Talkin’ Turkey

The cause of Turkey’s recent economic pain seems to have originated with US sanctions.

These may have made an acute contribution. Unfortunately, the country’s economic troubles are essentially chronic and potentially contagious.

On August 1, the US Treasury Department imposed an asset freeze on two senior Turkish officials related to their roles in the detention of a US pastor. Turkey retaliated.

Since, the Lira has lost about 1/3 of its value versus the dollar and the Turkish stock market is down more than -25%.

While reversing sanctions may temporarily ease the agony, the pernicious economic and geopolitical backdrop only portend a protracted downturn.

From 2001 – 2011, many developing countries borrowed heavily in foreign-denominated debt. Much of this debt will come due as the dollar continues to strengthen, perpetuating a cycle of downward pressure on local currency. 

Concurrently, China’s slower growth has dented demand for the commodities developing countries typically export. All the while, to keep ahold of power, Populist governments will try to “give the people what they want” swelling deficits via tax cuts and/or largesse.

Based on inordinate foreign-currency private sector debt, the countries most vulnerable to Turkey’s malaise include Argentina, Brazil, Indonesia, Chile and Columbia. 

Weekly Update through August 17, 2018 The S&P 500 added 66bps, even as the Dow Jones gained 1.48%, the Russell 2000 added 40bps, the Nasdaq declined -23bps.

As for US bonds, they lost -2bps.                         

Globally, the MSCI World Index lost -1bp the Barclays Global Aggregate Bond Index declined -7bps.

The Euro Stoxx 50 lost -1.56% in local-currency (Euro) and -1.50% in USD.  Meanwhile, the Topix declined -1.31% local-currency (Yen) and -1.03% in USD.

IOU $1,000,000,000,000

A trillion is one million million. When you write it out it has 12 zeros and looks like this: 1,000,000,000,000. Yea, It’s HUGE. 

In 2014 - in the midst of the economic recovery - the deficit was a paltry $486 billion.

By next year, according to the White House’s estimate - it will be more than $1 trillion or 5.1% of GDP.

What happened?

It’s hardly an economic koan. The US government is spending more than its making – way more. And, rising rates won’t just affect your new mortgage. It also increases what Uncle Sam owes. 

Since WW2 the US breached this 5% ratio only twice. In 1983 and from 2009 to 2012 extreme government spending helped revive the economy and reverse nearly 10% unemployment.

Today, unemployment is 3.9% and the economy is strong.

What will the government do when there's another major downturn? In the light of the $1T already owed, probably not so much.

Weekly Update through August 10, 2018 The S&P 500 lost -18bps, even as the Dow Jones dropped -44bps, the Russell 2000 gained 82bps, the Nasdaq added 40bps.As for US bonds, they climbed 42bps.                 

Globally, the MSCI World Index was down -64bps the Barclays Global Aggregate Bond Index lost -11bps.

The Euro Stoxx 50 lost -1.57% in local-currency (Euro) and -3.21% in USD. Meanwhile, the Topix declined -1.29% local-currency (Yen) and -83bps in USD.

Earnings & Earnings

In July, exceptional corporate earnings buoyed markets. Data also shed light on other optimistic trends including strong retails sales, above trend GDP and further declining unemployment.

But what of personal earnings, aka wages?

Nominal wages increased 2.7% year-over-year. That doesn’t sound too bad, does it? The problem is real wage gains were…exactly zero.

Once year-over-year inflation of 2.7% is accounted for real wage growth was a tidy paltry 0.0%.

For perspective, US average hourly earnings went from $26.26/hour in June 2017 to $26.98/hour in June 2018.

Considering consumer spending comprises 68% of the US economy, it is hard to envision corporate earnings continuing to climb while humanoid earnings only stagnate.

Click here for the report.

Weekly Update through August 3, 2018 The S&P 500 added 80bps, even as the Dow Jones gained 5bps, the Russell 2000 gained 63bps, the Nasdaq added 98bps.

As for US bonds, they climbed 14bps.                         

Globally, the MSCI World Index was flat and the Barclays Global Aggregate Bond Index lost -27bps.

The Euro Stoxx 50 lost -1.20% in local-currency (Euro) and -1.74% in USD. Meanwhile, the Topix declined -1.87% local-currency (Yen) and -2.20% in USD.

