Hold Your Ground
Thinking and Doing
After hitting a new high around March 1,
the Dow Jones Industrial Average spent the next three months
consolidating in a fairly tight range before exploding to another new
record high as I write this. Most sectors of the market are rallying,
delivering big profits to the patient investors who managed to
ignore all of the noise from Washington. As I said last
night, one should be cautious, but remain invested; you should
hold your ground.
Looking at the chart of the #DJIA for the past
seven months, we see a very bullish primary trend. The rally that began
in March 2009
continues in force with fresh new records being recorded yesterday and
today. The current price is well above both the 50-day and 200-day
moving averages, and is well above interim support around 20,400. So if
Trump and his administration can avoid alienating all our allies and
blowing up the economy, there's no reason to think that the
market can't continue to move higher, at least for now.
Even the more economically sensitive Dow Jones
Transportation Average is joining the party. Last month I suggested
that if it moved any lower it would be a buying opportunity. Within a
day or so of writing that, the index turned higher. It would be a very
bullish indicator if the index would hit a new high at the same time as
the industrial average.
The staid Dow Jones Utility
Average has produced remarkably outsized gains so far this year as
lower than expected. The question is what will happen if/when
the Fed increases its lending rate by 25 basis points this week. Will
Treasuries move higher, or will the yield curve flatten? The answer to
that question will go a long way towards deciding the fate of the
to the Department of Labor, the
figure for seasonally-adjusted initial jobless claims for the week
ended June 3 was 245,000, which is on the high end of the same range of
figures we've seen all year. The four-week
average of 242,000 continues the gentle downward trajectory.
non-farm payroll employment report in May was well below
expectations, as only 138,000 jobs were gained in the month,
and even worse, 66,000 net jobs were subtracted from the
prior two months. The household survey reported that the unemployment
rate dropped to a tiny 4.3%, the lowest level in a decade,
while the labor force
participation rate fell back to 62.7. Average hourly wages for blue
collar workers rose to a new high of $22.00 while the average work
week held at 33.6 hours.
6.9 million workers were counted as
unemployed, while 1.7 million people remained
unemployed longer than 27 weeks. The seasonally
adjusted number of people who could only find part-time work fell to
5.2 million while the number of marginally attached workers
remained at 1.5 million. The number of people holding multiple
jobs dropped to 7.58 million. All of this resulted
in the U-6 "underemployment" rate falling to 8.4, which is
the lowest level since late 2007. Overall, this was a pretty mediocre
report, showing that it isn't so easy to create new jobs in this
country right now.
Congressional Budget Office (CBO) estimated that on a net present value
basis, the nation's budget deficit was $87 billion in May,
and $35 billion more than a year ago. This resulted in a deficit of
$432 billion for the first eight months of
fiscal 2017, $26 billion more than the shortfall recorded during the
same period last year, but if not for timing shifts, the shortfall
would have been much larger.
Census Bureau reported that privately owned housing starts
decreased 2.6% in April to 1,172,000, which was up only 0.7% from a
year ago. The crappy weather from March continued in April, so I'm not
concerned by this decline. Indeed, a nasty May will likely also produce
Census Bureau reported that on a seasonally adjusted annualized
basis, only 569,000 new homes were sold in April,
down 11.4% from March, and basically flat from a year ago. The estimate
the number of homes for sale was 268,000, representing 5.7
months of inventory at the current rate of sales. The median sales
price was $309,200, just below the 12-month moving
average price of $311,350. These mediocre numbers are consistent with
the poor housing start numbers. I would expect more of the same next
month, thanks to the lousy weather.
National Association of Realtors reported that 5.57 million existing
homes were sold in April, down 2.3% from the
prior month, yet still up 1.6% from a year
ago. The estimate of the number of homes for sale was 1.93 million,
representing only 4.2 months of inventory at the current
rate of sales. The median price was $244,800, which is above
the rising 12-month moving average price of $236,975. Again, poor sales
totals, yet rising prices, evidenced the poor weather but a tight
to the Institute for Supply Management (ISM), economic
activity in the manufacturing sector expanded in May for
the ninth month in a row, inching up to 54.9. The ISM index of
non-manufacturing activity decreased 56.9, which still
signaled growth in the service sector for 88 consecutive months. Almost
boringly, the economy continues to expand at a modest pace.
Conference Board reported that its index of Leading Economic
Indicators (LEI) was increased 0.3% in April, following a gain of 0.3%
(revised) in March and 0.5% in February. "The
recent trend in the U.S. LEI, led by the positive outlook of consumers
and financial markets, continues to point to a growing economy, perhaps
even a cyclical pickup," said Ataman Ozyildirim, Director of Business
Cycles and Growth Research at The Conference Board. "First quarter’s
weak GDP growth is likely a temporary hiccup as the economy returns to
its long-term trend of about 2 percent. While the majority of leading
indicators have been contributing positively in recent months, housing
permits followed by average workweek in manufacturing have been the
sources of weakness among the U.S. LEI components."
to the "second" estimate by the Bureau of Economic Analysis,
GDP increased at a modest annualized rate of 1.2% in Q1 2017, up from
the meager 0.7% advance estimate. This
compares very poorly with the 2.1% rate of growth from Q4 2016 and the
3.5% rate of growth from Q3, but is only slightly worse than the 1.4%
growth rate in Q2. The best we can say is it compares favorably with
the mediocre 0.8% growth rate in Q1 2016. This report is unlikely to
Fed from implementing their next 0.25% rate hike later this month.
to the BLS, the seasonally adjusted Consumer Price Index for all Urban
Consumers (CPI-U) increased 0.2% in April, after falling 0.3% in March.
