20 percent down to 11 percent. One company was singled out last week as a culprit for the decline—AIG—which saw earnings of -$2.72 per share when compared to +$1.17 the prior quarter. The reason provided by the company for the big difference was accounting changes for a single charge of $5.6 billion during the quarter. According to Factset, if AIG was not included in the overall earnings growth rate figure, the S&P 500 would currently have an earnings growth rate of 5.1 percent. Of the 90 companies that have released forward guidance, 61 have issued negative earnings expectations, while only 29 have issued positive guidance.

 

This is the seventh full week of trading during which fourth quarter earnings are being released. This week there is a heavy focus on retail and consumer-focused companies. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Advance Auto Parts J C Penney Company Red Lion Hotels
Dillard’s Jack in the Box Red Robin Gourmet Burgers
DISH Network Kohls Sanderson Farms
Foot Locker La-Z-Boy Seadrill
Gap Macy’s Sears
Genuine Parts Co McDermott International Six Flags Entertainment
Herbalife Medtronic Splunk
Hewlett Packard Newmont Mining Sprouts Farmers Market
Home Depot Nordstrom Tesla
Hormel Foods Papa John’s International TJX Companies
HP Pinnacle Foods Toll Brothers
Intuit Public Storage Wal-Mart Stores

 

Wal-Mart will get the most coverage this week of any of the companies in the table above when it releases its results as the company is the largest private employer in the world. With retail sales at the higher end taking a dip, as seen over the past few weeks, and many of the discount retailers not picking up the slack, a lot is riding on the results of Wal-Mart. The company’s holiday sales figures will be important, including its online sales results, as it made it a point of going head to head with Amazon over the holidays. Other retailers that will be watched this week include higher end stores like Dillard’s, Macy’s and Nordstrom as well as middle and lower end retailers such as JC Penney, Kohl’s and Sears. Technology giant Tesla will be closely followed for the number of vehicles it has produced and delivered during the fourth quarter as well as forward guidance on the Model 3 and progress on the Gigafactory. Wall Street will likely also be watching for any insight into President Trump’s ideas about technology since Tesla CEO Elon Musk is on several technology advisory groups with the President.

 

Global news impacting the markets:

 

Last week was another slow week for global financial news, as the majority of the world continued to wait on the US and the new administration. While global market performance was largely positive last week, the percentage gains faded toward the end of the week when compared to the gains seen here in the US. Japan saw some of the lowest performance in Asia after releasing its fourth quarter GDP figure, which came in at 0.2 percent, despite a weakening Yen during much of the quarter. When looking at the outlook for 2017 in terms of GDP for Japan, the latest figures are all over the map, with uncertainties over trade agreements and the value of the Yen. It seems pretty clear that Japan will continue to struggle with growth, as it has been struggling for the last 20 plus years. Japanese Prime Minister Abe was here in the US and met with Trump last weekend. He was here and with Trump when North Korea test fired a medium range missile. With tensions rising in the region over North Korea and the uncertainty over what actions other countries such as the US will take in the future with the constant provocations, there seems to be an increasing fear premium being put on Asian stocks. GDP numbers were also released for Europe last week and depicted continued slow growth.

 

Overall, GDP for the EU during the fourth quarter was positive 1.7 percent. This was one tenth of a percent lower than the 1.8 percent growth seen in the third quarter. Data coming out of the UK painted an uncertain picture for the country as consumer spending was shown to have declined during the month of January (-0.3 percent). This is more troubling than it normally would be because the poor January figure comes on the heels of a -2.1 percent reading on retail sales for the month of December. With the holiday shopping season being so important to retailers, the poor figures for the UK does not bode well for the country as it inches ever closer to actually triggering a Brexit from the UK.

 

Technical market review:

 

After redrawing the trading channel last week, all three of the major US indexes broke out of the newly drawn channels this week with three strong days of positive movements to start the week. All of the trading channels are sloped upward, with the fastest slope seen on the NASDAQ, while the slowest slope is seen on the Dow. The red line on the VIX chart remains the 52-week average level of the VIX, which the index is currently solidly below.

