Despite what felt like one of the first bouts of increasing volatility amid sharply rising geopolitical risk and ongoing turmoil coming from inside Washington, US stock indexes managed to close out the month of August positive on both the S&P500 and Dow. One might consider it a major moral victory when reflecting all that went on during the month of August (Charlottesville, N. Korea, and most recently Hurricane Harvey to name a few). But a look below the surface suggests the broader stock market struggled more during the month than the most publicized indexes otherwise reveal. For example, Apple added +104.5 points to the level of the Dow during August, more than accounting for the 57 point gain achieved by the blue-chip index. Perhaps more easily observed, mid- and small-sized company stock barometers were decidedly lower on the month. Is this weak performance and relatively better experience by larger-sized companies indicative of the financial markets assigning low probability of meaningful tax reform occurring? The trend is persisting throughout much of 2017 and is seems logical to expect smaller companies are the biggest beneficiaries of regulatory and corporate tax reform bearing relatively larger burdens than large counterparts who have the means to employ tax strategists and legal experts to exploit loopholes inherent in the existing regime.

From an economic perspective, the big news last week with 2Q corporate earnings now concluded was the disappointing employment report for August. The data showed a noticeable decline in the number of new jobs added, an uptick in the unemployment rate, and a miss and downshift in the pace of wage growth. While the data is typically volatile during August each year and Hurricane Harvey likely began to influence the numbers (as it will for the coming months), it was a weak report. In that regard, the financial markets are increasing their odds that the Fed will be unable to justify any further hikes to interest rates in 2017 and perhaps through a good portion of 2018. This lower-for-longer interest rate view decreases the near-term odds that policymakers will short-circuit the current economic cycle via overtightening of financial conditions. Aside from the weak US employment data, other economic data points were mostly stronger for the week, continuing to support the view that the current economic expansion is global and on solid footing.

With the slow-trading and often more volatile month of August in the books without any noticeable effect, eyes turn toward September which is often cited as the weakest month of the year from a historical perspective. This September seems vulnerable to a very negative flow of news as well. As highlighted in these musings last week, there are just 12 short days following the Labor Day congressional recess for agreement to take place on the debt ceiling and budget. At the margin however, the unfortunate chaos being experienced by Texas residents probably serves as a positive unifying force toward agreement; no politician wants to be accused of shutting the government down when a highly public catastrophe requiring federal assistance just occurred. In that same regard, escalating stress around North Korea also unifies parties in the view that defense and financial stability are important. Still, in the words of Strategas Research Partners, we are likely to observe messy political spinach in the near-term before we can enjoy the candy of desirable corporate tax reform and foreign earnings repatriation. Obviously if we can digest the spinach, and move successfully to the candy, the markets could quickly enjoy a nice bump up. From a technical perspective, the market has enjoyed better than average gains in each of the months so far YTD; does that bode well or ill for the balance of the year? Said differently, can the pattern of better than normal gains continue, or have those gains pulled-forward full-year progress? It will certainly be an interesting conclusion to what is so far an attractive year.

US equities broke their two-week losing streak with the S&P500 advancing +0.7%; US political noise seemed to cool slightly from what has otherwise been a disgusting month of turmoil and backlash against the President by both parties. Despite the favorable weekly result, the daily path of the market remains relatively choppy compared to the low volatility experience observed over the first 7 months of 2017. Indeed, most are pinning the recent uptick in volatility and daily swings to none other than the unpredictable rants and feuds being generated by Donald Trump. No other way to put it than a huge distraction from meaningful progress. And in a slow-growth economic environment that is hopeful for any ingredient including less restrictive policy to spur an faster pace of growth, this perceived importance of politics makes sense. It is from that perspective we believe the road will become even more choppy as we move through the balance of 3Q (September). In the month ahead, action by Congress will need to occur on the topics of the US debt ceiling and a budget resolution. To the extent that the debt limit would not be successfully negotiated and a government shutdown occurred, the market would surely exhibit stress. While that risk should be and seems still remote, it feels equally challenging to entirely dismiss the potential for idealistic dysfunction despite the well-known self-destructive consequences.

