March 20, 2017

The stock market manages to ignore the moronic tweets of our bumbling and ill-equipped President as it continues to deliver one record high after another. And don't let #Trump fool you; the market gains are not thanks to his actions, but in spite of them. The good news is that the economy appears to be on sound footing, good enough, in fact, that the Fed felt comfortable enough to raise their prime lending rate by 0.25% last week, and the stock market soared on the news. As I write this, all the major indices are within a whisper of their record levels. So for now, I think it's best to follow an old Wall St. adage: "Don't Fight The Tape". Basically, that means keep riding the trend, until it stops. Too many investors jump ship long before the primary bullish trend is over. My advice is to just stick with what's been working. 

Let's take a look at the chart of the #DJIA. After blowing right through #Dow20k, the venerable index kept right on going until it briefly surpassed 21,000 a few weeks later. I would expect a short period of consolidation now, between 20,000 and 21,000. Then, unless there is new stupidity from the White House, or some other external shock, I think we can expect even further gains down the road as Q1 corporate earnings are reported in April. 

The more sensitive Dow Jones Transportation Average has had a much more steep drop after hitting its record high a few weeks ago. After rising on the unrealistic hopes of Trump's $1 trillion infrastructure fantasy, it's now backing off on the understanding that those wildly optimistic plans will likely never come to fruition. That being said, the economy is doing better, more people are working, and therefore spending money. So I expect the index to continue its upward trajectory after it finishes consolidating.

I would have to say that the Dow Jones Utility Average is the surprise of the market right now. The staid index of "widows and orphans" has enjoyed a 14.5% gain over the past four months, which is pretty good for a basket of utilities. The sector continues to enjoy the relatively low interest rates, and even survived the first Fed rate increase. Now let's see if the index can surpass the record set last July.

Key Economic Statistics

• According to the Department of Labor, the figure for seasonally-adjusted initial jobless claims for the week ended March 11 was 241,000, a number basically in line with the prior week, and slightly higher than the prior month's figure. The four-week average of 237,250 was a  decrease of about 7,000 from the prior month.
• The non-farm payroll employment report in February far surpassed expectations for the second month in a row as 235,000 jobs were gained in the month, and 9,000 net jobs were added back to the prior two months. The household survey reported that the unemployment rate dropped back to 4.7%, at the same time the labor force participation rate inched up to 63.0. Average hourly wages for blue collar workers rose to a new high of $21.86 while the average work week has remained stuck at 33.6 hours for twelve of the last thirteen months.
• 7.5 million workers were counted as unemployed, and 1.8 million people remained unemployed longer than 27 weeks. The seasonally adjusted number of people who could only find part-time work rose to 5.7 million while the number of marginally attached workers dipped to 1.7 million. The number of people holding multiple jobs jumped to 7.98 million. All of this resulted in the U-6 "underemployment" rate falling to 9.2%, which is the lowest level in a decade.
• The Congressional Budget Office (CBO) estimated that on a net present value basis, the nation's budget deficit was $192 billion in February, resulting in a deficit of $348 billion for the first five months of fiscal 2017, roughly in line with the deficit for the same period last year.
• The Census Bureau reported that privately owned housing starts increased 3.0% in February to 1,288,000, which was up 6.2% from a year ago. It was also the largest total since late in 2007.
• The Census Bureau reported that on a seasonally adjusted annualized basis 555,000 new homes were sold in January, up 3.7% from December, and 5.5% from a year ago. The estimate of the number of homes for sale was 265,000, representing 5.7 months of inventory at the current rate of sales. The median sales price was $312,900, just above the rising 12-month moving average price of $310,808.
• The National Association of Realtors reported that 5.69 million existing homes were sold in January, at the highest level since May 2010, which was up 3.3% from the prior month, and 3.8% from a year ago. The estimate of the number of homes for sale was 1.69 million, representing a minuscule 3.6 months of inventory at the current rate of sales. The median price was $228,900, is just below the rising 12-month moving average price of $233,350.
• According to the Institute for Supply Management (ISM), economic activity in the manufacturing sector expanded in February for the sixth month in a row, rising from 56.0 to 57.7. The ISM index of non- manufacturing activity rose from 56.5 to 57.6, which signaled growth in the service sector for 85 consecutive months. These are solid numbers, suggesting the economy continues to hum right along.
• The Conference Board reported that its index of Leading Economic Indicators (LEI) was increased 0.6% in February, following similar gains of 0.6% in January and December. "After six consecutive monthly gains, the U.S. LEI is at its highest level in over a decade. Widespread gains across a majority of the leading indicators points to an improving economic outlook for 2017, although GDP growth is likely to remain moderate," said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. "Only housing permits contributed negatively to the LEI in February, reversing gains over the previous two months.
• According to the "second" estimate by the Bureau of Economic Analysis, GDP increased at a tepid annualized 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 did not dissuade the Fed from announcing a 0.25% rate increase last week.
• According to the BLS, the seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) increased 0.1% in February, after a big 0.6% increase in January. Over the last twelve months, the index rose 2.7%, continuing the upward trend that began in July 2016. This level is above the 2.0% target set by the Fed, giving them cover for the recent rate increase.
• The Conference Board's Consumer Confidence Index increased to 114.8 in February from 111.6 (revised) in January. "Consumer confidence increased in February and remains at a 15-year high (July 2001, 116.3)," said Lynn Franco, Director of Economic Indicators at The Conference Board. "Consumers rated current business and labor market conditions more favorably this month than in January. Expectations improved regarding the short-term outlook for business, and to a lesser degree jobs and income prospects. Overall, consumers expect the economy to continue expanding in the months ahead."