Month-end Update through end-July 2018 In July, the S&P 500 added 3.72%, the Dow Jones gained 4.83%, the Russell 2000 added 1.74% and the Nasdaq gained 2.19%. 

As for US bonds, they increased 2bps.

Globally, the MSCI World Index added 3.15% and the Barclays Global Aggregate Bond Index declined -17bps. 

In July, the Euro Stoxx 50 added 3.96% in local-currency (Euro) and 4.21% in USD. Meanwhile, the Topix gained 1.30% in local-currency (Yen) and 38bps in USD.In July, exceptional corporate earnings buoyed markets. Data also shed light on other optimistic trends including strong retails sales, above trend GDP and further declining unemployment.

But what of personal earnings, aka wages?

Nominal wages increased 2.7% year-over-year. That doesn’t sound too bad, does it? The problem is real wage gains were…exactly zero.

Once year-over-year inflation of 2.7% is accounted for real wage growth was a tidy paltry 0.0%.

For perspective, US average hourly earnings went from $26.26/hour in June 2017 to $26.98/hour in June 2018.

Considering consumer spending comprises 68% of the US economy, it is hard to envision corporate earnings continuing to climb while humanoid earnings only stagnate.

Click here for the report.

Weekly Update through August 3, 2018 The S&P 500 added 80bps, even as the Dow Jones gained 5bps, the Russell 2000 gained 63bps, the Nasdaq added 98bps.

As for US bonds, they climbed 14bps.                         

Globally, the MSCI World Index was flat and the Barclays Global Aggregate Bond Index lost -27bps.

The Euro Stoxx 50 lost -1.20% in local-currency (Euro) and -1.74% in USD. Meanwhile, the Topix declined -1.87% local-currency (Yen) and -2.20% in USD.

Month-end Update through end-July 2018 In July, the S&P 500 added 3.72%, the Dow Jones gained 4.83%, the Russell 2000 added 1.74% and the Nasdaq gained 2.19%. 

As for US bonds, they increased 2bps.

Globally, the MSCI World Index added 3.15% and the Barclays Global Aggregate Bond Index declined -17bps. 

In July, the Euro Stoxx 50 added 3.96% in local-currency (Euro) and 4.21% in USD. Meanwhile, the Topix gained 1.30% in local-currency (Yen) and 38bps in USD.

Trade War Winners

While no country can possibly win a trade war, there may be stocks that could prove resilient.

For most stocks trade war spells calamity. Based on foreign revenue levels, the biggest losers would be Semiconductors, Tech Equipment, Materials, Food & Beverage, Software and Capital Goods. That is a lot of sectors.

Hmm, what types of companies use domestic inputs, rely on domestic consumption and have low exposure to international trade? You're right, not many.There is one though – defense. In the face of war – trade war that is – both domestic and foreign sales would almost certainly remain steady.

It’s pretty hard to switch out your F-15 (McDonnell Douglas), your F-16 (General Dynamics) or even your F-35 (Lockheed Martin).

With the US responsible for more than 1/3 of global arms sales, a bevy of firms would be okay or maybe even benefit.

Weekly Update through July 27, 2018 The S&P 500 added 61bps, even as the Dow Jones gained 1.57%, the Russell 2000 lost -1.96%, the Nasdaq slid -1.05%.

As for US bonds, they dropped -17bps.                         

Globally, the MSCI World Index gained 81bps and the Barclays Global Aggregate Bond Index lost -20bps.

The Euro Stoxx 50 gained 1.98% in local-currency (Euro) and 1.54% in USD.  Meanwhile, the Topix added 1.77% local-currency (Yen) and 2.54% in USD.

Real estate prices soar, except when they don't

Overall 2018 is shaping up to be the hottest real estate market…ever.

In most of the country, housing prices continue to soar above their mid-2000 all-time-highs.

For example, according to S&P Core Logic, as of end-April 2018, Denver-area housing prices were 52% higher than their bubble-high (June 2007).

While extreme price appreciation is making news, real estate is a segmented market.

The top 5% of prices are appreciating at a much slower pace. According to LIV Sotheby’s, prices for homes over $1M have increased just 1-4% in the last four years.