Over the last twelve months, the index rose 2.2%,
continuing the modest trend that began a year ago. This level is
just above the 2.0% target set by the Fed, giving them cover for their
next rate increase in June.
Conference Board's Consumer Confidence Index decreased to 117.9 in May
from 119.4 (revised) in April. "Consumer
confidence decreased slightly in May, following a moderate decline in
April," said Lynn Franco, Director of Economic Indicators at The
Conference Board. "However, consumers' assessment of present-day
conditions held steady, suggesting little change in overall economic
conditions. Looking ahead, consumers were somewhat less upbeat than in
April, but overall remain optimistic that the economy will continue
expanding into the summer months."
The value of the dollar index continues to weaken,
as you can see below. A cheaper dollar has likely helped drive
additional profits to the bottom lines of large multinational
companies. I would expect the dollar to improve in the next six
months if the
Fed makes good on its promise to hike rates two more times this year,
and that could impact corporate profits in the second half of the
year. Stay tuned.
The yield of the 10-year Treasury bond has traded
between 2.2% and 2.6% for the past seven months. As I've said before,
it's hard to envision a
scenario where rates drop appreciably from here, but they could remain
range-bound for a few more months, even when the Fed increases their
lending rate this week..Still, I still think the yield could
approach 3% before the end of the year.
The price of a barrel of West Texas Crude is
clearly having trouble finding a stable level, as it swings between $45
and $55. Until the price moves out of the range, one way or
another, there is no
reason to change my current investment thesis, which is to hold only a
core, long-time positions. Otherwise, I am underweight this
While the price of gold again failed to
pierce resistance at $1,300, it is trading near the top of the range
established over the last six months. Given all the uncertainty around
this trade, I still prefer to remain
on the sidelines.
The Nasdaq Composite, led by the FAANG stocks,
continued to power record highs before a brief two-day decline. It is
not time to get off this train.
Trading in the financial sector has been
range-bound for the past six months, as you can see below. Five times
the index has fallen to, but not through, support around $23. My bet is
that we'll see the index move above resistance around $25.25 before
falling below support.
Sticky low interest rates continue to
benefit the tight housing market. And now that the weather has finally
warmed up, heading into the strong home selling
season, there's no reason this sector can't move even higher.
The NYSE Bullish sentiment index continues to
weaken, as it has for most of the year, even while the stock market has
moved ever higher. That is very bullish and suggests that the market
could move even higher.
It really appears that the VIX has lost
much of its predictive powers. No matter how little volatility there
is, the stock market just continues on its merry way. Even the brief
spikes of volatility, like in mid-May, prove meaningless. I may have to
stop showing this chart in the coming months.
What I'm Thinking and Doing
For my purposes, it's basically business
as usual right now. Presidents come and go, as do Congressmen and
Senators (although many of them seem to hang on until eternity). But
the economic cycle will outlast them all. And right now, we are in the
midst of an historic period of relatively stable but modest economic
growth. Interest rates remain historically low, corporate
profits are steady and predictable and inflation
is quiescent. Given all of that, my basic
investment thesis is had it has been since 2009: be fully invested in
the stocks of quality
companies, most of whom pay a steady dividend. I've also chosen to mix
some small, fast-growing tech stocks that give me the chance to make
multiple of my money if I pick correctly. I have also chosen
to hold some
defensive stocks, like utilities, large food and beverage companies,
and defense companies. Owning this mix of stocks has helped me and my
clients profit from this very long bull market and I so no reason to
change anything now.
As I've said for most of this year, when the market
is at, or near, all-time high
levels, it's difficult to find stocks to buy at good prices. And that,
after all, is the entire key to investing: buying good stocks at great
prices. As a result, thanks to new record high prices for much of the
stock market, I've been mostly on the sidelines for the past few
I did buy a sizable position in a major defense contractor on
earnings dip. I have also added smaller positions in half a dozen
small- and micro-cap tech stocks in the hopes that I might
find the next Nvidia. Overall, I think my clients
are well-positioned to profit in the months and years ahead.
News and Notes
There's not much new to discuss with respect to the
family this month. Nola is in Western Massachusetts for the next two
months. Lily is in DC and Ezra is getting ready to head to Iceland in
two weeks. The only really news is that I had surgery on my right
shoulder last week; three years after I had the same procedure on my
left one, giving me a matching set. It hasn't been a pleasant few days,
but I'm getting better every day.
Kathiryn and I continue to be very busy with
baseball games and Broadway shows. Kathiryn will also be performing one
or two gigs a month through the end of the summer, giving our friends
lots of chances to see her perform. If you want, just let me know and
I'll add you to the
distribution list for all announcements of upcoming gigs. I also
continue to be very busy with my responsibilities to the Food Bank for
Westchester. I would encourage each and every one of you to find
something that matters to you, something you believe in strongly, and
do something to give back to your local community.
That's it for this month. I look forward to
communicating with you again next month. If you have
any questions, please don't hesitate to contact me.
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