The Party Continues . . . But
Thinking and Doing
What can I say about the
state of the stock market except "wow". The Dow Jones Industrial
Average, S&P 500 and Nasdaq Composite are all at record high
levels. Interest rates have leveled off, and even fallen a bit. The
price of oil is comfortably over $50/barrel. Investor optimism is high
and volatility is low. Corporate earnings for Q4 have come in better
than expected and analysts are cautiously optimistic that they'll get
better as the year progresses.
that means it's full steam ahead with no worries, right? Not exactly.
There are potential storm clouds ahead. And the biggest and baddest of
those dark clouds resides, part-time anyway, at 1600 Pennsylvania
Avenue. But for now, I'll leave you with an old adage that seems very
timely right now: "don't fight the tape".
Let's take a look at the chart of the #DJIA. Last month I predicted that we would "see #Dow20k sometime in
January." That ended up being spot on as the venerable index passed 20,000 on January 25 in the midst of a
powerful post-election surge that has taken the average from 17,883 to
the close of 20,269 on Friday. That's a 13.3% gain in only three
months. Even more impressive is the 31.2% return in just the past year.
That doesn't begin to describe the almost 210% gain in the past eight
years since the bottom of the financial crisis. Enjoy the gains while
they last; the day of reckoning is coming - sooner or later.
Even though the Dow
Jones Transportation Average has recently achieved a record high, the
index continues to underperform its industrial sibling. If #Trump
is able to enact a viable infrastructure stimulus plan I would expect
this average to jump to new heights. Until that time, I wouldn't be
surprised to see a period of consolidation.
The Dow Jones Utility
Average has continued to strengthen over the past few months,
perhaps riding the
coattails of the broad market rally, but also enjoying a period of
somewhat lower interest rates. Now let's see if the index can surpass
the green resistance line before the Federal Reserve enacts its
next rate increase.
Key Economic Statistics
to the Department of Labor, the
figure for seasonally-adjusted initial jobless claims for the week
ended February 4 was 234,000, a decrease from the prior
week, and about the same as the prior month's figure.
The four-week average of 244,250 was a decrease of about
12,000 from the prior month.
non-farm payroll employment report in January far
surpassed expectations as 227,000 jobs were gained in the
but 39,000 net jobs were subtracted from the
prior two months. The household survey reported that the unemployment
rate ticked up to 4.8%, but that isn't a bad thing as evidence suggests
more people are entering the labor force, which is why the labor force
participation rate inched up to 62.9. Average hourly wages for blue
rose to a new high of $21.84 while the average work
week has remained stuck at 33.6 hours for eleven of the last twelve
million workers were counted as
unemployed, and 1.9 million people remained
unemployed longer than 27 weeks. The seasonally
adjusted number of people who could only find part-time work rose to
5.8 million while the number of marginally attached workers
ticked up to 1.8 million. The number of people holding multiple
jobs dropped to 7.41 million. All of this resulted
in the U-6 "underemployment" rate falling rising 9.4%, just off the
lowest level in a decade.
Congressional Budget Office (CBO) estimated that on a net present value
basis, the nation's budget surplus was $49 billion in January,
resulting in a deficit of $159 billion for the first four
months of fiscal
2017, roughly in line with the deficit for the same period last year.
Census Bureau reported that privately owned housing starts
increased 11.3% in December to 1,226,000, which was up 5.7% from a year
ago. It was also the largest total since the end of 2007.
Census Bureau reported that on a seasonally adjusted annualized
basis 536,000 new homes were sold in December, down
10.4% from November, and basically the same figure as a year
ago. The estimate of the
number of homes for sale was 259,000, representing 5.8
months of inventory at the current rate of sales, the widest gap in the
year. The median sales
price was $322,500, well above the rising 12-month moving average
price of $308,942.
National Association of Realtors reported that 5.49 million existing
homes were sold in December, off the highest level of the
year, which was down 2.8% from the prior month, and up 0.7% from a year
ago. The estimate of the number of homes for sale was 1.65 million,
representing only 3.6 months of inventory at the current
rate of sales. The median price was $232,200, which is right
on the rising 12-month moving average price.
to the Institute for Supply Management (ISM), economic
activity in the manufacturing sector expanded in January for
the fifth month in a row, rising from 54.7 to 56.0. The ISM index of
non- manufacturing activity dipped to 56.5, which signaled
growth in the service sector for 84 consecutive months. These are solid
numbers, suggesting the economy is humming right along.