4-charts-combined-2-20-17

All three of the major US indexes pushed higher for the week last week, but there were some signs that the top of the market may be near. One of the biggest warning signs last week was the movement of the VIX, which at several points was moving significantly higher while the markets were also pushing higher. This type of movement is very unusual as the VIX typically moves lower when the markets move higher and vice versa. One reason for the upward movement in the VIX could be that large financial institutions were hedging some of their long equity positions by buying risk as it was very cheap. Another theory is that the movement of the markets last week was driven by a relatively small number of companies and, overall, it was not as good a week as the headline numbers would make one think. Whatever the reason, the VIX moving higher with the market is a warning sign. Time is another factor that may point to the market being near a top. All three markets made all-time highs at several points along the way last week, which is very good, but the movement has been done with virtually no steps backwards. Both the Dow and the S&P 500 extended their days without a 1 percent decline or more to 89 days last week, which from an historical perspective is a long run. One of the main problems with a market such as what we are currently seeing is that it only takes something relatively small to tip the markets over. With jumpy investors having seen nice gains in their accounts since Trump’s election, they will likely be very quick to book profits and move out of the markets. This selling to book profits could easily exacerbate any downward movements in the markets that would otherwise be fairly small. When looking at the technical levels of things, like the forward PE ratio of the S&P 500 being 17.6, we are currently seeing the most expensive market since 2004. The market is currently pricing in that everything the new administration talked about on the campaign trail will be implemented flawlessly and, potentially more important, very quickly. So far, tax reforms, both at the corporate and individual levels, are the primary driving force behind a lot of this market movement, but that fight is a long way from being over, if it has even started yet.

 

Hybrid model performance and update

For the trading week ending on 2/17/2017, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

 

  Last Week 2017 YTD Since 6/30/2015
Aggressive Model 0.99% 2.86% 8.34%
Aggressive Benchmark 1.06% 4.76% 4.56%
Growth Model 0.87% 2.69% 7.27%
Growth Benchmark 0.82% 3.69% 3.84%
Moderate Model 0.70% 2.35% 6.04%
Moderate Benchmark 0.59% 2.65% 3.02%
Income Model 0.62% 2.19% 5.68%
Income Benchmark 0.31% 1.35% 1.83%
Quant Model 0.64% 7.06%
S&P 500 1.51% 5.02% 13.96%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.

 

There were several changes made to the hybrid models over the course of the previous week. The most notable change was the addition of another ETF into the model allocation, the Guggenheim Equal Weight Technology fund (RYT). Technology was an area of the markets that the models were a little underweight in and this was a cost effective way to gain a broad exposure to the super sector of the markets. The equal weight nature of the ETF ensures that the smaller companies have an equal amount of weighting when compared to the large cap companies such as Apple and Microsoft. Many of the technology focused funds are funds with very high concentrations in the largest of the technology companies, largely ignoring the smaller companies. An additional factor in deciding to buy RYT was the focus of the new administration being “the US first” and the likely tail wind  that small and mid-sized companies will enjoy with many of these companies solely based in the US and selling primarily within the US. The other changes in the hybrid models last week included minor adjustments to both the defensive equity ETF (DEF) and the equal weight industrials ETF (RGI). We are currently evaluating an area of the market that looks like the prospects are strong in 2017, but that the market has been discounting since the initial Trump rally. More to come if and when any new allocations are made to this sector.

 

Market Statistics:

 

The rally continued last week as Chair Yellen sounded more Hawkish and earnings season draws down to a close:

 

Index Change Volume
NASDAQ 1.82% Average
Dow 1.75% Above Average
S&P 500 1.51% Average

 

Volume was above the one-year average level on the Dow as earnings season continued to cause heavy trading in stocks that reported earnings during the week. We saw volume taper off into the weekend last week ahead of the extended President’s Day holiday weekend, as is typically the case.

 

The following were the top 5 and bottom 5 performers over the course of the previous week:

 

Top 5 Sectors Change   Bottom 5 Sectors Change
Biotechnology 3.51%   Home Construction -0.34%
Multimedia Networking 3.19%   Commodities -1.40%
Financial Services 3.08%   Natural Resources -1.76%
Pharmaceuticals 3.03%   Energy -1.89%
Regional Banks 2.81%   Oil & Gas Exploration -2.54%

 

Biotechnology and Pharmaceuticals both made the top 5 performing sectors list, primarily because they were not in the political cross hairs last week as Washington DC was kept very busy with the fallout from National Security Adviser Michael Flynn’s resignation. Steve Mnuchin was confirmed and sworn in as Treasury Secretary. With his approval, the markets pushed several areas of financials higher, with Financial Services and Regional Banks moving enough to make the top 5 sectors list. Deregulation and minimizing the impact of Dodd Frank seems to be one area that this administration will tackle quickly. With fewer regulations financials are typically more profitable. Multimedia Networking came in second place last week in terms of sector performance, thanks in large part to a surprise earnings beat by Cisco and a better than anticipated outlook for 2017 from the company. On the negative side, almost all sectors related to oil moved lower with the most risky, Oil and Gas Exploration, moving down the most, followed by Energy overall, then Natural Resources and Commodities. With the Keystone XL pipeline and several other pipe lines now looking all but inevitable, the supply of oil here in the US is likely to increase greatly over the coming quarters. When supply increases and demand stays the same, prices have to decline, which is what we saw last week. Home Construction also made the bottom five performing sectors last week as there seemed to be a little slowing down in demand for new homes here in the US.

