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Last Quarter / Year Review:   In a generally low volatility manner, the market continues to run higher. Q2, 2017 rose 2.57% and somewhat slower than Q1. Earnings continued to increase which is necessary for a well behaved market. There is significant worry about how Washington performs. Progress seems to be made yet not much is complete. Much more progress needs to happen to bring growth back to the American economy. Congress has been doing poorly in the minds of Americans. Is this new? Mark Twain, born 1835, died 1910, said “Suppose you were an idiot.  And suppose you were a member of Congress.  But then I repeat myself. “ Being unhappy with politicians is not new.

Investment & Economic Summary (source – Moody’s Analytics): Economic data, in general, remains positive with some back and forth results. The latest Economic details are:

  • The pace of U.S. growth slowed in May. The Chicago Fed National Activity Index dropped to -0.26 in May from 0.57 in April because of losses in production-related indicators. Three of the four broad categories that make up the index declined from the prior month. Only one managed to make a positive contribution to the headline index.
  • Consumer confidence increased 1.3 points in June, recovering some of last month’s 1.8-point drop. The May reading was revised downward by 0.3 point. The index was supported by a strong improvement in the present situations index, which was buoyed by business conditions and job market perceptions. However, expectations continued to weaken this month, falling to a five-month low.
  • The Conference Board index of leading indicators rose for the ninth month in a row, rising 0.3%. This was modestly below the consensus forecast. April’s gain was revised down from 0.3% to 0.2%. Among the components, the average workweek was neutral for the second month in a row, while jobless claims added 0.05 percentage point. The ISM new orders index provided a small boost, adding 0.08 percentage point.       The leading indicators’ six-month annualized growth rate accelerated to 4.7% from 4.4% in April. The expansion is getting long in the tooth, but it’s not in serious jeopardy. The probability that the U.S. economy will fall into recession in six months increased from 6% in March to 9% in April, but it remains very low.
  • Employment cost index data suggest that the labor market is heading in the right direction but still has room to improve. The ECI for private wages rose 0.9% in the first quarter, leaving it up 2.6% on a year-ago basis.
  • The Fed raised the target range for the federal funds rate by 25 basis points, to 1% to 1.25%. This was widely expected. The guidance on the Fed’s plan to normalize its balance sheet was more important. Sooner than expected, the Fed issued an addendum to the Policy Normalization Principles and Plans. The Fed intends to reduce its balance sheet by decreasing its reinvestment of the principal payments.
  • The ISM manufacturing index edged higher in May, weaker than anticipated. The manufacturing index rose from 54.8 in April to 54.9 in May. Manufacturing has cooled as the index remains below its first quarter average of 57. New orders rose from 57.5 in April to 59.5 in May.
  • The economy is still generating plenty of jobs. The job openings rate increased to 4% at the end of April, with the number of openings reaching a series high of 6.04 million. Openings increased in many industries, with construction and leisure/hospitality providing the biggest boost. Hiring slowed a bit in April. It fell from 5.3 million in March to 5.05 million. The rate edged lower from 3.6% to 3.5%. The decline in hiring was largely due to a drop-off in healthcare, financial activities and retail trade. The level of hiring remains strong by historical standards and is still slightly above its year-ago level.
  • The economy is still generating plenty of jobs. The job openings rate increased to 4% at the end of April, with the number of openings reaching a series high of 6.04 million. Openings increased in many industries, with construction and leisure/hospitality providing the biggest boost. Hiring slowed a bit in April. It fell from 5.3 million in March to 5.05 million. The rate edged lower from 3.6% to 3.5%. The decline in hiring was largely due to a drop-off in healthcare, financial activities and retail trade. The level of hiring remains strong by historical standards and is still slightly above its year-ago level.
  • On a year-ago basis, the headline Personal Choice Expenditure deflator (favored by the FED) was up 1.4% for May, compared with 1.7% in April and 1.8% in March. After surpassing 2% in February (for the first time since 2012 and the FED Target), year-over-year growth has decelerated. The core PCE was up 1.4% on a year-ago basis, a touch lighter than the 1.5% gain in April and the weakest since late 2015.

