Breakin’ Out to the Upside!

On Friday, the markets closed the week gaining traction. The Dow had 7 days of consecutive growth, rising 2.34%—its largest weekly gain since March. Meanwhile, the S&P 500 rose 2.41%, the NASDAQ jumped 2.68%, and the MSCI EAFE increased 1.41%.

Various factors came together to support the growth. From geopolitical topics to strong corporate earnings, we’ll focus on 3 key developments that drove movement.

1. Energy Shares Boosted by Iran Nuclear Deal Withdrawal

President Trump’s decision on Tuesday to withdraw from the Iran nuclear deal helped push the energy sector higher. With the possibility of renewed sanctions on the horizon, the anticipation of a pullback from global oil supplies helped boost prices. Though oil prices fell from a 3½-year high on Friday, it was the 2nd week of growth, driving energy shares to rise 3.8%.

2. Technology Sector Jumps Amid Strong Corporate Earnings

After the technology sector’s months of stagnation—fueled in part by recent fears over privacy—it is now approaching all-time highs. Since April 25, the information technology sector has increased 9%. The movement is driving many investors to join the rally, while many analysts remain cautious.4 Overall, the growth contributed 3.5%.5

This rally happened on the back of strong corporate earnings. Over 70% of total S&P 500 companies reported earnings growth that exceeded expectations. Last week’s positive reports helped push the index past 50- and 100-day moving averages.6

3. Inflation Remains Steady

The Consumer Price Index (CPI), which measures the price of goods and services, rose only 0.2% for the month in April and 2.5% over the year. These reports both missed and met expectations, respectively.7 The tepid growth caused some investors to worry that the Federal reserve would raise interest rates more quickly, as the U.S. dollar fell and held below its 2018 high.8 Some analysts, however, believe that the missed expectations should ease the Fed’s pressure to fast-track interest rates.9

Looking Ahead

We will continue tracking geopolitical developments—from potential actions against Syria, tariffs on Iran, and preparations for President Trump’s upcoming meeting with North Korea’s Kim Jong-un.10 In addition, key discussions around the American Free Trade Act and trade relationships with China remain on the horizon.11 We also will gain our first insights on how well consumer spending performed in the 2nd quarter.12

If you would like to discuss any developments or gain a clearer understanding of how these issues may affect your portfolio, contact us today. We are always here to help you make sense of your financial life and gain clarity for the road ahead. READY TO GET IN? CLICK HERE FOR CUSTOMER CENTER

ECONOMIC CALENDAR
Tuesday: Retail Sales, Housing Market Index
Wednesday: Housing Starts
Thursday: Initial Jobless Claims, Philadelphia Fed Business Outlook Survey, Bloomberg Consumer Comfort Index

DATA AS OF 5/11/2018 1 WEEK SINCE 1/1/18 1 YEAR 5 YEAR 10 YEAR
STANDARD & POOR’S 500 2.41% 2.02% 13.92% 10.80% 6.99%
DOW 2.34% 0.45% 18.70% 10.43% 6.90%
NASDAQ 2.68% 7.24% 21.04% 16.59% 11.71%
INTERNATIONAL 1.41% 0.45% 10.84% 3.21% -0.37%
DATA AS OF 5/11/2018 1 MONTH 6 MONTHS 1 YEAR 5 YEAR 10 YEAR
TREASURY YIELDS (CMT) 1.68% 2.06% 2.28% 2.84% 2.97%

Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Why Didn’t Earnings Rekindle the Bull?

Domestic indexes posted strong results on Friday, May 4, as the latest labor report data lessened investors’ concerns about inflation and interest rates. Nonetheless, stocks had mixed results last week. The S&P 500 dropped 0.24% and the Dow gave back 0.20%, which marked both indexes’ 2nd week of losses in a row. Thanks to a bounce in tech stocks, however, the NASDAQ gained 1.26%. International stocks in the MSCI EAFE decreased by 0.57%.

Amid this relatively tepid performance, we reached a big milestone on May 1: Our current economic expansion is now officially the 2nd longest on record. For 8 years and 10 months, the economy has been growing, and many sectors still have room to advance.

As we look to better understand where we stand today, Friday’s employment report provides key insights into our economic health.

What We Learned About Employment

1. Growth Slowed
The report indicated that the economy added fewer jobs than expected in April, and average hourly wage growth also grew more slowly than forecast. Federal Reserve members watch this data closely to help anticipate changes in inflation.

2. Participation Dropped
The percentage of working-age people participating in the labor force dropped by 0.1%. This decline may result from people retiring or returning to school but can also come from people choosing to stop looking for work. The lower participation rate may contradict some of the more positive trends we’ve seen recently.

