Stocks Churn As Eyes Were Centered on Comey Testimony Week Ended 6/9/17

Broadly, US equities were mixed for the week ended June 9, but remain higher after 7 trading days in June. The S&P500 slipped -0.3% at the same time as the Dow added +0.3%; meanwhile the tech-heavy Nasdaq which is outstripping virtually all other US market barometers so far in 2017 slipped noticeably on Friday and logged a -1.6% dip for the week (still up +15.3% YTD). Perhaps more notable however is that overall market volatility remains depressed and might best be characterized as sleepy. Some feared heading into the week that a hotly anticipated testimony by former FBI Director James Comey might reveal a smoking gun, active conspiracy, or attempt to obstruct justice by the Trump administration and be the straw that breaks the new Presidents back (the testimony delivered on none of those accusations). And, that story did capture most of the attention and discussion for the week. We also witnessed political populism return with the significant loss of representation by the conservative party in the UK following its election, which all else equal results in a more uncertain geopolitical environment and fattens Brexit tail risks. But consistent with the overall theme of recent months, it remains hard to see much of anything upset the financial markets.

Last week we wrote in our monthly commentary that fundamentals such as economic readings and corporate earnings matter most for any investor with timelines beyond the shortest of term (not political noise or media headlines attempting to provoke emotion). In that regard it was another week that kept alive the more constructive case that building for much of the last 12 months: slow but steady improvement not just here in the US but around the globe. Admittedly, that pace of improvement continues to disappoint depending on who you talk with. But the global economic landscape and outlook has much improved; employment continues to trend higher; and industrial production remains firmly in expansion in countries like Germany and China. US bank lending also continues to advance and corporate earnings estimates for the remaining quarters of 2017 are being revised higher suggesting the huge year-on-year progress reported for the 1Q will continue. Mortgage equity withdraw (the act of monetizing equity in your home value) is on the rise again after being virtually dormant since the financial and housing crisis in 2008, and acts as another support for the powerful US consumer. Unfortunately, the week was not without some soft data points as well that give ongoing concern including the recent slide in commodity prices including iron ore and oil prices; typically commodity prices should be expected to rise as economic growth is accelerating. In a related way, inflation expectations are slipping as the Fed is expected to raise interest rates for the 2nd time this calendar year (usually an inflation fighting tool); this will continue to gain attention especially as it would otherwise naturally cause the yield curve to further flatten or move toward inversion (an ominous and early recession signal).

While soft data (surveys, consumer, and business sentiment) continue to suggest a supportive backdrop for the economy, corporate earnings, and thereby financial markets, one of the biggest mental obstacles for investors to overcome and remain constructive remains the age of the current bull market. Additionally, following roughly 15 months of a strong rally by domestic equities without a meaningful correction, the valuation of domestic equities is not cheap. In that regard, foreign which has generated attractive performance here in 2017 but lagged badly for several years, looks to have additional and significant room to run assuming that foreign political complexities (European referendums and elections) do not steal what appears to be an upturn in economic progress. As we look to the weeks ahead, the pace enjoyed by investors in recent months seems overdue for a pause and we are also entering what is typically a softer period of the year from a seasonality perspective. That said, when reviewing the confluence of data, skeptical sentiment, and slow but steady pace, it would suggest this economic cycle is not at a near-term risk of dying and more gas is still in the tank.

Posted in Blog Post.