 

With Fed Chair Yellen giving her testimony before Congress last week, it was a little surprising to see that bond prices really didn’t move very much and, in fact, prices moved lower despite the greater likelihood of a rate increase at one of the near term meetings. The most likely reason for this is that the fixed income markets heard what Chair Yellen said, but do not believe that she has the will to actually raise rates here in the US until the second half of 2017:

 

Fixed Income Change
Long (20+ years) -0.36%
Middle (7-10 years) -0.04%
Short (less than 1 year) 0.00%
TIPS -0.04%

Global currency trading volume was average last week as investors around the world made small changes to their positions following Chair Yellen’s testimony. Overall, the US dollar gained 0.19 percent against a basket of international currencies as many global investors are still waiting on actions from the new administration. The best performing of the global currencies last week was the Egyptian Pound, for the second week in a row, as it gained 11.8 percent against the US dollar. The gains in both the Egyptian fixed income markets and in the Egyptian pound are all due to the changes the government in Egypt instituted back in November, designed to allow more foreign investors to participate in its markets. While the Egyptian markets are very risky, their higher than average yields are currently attracting a lot of new money and thus demand for the local currency. The worst performance among the global currencies was seen in the Colombian Peso, as it declined by 1.2 percent against the value of the US dollar.

Commodities were mixed last week as precious metals advanced, while oil declined in value:

Metals Change   Commodities Change
Gold 0.07%   Oil -0.96%
Silver 0.24%   Livestock 0.36%
Copper -2.80%   Grains -1.81%
      Agriculture 0.10%

The overall Goldman Sachs Commodity Index declined 1.4 percent last week. Oil declined 0.96 percent, making it two weeks in a row of declines that we have seen in the price of oil. As mentioned above, supply and demand seemed like the primary driving force of the oil price movements last week. Metals were mixed last week as Gold advanced 0.07 percent, while Silver gained 0.24 percent and the more industrially used Copper declined 2.80 percent. The decline in the price of Copper would have been greater if it were not for a strike in Chile at copper mines toward the end of the week. Soft commodities were mixed last week, with Agriculture gaining 0.10 percent, while Livestock gained 0.36 percent and Grains posted a loss of 1.81 percent.

Top 2 Indexes Country Change   Bottom 2 Indexes Country Change
Caracas General Venezuela 6.53%   IPC All-Share Mexico -1.32%
Sao Paulo Bovespa Brazil 2.46%   CASE 30 Egypt -3.53%

Last week was a good week for global financial markets as 78 percent of the markets posted gains over the course of the week. The best performing index last week was found in Venezuela, with the Caracas General Index turning in a gain of 6.53 percent for the week. With the gains last week in Venezuela, the market has now been up more than 24 percent over the course of just the past two weeks. The worst performing index last week was found in Egypt, the CASE 30 Index, which turned in a loss of 3.53 percent as foreign investors took advantage of high yields in the Egyptian fixed income market over the Egyptian equity market last week.

As mentioned above, the VIX last week saw some very interesting movements during the week, but overall ended the week with a gain of 5.35 percent. Despite the small gains seen last week in the VIX, it continues to show persistent complacency over the volatility that one would normally expect given all that is going on with the markets. The current reading of 11.43 implies that a move of 3.30 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was a typical week in terms of the number of economic news releases, with the releases in aggregate being positive for the economy:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Neutral 2/14/2017 PPI January 2017 0.60% 0.30%
Neutral 2/14/2017 Core PPI January 2017 0.40% 0.20%
Neutral 2/15/2017 Core CPI January 2017 0.30% 0.20%
Neutral 2/15/2017 CPI January 2017 0.60% 0.30%
Positive 2/15/2017 Empire Manufacturing February 2017 18.7 7
Positive 2/15/2017 Retail Sales January 2017 0.40% 0.10%
Positive 2/15/2017 Retail Sales ex-auto January 2017 0.80% 0.40%
Neutral 2/16/2017 Housing Starts January 2017 1246K 1220K
Neutral 2/16/2017 Building Permits January 2017 1285K 1230K
Positive 2/16/2017 Philadelphia Fed February 2017 43.3 17.5

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

On Tuesday, the Producer Price Index (PPI) was released for the month of January, which came in showing faster inflation than was expected, both overall and when looking at core PPI. On Wednesday, the Consumer Price Index (CPI) was released and it too showed faster inflation than was expected. These two releases make it a bit easier for the Fed to raise rates as they can point to inflation picking up, unlike the past year when inflation remained stubbornly low. Also released on Wednesday were better than expected readings from retail sales for the month of January and a much better reading on the Empire manufacturing index for the month of February. This positive gain in manufacturing in the greater New York area was confirmed on Thursday when the Philly Fed index also showed very positive and surprising results. With inflation being shown to be picking up, as well as manufacturing and employment looking strong, it is easy to see why the Fed is contemplating raising rates in the near future. The final releases of the week last week were related to housing and were the housing starts and building permit figures for the month of January, which both came in above 1.2 million units, indicating a strong, but not overly strong US housing market during the month of January.

