September 17, 2017

After ascending to a new record in early August, stocks took a little breather through early September, falling a modest 2.7%, precipitated mostly by Kim Jong-un, then Hurricanes Harvey and Irma. But while the latter devastated the Leeward Islands of the Caribbean, including Barbuda and St. Maarten (#SXMstrong!), it didn't cause the destruction forecast in Florida. That precipitated the big rally last week, as you can see below. No matter what bad news is thrown at this stock market, it just continues to power upward. 

As we look at the chart of the #DJIA so far this year, we continue to see a very bullish primary trend leading to a new record high on Friday. The current price is well above both the 50-day and 200-day moving averages, with interim support around 21,600. As I said last week, barring any "Black Swan Events", like further hurricanes, or a missile hitting Alaska, the rally should continue. 

After finally making a new record high in July, the Dow Jones Transportation Average subsequently fell 7.7% over the next six weeks before starting an ascent  in late August. I would like to see a little more strength here, and I think it will come. 

The Dow Jones Utility Average surged over the last two months, hitting a new high last week before backing off a bit as rates ticked higher. Historically low interest rates continue to benefit this rate-sensitive sector. There is no reason to get off this train yet.  

Key Economic Statistics

• According to the Department of Labor, the figure for seasonally-adjusted initial jobless claims for the week ended September 9 was 284,000, representing a second straight week of large increases. The four-week average of 263,250 is up about 20,000 from the just a month ago. Clearly these numbers are impacted by Hurricanes Harvey and Irma.
• The non-farm payroll employment report in August was weak, as only 156,000 jobs were gained in the month, and 41,000 net jobs were subtracted from the prior two months. The household survey reported that the unemployment rate inched back up to 4.4%, while the labor force participation rate held steady at 62.9. Average hourly wages for blue collar workers rose to a new high of $22.12 while the average work week held steady at 33.7 hours.
• About 7.1 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 held at 5.3 million while the number of marginally attached workers crept lower to 1.5 million. The number of people holding multiple jobs fell to 6.96 million. All of this resulted in the U-6 "underemployment" rate holding at 8.6. Nothing in this report should nudge the Fed to increase their lending rate in September. 
• The Congressional Budget Office (CBO) estimated that on a net present value basis, the nation's budget deficit was $109 billion in August, which resulted in a deficit of $675 billion for the first eleven months of fiscal 2017, $56 billion more than the shortfall recorded during the same period last year. 
• The Census Bureau reported that privately owned housing starts decreased 4.8% in July to 1,155,000, which is down 5.6% from a year ago. A lot more homes will have to be built, and sold, in order to benefit the new home sale market. Given the storms in August and September, I expect this number to fall. 
• The Census Bureau reported that on a seasonally adjusted annualized basis, 5710,000 new homes were sold in July, a steep drop of 9.4% from June, and 8.9% lower than a year ago. The estimate of the number of homes for sale was 276,000, representing 5.8 months of inventory at the current rate of sales. The median sales price was $313,700, up slightly from the revised figure from the prior month, and about $1,000 less than the 12-month moving average price of $314,617.
• The National Association of Realtors reported that 5.44 million existing homes were sold in July, down 1.3% from the prior month, but still up 2.1% from a year ago. The estimate of the number of homes for sale was 1.92 million, representing only 4.2 months of inventory at the current rate of sales. The median price was $258,300, lower than the prior month, but still well above the rising 12-month moving average price of $240,683.
• The Conference Board reported that its index of Leading Economic Indicators (LEI) increased 0.3% in July, following a gain of 0.6% in June. "The U.S. LEI improved in July, suggesting the U.S. economy may experience further improvements in economic activity in the second half of the year," said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. "The large negative contribution from housing permits, a reversal from June, was more than offset by gains in the financial indicators, new orders and sentiment."
• According to the "second" estimate by the Bureau of Economic Analysis, GDP increased at an annualized rate of 3.0% in Q2 2017, which is revised up from the 2.6% advanced estimate. It is also up substantially from the modest 1.4% growth in Q1. This is in the middle of the 2.1% rate of growth from Q4 2016 and the 3.5% from Q3, but compares well the 1.4% growth rate in Q2 2016. This figure may push some Fed governors to advocate for a September rate hike, but I still believe a December hike is more likely. 
• According to the BLS, the seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) rose 0.4% in August, after a modest 0.1% hike in July. Over the last twelve months, the index rose 1.9%, getting closer to the 2.0% level sought by the Fed. 
• The Conference Board's Consumer Confidence Index increased to 122.9 in August from 120.0 (revised) in July. "Consumer confidence increased in August following a moderate improvement in July," said Lynn Franco, Director of Economic Indicators at The Conference Board. "Consumers’ more buoyant assessment of present-day conditions was the primary driver of the boost in confidence, with the Present Situation Index continuing to hover at a 16-year high (July 2001, 151.3). Consumers’ short-term expectations were relatively flat, though still optimistic, suggesting that they do not anticipate an acceleration in the pace of economic activity in the months ahead."

Trends To Watch

This steady decline in the value of the dollar index continues to be one of the big stories of the year. This has had a very happy effect on the bottom lines of our large, multi-national companies and our tourism industry, as it has become less expensive for foreign visitors to spend their money here. If, and when, the Fed hikes rates, it should stem the decline.

While the yield on the 10-year Treasury bond continues to vacillate within a narrow, and declining, trading channel (teal blue). There was one break of support at 2.1% but it quickly rose back up. If the trend continues, we could see rates fall back to 2.0%. This should continue to power the housing market. 

The price of a barrel of West Texas Crude has bounced nicely off the June low. It has moved above the trading channel (in purple) and again briefly broke above $50. I think the price is higher than anticipated due to fallout from Hurricane Harvey. I would expect lower prices as production comes back online.

The price of gold finally broke through resistance at $1,300 as it shot higher, gaining $160 in just two months. It was, though, unable to crest major resistance at $1,380. Should tensions in Korea subside, and Mother Nature stop sending storms our way, I would expect the price of gold return to the mid-$1,200s. 

The Nasdaq Composite, led by the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google), which took a momentary breather in August, has resumed its stunning ascent. I would argue it should be renamed FAANNG by adding Nvidia. The current price is well above the 50-day moving average. Party on!! 

Trading in the financial sector continues to be range-bound, as you can see below, after failing twice to breach resistance around 25.20 or support around $22.65. I still believe, as I wrote last month, that the index is more likely to move above resistance than fall below support. 

Sticky low interest rates continue to benefit the tight housing market. I think the decline last month appears to be nothing more than a buying opportunity. As long as rates remain near 2%, nothing should stop this rally.

I love this chart. Even as the stock market powers to ever higher highs, the NYSE Bullish sentiment index is actually falling. This lack of bullish sentiment in the face of record stock prices suggests that the bull has further to run.