From an economic perspective, the most clear message conveyed by data last week is that we are enjoying a period of synchronized global growth. Improving metrics around the world remain constructive and according to the IMF, in a way that has not been seen in a decade. Objectively and as reported by the WSJ this past Thursday, all 45 countries tracked by the Organization for Economic Cooperation and Development are on track to grow and 33 of those are poised for acceleration. Even here in the US the number of cities that are reported to be enjoying robust economic conditions is outstanding. And at the same time as growth is supportive, inflation remains tepid and a non-threat. This remains surprising when considering the degree to which monetary stimulus has been pursued over that same 10-year period; traditionally such a notable expansion of the monetary supply accompanied by economic growth might be assumed to produce problematic inflation. But the fact that inflation is yet to manifest continues to provide central bankers the flexibility to remove stimulus extraordinarily slowly and carefully.

While price inflation remains MIA, it would be hard to argue that central bankers have not achieved asset inflation. Asset inflation is visible through the levels of arguably most markets including housing, stocks, and bonds alike. From a valuation perspective, it is challenging to suggest that any asset class is cheap. It is in that regard, that the calls from market skeptics continue to call for the end of the bull market. This relatively pervasive notion probably best explains why money continues to flow out of equities in a way that is starkly different from what would be expected if investors were euphoric. But given the resiliency of the financial markets despite political noise, coupled with the observation that the President regularly likes to cite the performance of the Dow as a barometer for his success, might the stock market become the vigilante that gets Washington to focus on making progress on issues that have real fiscal significance? Will stock market vigilantes begin to exert pressure (via falling market) on Washington as we move into September? We think it might. In fact, one strategist is suggesting that should the stock market pressure via a more noticeable decline amid a sloppy political negotiation on the looming debt ceiling, it would be a buyable moment. While Trump and a partisan Congress seems deaf to criticism or wisdom in pursuit of achievements for the greater good, we have hope there is at least one vigilante left who can successfully get the message through: stocks. In the short-run, we suspect the market may get sloppy; but that may just be what the doctor ordered to incentivize leaders to get their act in gear and move forward with reforms that have the potential to extend the real business cycle.

As North Korean dictator Kim Jong Un pulsed back from recent threats aimed toward the US early last week, the overall stock market initially surged. Hopes for a diplomatic solution to the recent back and forth war of words between the US and North Korea suddenly appeared more plausible. Yet President Trump quickly reminded investors that he can be a distraction and tail risk following what appear to be less than calculated remarks in response to recent extremist violence occurring on our own soil in Charlottesville, VA. His reaction to the tragedy seemed to be the final straw for many on his business advisory councils, and is perhaps a good barometer for just how isolated he is making himself from both legislators as well as the broad public. Investors by extension, are solidly of the perspective that any meaningful pro-growth policy achievements campaigned upon and celebrated in the immediate aftermath of the November election now have virtually zero chance of advancing. On that deepening belief, US equity markets slid sharply again late-week with the S&P, Dow, and Nasdaq each finishing lower by between -0.6% and -1%; that marks another consecutive weekly decline to US.

Outside of the political mess that seems to continue circling (or be self-inflicted) Trump, fundamental data in the latest week was supportive of a view that the global economy is on sound footing. US retail sales advanced +4.2%; Chinese retail soared +10.4%; consumer sentiment is up high single-digits while the money supply is also on the rise despite slowly climbing interest rates (suggesting velocity of money is picking up slightly). Wage data shows that workers are seeing bumps in pay that slightly outpace reported inflation. And Eurozone real GDP is up roughly 2%. Corporate earnings reports, while weaker in these last couple weeks (very normal during the later weeks of reporting season), are concluding the 2Q in aggregate strongly ahead of last year. Admittedly, 3Q will present harder comparisons to year-ago results than enjoyed during the first half of 2017.