 

This week is a slow week for economic news releases with the highlight of the week being the FOMC meeting minutes from the February meeting. The release that has the largest potential to move the markets on the day it is released is highlighted in green below:

 

Date Release Release Range Market Expectation
2/22/2017 Existing Home Sales January 2017 5.57M
2/22/2017 FOMC Minutes February Meeting N/A
2/24/2017 University of Michigan Consumer Sentiment Index February 2017 95.8
2/24/2017 New Home Sales January 2017 566K

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

The economic news releases this week start on Wednesday with the release of the existing home sales figure for the month of January, which is expected to post a slight improvement over the December reading, coming in just short of 5.6 million units sold. Later during the day on Wednesday the Fed releases the meeting minutes from the February meeting, but with Chair Yellen having testified before Congress last week, as mentioned above, it is unlikely that there will be new and meaningful information in the minutes. We may, however, see which direction the discussions leaned in terms of who is in favor of moving at the March meeting and who is not. On Friday, the University of Michigan’s Consumer Sentiment Index for the month of February (middle of the month reading) is set to be released with little change anticipated when compared to the end of January reading of 95.7. Wrapping up the week this week is the release of the New Home Sales figure for the month of January, which, much like the existing home sales figure earlier in the week, is expected to post a modest increase. In addition to the above mentioned economic news releases there will be speeches given by two Federal Reserve officials during market hours next week that could slightly impact the direction of the markets.

 

Interesting Fact Presidential Golf

 

Golf has been a pastime for many US presidents, but it was Woodrow Wilson who really made it a point to play golf while being President. He played 1,200 rounds of golf during his 8 years as President. Woodrow Wilson found golf essential during World War I, often taking to the links daily. Wilson even played in the snow, using black golf balls.

 

Source: www.theatlantic.com

 

For a PDF version of the below commentary please click here weekly-letter-2-13-2017

Commentary quick take:

 

  • Major developments:
    • Rally continues
    • 84 consecutive days of no declines 1 percent or greater
    • 4th quarter earnings season continues to look good
    • All three indexes closed at all-time highs this week

 

  • US:
    • Earnings season drove performance
    • Several cabinet positions were approved
    • Fed is waiting on changes from the administration
    • Three rate hikes likely this year
    • US government lost in appeals court
    • Trump went after Nordstrom on Twitter, but failed

 

  • Global:
    • All central bank meetings took no action last week
    • Greece made headlines
    • Germany seems less likely to bailout Greece again

 

  • Technical market view:
    • All three indexes broke above new trading channels
    • VIX had a tame week

 

  • Hybrid investments strategy update:
    • No changes over the previous week
    • Positions have been performing as expected
    • Coca-Cola released earnings

 

  • This week for the markets:
    • Fed chair Yellen’s testimony on Capitol Hill
    • Trump: what will he do next?
    • Earnings season winds down further

 

  • Interesting Fact: Sweet hearts around the world.

 

Major theme of the markets last week: The rally continues!

market-rally-2-13-17

The current rally in the US financial markets is skating on pretty thin ice. While the market continues to advance without a single day of a pullback in excess of 1 percent and there are a lot of factors that could continue to push the markets higher, history would suggest otherwise. Markets typically do not move in one direction and one direction only. There are typically small pull backs, even during large rallies. One thing some market technicians watch is the number of days between daily declines of 1 percent or more on the major indexes. Looking at the market levels as of the close on Friday, there have been 84 consecutive days since the S&P 500 or the Dow had a decline of 1 percent or more on a single day. While this is not unheard of, it is becoming rarer as time goes by. The last time we had more than 84 consecutive days of market movements without a decline of 1 percent or greater was November 24th, 2006. Both the S&P 500 and the Dow ran for 94 trading days before they saw a decline of 1 percent on November 27th, 2006. The NASDAQ, being technology heavy, is a more actively moving index and has currently only gone 45 days without a decline of 1 percent or more. For those of you who may be interested, the longest run of days without a 1 percent decline for the Dow is 116 days (ending September 20th, 1993) and for the S&P 500, 110 days (ending May 18th, 1995). So, while the rally could continue, it is be becoming highly likely that at some point the market will stumble, even if only a little and for a short time.
US news impacting the financial markets:

 

Earnings reports were the primary driver of market performance last week as they were strong and seemed to be showing a resilient and very confident US consumer. Last week was the fifth week of fourth quarter earnings releases and, in aggregate, earnings continued to be better than expected. Below is a table of the well-known companies that released earnings last week, with earnings that missed expectations highlighted in red, while earnings that beat expectations by more than 10 percent are highlighted in green:

