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Fast out of the gate

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The Days Ahead:
Earnings season start. CPI at end of week.

So, all markets were on a tear in 2017. If you had any exposure to bonds or equities, you would have made between 11% and 25% (depending on the allocation). More if you’d sunk it all in tech. More if you sunk it all into Bitcoin (but if you did, please call us…you need help).

But we were talking around here about how much people seemed to hate the market and how reluctant investors seemed to be a part of it. Why so? Some is that we tend to project our distaste with politics onto markets. “How can markets rise when X is happening?” is a pretty common question. Another is that investors are still burned by the 2000 and 2008 crashes, which wiped off 40% and 38% from equities. It hurt. But it was temporary. Those that stayed in cash missed a 60% gain in Treasuries and a 333% gain in equities from 2009 lows. Even in 2018, there are many who are fearful of markets. That’s fine. We're not wide-eyed optimists but we do think 2018 will be a good year for investors. Staying invested and diversified remains very important. Meanwhile, elsewhere:

1. How’s the job market doing?

Not so good. The December payrolls came in at 148,000 below estimates. The reason we keep talking about this number is because the Fed does. In the last set of Fed minutes, from December, they mentioned it 55 times up from 30 times the month before. And their message was all was good, gains were supportive of growth and spending and so on. Here’s the chart:

There was a spike in October and November following the hurricanes and the bad September number. But this latest print seems to revert to the levels from the last few years. Average hourly earnings and hours worked were unchanged but the prior month was revised down.

The two big questions for the jobs market are:

  1. Will employers start to increase wages? Either because of the tax changes or skill shortage.
  2. Will more employees be pulled into the labor market? Participation and the employment/population rates are still way below crisis levels.

We think yes and no but admit our conviction rate is not high. Anyway, at the margin, this postpones chances of a Fed hike for March but there is a ton of data between now and then. (h/t Pantheon Economics).

2. Trade:

Remember the “twin deficit” debates years ago? It was the budget deficit and trade (actually current account) deficits, which both took off in the 1980s, causing much hand wringing. But then budget and current accounts deficits went away in the late 90s and everyone said, “well that was close, let’s not do that again.” But by then lots of manufacturing jobs had gone for good and the in those jobs declined from 25% of the workforce to 10%. So, when the next upturn came the current account deficit quadrupled as we sucked in imports of just about everything.

So why do we care? Because we know that budget deficits are on the rise (the folk who passed the tax bill told us so) and now trade is looking bad. And the latest trade numbers don't look so good. Here’s the part that just deals with Canada and Mexico, which account for 35% of trade and are in the firing line (along with China) for the fights the current administration wants to pick.

This shows trade with Canada falling off sharply and Mexico essentially flat for the last five years. Some of this is down to the increase in oil prices. The two account for 43% of oil imports. But the overall November trade deficit increased to $55bn or up 12% from Q2 and the third widest since 2008. And that was enough so shave off 0.6% from the Q4 GDP numbers at the Atlanta Fed GDP Now site. Most people expected a 3% print on Q4 GDP. The latest number is 2.7%, which is still good. But, you know, something to worry about.

3. How’s Japan holding up?

We ask because a few corporate scandals came to light in December starting with a fault in one of the famous bullet trains, which seems to have been a cover-up. We'd admit that Japanese corporate governance is no poster child for transparency but when caught, they tend to fess up quickly. But there are many factors going well for the Japanese economy and stocks: 

  1. Employees will see more income growth
  2. There is a big opportunity for Japanese companies to improve margins and ROE and…
  3. Increase share repurchases
  4. Governance improvements are working
  5. Global growth is on the upswing
  6. The Japanese corporate sector has a large exposure to high growth areas of the world.
  7. Sales and earnings growth for stocks are around 6% and 15% respectively

Stocks got off to a strong start this year and here’s how the Japanese market has done against the S&P 500 over the last six months.

Bottom Line: Strong start to the year. Earnings don't start in earnest for a week or so but watch for CEO commentary on taxes and growth. Both should be upbeat.  


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Please note that this discussion of our investments and investment strategy (including our research and investment process) represents our investments and investment strategy at the date of this commentary, and is subject to change without notice.  We cannot assure that the type of investments discussed in this commentary will outperform any other investment strategy in the future, nor can we guarantee that such investments will present the best or an attractive risk-adjusted investment in the future. This is for general informational purposes only; references to an individual security should not be construed as a recommendation to buy or sell that security.  The securities mentioned in this commentary are only several of the successful as well as unsuccessful investments by us, and do not represent all of the securities we have purchased, sold or recommended.  Although we deem reliable the sources of the statistical and other information referred to in this commentary, we cannot guarantee the accuracy or completeness of any statements or numerical data.  Past performance is no indication of future results.

All charts from Factset unless otherwise noted.