In recent years, the month of August has not been kind to global investment markets (stocks in particular). Low summer trading volume tends to amplify negative developments. And following months of extraordinarily low volatility, recent sharp dips feel even more alarming; this is especially the case against a growing count of scary news stories proclaiming that the bull market (usually referred to as only a rally) is highly fragile. For example, the markets logged several new all-time highs in one week during the month of July, and no mention was made of it by the mainstream media. Negative stories seem to ignore how this bull market has recovered from dozens of major shocks in the last 8 years. This is not to suggest that investors should dismiss recent troubling developments. In fact, elevated valuations while not a useful market timing tool do imply that forward returns look muted. Still, reviewing valuations relative to historical averages inside a vacuum ignores the fact that investors still have few viable alternatives for where to allocate savings in pursuit of real (after-inflation) returns considering that bonds and cash yield almost nothing after the effects of inflation. We believe that growth of corporate earnings must continue to facilitate this bull market enduring longer, and the economy remains highly dependent on consumer and business confidence staying accommodative. But amid recent signs that economic conditions continue to improve internationally, US demand should also remain healthy. Continued skepticism over the durability investment assets also likely affords this bull market more time and keeps the risk of full-blown bubbles low. Taken with the acknowledgment that investors believe pro-growth US fiscal policies are dead in the water (and been fully removed from asset prices in the months since inauguration), a positive surprise in the form of tax reform or repatriation, or any reduction in regulatory burdens could setup stocks to receive another nice leg up. Short-term, rising volatility and still-low trading volume keep this market vulnerable in the month or so ahead.

As one market commentary this morning put it, the heated rhetoric from both North Korea and the US fell like a rock into the still pool of the markets last week. Tensions escalated between the two countries on Tuesday as Trump tweeted that the US would respond to any actions by N. Korea against the US or its allies with fire and fury like the world has never seen. On that headline, the S&P500 reversed -0.8% from what was an attractive intra-day advance. The bleeding of financial markets continued through Thursday which experienced the most notable drawdown in roughly 3 months. Markets managed to stabilize Friday, but the Dow, S&P, and Nasdaq each declined by -1.1%, -1.4%, and -1.5%, respectively for the week. It was not just domestic equities that sold off; Eurozone banks fell -4.1% and other international also swooned by anywhere between -1% to -2.5% for the week. As might be expected, safe-haven bond yields again moved lower (prices up). Following what has been months of market and investor calm despite ongoing dysfunction in Washington and pro-growth policy (like healthcare or tax reform progress) stagnation, the colorful exchange of words and threats over the use of nuclear force seem to be scary or uncertain enough to reawaken volatility.

From an economic perspective, 2Q earnings season is coming to a close in the US. The year-over-year progress is noteworthy, but should also be at least partially attributed to still-easy year-ago comparisons; looking to 3Q, comparisons should become more challenging. But that aside, corporate earnings and guidance commentary still reflects an economy that is progressing and bolstered by steady consumer and business sentiment. Foreign economies also are showing ongoing improvement. At the same time, while unemployment continues to drift lower, wage growth remains benign to corporate margins meaning that inflation should remain a non-issue in the short-run. That view was supported with the release of the Consumer Price Index last week, which again reflected a pace of inflation that falls-short of central bank expectations and goals. When coupled with the recent escalation of geopolitical tension, it would seem the Fed and other central bankers may be incrementally harder-pressed to move forward with additional rate normalization and tightening efforts despite their idealistic notion to do so.