 

Advance Auto Parts pushed General Motors 12% Panera Bread 3%
Allergan 3% Gilead Sciences 14% Pioneer Natural Resources 63%
Aptargroup 5% Hasbro 28% Prudential Financial 6%
Archer Daniels Midland -6% Humana 1% Sysco 7%
Arrow Electronics -1% Jack Henry & Associates 1% Time Warner 5%
Brinks 23% Kellogg 8% Twitter 73%
Buffalo Wild Wings -29% Level 3 Communications 36% Tyson Foods 25%
CBRE Group 16% Maximus 15% Walt Disney 5%
CenturyLink -4% Mondelez International -4% Western Union 9%
Church & Dwight 5% Newell Brands 0% Whole Foods Market 0%
Coca-Cola 3% News Corp 6% Yelp 333%
CVS Health 2% O’Reilly Automotive 2% Yum! Brands 10%
Dunkin’ Brands 7% Pandora Media 25% Zillow Group 267%

 

Online technology companies saw some of the best figures last week, in terms of beating expectations, as both Yelp and Zillow beat expectations by more than 250 percent. Much of the percentage gain was due to the very low and near zero expectations going into reporting. Twitter also handedly beat expectations for earnings per share by 73 percent last week, while at the same time missing revenues expectations and lowering forward guidance for earnings. Twitter stock tumbled more than 11 percent the day following the announcement as revenues and revenues expectations drove the stock much more than the earnings figure. Pandora rounded out the online technology companies that beat expectations last week, besting expectations by 25 percent, thanks to increased subscriber numbers during the quarter. Consumer Staples was also a major group to report earnings last week as Tyson Foods beat expectations and saw its stock price recover some following the announcement of a federal subpoena looking into price fixing. Coca-Cola announced earnings that were in line with expectations, despite seeing its fourth consecutive year of declining sales volume. Church & Dwight and Kellogg both turned in strong results in the consumer staple space. Whole Foods met market expectations, but made some waves during its conference call as it lowered its expectations for future growth and actually announced the closure of 9 stores nationally over the next few months. The company has long been struggling with trying to lose the stigma of “whole paycheck,” which is used to describe how expensive it is for the average person to buy groceries from Whole Foods. So far, the changes the company has made to its business over the past year have not been as successful as hoped in changing consumer minds about the company.

 

According to Factset Research, we have seen 357 (71 percent) of the S&P 500 companies release their results for the fourth quarter of 2016. Of the 357 that have released, 67 percent have beaten earnings estimates, while 11 percent have met expectations and 22 percent have fallen short of expectations. When looking at revenue, of the companies that have reported, 52 percent of the companies have beaten estimates, while 48 percent have fallen short. The overall growth rate that we have seen so far for S&P 500 earnings for the fourth quarter currently stands at 5.0 percent, which is a significant amount above the 3.1 percent that was expected at the end of 2016. Of the companies that have reported earnings, there have been 82 companies that have issued forward looking guidance for the first quarter of 2017. Of the 82 companies that have released forward guidance, 57 have issued negative earnings expectations, while only 25 have issued positive guidance.

 

This is the sixth full week of trading during which fourth quarter earnings are being released. The number of easily recognized companies reporting earnings this week continues to decline and we are starting to see more of a shift toward consumer facing companies reporting. The table below shows the companies that have the greatest potential to move the markets highlighted in green:

 

Agilent Technologies CubeSmart J M Smucker
Barnes Group Dean Foods Molson Coors Brewing
Bloomin’ Brands Deere & Co Owens & Minor
Cabela’s Denny’s PepsiCo
Caesars Entertainment Dr Pepper Snapple Group Time
Campbell Soup First Data T-Mobile
CBS Flowserve VF Corp
Cisco Systems Fossil Group Waste Management
Cooper Tire & Rubber Groupon Wendys

 

After Coca-Cola posted declining volumes last week, investors will be closely watching Pepsi to see if it is a more wide spread phenomenon or just something going on with Coke. Deere & Company is another company that the markets will watch closely as its heavy machinery is used in many different applications around the world, providing a great indicator for how the overall industrial sector is doing. T-Mobile will be followed closely as investors are trying to figure out if T-Mobile’s new unlimited data and unlimited talk plans are actually attracting new customers or if the company is still losing customers to competitors, as has been the trend in recent quarters. Earnings will not be the only driving force behind the market movements as politics continues to play into the mix.