3. Unemployment Declined
Despite missing growth projections, unemployment fell to 3.9%, the lowest point in 18 years. The rate has only dropped below 4% during 3 other periods. The low unemployment numbers came more from the lower labor force participation rate than from more people finding jobs.

Key Takeaway
Lower participation rates could affect long-term economic growth. However, the combination of low unemployment and reasonable wage growth are likely a positive scenario for the economy. Many people who want jobs have them, but inflation should remain under control.

As the bull market lumbers toward its 9th year, many reports continue to indicate a solid economy. If the economic expansion continues through July 2019, it would be the longest in history (with records going back to the 1850s). While that accomplishment would be noteworthy, our focus remains on current circumstances, and striving to find insight that affects your financial future. From trade to jobs to manufacturing and beyond, we have many details to watch on your behalf.

ECONOMIC CALENDAR
Tuesday: JOLTS
Thursday: Consumer Price Index, Jobless Claims
Friday: Consumer Sentiment

DATA AS OF 5/4/2018 1 WEEK SINCE 1/1/18 1 YEAR 5 YEAR 10 YEAR
STANDARD & POOR’S 500 -0.24% -0.38% 11.46% 10.53% 6.54%
DOW -0.20% -1.85% 15.80% 10.13% 6.39%
NASDAQ 1.26% 4.44% 18.67% 16.37% 11.28%
INTERNATIONAL -0.57% -0.96% 9.60% 3.03% -0.60%
DATA AS OF 5/4/2018 1 MONTH 6 MONTHS 1 YEAR 5 YEAR 10 YEAR
TREASURY YIELDS (CMT) 1.67% 2.03% 2.24% 2.78% 2.95%

Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Earnings Season Begins

Market volatility continues. Stocks slid on Friday, April 13, but still held on to gains for the week. The S&P 500 increased 1.99%, the Dow added 1.79%, and the NASDAQ was up 2.77%. International stocks in the MSCI EAFE also rose, gaining 1.45%.

Similar to recent weeks, international events continued to sway markets: Concerns about trade disputes affected investor behavior. Meanwhile, escalating conflict in Syria may have weighed on people’s minds.

As we track these developments, we want to share insight about another important occurrence from last week: the beginning of corporate earnings season.

1st Quarter Corporate Earnings Season

1. Expectations remain very high
Analysts anticipate a particularly strong earnings season. Thomson Reuters data predicts that S&P 500 companies’ profits were 18.6% higher in the 1st quarter of 2018 than in 2017. If accurate, this increase would be the largest since 2011.

So far, data seems on track. According to The Earnings Scout, 1st-quarter earnings growth is currently at 26.8%.

2. Banks outperform but stocks drop
On Friday, 3 major banks released their reports—and each beat projections for earnings and revenue. Despite this positive news, however, their stocks experienced sizable declines that contributed to overall market losses.

Why would strong quarterly results create stocks losses?

The markets anticipated this positive performance and had already priced it into the shares. As a result, any less-than-ideal news seemed to outweigh the expected earnings and revenue increases. In particular, 2 facts drove losses:
• 1 bank may have to pay a $1 billion penalty
• All 3 banks experienced slow loan growth

We are in the early stages of earnings season, and many major corporations still need to release their reports. In the coming weeks, we’ll continue monitoring these developments to better understand our economy. As always, please contact us if you have questions about how the data affects your finances and life.

ECONOMIC CALENDAR
Monday: Retail Sales, Housing Market Index
Tuesday: Housing Starts, Industrial Production
Thursday: Jobless Claims

DATA AS OF 4/13/2018 1 WEEK SINCE 1/1/18 1 YEAR 5 YEAR 10 YEAR
STANDARD & POOR’S 500 1.99% -0.65% 14.06% 10.83% 7.14%
DOW 1.79% -1.45% 19.10% 10.38% 7.05%
NASDAQ 2.77% 2.94% 22.42% 16.62% 11.99%
INTERNATIONAL 1.45% -0.41% 14.75% 3.55% -0.21%
DATA AS OF 4/13/2018 1 MONTH 6 MONTHS 1 YEAR 5 YEAR 10 YEAR
TREASURY YIELDS (CMT) 1.64% 1.97% 2.12% 2.67% 2.82%

Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

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S&P 500 Could Fall 60%: Hussman

Citing fundamentals, cash distribution, and valuation as the source of stock market gains, Wall Street analyst and fund manager John P. Hussman points out that, while historically high, all are drastically slowing to what many would call a point of no return. “Consider these drivers today. Combining depressed growth prospects with an S&P 500 dividend yield of just 2.0%, the likelihood is that over the coming 10-12 years, even a run-of-the-mill reversion of valuations will wipe out the entire contribution of growth and dividend income, resulting in zero or negative total returns in the S&P 500 Index on that horizon, with an estimated interim market loss on the order of -60%,” Hussman said in his post.