While the drawdowns experienced last week likely re-awaken markets that have been extraordinarily calm throughout much of the year, it should stand as an important reminder to investors that unexpected developments always have the potential to upset markets in the short-run. They are also a normal part of investing. With that said, it is our understanding from following various experts on the topic of actual war with North Korea (beyond words), the risk may still be overstated. Perhaps more importantly, it is the perspective of experts that the abilities of North Korea to strike the US this year or even the coming few (despite accelerating progress) are even more overstated by the media. This is not to suggest that the prospects of any nuclear attack or not to be evaluated seriously, or that N. Korea isnt moving toward that achievement. Or, that one of the biggest risks in this situation is that each country has a leader that seems to lack the rationality or cool head we might normally expect and from that perspective these worries do have the capacity to increase financial risks in the short-run. We do not believe however that this event materially changes the underlying economic fundamentals of either growth here in the US or globally. But in the very short run (next few months), it is entirely possible and perhaps even probable that volatility continues to rise or at least shift to a higher level than enjoyed by investors YTD because it is our perspective that most investors remain on-alert for anything that looks to have potential of upsetting the Goldilocks environment. Further, we are still within 2% of the all-time highs set by US indexes within recent weeks and hardly constitute a correction. Investors and clients should expect that streak without correction to end at some point, but the important question that must always be considered is whether underlying fundamentals are changing for the worse suggesting that a pullback is the beginning of something more sinister. At present, that answer is no. And, perhaps even more broadly, TINY (There Is No Yield) continues to perpetuate TINA (There Is No Alternative [to stocks] for generating real return).

The summer months are often characterized by sleepy low volume trading, but the experience in 2017 makes that statement even more pronounced than normal. It is no secret that in recent months, observed volatility is extraordinarily low, but Friday marked the 12th consecutive trading session wherein the S&P500 moved less than 0.3% throughout the day; the longest such boring (not that boring is bad) streak on record. For investors who remain long the market, this calm is attractive as the level of volatility tends to be negatively correlated with the direction of markets (low volatility tends to accompany rising markets, while spiking volatility tends to push values lower). In support of that correlation, the Dow managed to set a fresh all-time closing high crossing the level of 22,000 for the first time this past Wednesday while the broader S&P remains within 1% of its record high set a week back or so. Still, while it is neat to see the market moving higher and seemingly unfazed by ongoing noise from political dysfunction, it has been more than 270 days since the US stock market experienced a pullback of 5% or more; this is not the longest such streak without a pause, but it sits among the longer stretches. That fact alone is probably why the number of media outlets and respected investors calling for a top or sharp pullback in the near term seem to be getting louder and more attention.

On the economic front, the Goldilocks (not-too-hot, nor not-too-cold) economic camp continues to see their base case validated by the incoming data. Most notable and watched last week was the employment report for the now complete month of July; the report showed another round of better than expected job creation and a falling unemployment rate. Company surveys also continue to reflect a stable corporate outlook and upbeat sentiment for business both here domestically and abroad. At the same time, a declining US dollar looks to be helping domestic export activity and sharply rising commodity prices like that of Iron Ore and the stabilization to improvement of oil prices suggest economic activity is healthy and perhaps accelerating (even though acceleration has been elusive throughout much of the economic recovery). And in the US, the number of cities that are experiencing robust economic conditions seems to be broad and expanding. Perhaps the most stubbornly curious data point continues to be on the front of low observed inflation; at this stage of the cycle and with unemployment so low, one would typically expect to see wages growing at a faster clip than they are and resulting in more normal inflation. But low inflation should be enough to help central bankers avoid the temptation to get too aggressive in their pursuit of normalizing monetary policy which could ultimately short-circuit what is now one of the longest economic cycles in US history.

In the coming day, we look to distribute our August commentary to clients (also made available on our website). In that note, we will survey what we believe is the front-and-center topic on investor minds: how much longer than the current market advance continue? In many respects, it is hard to argue with the growing chorus that a notable pullback should be coming amid financial markets that feel to be a bit departed from economic and corporate fundamentals. On the other side of the coin however, valuations while elevated slightly above historical average are getting some help from corporate earnings which grew double-digits again in the 2Q over the same period last year. And, as long as wage growth fails to accelerate meaningfully or provoke higher inflation, it is equally challenging to say that the economy (and financial markets as a derivative) will suddenly impair the current trend beyond a short-term bump or two. We encourage you to check back for our monthly commentary titled Dancing on the Ceiling in the coming days.

