The Week Ahead:
More sideways moves. The market will look to Washington.
Markets seem a little non-plussed of late. In the last ten days, stocks have traded in a 1.5% band and have really gone nowhere since mid-December. And it’s largely the same with the benchmark 10-Year Treasury, which peaked at 2.60% at roughly the same time and is now 2.42% or some 2% greater in price.
The industries that performed well in late 2016, such as financials are mostly flat, while healthcare, caught in the cross hairs of a very public debate, has massively underperformed the broader market. Two areas that have picked up this year are international equities, up 1.7% and emerging markets, up 3.7%, which compare well to the S&P 500 up 1.1%.
What’s happening? Well, in short, business confidence remains high while consumer and market confidence has begun to erode. To some extent, this was inevitable. The “buy the rumor” phase of the market ran quickly in the post-election weeks.
“Sell the news” has not happened but investors are waiting to see if the administration will first move on healthcare, NATO, drug costs, trade, taxes or regulation. Or something else.
Trump, as with any new administration, will have the most traction to make changes in the first 100 days. After that, the risk of “business as usual” surely emerges.
Meanwhile, this caught our eye last week:
1. A round of decent economic numbers: starting with Industrial Production, which rose above consensus, helped by a large jump in utility production. Here’s’ the chart:
The important part of the chart is the move into positive territory after 14 straight quarters of decline. Much of the improvement is down to the huge cut back in oil and gas, which fell by over 60% (it’s the lower U-shaped line). It’s now down just 10%, which is enough to move the overall number to 0.8% growth. On the job side, claims fell to 234,000 from a three-month average of 253,000. If this goes on, the some pressure on wages, which the Fed publicly fears, will result.
2. What does the bond market think? Bonds are caught between the inflation trade, inevitably bad for bonds, and the deflation norm of the last six years. While the market reacted quickly to the election, we by no means subscribe to the “end of the bond bull market” theme.
The quick way to think about the spread between 10-Year and 2-Year Treasuries, is that when the upper blue line is trending down, the market worries about low growth, deflation and ultra low rates. As it trends up, the market sees more growth and a steeper yield curve.
The recent retracement is simply deflation concerns coming back. And that makes sense. The economy is still a 2% growth machine, not a steady state 3% grower. Wage growth is slow. The strong dollar is a form of monetary tightening. Housing markets are flat. So with all this, the Fed may not be as anxious to rush into three rate hikes this year.
3. The Obama Years: we looked at the market returns under various Presidents (h/t FT). In the post-war period, the Clinton years were the best for stocks. They were up 209%. Second was Obama with 180%. Third was Eisenhower with 129%. The best one term President was Bush I with 51%. We offer this knowing that Presidents do not control the stock market and many other factors play into economic and business success. Obama entered office at the depth of the financial crisis so returns grew from a very low base. But, it’s tough to see the markets performing nearly as well in the short term.
Bottom Line: We are in a breather stage. There’s no big theme but earnings are coming is solidly. We expect around a 6% earnings increase. Company outlooks are keeping quiet about what happens next. It’s over to Washington.
A tall graph on the Dow
--Christian Thwaites, Brouwer & Janachowski, LLC
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All charts from Factset unless otherwise noted.