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The trend no longer a friend

The Week Ahead: All eyes on earnings and CEO outlooks.

Some quick trivia on the markets. First, the S&P 500 opened and closed exactly unchanged on the day last Tuesday. The last time that happened was in January 2008. Second, the world’s worst index, the Dow Jones Industrial index, managed an intra-day high of 20,000. But so far this year it has only moved in a 1.0% range, which is the lowest since 1896.

What does this mean? Clearly investors are not ready to jump into the reflation and off-to-the-races story. Remember the narrative[1] since the election is:  

1.     Lower pay roll taxes boosts consumption

2.     Lower corporate taxes boost earnings

3.     Infrastructure spending is a’ comin

4.     But at the expense of the deficit

5.     Which will cause the Fed to raise rates

6.     Which helps the banks but which also…

7.     Strengthens the dollar

But none of this has happened. The market is floating on expectations and has been sideways since mid December. The S&P 500’s close on Friday was around 2,272. On December 13th it was 2,271. Treasuries, however, continued to weaken through the end of the year but have since settled in at 2.4% or 20bps below their high. Holders of the 10-Year Treasury benchmark bond have seen the price drop from $99 to $94 and back up to $96.


Here’s what else caught our eye last week:

1. Stocks nervous: In his first major press conference, President-elect Trump threw out a casual remark about pharmaceutical companies "getting away with murder". Guess what happened?

Boom. That was enough to write off $60bn from the S&P 500’s third largest industry. The point is that, despite the meta theme of all-good, details are somewhat in short supply. Companies fully expect to take their turn in the Trump barrel and when that happens, investors take fright. Expect more of this.  

2. But meanwhile: we have always followed the NFIB or National Federation of Independent Business, not least because small companies with less than 50 workers employ around 50% of the labor force. Last week we had a blow out number on their optimism and “Good time to expand” index.

Blog 2 01-16-2017 Optimism 1_DJII-USA.jpg

The overall index rose to its highest since 2004 and was certainly the biggest one month jump on record. The lower line shows that 23% consider that “Now is a good time to expand”, which is nearly double the level of the post-recession period. If this optimism continues, then we’ll see more spending and hiring. But, note confidence and spending are not the same. On Friday, the University of Michigan consumer confidence survey dipped a bit and retail sales disappointed.


3. International: highlighting the sideways move in domestic stocks, we compare it to International stocks.

International stocks are up 2.3% this year against the U.S. of 1.5% and Japan and emerging markets up nearly 4%. Some of this is catch up, some better prospects for overseas large cap companies and some a reversal of the one-way trade in the dollar. The yen has gained some 3% against the dollar in the last week or so.


Bottom Line:
Some of the post-election trends are taking a breather. Inflation expectations are on the rise. Only 6% of companies have reported so far but 70% of those have come in above estimates. Eyes will be on earnings.



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--Christian Thwaites, Brouwer & Janachowski, LLC


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All charts from Factset unless otherwise noted.



[1] H/T David Ader