Will stocks ever go down again? This seemingly absurd question is actually the result of Google search auto-complete feature if one starts typing the phrase: will stocks ever While we obviously do not root for the market to do so, the answer to this funny question is YES as the strong rally that has gone virtually uninterrupted for the better part of 12 months will assuredly end at some point. Rainy days are part of investing and should be expected (history reveals they do not occur as often as sunny ones, which makes it a rewarding endeavor). But in a period where the market is regularly setting new all-time highs and price volatility hovering near all-time lows in spite of less than encouraging news flow (political failures and dysfunction in particular), perhaps it should not be surprising to observe that this question is being asked of Google often enough to auto-complete. In support of those favorable trends, it is worth highlighting that the S&P500 added another +0.5% last week; the Nasdaq snapped its streak of 10 consecutive positive days on Friday, but still concluded the week up +1.2% adding to the gains by both for July and YTD. Interestingly, momentum factors, those least predicated on economic fundamentals continue to do the best and lead the overall market charge higher while valuation continues to be a factor that is not rewarded by the market at present.

On the economic front where recent weekly data has been somewhat muted and fallen short of the narrative looking for economic improvement, the data last week was more positive. Soft data from corporate surveys continues to produce encouraging readings. Hard data confirmed with bank lending reaccelerating and unemployment claims declining. 2Q corporate earnings are also improving over year-ago levels roughly as expected (and beating corporate guidance by healthy margins). Housing data was also in focus last week amid a number of fresh points was strong with new starts up +8.3% in June over the month prior which had disappointed. This better housing data fits with a logical theme of pent-up demand following the housing crisis 8 years ago and the long shadows it cast until just a couple years ago. At the same time, inflation data remains benign. Abroad, animal spirits (business and consumer sentiment) in Europe continue to look up despite the ongoing uncertainty related to Brexit while China posted very positive data favoring the upside. This is all occurring at the same time central banks continue to discuss shrinking their balance sheets (a form of monetary tightening) and additional rate hikes.

In closing, its been over 270 days since the US equity market experienced a pullback of -5% or more from a recent high. This is not unprecedented, but is well longer than typical. We are keenly aware that markets will not always move unilaterally higher. With that said and despite recent strength, it is hard to characterize investors as euphoric when data reveals that investors continue to pull money out of equities and funnel the proceeds toward bonds. Low volatility suggests that while investors may be complacent (can also be dangerous), but are not euphoric (herding behavior). With so many people continuing to believe we are overdue for a big correction, that may well remain an elusive development. With all that said, the seasonally weakest months are now upon us, and it seems reasonable to suspect some unforeseen negative surprise might have the ability to reawaken fear in the short-run. But returning our focus to the fundamentals, the themes of sound economic attributes suggest the longer-running bull trend can endure a bit longer. Business cycles do not end with profits up and wages up together, and the not-too-hot but not-too-cold Goldilocks theme continues to appear in-tact.

Domestic equities managed to establish fresh all-time highs again last week despite an economic backdrop that remains well short of robust in terms of pace. At the same time global central bankers continue to speak in a way that leaves little doubt they desire to continue on a path toward more normal monetary policy. But while the pace of economic growth may not be exciting, corporate earnings season for the completed 2Q period looks to be more encouraging, especially when compared against year-ago levels. The S&P500 climbed +1.4% last week, and is now up roughly +11% in 2017. Many continue to scratch their heads as to why, given that the promise of a more business-friendly tax and regulatory climate that coincided with the election of an all-Republican congress and Trump now seems equally ineffective as the prior Washington climate. But it is worth noting that the sectors benefiting most from the election last November have actually fared worst since the beginning of the year, suggesting markets are not as tone deaf as they might first appear. Instead, the gains this year appear to be occurring for reasons other than political reform.