The disparity has to do with supply and demand. Nationally, the greatest shortfall in housing inventory is in the “starter home” category – median price $178K.

Accounting for just over 50% of inventory, the high-end market isn’t nearly as constrained.

Weekly Update through July 20, 2018 The S&P 500 added 4bps, even as the Dow Jones gained 20bps, the Russell 2000 increased 58bps, the Nasdaq slid -7bps.

As for US bonds, they dropped -27bps.                         

Globally, the MSCI World Index gained 23bps and the Barclays Global Aggregate Bond Index lost -2bps.

The Euro Stoxx 50 gained 16bps in local-currency (Euro) and 46bps in USD.  Meanwhile, the Topix added 86bps local-currency (Yen) and 1.54% in USD.

Great expectations

Q2 corporate earnings kicked off on Friday the 13th. However, analysts don’t seem worried by bad luck.

Estimates for Q2 earnings growth is 20% – about the highest level in the last seven years. For comparison, earnings rose only 11% in 2017.

Robust corporate profits signal economic strength. Whether they also portend higher stock prices is debatable.

Expectations play a big role.

For example, although earnings were up 11% last year, the market was up more than 20%. Returns were exceptional in part because of earnings expectations.

As it stands now, analysts suggest this level of earnings growth is hard to maintain and predict lower growth next year.

Weekly Update through July 13, 2018 The S&P 500 added 1.55%, even as the Dow Jones gained 2.32%, the Russell 2000 declined 40bps the Nasdaq added 1.79%

As for US bonds, they added 18bps.                         

Globally, the MSCI World Index gained 1.02% and the Barclays Global Aggregate Bond Index lost -43bps.

The Euro Stoxx 50 gained 22bps in local-currency (Euro) and declined -39bps in USD. Meanwhile, the Topix added 2.28% local-currency (Yen) and 49bps in USD.

What growth?

Q1 GDP came in at 2%.When the US Bureau of Economic Analysis releases Gross Domestic Product (GDP) figures, data are reported in nominal terms.

Nominal GDP does not account for inflation, while “real GDP” means inflation is reflected in the figure.

We rarely hear talk of “real GDP” and when we hear “GDP” we can infer it refers to nominal GDP.

By end Q1, US inflation was 2.4%.

This means Q1 real GDP was -0.4% Yep, once inflation is considered, US economic growth shrank in Q1.  Oops. Why isn’t this big-ish news?

For now it’s not news because – for now – it's not a trend.

By end-May (most recent data) annual inflation had increased rather considerably to 2.8%. Which doesn’t seem to auger well, until you realize…

According to an Atlanta Fed report released last week, Q2 GDP is likely to come in at a whopping 3.8% (!!!)

For now - it looks like real growth is back on track.

Weekly Update through July 6, 2018 The S&P 500 added 1.56%, even as the Dow Jones gained 82bps, the Russell 2000 was up 3.12% the Nasdaq added 2.40%

As for US bonds, they added 24bps.                         

Globally, the MSCI World Index gained 1.19% and the Barclays Global Aggregate

Bond Index added 48bps.

The Euro Stoxx 50 gained 1.56% in local-currency (Euro) and 2.16% in USD. Meanwhile, the Topix declined -2.27% local-currency (Yen) and -2.00% in USD.

Timing vs. time in

Global economic growth is peaking even as US growth remains impressive. For now, we continue to be biased toward US equities.

Volatility is back and we don’t see it declining in the near or mid-term. Clients watch the market zigzag and understandably feel uneasy. They are asking “should I get out now?”

There is no one answer to this question. Many investors are learning their risk tolerance on the fly.

Stomaching risk is relatively easy when markets are relatively calm. That’s sooo last year.

Data supports the premise “time in the market is more important than market timing.” This is because there tends to be a handful of days in a given year that provide above average return.

For example, missing the top 30 days of return in a year usually leaves an investor down for the entire year.

I’ve been reaching out to clients, talking through what a rough-patch or even a recession might mean for their portfolio(s). If we haven’t yet, I hope we get together soon.

Weekly Update through June 29, 2018 The S&P 500 declined -1.31%, even as the Dow Jones lost -1.26%, the Russell 2000 was down -2.46% the Nasdaq lost -2.36%

As for US bonds, they added 34bps.                         