Conference Board reported that its index of Leading Economic
Indicators (LEI) was increased 0.5% in December, following a gain of
0.1% in November. "The
U.S. Leading Economic Index increased in December, suggesting the
economy will continue growing at a moderate pace, perhaps even
accelerating slightly in the early months of this year," said Ataman
Ozyildirim, Director of Business Cycles and Growth Research at The
Conference Board. "December’s large gain was mainly driven by improving
sentiment about the outlook and suggests the business cycle still
showed strong momentum in the final months of 2016.
to the "advance" estimate by the Bureau of Economic Analysis,
GDP increased at a tepid annual rate of 1.9% in Q4 2016. This compares
poorly with the 3.5% rate of growth from Q3 but is slightly better than
the 1.4% growth rate in Q2 and 0.8% in
Q1. It is also slightly better than the 1.4% from Q4 2015.
This report should help the Fed hold off on implementing the
next rate increase until sometime in the second quarter.
to the BLS, the seasonally adjusted Consumer Price Index
for all Urban Consumers (CPI-U) increased 0.3% in December,
after a 0.2% increase in November. Over the last twelve months, the
index rose 2.1%, which is basically right on the 2.0% target
set by the Fed.
Conference Board's Consumer Confidence Index dipped to 111.8 in January
from 113.3 (revised) in December. "Consumer
confidence decreased in January, after reaching a 15-year high in
December," said Lynn Franco, Director of Economic Indicators at The
Conference Board. "The decline in confidence was driven solely by a
less optimistic outlook for business conditions, jobs, and especially
consumers’ income prospects. Consumers’ assessment of current
conditions, on the other hand, improved in January. Despite the retreat
in confidence, consumers remain confident that the economy will
continue to expand in the coming months.
Trends To Watch
Following an inexorable
climb during the second half of 2016, the value of the dollar index has
taken a hit during 2017, which has provided a little relief to
companies with significant overseas revenues. It's also helping the
price of commodities like oil and gold. As always, the relative
movement of the dollar will be a very important trend to watch this
Looking at the chart of
the yield on the 10-year Treasury bond, we can see two failed attempts
to pierce resistance at 2.6%. As I've said for the last few months, I
we'll surpass 3% in the near term, but I do expect to see rates at that
level in the second half of the year.
The price of West
Texas Crude is consolidating at a new resistance
level around $54 per barrel. These slightly higher prices are
generating nice gains in the stock prices of
companies throughout the energy sector. Should the price remain in the
$50s, or even move up to $60, I would expect to see businesses in the
oil patches start hiring again as they attempt to bring increased
online. That would eventually put a cap on the price as increased
production would drive the price of oil back down. But for now, we
enjoy the gains.
The action on the price
of gold continues to be a traders dream and an investors nightmare,
with wild swings but no sustained direction. After
it cratered through resistance just below $1,200
per ounce, the price has surged higher, blowing right back through
resistance. Honestly, I have no idea what's next, but my guess is
there's a greater chance of it moving below $1,200 than above
The good times continue
to roll for the tech
sector, as evidenced by the
chart below, showing the tremendous gains in the Nasdaq Composite.
Investors continue to focus on the growth and the
earnings potential of these stocks. I do, though, expect a little
breather in the weeks or months ahead, bringing the index back down to
meet the rising (purple) trendline, which may offer another good buying
After enjoying a huge
post-election run-up, the
financial sector continues to take a much needed breather as the index
consolidates just below resistance at 24. I think everyone is simply
waiting to see if the Trump administration is able to follow through on
its goal to repeal Dodd-Frank, and perhaps other governance, thereby
releasing banks from some of their regulatory
shackles. In addition, the market is anticipating higher interest
rates, which will result in higher lending
margins, which will boost earnings. I remain bullish.