Expectations – next quarter:   The markets and earnings continued to power forward. Year over Year earnings are the headline people pay attention to (20.19%) but Quarter over Qurter is a good comparison to the S&P change this quarter. The Market index was up 2.57% for Q2 and Q1/Q4 earnings were up 3.26%. Q2 earnings are expected to be up 7.5% v. Q1. If that happens, we should have a good quarter end after a distracted summer. Yet expect market volatility this summer with all that is going on in Washington and the rancor one hears in the News.

Our firm, Tempo, is over-weight in Growth and Technology. Is that a concern? Brad Sorenson, Schwab Director of Market and Sector Analysis, 6/8/17: “At this point it’s tough for us to argue that technology-related products and services don’t make up at least a quarter of the U.S. economy. To back that up, it should be noted that according to Yardeni Research, the tech sector’s share of S&P 500 earnings—at 22%—aren’t much below the current weighting (in the S&P 500) of 23%. Compare that with the height of the tech bubble, when tech’s share of earnings was 15%, while its weighting was more than 30%. (See the nearby table for other current v. year 2000 metrics.) Even areas that don’t readily come to mind as being tech-related, such as energy or health care, perhaps, are increasingly appearing to turn to tech to enhance their business operations.

“The tech run likely won’t go on forever—nothing does—but we don’t see the unabashed enthusiasm for the group that would make us more concerned, and valuations aren’t extended to the point that we believe investors should start to worry. That doesn’t mean investors who have developed too large a position in tech relative to their risk tolerances shouldn’t rebalance and take some profits. But we continue to see positive developments and believe the run in the tech sector still has further to go.”

Bob Doll Nuveen Chief Strategist 6/26/17 Equity Outlook: Earnings Are the Critical Variable

“Although many investors are questioning equity valuations, we believe valuations can be sustained or climb further, as long as corporate profits and earnings rise. And notwithstanding some recent economic weakness, we believe the global economy should continue to accelerate modestly, providing a tailwind for corporate earnings, profits and equity prices. As such, we think equity prices will move unevenly higher over the next 6 to 12 months (and likely beyond), but also expect more modest returns than investors have seen in recent years.”

Equities Should Continue Their Long-Term Outperformance-Bob Doll, Chief Equity Stratagist Nuveen, 6/19/17

“Investors have become slightly more pessimistic in recent weeks. U.S. economic data has softened, and currently high consumer and business confidence levels could diminish. This sort of soft patch is nothing new. Over the last decade, we have seen numerous periods of mounting pessimism as the world has remained beset by choppy economic growth, deflation scares and numerous political risks. Given this backdrop and the overhang of the financial crisis and Great Recession, it is not surprising that safe-haven assets have remained in high demand and that global bond yields remain extremely low.

“For several years, we have advocated a pro-growth investment stance, suggesting overweight positions in equities make sense. The recent downturn in economic data has not changed our view. At present, the biggest objection to this view is that many investors believe that equities in general, and U.S. equities in particular, are overvalued. While equity valuations are less attractive than several years ago, we still believe stocks are more attractive than bonds and cash. Additionally, we think equity valuations can be sustained or climb further, as long as bond yields remain low and corporate profits rise. From a geographic perspective, it would be reasonable to expect a “catch-up” phase when non-U.S. markets outperform U.S. stocks.

“Regarding our investment views, we continue to focus on financial assets that could benefit from a modest acceleration in global economic growth. This leads us to favor non-resource-related areas of the global equity market and to prefer credit sectors over government bonds in fixed income markets. The key to our outlook is that corporate profits must continue to improve. And notwithstanding some recent economic weakness, we believe the global economy should continue to accelerate modestly, providing a tailwind for corporate earnings, profits and equity prices.”

 

Happy Independence Day to you and your family!

Brent and Dave

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