Trends To Watch

The value of the dollar index has taken a hit this year, which is not surprising, as the world starts to realize that our President is like the Emperor with no clothes; he's all bluster and no substance. The good news is that a somewhat weaker dollar is good for commodity prices and for the earnings of large, multi-national companies.

Looking at the chart of the yield on the 10-year Treasury bond, we can see four failed attempts to pierce strong resistance at 2.6%. As I've been writing for the last few months, I don't think we'll surpass 3% in the near term, like before September, but I do expect to see rates at that level by sometime in the fourth quarter.

After trying unsuccessfully for months to pierce resistance around $55 per barrel, the price of West Texas Crude has fallen sharply this month as supplies of crude oil are rising while more production comes on line. My concern that higher prices would instigate further production seems to be coming true. And as I wrote last month, that will likely "put a cap on the price as increased production would drive the price of oil back down." It looks like that cap is around $55.  

I don't have many new thoughts on the price of gold except to say that I'll stand by my prediction from last month that there is "a greater chance of it moving below $1,200 than above $1,300." I expect the price of gold to stay in a relatively tight band for most of this year.

The Nasdaq Composite continues to rise to ever higher record levels a evidenced by the chart below. With a couple of very brief corrections, it has been almost straight up for the past year. It may have gotten a bit frothy recently, which could lead to a period of consolidation, which means a potential buying opportunity.  

>

The financial sector has been enjoying large gains over the past year, and is currently trading at the top of its range right now. The pause in December and January seems to have been just the tonic needed to provide the impetus for the latest advance. There is still the potential that the Trump administration will follow through on its goal to repeal Dodd-Frank, and perhaps other governance, thereby releasing banks from some of their regulatory shackles. In addition, it's clear that the market will get higher interest rates, which will result in higher lending margins, thereby boosting earnings. With all that being said, I remain bullish.

I must admit that the housing index has done much better than I expected, and currently sits right at its record level. As you were able to see from the housing statistics I recorded earlier, housing starts, as well as new and existing home sales, are all growing, even during the slower winter months. This gives hope that the expansion in the housing market has further room to grow. 

Like many of the domestic indices, the index representing the developed international markets is also making new highs right now. I have to say, I don't really understand the optimism.

The NYSE Bullish sentiment index has remained in a fairly narrow range for the past year, spending most of 2017 near the top of the trading range. While I would normally be very wary of this level of bullishness, the recent steep drop in optimism has allayed those concerns somewhat. Indeed, it suggests another rally could be forthcoming. 

The fact that the price of the VIX remains at absurdly low levels contradicts the falling level of bullishness shown above. Either way, we're clearly due to have something happen that while again stir volatility. And that doesn't mean a crash is imminent. It just means that we're likely to experience greater price swings, up and down, sometime in the coming months.