How Expensive Is the S&P 500?
The S&P 500 traded at a record high Monday, trading to within a few ticks of 2500. With this, it dragged the forward 12-month EPS to a record high and the 12-month price to earnings ratio to levels not seen since the pre-Dotcom era. But even these stretched levels don’t uncover the extent of the over-valuation. “Notice that the distinction between today and the 2000 peak is in the breadth of overvaluation across individual stock,” Hussman said in an August post.
“As of last week, with the exception of the richest decile of stocks, where median valuations were higher only during the January 2000-March 2001 period (followed by median losses exceeding -80% for those stocks), every decile of S&P 500 components is currently at or within 2% of its most extreme valuation in history.”
Arguments for a stock market correction clutter financial publications every morning. All will be correct at some point, but as Keynes said, in the long-run we’ll all be dead. But what’s different about this one is not just the magnitude of the correction, but where it begins. “During the journey of Empress Catherine II to Crimea, Prince Grigory Potemkin, the governor of the region, erected fabricated villages along the Dnieper river” That’s Wall Street analyst and fund manager John P. Hussman whose outlook is dire than any Wall Street bear going around. (See also: Bear Market Ahead: What 5 Big Investors Forecast)
Citing fundamentals, cash distribution, and valuation as the source of stock market gains, Hussman points out that, while historically high, all are drastically slowing to what many would call a point of no return. “Consider these drivers today. Combining depressed growth prospects with an S&P 500 dividend yield of just 2.0%, the likelihood is that over the coming 10-12 years, even a run-of-the-mill reversion of valuations will wipe out the entire contribution of growth and dividend income, resulting in zero or negative total returns in the S&P 500 Index on that horizon, with an estimated interim market loss on the order of -60%,” Hussman said in his post.

Hussman Isn’t the Only Doom-Sayer
While the extent of Hussman’s call is frightening, he is not alone in calling for a stock market correction. Deutsche Bank said recently that the probability of a recession is at the highest level in ten years saying a flattening yield curve means investors are bracing for tough times ahead by investing in longer term Treasuries, which has pushed the yield curve to levels last seen before the Great Recession.
The Number of Nay-Sayers Who Have Been Wrong Increases, But…
September 4 marked the 300th consecutive trading day the S&P 500 has been above its 200-day moving average, which is the 15th longest since 1923, and while valuations continue to stretch and the number of people calling for a correction grow, so does the number of those who have been wrong.
However, if Hussman is correct, then the Potemkin villages will, in fact, be as valuable as those pieces of paper representing the S&P 500: “temporarily glorious and impressive on the surface, but backed by much less than investors had imagined was there.”

Contact us to see what you can do to traverse these uncertain markets.

Sources:
Investopedia.com; HussmanFunds.com

Markets Keep Screaming North, Euphoria Sets In–Are You Protecting Your Retirement Income?

Am I being overly paranoid to worry about the stock market during a week when the Dow finally reached the 22,000 mark. Even the fact that the move was largely on the shoulders of Apple’s jump higher after it released great earnings news shouldn’t make much of a difference. The trend is the trend, and it is still to the upside. So, is there no end in sight? Euphoria, etc., we’ve seen this before. Make money on the up moves while you can, it’s fun! But don’t gamble with your Retirement Money by leaving everything “on the table.”

Red Flags
While the Dow and other major market indices soar, danger signs and red flags abound, as technical analyst Michael Kahn points out in his Barron’s column. August typically has relatively low trading volume, Kahn writes, and this means that a slight change in mood among a relatively small number of traders on the margin can produce big market swings. He notes that the flash crash of 2015, when the Dow shed 1,100 points in just 4 minutes, took place on August 24 of that year.

Worries about narrow market leadership by, and high valuations on, big tech stocks are one potential trigger for a correction that Kahn mentions. Others that he does not mention include: potential international crises involving North Korea and Russia; political controversies swirling around president Trump, such as the Russia investigations; Trump’s threats to launch trade wars; and the anemic U.S. economy.

