November 17, 2017

After taking a little breather in late August - early September, thanks largely to North Korea and Hurricanes Harvey, Irma and Maria, stocks resumed their ascent through the end of October. Over the past week, stocks have teetered a bit thanks to the uncertainty surrounding the debate on tax reform. Corporate earnings continue to be strong, the Fed has signaled the next rate hike and the economy looks to be on good footing. Barring a collapse of those negotiations, and a shutdown of the federal government in December, there's no reason to think that the bull market won't continue at least through the end of the year.  

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 record high earlier this month. The current price is well above both the 50-day and 200-day moving averages, with interim support around 22,250. Unless Washington DC figures out how to screw things up, which is a very strong possibility, stocks should finish the year strongly. If they do blow things up, it could provide a very good buying opportunity.  

After making a new record high in October, the Dow Jones Transportation Average rolled over and fell 7.0% over the next month, almost mirroring the results of the prior rise and fall. I would prefer more strength in this sector to validate the gains of the broader market. Still, this could be a good buying opportunity. 

The Dow Jones Utility Average has advanced almost 20% this year, not bad for a collection of stocks meant for "widows and orphans". Historically low interest rates continue to benefit this rate-sensitive sector and there is no reason to get off this train yet., even knowing that rates are likely going up next month. 

Key Economic Statistics

• According to the Department of Labor, the figure for seasonally-adjusted initial jobless claims for the week ended November 11 was 249,000, a large drop from two months ago. The four-week average of 237,750 is down about 25,000 from that same point two months ago.
• The non-farm payroll employment report in October was strong, as 261,000 jobs were gained in the month, and 90,000 net jobs were added in the prior two months. The household survey reported that the unemployment rate edged down to 4.1%, while the labor force participation rate fell to 62.7. Average hourly wages for blue collar workers dipped to $22.22 while the average work week held steady at 33.7 hours.
• About 6.5 million workers were counted as unemployed, down substantially from two months ago, while 1.6 million people remained unemployed longer than 27 weeks. The seasonally adjusted number of people who could only find part-time work fell to 4.8 million while the number of marginally attached workers remained at 1.5 million. The number of people holding multiple jobs rose to 7.41 million. All of this resulted in the U-6 "underemployment" rate falling to a new low of 7.9%. This report helps to give the Fed a clear path to raising their lending rate in their December meeting.
• The Congressional Budget Office (CBO) reported that on a net present value basis, the nation's budget surplus was $8 billion in September, which resulted in a deficit of $668 billion for fiscal 2017, $82 billion more than the shortfall recorded during the same period last year. The CBO further reported a deficit of $62 billion in October, $17 billion more than the prior year. 
• The Census Bureau reported that privately owned housing starts increased 13.7% in October to 1,290,000, which is down 2.9% from a year ago, but still the highest number of the year. I imagine a lot of new homes will have to be build after the various storms in August and September. 
• The Census Bureau reported that on a seasonally adjusted annualized basis, 667,000 new homes were sold in September, a huge increase of 18.9% from August, and 17.0% lower than a year ago. The estimate of the number of homes for sale was 279,000, representing 5.0 months of inventory at the current rate of sales. The median sales price was $319,700, up slightly from the revised figure from the prior month, and about $4,000 more than the 12-month moving average price of $315,408.
• The National Association of Realtors reported that 5.39 million existing homes were sold in September, up fractionally from the prior month, and down 1.5% from a year ago. The estimate of the number of homes for sale was 1.9 million, representing only 4.2 months of inventory at the current rate of sales. The median price was $245,100, lower than the prior month, but still slightly above the rising 12-month moving average price of $242,583.
• The Conference Board reported that its index of Leading Economic Indicators (LEI) fell 0.2% in September, following a gain of 0.4% in August. "The US LEI declined slightly in September for the first time in the last twelve months, partly a result of the temporary impact of the recent hurricanes," said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. "The source of weakness was concentrated in labor markets and residential construction, while the majority of the LEI components continued to contribute positively. Despite September’s decline, the trend in the US LEI remains consistent with continuing solid growth in the US economy for the second half of the year."
• According to the "advance" estimate by the Bureau of Economic Analysis, GDP increased at an annualized rate of 3.0% in Q3 2017. This is down fractionally from the 3.1% reported in Q1, but up substantially from the modest 1.4% growth in Q1 and the 2.1% from Q4 2016. Still, it's a little below the 3.5% from Q3 2016. Like the employment figures, I expect this will give the Fed cover to raise their lending rate in December. 
• According to the BLS, the seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) rose 0.1% in October, after a strong 0.5% jump in September. Over the last twelve months, the index rose 2.0%, right on the 2.0% goal sought by the Fed. 
• The Conference Board's Consumer Confidence Index increased to 125.9 in October from 120.6 (revised) in September. "Consumer confidence increased to its highest level in almost 17 years (Dec. 2000, 128.6) in October after remaining relatively flat in September," said Lynn Franco, Director of Economic Indicators at The Conference Board. "Consumers' assessment of current conditions improved, boosted by the job market which had not received such favorable ratings since the summer of 2001. Consumers were also considerably more upbeat about the short-term outlook, with the prospect of improving business conditions as the primary driver. Confidence remains high among consumers, and their expectations suggest the economy will continue expanding at a solid pace for the remainder of the year."

Trends To Watch

Don't look now, but after falling non-stop for nine months, the dollar index may have finally bottomed and begun to move higher. The decline in the value of the dollar provided a nice tailwind to the profits of the large multi-national corporations. Should the dollar rise too much, that could easily become a headwind. The first level of resistance is at $95.

After bottoming at around 2.0%, the yield on the 10-year Treasury bond has moved higher over the past two months, likely reflecting the upcoming Fed rate increase. Could this finally be the beginning of a steady increase in rates, or is this simply a blip in the unnaturally low interest rate environment? Time will tell. 

The price of a barrel of West Texas Crude rallied about 35% in the four months after the June low. It even managed to breach resistance at $55, before peaking around $58. While I appreciate the rally, I don't believe in its health; I would not bet on further gains. Indeed, I think we'll see $50 before $60. .

After falling just short of the year-old high set last August, the price of gold fell back through support at $1,300. In September I would that "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." That forecast has almost come to pass. 

The Nasdaq Composite, led by the FAANNG stocks (Facebook, Apple, Amazon, Netflix, Nvidia and Google), continues to be an unstoppable force of nature. The party cannot, and will not, continue forever; but for now, there is no reason to jump ship. 

After breaching resistance around $25.50, the index representing the financial sector reached a new apex early this month. The sector has subsequently dipped, but remains above interim support around $25.75. Last time I wrote that "the index is more likely to move above resistance than fall below support." I still think the sector has more gains ahead as rates rise. 

In the last newsletter I wrote that "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." That certainly proved to be correct as the index soared to new heights. 

This chart has been a wonderful contra-indicator this year. Until September, the index continued to fall even as stocks continued to rise. Since bottoming in August, sentiment has improved, but it could hardly be considered wildly bullish. As a result, I think this rally has more legs.