Economic readings last week were highlighted by progressing global leading indicators. In the US JOLTS (a measure voluntary job separations) readings were indicative of labor market strength; still improving corporate surveys and measures of sentiment; European data showed strong auto sales, exports, and industrial production; and Chinese bank lending, government spending, and exports appear supportive of a globally sound economy. In addition, oil prices along with other industrial commodities (which do not seem to be worrying the markets the way they did between June 2014 thru mid-2015 when they were rapidly falling) rebounded sharply last week, probably indicating that global economic activity is OK. Related though, low inflation continues to challenge and mystify global central bankers, giving them pause as they desire to continue backing away from ultra-accommodative monetary policies of the last 8 years. Make no mistake, it is these same weak inflation readings and new communication from monetary authorities, that may warrant the most attention from investors as they evaluate how much longer the current economic expansion and bull market may endure. But so long as short rates are below actual inflation AND it does not drive the US dollar dramatically higher it would be hard to describe financial conditions as too-tight. From a fundamentals perspective, perhaps the most challenging attribute of the continued advance of financial markets is that the economy while OK, does not feel strong enough to justify the low levels of volatility and unarguably strong additional upward advance by equities so far in 2017.

In the coming week, investors will be most focused on the continuation and story being told by corporate America through 2Q earnings. The early days of that data dump have been positive and appear on pace to be +11% over the same interval last year; but if reported earnings can even further surprise to the upside it would make the bull case and current level of equity valuations easier to justify. In addition to corporate earnings, we will get a number of fresh data points on the housing sector. Housing remains an important component of the US economy from the perspective that not only does the construction of new homes support a significant number of jobs, but the movement of people to new living arrangements also has large trickle-down impacts for other industries within the economy. At this point, it seems reasonable to project that the momentum is with more optimistic participants through the balance of 2017 and into next year. It not lost on us however that a meaningful pullback by financial markets has not been experienced in well more than a year and a seasonally weaker portion of the calendar is now upon us through mid- to late-September. Combine that with more hawkish speak by central bankers, or watering down the proverbial punchbowl, we may have the catalyst that creates a short-term scare. We are not advocates of market timing, so that awareness of seasonal vulnerability and one potential threat serves more as a reminder that any pullback (overdue) should probably be viewed as just that; not the beginning of the end of this current economic cycle. As one market technician recently put it, structurally bullish but short-term cautious.

Global markets were roughly unchanged last week (S&P500 +0.1%), but volatility picked up as investors appear to be increasingly focusing on a more hawkish Fed and other key central banks talking that direction as well. This tone shift is probably appropriate based on sound economic readings being more normal including (actually low) unemployment rates, steady inflation, and reasonable economic growth; conditions that cannot be described as anything like a crisis or warranting of extraordinarily accommodative monetary policies in which they were implement. But the prospect of diminishing monetary stimulus introduces anxiety for those who firmly believe that asset prices have largely moved over the last 8 years due only to that central bank support. In recent weeks, US equities have struggled for direction, but do feel to be awakening from an extended period of very small intra-day trading ranges. In similar fashion, international markets have also slowed their pace of robust progress that was enjoyed through the first five months of 2017. Interestingly however, the conflicting narrative for economic conditions coming from rising equity prices (suggesting economic improvement) but slipping bond yields and flattening yield curves (which would suggest weakening forward outlooks) appeared to revert a bit last week and in short-term support to the more bullish case.