 

Several more members of the Trump cabinet were approved last week with most of the approvals coming by very narrow margins. In the case of the Secretary of Education, a tie had to be broken by the Vice President himself, who cast the 51st vote in favor of Betsy DeVos. After a rough confirmation hearing for Secretary DeVos, her first day on the job proved to be just as challenging; protestors blocked her from entering a public school in the Washington DC area and hurried both her and her security detail back to their vehicles before they sped off. The President had a few setbacks during the week as well as the 9th circuit court of appeals upheld a lower court’s ruling that blocked Trump’s immigration order. This provided a bit of a pop to the airline stocks, which had been hit following the announcement of his select country immigration ban. President Trump took to Twitter, as he has many times in the past, and said that the Department of Justice will be taking the case to the Supreme Court, which is currently evenly divided down party lines four to four and could very well end up with a hung decision on the immigration ban unless Trump’s Supreme Court nominee can be confirmed in time to be on the case, which seems unlikely. Something unusual also happened this week after President Trump launched a personal attack on Nordstrom via Twitter for dropping his daughter’s clothing line. The stock price actually went up and went up by more than 4 percent following his negative tweet. This is a first as the previous times President Trump has gone after a specific company on Twitter, its stock moved significantly lower.

 

Global news impacting the markets:

 

Global news last week continued to seemingly be on hold as the world waits to see what will actually come out of Washington DC once the initial wave of actions is complete. This includes trade agreements that will need to be reworked now that the TPP and NAFTA are in the cross sights of President Trump, which could drive global market performance. For their part, even the central banks that held meetings last week took no action, choosing to wait and see how things develop in the US before making any changes. The central banks that met last week include the Bank of New Zealand, Bank of Australia and the Bank of India. There was, however, a story that popped up that has surfaced many times in the past and was largely ignored by the financial markets this time around—Greece.

 

Greece continues to struggle with the debt burden it is carrying. This was made glaringly clear last week as the IMF released its bi-annual report on the economic situation in Greece. In boiled down terms, Greece is still very much in debt and the debt is, once again, quickly getting out of control. At this point, Greece is in need of another tranche of its promised bailout funds to make the payment on its previous bailout agreement. If Greece does not receive the bailout funds, it will likely default on some of its debts. Germany, this time around, does not appear to be in the mood to offer any more olive branches to Greece as the head of the Free Democrats Party (FDP) has called for Greece to leave the Eurozone rather than receive any more money in the form of bailouts. While this type of call would typically be ignored, as it has in the past by politicians in both Germany and the Eurozone overall, it cannot be ignored any more as the FDP looks like they could legitimately win this year’s election in Germany. If the FDP does win the election in Germany, they could form a coalition government that is very much focused on doing what is best for Germany and it could mean the cessation of funding some of the less economically viable countries in Europe. Currently, the IMF is not a creditor to the situation with Greece, which has some countries a little upset. To the IMF’s credit, it has said that it would like to loan Greece money, but that Greece currently doesn’t meet the necessary economic requirements to qualify for any loans.

 

Technical market review:

 

With the breakouts that occurred on the three major indexes over the past three weeks, we have redrawn trading channels this week (yellow lines below). All of the trading channels are sloped upward, with the fastest slope seen on the NASDAQ, while the slowest slope is seen on the Dow. The red line on the VIX chart remains the 52-week average level of the VIX, which the index is currently solidly below.

4-charts-combined-2-13-17

The indexes technically confirmed their breakouts above the previously drawn trading ranges (horizontal ranges) last week on both the Dow and the S&P 500, which led us to redraw the trading channels this week. Even the most current trading channels drawn above were broken out of to the up side on both the S&P 500 (upper left pane above) and the Dow (upper right pane above), while the NASDAQ ended the week almost directly at the upper level of its trading channel. From a technical perspective, the current markets look strong and could continue to keep moving higher as earnings season starts to come to an end and Washington DC works on picking up the pace of growth in the economy. The VIX (lower right pane above) continues to signal that everything is fine with the markets and it will be relatively smooth sailing for at least the next 30 days. However, as we have seen in the past, the VIX can jump on a moment’s notice for a wide variety of reasons.

 

Hybrid model performance and update

For the trading week ending on 2/10/2017, returns in the hybrid hypothetical models* (net of a 1% annual management fee) were as follows:

 

Last Week 2017 YTD Since 6/30/2015
Aggressive Model 0.90% 1.84% 7.25%
Aggressive Benchmark 0.53% 3.66% 3.47%
Growth Model 0.73% 1.79% 6.33%
Growth Benchmark 0.42% 2.85% 3.00%
Moderate Model 0.55% 1.62% 5.27%
Moderate Benchmark 0.30% 2.04% 2.42%
Income Model 0.51% 1.54% 5.00%
Income Benchmark 0.15% 1.04% 1.52%
Quant Model 0.46% 6.35%
S&P 500 0.81% 3.45% 12.26%

*Model performance does not represent any specific account performance but rather a model of holdings based on risk levels that are like my actual holdings, the hypothetical models are rebalanced daily to model targets.

