With 9 Days Remaining, Will Santa Give This Market Even More – Week Ended 12/15/17

As hard as it may be to believe, there are just 9 trading days remaining in 2017. Most notable is that through the first 242 trading days of this year, the worst S&P drawdown was a benign -2.8% decline. That hardly-sinister setback is the second skinniest calendar year correction ever (1995 was the narrowest). And the S&P maintains a perfect calendar-month winning streak through November. The 2nd full week of December continued the upward melt theme of 2017 with the S&P climbing on 3 of the 5 trading days and adding a little more than +0.5% for the week. In that vein, it would seem to be an easy statement to say that 2018 is likely to contain more uncomfortable moments than witnessed in the last 12 months.

From an economic perspective, the biggest news so far in December is that the US economy appears to be building on its 3Q momentum. With both stock and home prices well-higher YTD, measures of consumer confidence continue to hover near attractive high levels. In that regard, it is not surprising to learn that nominal retail sales were up +5.8% over last year in November; a much faster pace than the +4% rate enjoyed in recent years and setting the stage for 4Q GDP to be up an estimated 4% after backing out the effects of inflation (which is still quite tame, but perhaps starting to show some signs of life). And strength should beget more near-term strength; in the last 20 years there is an 85% correlation between the YTD performance of the S&P and holiday sales; with that in mind it suggests holiday sales could be up 7% over last year. As indicative as that all is (healthy consumer tends to lead to more confidence by businesses as well) the big news is actually that the tax reform bill looks set to be passed by Republicans before year-end. We realize that there are conflicting views on the appropriateness of any of the many changes contained in the bill (any legislation that purports change will always create marginal winners/losers), and are not offering an endorsement or opposition in that regard; but the body of work we read and receive on that subject suggests that on balance it (corporate tax changes in particular) will be accretive and boosting of the economy in at least the short-term (next few years). And, a strengthening economy generally has positive implications for financial markets as well, all else equal.

As offered in the opening, 2017 has been a fantastically encouraging year for those who remained disciplined and invested over the interval despite no shortage of negative media. Calm, low volatility, has been a hallmark of the last 12 months; so calm in fact that it will go down as one of the least volatile years ever. In that regard, 2018 should offer more bumps. The question in the most immediate term is whether the final trading days of the year will add to what is already a great performance, or if Santa has already done his giving for 2017? With eyes toward what 2018 might offer; despite valuations being perhaps worrisome, the economic and fundamental picture continues to look supportive in the coming 12 months. [Bitcoin: hard to imagine that it will experience an ongoing run without a significant crash at some point!] Internationally, we were also pleased to see allocations rewarded as foreign economies appear to have moved into a more stable growth pattern and look to be at the earlier stages of their recovery than the US. In that regard, they may continue the market-leading performance observable throughout the last year into 2018 and beyond.

Most important, we wish all of our clients and their families the Merriest this Christmas! We look forward to visiting with you as we turn the calendar to a New Year!

Gains Accelerate Bringing Both New Joy and Concern – Week Ended 12/1/17

The final trading week in November was decisively positive for US equities; in fact on Thursday the Dow achieved its 5th 1,000 point milestone by crossing the round number of 24,000 and was led by financials and transportation companies in what is ordinarily a signal of fundamental economic strength. The Dow actually concluded up +2.9% on the week (with financials up +5.2%!) while the S&P500 managed a weekly gain of +1.5%. It was noteworthy however that the technology sector, which has been the far and away leader throughout 2017, surrendered -2% and causing the Nasdaq to slip -0.6% during the week. In that vein, it would seem as we enter the final month of the year that some of the most swiftly appreciating names and areas of the market are taking a breather while others play catch-up. Fortunately, some of these areas most notably participating in recent days are those that tend to be thought of as more cyclically sensitive. Is this the start of a broader thematic shift, or just an overdue catch-up in participation by areas of the market that would seem to benefit most from the passage of tax reform making its way through Congress (more on that in a moment)?

From an economic perspective, the synchronized global growth theme seems to remain in good health judging from recent data points. To this end, the Citi global surprise index made a new high, and the Baltic Dry shipping index with the price of industrial commodities such as iron ore also made upside breakouts. In the US, stronger data included an upward estimate to 3Q GDP, rising oil rig count, vehicle production, consumer confidence (now approaching a record-high), and a concert of stronger home-related data. This is all while inflation related measures continue to remain a non-problem. In fact, so much of the data recently seems to be coming in favorably, that the narrative surrounding the market performance YTD is beginning to attract some irrational exuberance type labels (a term used to describe the markets by then Fed Chair Alan Greenspan in 1996 when the tech bubble was building). Indeed, there are some signs that some market participants are getting a bit euphoric and chasing or piling into what would seem to be some of the most risky areas. [Bitcoin for instance; without veering too far off-track, the appreciation of cryptocurrencies is making a number of prior bubbles that preceded their historic crashes look benign by comparison and that is to say nothing of the challenges we have with trying to understand the fundamental case behind the trade at any price level. Bubbles like Bitcoin can of course persist longer than reason suggests they should; precisely what makes them so alluring and risky] Interestingly, Greenspan first referenced the famous irrational exuberance term in 1996, a good 3 years before the high-flying technology sector and broader market experienced its day of reckoning.

As we enter the final month of 2017, a review of how far the markets have come is encouraging. Improving economic fundamentals seem to have delivered upon what the market was anticipating or suggesting when it began the current move higher back nearly 23 months ago. Now, what seems to be a rising probability of success with respect to Congress delivering tax reform (particularly at the corporate level), has the potential to add fresh fuel to the tank in terms of helping companies boost earnings margins and further lift confidence. At the same time however, it is the same virtually uninterrupted walk higher that has many investors growing concerned. YTD, the largest peak-to-trough decline is just -3%; that is the 2nd narrowest giveback from January to December in at least 70 years according to market research group Strategas. That alone suggests volatility will go higher from its current levels of tranquility; and volatility is historically inversely correlated to the price direction of equities. But before getting too spooked, it is worth noting that history offers that gains are still probable in the following 12 months; the pace of those gains however slowed and a much wider range of outcomes was possible. Bluntly stated, the probability of some form of corrective price action in 2018 appears high even if the longer-term theme of upward economic momentum remains intact as we think it can. Such an interruption might likely occur because inflation should pop up from its current non-visible state at some point, causing participants to fear a quick shift to a less accommodating monetary policy mix. In the near-term however, the final month of 2017 seems set to push higher.