On the economic front, the big news out last week was the much better than expected employment report for June. Not only was the headline number of jobs added very strong, but there were upward revisions to prior month readings; the details of the report were equally encouraging with the average workweek increasing as well as workforce participation. In addition, surveys of corporate managers across a variety of industries broadly reflect a favorable environment not just in the US but abroad as well. At the same time however, oil prices continue to plumb low levels; two years ago the narrative on negative price action from oil was slumping global demand and created spillover caution and worry over what it suggested about the broader economic climate. Today the markets seem to be maintaining the perspective that falling prices are a function of too much supply rather than a more troublesome indicator. Yet, the price bears watching as it historically has translated into higher borrowing costs for much of the high-yield issuer universe and increased their refinancing risk. We also see

Bringing it all together, what appears most clear is that we are at the onset of a new monetary environment; more mixed than witnessed over most of the last 8 years wherein everything seemed to error on the side of being too easy. More immediate term, corporate earnings season for the now complete 2Q looks to commence this week as well; many anticipate that it will be another quarter where, not unlike the favorable 1Q period, will show companies posting results that well exceed year-ago levels. More uncertain is how reported earnings will stack up against analyst expectations which have been ratcheted up after the 1Q observation that year-ago levels still make for relatively easy comparison (so how much of a beat is already priced-in?). And while the US Fed has been telegraphing its desire to normalize monetary policy for well more than a year, the jury is out on how markets will react to the change in tone and how soon it might morph into action from the ECB (Europe: perhaps the 2nd most influential central bank in the world). We should be careful to remind ourselves that rate increases should not be viewed as a negative when done prudently or carefully as seems to be the appetite; in direct response to improving economic growth and in prevention of too strong price inflation. So long as central bankers do not collectively create an environment wherein financial conditions are excessively tight such that it restricts growth or causes something to break, higher interest rates and returns on money are a good thing for investors. With global real short rates still well-negative (below the pace of reported inflation), it is hard to argue that financial conditions themselves are anywhere near tight; rather the regulatory environment and uncertainty are arguably what has created tight financial conditions and to a large extent limited the effectiveness of monetary policy. From that perspective, it is important that fiscal policy become more sensible (not restricting the ability to borrow for those who show the ability and desire to repay, while excluding access to those who are clearly not in a position to do so). Rising rates are generally in response to an improving growth outlook.

For a second consecutive week, US equities wobbled but concluded on the right side (positive of course) of the ledger with the S&P500 adding +0.2% amid what many investors and the financial media continue to highlight as mixed signals. Bears are saying the decline in bond yields and plunge in oil prices are screaming recession. And, the Citi surprise index has plunged while contending at the same time a lack of inflation means lack of demand. They also argue the Fed is tightening too aggressively and too early in light of these less than robust data points indicate is necessary. Meantime, Bulls are saying goldilocks conditions, not-too-hot and not-too-cold growth and low inflation, continue to pave the way for steady economic expansion. They cite leading indicators continue to increase and unemployment claims remain low; house prices are rising and corporate earnings are poised to continue the 1Q experience of general outperformance relative to both expectations and the year-ago period.

Stepping back from the commentary, the data last week indeed remains a mixed bag. The US yield curve continued to flatten last week while company surveys report a steady and optimistic tone from businesses; oil continued to move lower (and broke the threshold for a technical bear market) but copper and iron ore began to improve. Corporate spreads remain steady (suggesting credit risk is not rising meaningfully as it did last year during the oil selloff), but economic data from China was mixed. US retail continues to be a tale of two extremes as Amazon continues to prosper and innovate while more traditional outlets suffer and try to play defense. More short-term positive was that US housing activity seems to be improved following the weak reading that captured attention last month. And on the US policy front there remains at least the appearance that Congress is still attempting to move its agenda of healthcare and tax reform forward despite the expectation by many that a toxic Trump presidency will torpedo any actual progress on hoped-for pro-growth fiscal policy (this was observed through the outperformance of the healthcare sector last week). Another positive was a report that US banks are in very strong and healthy shape following release of recent stress test results.