Globally, the MSCI World Index lost -1.17% and the Barclays Global Aggregate Bond Index added 15bps.

The Euro Stoxx 50 lost -1.34% in local-currency (Euro) and 1.09% in USD.  Meanwhile, the Topix declined -70bps local-currency (Yen) and -1.45% in USD.

Month-end Update through end-June 2018 In June, the S&P 500 added 62bps, the Dow Jones lost -49bps, the Russell 2000 added 72bps and the Nasdaq gained 98bps. 

As for US bonds, they declined -12bps.

Globally, the MSCI World Index lost -1bp and the Barclays Global Aggregate Bond Index declined -44bps. 

In June, the Euro Stoxx 50 declined -16bps local-currency (Euro) and -11bps in USD. Meanwhile, the Topix lost -85bps in local-currency (Yen) and -2.68% in USD.

Who is Peter Navarro?

To be sure, trade tensions are rattling US stocks.

The author of Death by China and Trump’s Director of Trade and Industrial Policy today said, “There’s no plans to impose investment restrictions on any countries that are interfering in any way with our country.”

With the Dow plummeting 400 points by mid-day, Navarro’s soothing - yet confusing - comments immediately reversed the Dow's trajectory.

Formerly a professor at UC Irvine and a Harvard PhD, Navarro is considered well outside the mainstream of US economic thought. In 2012, Navarro made Death by China into a documentary Trump called “right on.” The A.C. Club, an apolitical entertainment website called it “the documentary equivalent of a raving street-corner derelict.”

Whether a coherent US trade policy will emerge remains unclear.

In the meantime, White House histrionics and shilly-shallying seems only to be hurting the companies they claim they are trying to protect.

Weekly Update through June 22,2018 The S&P 500 lost -87bps, even as the Dow Jones declined -2.03%, the Russell 2000 added 11bps the Nasdaq lost -68bps.

As for US bonds, they declined -1bps.                         

Globally, the MSCI World Index lost -88bps and the Barclays Global Aggregate Bond Index added 11bps.

The Euro Stoxx 50 declined -1.81% in local-currency (Euro) and -1.45% in USD. Meanwhile, the Topix lost -2.47% in local-currency (Yen) and -1.90% in USD.

Recession proof-ish

What stocks might outperform in a recession?

Firstly, as we all know and seldom heed - past performance does not indicate future results.

Caveat considered, let’s look at what totally blew it out of the water the last time around“Last time around” can be defined two ways. The Great Recession started in December 2007 and ended 18 god-awful months later in June 2009.

The bear market predated the Great Recession. The market tippy-topped October 9, 2007 and slid 56 gruesome percentage points, hitting the low on March 5, 2009.

As we’ve discussed previously, stock market declines almost always foreshadow recessions – and the big one was no exception.

There’s a lot of weird hardly traded names that did really well during this period. (Antigenics anyone? Up 700% !!!).

Another name that did remarkably well is Netflix (ticker NFLX). How well you ask? Oh just up a measly 62% during the bear market and 79% during the Recession. For real.

Too risky? Try a boring old bond ETF like the IShares 20+ Year Treasury Bond (ticker TLT) up 25% during the bear market and 7% during the Recession.

We don’t know exactly when the tide will turn or what will pop when it does. We’re just doing our research and getting our ducks lined up.

Weekly Update through June 15, 2018 The S&P 500 added 7bps, even as the Dow Jones lost -84bps, the Russell 2000 added 72bps the Nasdaq gained 1.34%

As for US bonds, they added 13bps.                         

Globally, the MSCI World Index lost -12bps and the Barclays Global Aggregate Bond Index declined -30bps.

The Euro Stoxx 50 added 1.81% in local-currency (Euro) and 36bps in USD. Meanwhile, the Topix added 43bps in local-currency (Yen) and declined -56bps in USD

Multipolarity

Diminished global US leadership – both de facto and de jure – is increasingly a given.

Green shoots – of the de jure variety – were evidenced as early as ’89 with the fall of the Berlin Wall.

By the end of Soviet times, US preeminence was unqualified. Until recently, most of the post-WWII period is characterized as unipolar or bipolar.*

Today, more players vie for global leadership. China and the European Union – for example - struggle for increasing influence over international policy.

