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Last Quarter / Year Review:
The market continues to run higher. Q1, 2017 was up 5.53% and significantly better than Q4, 2016. A concern is that the PE ratio is getting high relative to history and may suggest that either a correction could come or simply a volatile trading range for some time until new earnings data is disclosed. Markets don’t continue to rise without fundamental improvements in earnings, business investment, fiscal policy actual improvements among others. It was a great quarter but it can’t last without actual followup.
Investment & Economic Summary (source – Moody’s Analytics):
Economic data is coming in more positive than expected. See the discussion regarding the economic surprise index. The latest Economic details are:
- The ISM manufacturing index was noticeably better than anticipated in February, rising 1.7 points to 57.7. The index is comfortably above its fourth quarter average of 53.3 and suggests that growth in manufacturing broadened early this quarter. The details were solid. New orders were above 60 for the third consecutive month. No industry reported a decline.
- The pace of U.S. economic growth improved in February. The Chicago Fed National Activity Index rose to 0.34 from -0.02 in January thanks to gains in employment-related indicators. All four broad categories that make up the index increased from the prior month. Only one made a negative contribution to the headline index.
- Consumer confidence increased 9.5 points in March to 125.6, the highest since December 2000. This is the fourth increase in the past five months and brings the cumulative improvement over this span to 24.8 points.
- Employment cost index data suggest that the labor market still has room to improve. The ECI for private wages rose 0.5% in the fourth quarter, leaving it up 2.3% on a year-ago basis.
- The economy is still generating plenty of jobs. The job openings rate remained at 3.7% at the end of January with the number of openings increasing to 5.63 million. Openings increased in most industries with the notable exception of the federal government given its hiring freeze as well as some service industries. The number of job openings is near a record high.
- Productivity rose 1.3% at an annual rate in the fourth quarter. On a year-ago basis, productivity rose 1% in the fourth quarter, better than its performance recently. However, year-over-year growth in productivity growth is volatile and lower by historical standards.
- The U.S. economy will advance at a healthy pace in coming months. The Conference Board index of leading indicators rose 0.6% in February, besting consensus expectations by 0.2 percentage point. The improvement was broad-based, led by the interest rate spread, the ISM new orders index, and initial claims for unemployment insurance.
The graphic above is a long view of the Leading Economic Indicators LEI, the last bullet point avove. It is a very important composite of economic indicators to which we all should pay close attention. The economy is doing OK and improving. The time to reclimb to the previous peak was much slower in this cycle, it nonetheless is there now. The question is how long will the LEI expand before it begins to forecast a pending recession by declining for a few months. The average length from the last peak to the next recession is 6-years as noted. We likely have a few years before the next recession subject to a discontinuity, such as the 9/11 terrorist attack. The Economic Surprise Index discussed below is indicating a stronger economy than expected and the LEI still predicts it will continue. If earnings continue to improve, all is expected to be good with the Stock Market as well.
Liz Ann Sonders, Schwab Chief Strategist 3/27/17 Investment Insight
“Soft data is generally survey-based readings, including many of the most widely-followed confidence indicators—incorporating both consumer and business measures of confidence, as well as purchasing managers’ surveys (PMIs). Think of it as the qualitative data. On the other hand, hard data is the quantitative data—actual measures of economic activity. The strength in the soft data, as well as some in the hard data, has helped push up the Citi U.S. Economic Surprise Index, which measures how data is coming in relative to expectations (see chart below).”
The markets and earnings continued to power forward. Year over Year earnings were the best in many years. While Quarter to Quarter earnings were slightly lower, expected future earnings gains are very attractive. In our opinion, future stock market gains will be mostly dependent on efforts in regulation reduction and tax reform. Business encouragement by the Executive Branch is visible as a first step We’ll see the impact of reform soon enough.
Bob Doll, Nuveen Chief Strategist 3-27-17 We May See a Correction, but This Bull Market Isn’t Over
“U.S. stock prices rose significantly over the past year and experienced a strong bounce after the election. We have been saying for some time that economic and political optimism may be overdone. It appears investors are finally starting to question the extent to which President Trump can deliver on his wide range of pro-growth economic promises. Last week’s stunning setback for health care reform shows he will have difficulty pushing his agenda forward. Any politically-oriented economic boost over the next 6 to 12 months may be less robust than expected.
“Nevertheless, we remain relatively upbeat about the state of the U.S. economy. Growth trends and sentiment began improving last summer. We believe fundamentals remain solid. Even if sentiment drops a notch or two due to fading political optimism, we expect economic growth will remain on track.
However, we think equity markets may have gotten ahead of themselves, and risk assets appear poised for a correction. The good news is that investor sentiment appears to have improved over the last year. Investors are unlikely to overreact to negative news as they did periodically throughout 2016.
“We don’t believe the recent peak in equity prices marks the high point for this bull market, but more volatility is likely as the post-election euphoria continues to fade. As such, we suggest that investors ride out any near-term equity turbulence. At the same time, we think government bonds look expensive and do not believe the recent downturn in yields is likely to continue. We are maintaining our moderate pro-growth investment view and continue to believe equities will outperform bonds over the next year.”
Spring is here…finally.
Best Wishes – Dave and Brent