At the end of the day, what remains most clear is that the days of easy US monetary policy are ending and the market seems to retain at least some hope (even amid rising skepticism) that fiscal policy can successfully pick up the baton. Additionally, while the US economic and financial market cycle is now among the longest in history (it was 10 years ago in June that the US housing crisis began to unfold and morph into a full-blown global financial crisis lasting through Spring 2009), economic conditions and animal spirit sentiment outside the US and particularly in Europe are earlier in their recovery phase. This improvement abroad provides a tailwind in an ever more globalized economy and investors are viewing the recent crash in oil prices as an issue of oversupply rather than one of weakening demand. Bottom line: for the moment we believe the bulls continue to retain the upper hand in this goldilocks story; the bears have not yet began to head for home and recession risk still seems all but imminent. Still, investors must acknowledge that a market pause or more meaningful pullback seems well overdue in the short-term following complete hiatus since the beginning of 2017. Complacency born by persistent low volatility is a recipe for short-term surprise should unexpectedly weak data present itself.

Enjoy the upcoming 4th of July holiday and be on the watch for our latest quarterly newsletter to come in the first part of July.

The second full week of June, which yielded more flat market performance with the S&P500 barely changed at +0.1%, seemed to offer a little bit of something for everyone. Volatility and the daily trading range observed was up a touch relative to the sleepy pattern investors have grown accustomed to so far in 2017, but remains low by historical standards. Perhaps the most notable development throughout the week was the Fed decision to raise short-term interest rates by another +0.25% bringing its target up to between 1.00% and 1.25%. This hike came despite some recent readings suggesting softer than anticipated and desired inflation. With that, the bearish camp can find support for their case in observing the continued flattening of the yield curve (inverted yield curves have served as a reliable leading recession indicator), weakness in oil, or the recent reversal in what has been the high-flying tech sector so far this year. The glass-half-full crowd might instead choose to focus on the rotation by the market into Financials (often described as the transmission of the economy) despite flatter yield curve, the weakness in gold stocks, or the resiliency from the Industrials sector. Whatever side you find yourself, the market continues to send mixed signals.

From a fundamentals perspective, we already highlighted perhaps the biggest development with the Fed rate increase last week, although the decision was well telegraphed and of essentially no surprise to market participants. Outside of that news, there was a package of stronger data around the world including key manufacturing indexes, Eurozone and Canadian employment, bank lending in China, Indonesia imports, and retail sales in Singapore. Those insights would tend to suggest then that recently cooler inflation readings despite continued labor market tightness are due to more transitory factors such as sliding oil prices on too much production and technology disrupting other goods and services pricing structures than an indication of a slowing economic environment. On the weaker front, some recent housing metrics in the form of new permits and mortgage have been disappointing relative to the time of year, as well as slumping auto sales; these are two sectors of the US economy that have significant trickle-down impacts so downshifts in activity are worth noting.

As observed in our update a week ago, perhaps the most unsettling attribute of recent market dynamics is the flattening yield curve. In that vein, the Fed decision and relatively hawkish press conference did not help. Either forward growth and/or inflation expectations need to lift for the yield curve to steepen when the Fed is in the process of propping up short-term rates. Further, stocks are admittedly not cheap, but it is important to also note that neither are bonds, real estate, or about anything else that is investable. If the financial crisis and unprecedented level of monetary stimulus applied in its aftermath in pursuit of stabilizing the economy has done nothing else, it has created a lot of money that generally remains underutilized and unproductive on corporate balance sheets or being hoarded earning decidedly less than inflation. It is from that perspective that valuations cannot be viewed as a timing tool, because significant sums of that money remain in search of more productive or opportunistic uses. Further, this logic probably also goes a long way toward explaining why the Fed continues to communicate a plan of additional rate increases, albeit at a still slow pace. After all, this has never been a normal economic or rate cycle, but the economy is strong enough now to pursue normalization (very slow but incremental steps away from extraordinary accommodation). In the short run, we suspect that what is a more difficult seasonal stretch of the year, coupled with mixed data and hawkish speak from the Fed will produce some anxiety for the markets, but that is unlikely to mark the end of this cycle.