With US intent to exit the Paris Accord, withdraw from the Iran Nuclear Agreement and leave the Trans-Pacific Partnership, it could be argued the US’s diminished roles is evermore de facto and increasingly acute.

Historically, global instability is the hallmark of a multipolar world. We are thinking quite a bit about how to position portfolios in light of this trend.

Weekly Update through May 11, 2018 The S&P 500 gained 2.49%, even as the Dow Jones added 2.51%. Both the Russell 2000 and the Nasdaq added 2.65%.

As for US bonds, they declined -1bps.                         

Globally, the MSCI World Index added 2.15% and the Barclays Global Aggregate Bond Index lost -3bps.

The Euro Stoxx 50 added 37bps in local-currency (Euro) and 58bps in USD. Meanwhile, the Topix rose 1.23% in local-currency (Yen) and 1.10% in USD.

Thank you for doing business with us! We always appreciate your valuable insight and feedback.

*Bipolar meaning two poles, in this case not "characterized by both manic and depressive episodes" although that too may be germaine.

What's a Minsky moment?

The Economist Hyman Minsky (1919-1996) coined the phrase “Stability leads to instability.”

His theories were generally disregarded by policy-makers throughout his life, partly because he shied from mathematical modeling – de rigueur at the time.

After the financial crisis, many traditional economists – with their myriad models - were lost. Minsky’s Financial Instability Hypothesis gave context and a roadmap. His theories suggested that too much private debt – leverage – sparked the sudden collapse in asset prices.

He also foresaw the role central banks could play in mitigating the causes and effects of such crises.

Post-2008, we take it for granted the Fed should use rates to help moderate market excess. Whether its up to the job is another question.

Weekly Update through May 4, 2018 The S&P 500 lost -21bps, even as the Dow Jones declined -19bps, the Russell 2000 gained 62bps and the Nasdaq added 1.29%.

As for US bonds, they added 2bps.           

Globally, the MSCI World Index lost -25bps and the Barclays Global Aggregate Bond Index lost -62bps.

The Euro Stoxx 50 added 1.44% in local-currency (Euro) and lost -14bps in USD. Meanwhile, the Topix declined -32bps in local-currency (Yen) and -1.02% in USD.

Month-end Update through end-April 2018 In April, the S&P 500 added 38bps, the Dow Jones gained 34bps, the Russell 2000 added 86bps and the Nasdaq added 8bps. 

As for US bonds, they declined -74bps.

Globally, the MSCI World Index added 1.26% and the Barclays Global Aggregate Bond Index declined -1.44%. 

In April, the Euro Stoxx 50 added 5.84% in local-currency (Euro) and 4.49% in USD. Meanwhile, the Topix added 4.31% in local-currency (Yen) and 1.78% in USD.

Why oil?

Strong global oil demand and OPEC/Russia cuts are draining inventories and supporting crude prices.

Sanctions against Iran and/or Venezuela could also help send oil to more than $80/per barrel – a 17% increase from the current $68.

Reckoning a short or mid-term position in oil with a pro-environment stance isn’t difficult.

As oil prices rise, alternatives only become more attractive.

Weekly Update through April 27, 2018 The S&P 500 was flat, even as the Dow Jones lost -62bps, the Russell 2000 was down -49bps and the Nasdaq declined -3bps.

As for US bonds, they gained 1bps. 

Globally, the MSCI World Index declined -11bps and the Barclays Global Aggregate Bond Index lost -72bps.

The Euro Stoxx 50 added 1.50% in local-currency (Euro) and declined -48bps in USD. Meanwhile, the Topix gained 1.49% in local-currency (Yen) and 2bps in USD. 

Flat curves

The yield curve on the 2-year treasury continued its ascent reaching a decade high of 2.41% on April 17. Meanwhile, the 10-year note closed at 2.82%, leaving a gap of just 41pbs - the narrowest since 2007.

This means the yield curve has flattened – imagine years on the (horizontal) x-axis and rates on the (vertical) y-axis.

If the 2-year and the 10-year rate were the same, we’d have a flat curve. And, if the 10-year rate was lower than the 2-year, we’d have a dreaded inverted yield curve.

Normally investors expect higher interest for tying up money for longer. Therefore, normally, the yield curve is upward sloping – that is the opposite of inverted.

