ECONOMIC OUTLOOK: “Turn Out the Lights, the Party’s Over?”
- You resident country music buffs almost certainly recall the Willie Nelson performance of the melancholy refrain by the rejected lover who concludes that all good things must end. But you may not remember the ending line of the song: “But tomorrow starts the same old thing again…” Willie’s tune is a pretty good descriptor of the current economic expansion that just refuses to roll over, having survived numerous predictions of coming to an end.
- In last week’s Investment Committee discussion, Analyst Corbin Grillo, CFA, provided the executive summary of the latest research review. Despite the length of this expansion, global macro research firm Strategas still sees signs of global economic momentum. In the U.S., initial jobless claims, a good leading indicator of the labor market, hit their lowest absolute level since 1973, when the labor force was just 60 percent of its current size! Clearly, employers are holding on to employees.
- In Europe, economic sentiment remains high, and new auto registrations are rising. And finally in Japan, it appears further fiscal stimulus may be forthcoming, and female labor participation keeps increasing.
- Committee Chair Walter Christopherson shared an interesting anecdotal confirmation of the global data from a report by Bloomberg relative to Q3 results reported by Volvo and Daimler: “Truck and construction equipment orders rose 32 percent and 45 percent respectively in the three-month period (compared to a year earlier). Encouragingly, that growth comes not just from China but is much more broadly based. ‘Market demand is strong,’ Martin Lundstedt, Volvo’s chief executive, said, noting that even the long-suffering Brazilian heavy duty truck market is bottoming out. Daimler AG’s truck business is roaring ahead too. Its sales rose 30 percent in the third quarter, with increases in previously tough markets such as Indonesia, India, Turkey and Brazil.” Strong demand for heavy trucks and equipment does not portend an economy approaching a tailspin.
- Housing market data stands a bit in contrast and continues to be a little spotty. Both housing starts and new permits fell about 4.5 percent in September. But again, weather may be effecting these measurements. If there is one silver lining, it is that permits for single-family homes (as opposed to multi-family units – think big apartment complexes) have been steadily improving. Typically, single-family home builds lead to greater economic activity than their multi-family counterparts.
- Despite the lackluster data, confidence among home building and real estate businesses remains strong. The National Association of Home Builders Housing Market Index popped back up to 68 from 64 the previous month. This measure was in the high 50s to low 60s for most of 2016.
- The labor market in the U.K. hasn’t shown many ill-effects from Brexit just yet, as the most recent unemployment rate is near an all-time low at 4.3 percent. However, a weaker currency has led to higher than expected inflation, which appears to be hurting consumer spending. Retail sales fell 0.8 percent in September and are up a paltry 1.2 percent over the past 12 months.
- China released a spate of data last week, most of it fairly positive. 3rd quarter GDP came in at a 6.8 percent annual rate, and retail sales are up 10 percent from a year earlier.
EQUITY MARKETS: 30 Year Anniversary of Black Monday…Came and Went Without Note
- If you follow the financial media at all, surely you were aware that last week marked the 30th anniversary of “Black Monday,” when markets dropped dramatically, falling over 20 percent in just one day. It was even featured on the cover of Barron’s magazine.
- Chief Investment Officer Ryan Patterson, CFA, observed that the Black Monday anniversary proved much ado about nothing, as investors ignored whatever anxiety the anniversary may have caused, pushing the S&P 500 up another 1 percent on the week. The S&P 500 is now up 17 percent on the year.
- A few good earnings reports out of big companies like IBM and Johnson & Johnson helped, but it was more likely what was going on in Washington that excited investors. On Thursday evening, Senate Republicans passed a budget resolution for next year, clearing a major hurdle for potential tax reform. The resolution allows Congress to cut taxes by $1.5 trillion over the next decade with only a majority vote of 51 members of the Senate. Even Bob Corker, just the latest to draw the ire of President Trump’s twitter account, said “the only thing about this that matters is preparation for tax reform.”
- RBC Capital Markets believes that a corporate tax cut to 20 percent could add $50 in earnings-per-share to the S&P 500. Our view is that this potential upside to corporate earnings is not fully priced in to current market valuations.
FIXED INCOME MARKETS and the FED: Investors Buying More Bonds as Prices Decline
- A pick-up in global growth? Strong equity markets? Central banks intent on raising interest rates? None of it seems to have deterred bond investors. Morningstar reports that taxable bond funds were the most popular investment category in September, registering $34.9 billion in inflows. This comes even though the 10-Year Treasury yield has risen from 2.06 percent to 2.38 percent in just the past 6 weeks.
- Nick Ibanez, Fixed Income Analyst, continues to keep the Committee up to date on the handicapping regarding the next Federal Reserve Chair appointment. Politico is now reporting that Jerome Powell is the leading candidate for next Fed Chair, ahead of incumbent Janet Yellen and previous favorite, Kevin Warsh.
- So what does this mean for monetary policy? Well, according to Horizon Investments Chief Strategist Greg Valliere, Powell is “viewed as a Yellen clone on monetary policy.” Some analysts are suggesting that Powell represents a combination of continuity from the Yellen era, as well as favoring financial deregulation, which President Trump may prefer.
THE WEEK AHEAD:
- Eurozone, Consumer Confidence (European Commission)
- U.S., Durable Goods Orders (Census)
- U.S., New Home Sales (Census, Commerce Dept, HUD)
- U.K., 3Q GDP
- Eurozone, European Central Bank Meeting
- U.S., 3Q GDP (BEA)