 

There were no changes to the hybrid models over the course of the previous week. Positioning remains tilted toward areas of the market that should benefit the most from potential new administration actions that will try to get the economy growing faster. We had several companies report earnings last week on the individual equity holdings, but there was nothing surprising or notable in any of the releases. This week there are a few of the remaining individual equity positions that will report earnings. Owens and Minor (OMI) will be watched very closely to see if the company provides any insight into any adverse impact we could see on its stock price due to the changes to or dismantling of the Affordable Care Act, which is supposed to be the number one agenda item of Republicans on Capitol Hill following all of the nomination hearings that are still ongoing.

 

Market Statistics:

 

The rally continued last week for the markets thanks to strong reported earnings and a few comments by the President about taxes:

 

Index Change Volume
NASDAQ 1.19% Average
Dow 0.99% Average
S&P 500 0.81% Average

 

Volume remained average last week, which is a little unusual in the middle of earnings season. All three indexes made new all-time highs in tandem at several points during the week last week, ending the week at the highest levels ever seen.

 

The following were the top 5 and bottom 5 performers over the course of the previous week:

 

Top 5 Sectors Change Bottom 5 Sectors Change
Software 2.39% Financials -0.12%
Aerospace & Defense 2.21% Oil & Gas Exploration -0.14%
Pharmaceuticals 1.98% Natural Resources -0.28%
Home Construction 1.89% Energy -0.47%
Multimedia Networking 1.87% Telecommunications -0.81%

 

The sectors that performed the best last week included several sectors that had been lagging behind the other sectors over the past month: Software, Aerospace and Defense, Pharmaceuticals and Multimedia Networking. Much of the gains in these four sectors appeared to be market timers trying to buy sectors of the markets that have the largest potential to outperform as they play catch up with the broad indexes. Home Construction was the odd man out in the positive sectors last week as the sector has been performing relatively well over the past several months. The primary driving force behind the positive move in the sector last week was the continued strength of the very large home builders such as DR Horton and Lennar Homes. On the negative side last week, Energy hit two of the sectors despite a rally in oil prices on Friday. Financials made the list of negative performers last week thanks to uncertainty over how deregulation will be handled by the new administration. There is little doubt that it will be coming, but investors are now trying to figure out how it will be accomplished. Telecommunications was the worst performing sector of the markets last week, in large part due to Globalstar, which declined by 14 percent for the week after the abrupt announcement that the President and Chief Operating Officer was stepping down immediately.

 

After several weeks of bonds meandering lower here in the US, last week they turned around and jumped higher, with the long end of the curve seeing the most price movement, while the short end saw the least, as is expected. Much of the move was due to the unlikely nature of the Fed being able to increase rates before at least the June meeting.

 

Fixed Income Change
Long (20+ years) 1.48%
Middle (7-10 years) 0.40%
Short (less than 1 year) 0.02%
TIPS 0.33%

Global currency trading volume was finally back to normal levels following several weeks of various holidays closing some markets around the world. Overall, the US dollar gained 0.97 percent against a basket of international currencies, as there was a general lack of political torpedoes fired at the US dollar last week from any members of the new administration. The best performing of the global currencies last week was the Egyptian Pound, which gained 4.7 percent against the US dollar, as Egypt continues to try to open its financial markets to global investors. The worst performance among the global currencies was seen in the Norwegian Krone, as it declined by 1.9 percent against the value of the US dollar.

Commodities were mixed last week as the metals turned in solid gains, while the soft commodities were mixed:

Metals Change Commodities Change
Gold 1.27% Oil -0.35%
Silver 2.72% Livestock -0.81%
Copper 6.67% Grains 3.62%
Agriculture 0.00%

The overall Goldman Sachs Commodity Index advanced 0.38 percent last week. Oil declined 0.35 percent, during and even after a report came out on Friday that signaled that the OPEC freeze/production cut seems to be holding after the first round of reported numbers from the group were released. Metals were positive last week as Gold advanced 1.27 percent, while Silver gained 2.72 percent and the more industrially used Copper jumped 6.67 percent; the wild swinging movements in the price of Copper continue. Soft commodities were mixed last week, with Agriculture flat overall (perfectly flat on a point-to-point calculation from the previous week, despite intraweek movement), while Livestock declined 0.81 percent and Grains posted gains of 3.62 percent.