An inverted yield curve is worrisome because it indicates investors have lost confidence in the economy.  Inverted Treasury yield curves “predicted” the last seven recessions, including the “great recession.”

That said, since 1980, of eight yield-curve inversions only four predicted recession. 

Data shows relatively severe inversions have foreshadowed recession.

While the curve has recently flattened - it has not inverted - not even mildly.

Weekly Update through April 20, 2018 The S&P 500 gained 55bps, even as the Dow Jones added 46bps, the Russell 2000 gained 95bps and the Nasdaq added 56bps.

As for US bonds, they lost -62bps.             

Globally, the MSCI World Index gained 57bps and the Barclays Global Aggregate Bond Index lost -71bps.

The Euro Stoxx 50 added 1.44% in local-currency (Euro) and 1.07% in USD. 

Meanwhile, the Topix gained 1.26% in local-currency (Yen) and 1.16% in USD.

Cycle-ing

After almost nine years of growth it’s easy to forget there’s even such a thing as economic cycles.

Boom/bust.

From 1926 to present, the average Bull Market has lasted 9.0 years with an average cumulative (total*) return of 474%. Over the same period, the average Bear Market lasted just 1.4 years and had an average cumulative loss of -41%.

That doesn’t sound so bad. But if you think about it, if you lose -41%, it takes gains of 70% just to get back to where you started.

Let’s work together to maximize gains and minimize losses.

Weekly Update through April 13, 2018 The S&P 500 gained 2.04%, even as the Dow Jones added 1.80%, the Russell 2000 gained 2.41% and the Nasdaq added 2.77%.

As for US bonds, they lost -18bps.                         

Globally, the MSCI World Index gained 1.81% and the Barclays Global Aggregate Bond Index added 10bps.

The Euro Stoxx 50 added 1.2o% in local-currency (Euro) and 1.75% USD. Meanwhile, the Topix gained 59bps in local-currency (Yen) and 31bps in USD.

*Total return takes into account dividends.

'Tis the season

Earnings season is starting and its expected to be another good one. On average analysts anticipate S&P 500 companies will report a 15% increase in earnings from the prior quarter - basically in line with forth quarter (2017) results.

It’s another sign the the US economy is - at present - robust.

Equity bear markets and recessions almost always overlap. Unless you think a recession is around the corner – and we don’t – you should probably over-weigh stocks.*

Weekly Update through April 6, 2018 The S&P 500 lost -1.35%, even as the Dow Jones dropped -67bps, the Russell 2000 lost -1.04% and the Nasdaq decreased -2.07%.

As for US bonds, they lost -5bps.                         

Globally, the MSCI World Index lost -55bps and the Barclays Global Aggregate Bond Index lost -24bps.

The Euro Stoxx 50 added 1.59% in local-currency (Euro) and 1.46% USD. Meanwhile, the Topix gained 90bps in local-currency (Yen) and 25bps in USD.

*Two years out is not "around the corner."

Correction

With today’s ride, the S&P 500 has officially “corrected,” down 10% from its January record-high.

And yet we beat the drum.

Firstly, US trade tactics seem to be following a pattern. Big news-making announcements followed by comparatively narrow/weak implementation.

Secondly, the fundamentals – especially in the US - remain strong. (Please see prior notes for details. I feel like we go over this point ad nauseam.)

Thirdly, history shows end-of cycle markets are volatile. Yes, we are in the final innings of this expansion ergo more volatility.

In early May, the Trump administration will decide whether to continue to waive sanctions against Iran - another volatility flashpoint. Buckle your seat belt.

Weekly Update through March 29, 2018 The S&P 500 gained 2.06%, even as the Dow Jones added 2.52%, the Russell 2000 advanced 1.35% and the Nasdaq added 1.03%.

As for US bonds, they gained 52bps.                         

Globally, the MSCI World Index gained 1.53% and the Barclays Global Aggregate Bond Index lost -9bps.

The Euro Stoxx 50 added 1.95% in local-currency (Euro) and 1.36% USD. Meanwhile, the Topix gained 3.18% in local-currency (Yen) and 1.83% in USD.

Month-end Update through end-March 2018 In March, the S&P 500 lost -2.54%, the Dow Jones lost -3.59%, the Russell 2000 gained 1.29% and the Nasdaq lost -2.79%.