Other predictions from five well-known market gurus, all trend bearish. Overvalued stocks were a chief concern of: Tom Forester, the founder of Forester Capital Management; Marc Faber, a consistently bearish newsletter author; and Rob Arnott, a pioneer of smart beta investing and the CEO of investment advisory firm Research Affiliates LLC. For his part, Forester added that the last two general market crashes were touched off by a collapse of investor confidence in a single sector. In the year 2000 it was tech stocks, and in 2008 it was financials. Faber also worried about narrow market leadership, with small numbers of stocks driving the major indexes upward.

Jim Rogers, who co-founded the Quantum Fund with George Soros, expressed concern over debt loads that are higher than prior to the financial crisis in 2008. Legendary bond fund manager Bill Gross, formerly of PIMCO and now with Janus Capital Group LLC, also worried about high indebtedness, weak productivity growth in the real economy, and an oversized financial economy. Earlier this year, Gross issued warnings similar to those made by Greenspan recently: that is, central banks’ massive infusions of liquidity since the financial crisis have created huge economic and financial distortions that will unwind with unpleasant market outcomes. (For more, see also: Bear Market Ahead: What 5 Big Investors Forecast.)

Bond Bubble?

For yet another source of worry, former Federal Reserve Chairman Alan Greenspan is warning of a bond market collapse that would bring down stocks. Greebspan says this is likely to happen after interest rates shoot up much faster than many people anticipate. (For more, see also: Stocks’ Big Threat Is a Bond Collapse: Greenspan.)

Unsustainable Interest Rates

“By any measure, real long-term interest rates are much too low and therefore unsustainable. When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace,” Greenspan comments to Bloomberg.

When central banks start withdrawing liquidity from the financial system in earnest by selling their bond holdings, Greenspan believes that long term interest rates will spring sharply upwards. Thus, bond prices will collapse. Greenspan says that would lead to the worst bout of stagflation since the 1970s, a period when inflation accelerated amid a stagnating U.S. economy. This environment would spark a nosedive in stock prices, Greenspan continues, because sharply higher bond yields could spur a massive movement of investor capital from equities to fixed income instruments. (For more, see also: Bill Gross: QE is “Financial Methadone.”)

The Fed Model

The so-called Fed Model consulted by Greenspan, as explained by Bloomberg, compares the yields on 10-year U.S. Treasury Inflation Protected Securities (TIPS) to the earnings yield on the S&P 500 Index (SPX). The current figures are 0.47% and 4.7%, respectively, per Bloomberg, which notes that the gap between the two measures is 21% greater than its 20-year average. For those who subscribe to this analytical framework, high valuations for stocks are justified for now. However, another spin on this analysis, per Bloomberg, is that investors are justified in buying the less inflated asset. If bond prices rapidly deflate, as Greenspan foresees, stock prices will soon follow.

Your Money

My question to you is, “If market experts are worried about rapid reallocations occurring in the macro scale, why aren’t you concerned about the impact on your IRA/401k, and other retirement assets?” Contact me now to schedule a discussion and review options available for your family’s security.

Read more: Stocks’ Big Threat Is a Bond Collapse: Greenspan | Investopedia

Read more: What to Do When the Bubble Bursts: 3 Takes | Investopedia

Read more: Stocks Surge 20% Under Trump Amid Warning Signals | Investopedia

Cattle Livestock Futures Zoom While Summer BBQ Feasts Loom; Equities Flat Overall for the Week; Treasuries Await This Week’s News

Meat packers were scrambling to cover forward sold beef contracts last week as new weight for carcass weights continue to come in an average of 30# shy of last year’s weights. Chinese demand for beef is ever increasing as they’ve purchased technology for safe handling of beef from US leaders for years and are now ramping up to handle beef on their own at US tech levels. Add summertime on the horizon and BBQ pits everywhere cleaning up as the weather stays warmer and the demand has exceeded supply: cattle livestock futures soared. Read more here and here.

Sector performance in equities fell out pretty much like this: Information Tech up about 0.33%; Healthcare up about 0.24%; Energy up about 0.13%; Utilities Real Estate and Materials all down from 0.44%, 0.60% and 0.71%, respectively.  Also down 0.43% each were the Industrials and Consumer Discretionary Sectors. The Financials Sector pared 0.94%, while the Consumer Staples Sector stayed flat (0.00%).  Source.

In fixed income, US Govt 5 year yields are 1.81% on a 1.88% Coupon; 10 year 2.28% on a 2.25% Coupon; and 30 year 2.95% on a 3.00% Coupon.  Source. The Bonds markets are awaiting inflation news Monday May 1, 2017 while April payroll news is due at the end of the week, with the Fed to announce its policy on May 3. Plus, Congress still has to keep the government open next week by passing a stop-gap funding bill. Source.