Top 2 Indexes Country Change Bottom 2 Indexes Country Change
Caracas General Venezuela 17.45% FTSE MIB Italy -1.33%
WIG Poland 3.57% RTS Index Russia -2.20%

Last week was a good week for global financial markets as 83 percent of the markets posted gains over the course of the week. The best performing index last week was found in Venezuela, with the Caracas General Index turning in a gain of 17.45 percent for the week. Much of the gains last week on the index could be attributed to the OPEC deal holding up and not endangering the price of oil. The worst performing index last week was found in Russia, the RTS Index, which turned in a loss of 2.20 percent as Russian President Putin seems to be taking more and more action in Ukraine and amassing more troops at the border. While President Trump has said that he would like a better relationship with Russia than the US has had recently, he is unlikely to go along with Russia going on yet another land grab without there being consequences.

The VIX had a lazy week last week, declining by 1.09 percent overall, but in general it was a smooth trading week for the fear gauge. The VIX has now been showing persistent complacency for several months and it does not look like this will change any time soon, as all of the new ideas that the administration would like to implement to try to get the economy growing faster are far more than 30 days out. The current reading of 10.85 implies that a move of 3.13 percent is likely to occur over the next 30 days. The direction of the move over the next 30 days is unknown.

Economic Release Calendar:

 

Last week was tied for being the slowest week for economic news that we have seen over the past year, with only one release that could have impacted the markets and even it didn’t have a noticeable impact when it was released:

 

Economic Impact Date Economic News Release Date Range Actual Expectation
Slightly Negative 2/10/2017 University of Michigan Consumer Sentiment Index February 2017 95.7 97.9

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

The only economic news release that was released last week came out on Friday and was the University of Michigan’s Consumer Sentiment Index for the month of February (first estimate). The release indicated that sentiment declined slightly during the first two weeks of February when compared to the ending value for January. There were four speeches given by Fed officials last week, but in aggregate they said nothing that was not already known by the markets and had little if any impact on the overall markets.

 

With last week being such a slow week, this week will seem very busy on the economic calendar, but it is really just an average week for economic news releases. The releases that have the largest potential to move the markets on the day they are released are highlighted in green below:

 

Date Release Release Range Market Expectation
2/14/2017 PPI January 2017 0.30%
2/14/2017 Core PPI January 2017 0.20%
2/15/2017 Core CPI January 2017 0.20%
2/15/2017 CPI January 2017 0.30%
2/15/2017 Empire Manufacturing February 2017 7
2/15/2017 Retail Sales January 2017 0.10%
2/15/2017 Retail Sales ex-auto January 2017 0.40%
2/16/2017 Housing Starts January 2017 1220K
2/16/2017 Building Permits January 2017 1230K
2/16/2017 Philadelphia Fed February 2017 17.5

Data for table from Econoday.com, Bloomberg and Yahoo Finance

 

This week the economic news releases start on Tuesday with the release of the Producer Price Index (PPI) for the month of January. Both the overall PPI and the core PPI are expected to show virtually no inflation as both are expected to print near three tents of a percent increase. The Consumer Price Index (CPI) will be released on Wednesday and both overall CPI and core CPI are also expected to post very little gains in January. If both PPI and CPI numbers print as low of figures as expected, it will continue to show that inflation is currently not a problem for the US economy and it will also provide leeway for the Fed to remain at these very low rates for an even longer period of time. Typically, ultra-low interest rates cause inflation to run high, thus forcing the Fed to raise rates in an attempt to cool things off, but so far this cycle the low rates have failed to cause inflation in the US economy. Perhaps more important, on Wednesday the latest retail sales figures for the month of January will be released with expectations of very slow sales growth of only 0.1 percent overall and 0.4 percent when excluding transportation. If these numbers turn out to be correct it would signal a meaningful slowdown from the 0.6 percent growth that we saw in December, despite much of the December growth being due to the holiday shopping season. We need to see retail sales numbers increasing at a faster pace to have the US economy fully on sure footing. Also released during the day on Wednesday is the latest reading for the Empire Manufacturing index for the month of February, which is expected to show little change from the 6.5 reading in January, as it is expected to post a reading of 7, signaling slow but steady expansion in manufacturing in the greater New York area. On Thursday, two housing related figures are set to be released, the housing starts and building permits figures, both for the month of January and both expected to be right about 1.2 million units. If the numbers are close to these two releases, the markets should largely ignore them. Wrapping up the week this week on Thursday is the release of the Philadelphia Fed Index for the month of February, which is expected to show that manufacturing and business conditions slowed down from the fast expansion seen in January, but are still expanding nicely in the region. In addition to the economic news releases of this week, there will be some closely watched testimony before Congress by Fed Chair Yellen as she is giving her biannual state of the US economy update to Congress. The question and answer period in both chambers is always the most interesting, but she may give some hints as to her current thinking and what, if any, impact it could have on future Fed rate hikes.

 

Interesting Fact Sweet hearts around the world.

 

According to the National Confectioners Association, there are about 8 billion little candy hearts sold each Valentine’s Day. With each heart being about half an inch in width, that is enough hearts to circle the earth two and a half times.

 

Source: http://www.candyusa.com