As for US bonds, they gained 64bps.

Globally, the MSCI World Index lost -2.18% and the Barclays Global Aggregate Bond Index gained 1.07%. 

In March, the Euro Stoxx 50 lost -2.15% in local-currency (Euro) and -1.49% in USD. Meanwhile, the Topix lost -2.85% in local-currency (Yen) and -2.57% in USD.

Consumer where art thou?

The labor market is strong. Wages are - slowly - rising. However, so far in 2018, sales have been relatively tepid.

For example, in February, headline retail sales dipped -0.1% and auto sales were also down.

What gives?

Consumer spending is the major contributor to GDP and accounts for about 70% of all US economic growth. Without it, GDP can’t accelerate.

Some investors are claiming this is a warning sign recession is imminent. We don’t agree.

Firstly, what these early ’18 figures belie is the strong 12-month data. Overall retail sales are up more than 4% from a year ago. Yes, the February data shows decreases, but these are off from super solid 12-month figures.

Secondly, strong employment growth, stable disposable incomes, all-time high household net worth and high levels of consumer confidence bode well for increased spending.

Weekly Update through March 16, 2018 The S&P 500 lost -1.20%, even as the Dow Jones declined -1.51%, the Russell 2000 lost -65bps and the Nasdaq lost -1.02%.

As for US bonds, they gained 22bps.     

Globally, the MSCI World Index lost -65bps and the Barclays Global Aggregate Bond Index gained 29bps.

The Euro Stoxx 50 added 49bps in local-currency (Euro) and 26bps in USD.  Meanwhile, the Topix gained 1.23% in local-currency (Yen) and gained 1.93% in USD.

Tit-for-tat

Trade tensions – rather than a trade war – are likely to persist.

However, the end of the equity bull market will probably be due to an overheated economy and rising fiscal imbalances - not trade protectionism.

Both the backdrops for US and global growth remain solid - for now. Our current outlook is still bullish. That said, data suggests we are likely near the final innings of the current expansion.

Weekly Update through March 9, 2018 The S&P 500 gained 3.59%, even as the Dow Jones increased 3.34%, the Russell 2000 added 4.20% and the Nasdaq also added 4.20%.

As for US bonds, they declined -12bps.                         

Globally, the MSCI World Index was up 2.91% and the Barclays Global Aggregate Bond Index lost -19bps.

The Euro Stoxx 50 added 2.90% in local-currency (Euro) and 2.95% in USD.  Meanwhile, the Topix gained 42bps in local-currency (Yen) and lost -75bps in USD.

Nothingburger

Despite last month’s dreary returns, stronger nominal growth and a patient Fed are most likely a positive combo for equities.

First quarter 2018 GDP is anticipated to come in at 2.50%, the same pace as for 2017.

However, economists are estimating a bit higher 2.8% GDP growth by year-end.

This compares with much slower growth of just 1.8% by end-2016.

That said, as we've talked over, it could be well argued the US is in the late innings of this expansion. Despite our currently positive outlook - as February returns attest - we’ve entered a more volatile phase.

Weekly Update through March 2, 2018 The S&P 500 lost -1.98%, even as the Dow Jones lost -2.97%, the Russell 2000 lost -1.00% and the Nasdaq lost -1.05%.

As for US bonds, they gained 2bps.   

Globally, the MSCI World Index lost -2.23% and the Barclays Global Aggregate Bond Index gained 17bps.

The Euro Stoxx 50 lost -3.39% in local-currency (Euro) and lost -3.34% in USD. Meanwhile, the Topix lost -2.94% in local-currency (Yen) and -2.04% in USD.

Month-end Update through end-February 2018 In February, the S&P 500 lost -3.69%, the Dow Jones lost -3.96%, the Russell 2000 lost -3.86 and the Nasdaq lost (just) -1.73%.

Meanwhile US bonds lost -95bps.

Globally, the MSCI World Index lost -4.09% and the Barclays Global Aggregate Bond Index lost -89bps. 

In February, the Euro Stoxx 50 lost -4.57% in local-currency (Euro) and -6.16% in USD. The Topix lost -3.70% in local-currency (Yen) and -1.33% in USD.