The housing index is now making a third attempt to breach resistance around 255. I continues to expect the
index to remain in the trading range outlined between the dotted purple
and solid red lines for at least the first quarter, after which the next rate
increase could send the index lower.
The index representing the developed international
markets continues to be range-bound, as it has been for most of the past year. Looking ahead, I see no reason for optimism.
NYSE Bullish sentiment index has remained in a narrow range
for the last eleven months, most recently hugging the resistance line
around 72.5. I would normally be very wary of this level of
bullishness. The fact that RSI has declined precipitously calms my
fears a bit, yet I am still concerned.
Finally, the price of
remains at absurdly low levels, suggesting way too much complacency
among investors, and that makes me nervous. We're due to have something
happen. The abnormally low levels of volatility, combined with the high
levels of bullishness, leave me very concerned that a correction of
some sort could be coming in our near future.
What I'm Thinking and Doing
I've had a few clients
reach out to me since #Trump took office, wondering what effect he
might have on the
market and our portfolios. My basic answer is that in the short-term,
his campaign rhetoric, and early executive actions, have appeared to be
positive for business, and therefore good for the stock market. He's
talking about infrastructure, tax cuts, regulatory reform and "bringing
jobs back to America". And that all sounds great. The problem is that
the devil is in the details, and there have been no details provided by
this administration as to how of of these, or any, initiatives are to
be implemented or funded. So for now the market is rejoicing in
collective optimism. Sooner or later reality must set in and then we'll
see what happens to the stock market.
I have to admit it's
difficult to invest in the face of so much uncertainty. As a result,
I've decided to simply follow my normal strategy of owning the best
companies in growing sectors, collecting dividends and cutting losses
quickly when an idea goes against me. This strategy has served me well
over the past two decades and I see no reason to change my ways
So far in 2017 I
eliminated one position in the pharmaceutical industry and added a few
new ETF holdings. By the end of last year I had completely eliminated
all of my mutual fund holdings. Those portfolios had been my worst
performers over the last couple of years and I decided that the time
was right to shift those holdings from mutual funds to ETFs. I expect
better performance, for lower cost, going forward, with greater
as I mentioned above, I prefer to let my winners run while minimizing
my losses. There are stocks in my own account that I've owned for more
than 20 years and have no plans to ever sell. That is the way to build
wealth. The only time I sell something is if it gets to be too big as a
percentage of the overall portfolio, or if the fundamental reason why I
bought it in the first place has changed. Otherwise, I prefer to buy
and hold indefinitely, thereby eliminating trading costs and
I buy a new stock, I do so with the belief that it is a leader in its
sector, it has strong competitive advantages, it is growing, profitable
and generating positive cash flow, and that all things being equal, I
intend to own it for at least three to five years. I try to avoid
deeply cyclical industries, fads, or "story stocks". I'm investing
money for my clients and my family and I take that responsibility very
seriously. I want to help my clients build wealth over time, not "get
rich quick". That's why I'm still here, in business serving my clients
for twenty years, and still going strong.
News and Notes
We'd just finished
digging out from the winter storm that blanketed much of the Northeast
on Thursday when we were hit with an ice storm last night, followed by
heavy, gusting winds today. Clearly Mother Nature had not forgotten
about us during a very mild start to winter. I'm already sick of the
cold, dark days and ready for Spring. I'll have to accept instead a
few, all-too-brief, trips to warmer climates until the sun is strong
enough locally to warm my bones.
has started playing locally with a new band called Merlin. If you live
in, or near, Westchester County, you should join us at their next gig
in March when they're playing in Port Chester. If you want more
information, either check out their Facebook page or email me for the
I'm very blessed that my
kids are all thriving. Nola graduates college in just a few months.
Lily is getting more active in social justice and women's rights as a
freshman at George Washington University. Ezra just passed his driver's
test and is having his best year ever in school. Kathiryn and I keep
busy on our not-for-profit Boards and with the constant stream of
kittens that we've fostered over the past few years. I think we've now
placed more than two dozen kittens into wonderful, loving homes.
it for this month. I look forward to
communicating with you in the months ahead. If you have any questions, please don't hesitate to contact me.
and Views", Copyright, Werlinich Asset Management, LLC and
www.waminvest.com. All Rights Reserved.