Once again the stock market continued to move higher last week following President Trump’s speech Tuesday night to a joint session of Congress and words from Fed Chairwoman Janet Yellen on Friday that opened the door to a potential rate hike this month.
Yes, President Trump seemed to look and act like a President last Tuesday night, calling for both political parties to work together to get the country back on track after the last 8 years. It was necessary of course if he has any hopes of pushing through his agenda, in particular, the overhaul of the Affordable Care Act and his tax reform plans.
Of course, all that goodwill seemed to wash away like a sand castle in the tide on Saturday with a series of Tweets from Mr. Trump. We won't get into the details of the Tweets or the accusations. Rather, we'll keep our noses where they belong ... on the markets. So let's get to it.
Several Data Points That Factor Into Our Cautious Stance Following The Market’s Continued Melt Higher
Once again the stock market continued to move higher last week following President Trump’s speech Tuesday night to a joint session of Congress and words from Fed Chairwoman Janet Yellen on Friday that opened the door to a potential rate hike this month.
Even though there were no major policy shifts and as we expected few details in President Trump’s speech last week, he called for both political parties to work together to get the country back on track after the last 8 years. That call for unity was far from surprising given that in order to move tax reform ahead and replace the Affordable Care Act, Trumps needs a united GOP and support from at least some Senate Democrats. Given the quick exit of Democrats following Trump’s concluding remarks, odds are the president will have much work to do to get his agenda flowing.
How did the stock market react to Trump’s speech?
Rather well, given the gap up in the Dow Jones Industrial Average past the 21,000 mark, one it held as we closed out the week. All in all, it was a good speech and one that in our view signals a more presidential Trump, but for those looking for harder details there was little to be had and it looks like the policy timetable has probably been extended. Our concern remains the increasingly out over its ski tips stock market will at some point have to catch up to the current low gear economic reality — more on that below.
The Market Continues to Lean Out Over its Ski Tips
As we entered March, the overall stock market has been robust year to date. Perhaps the best indication of that is the 1,000 point move in the Dow Jones Industrial Average since January 25. That’s right, in just over a month that index of 30 stocks moved from 20,000 to over 21,000 and closed last night at 21,115.55 — up a hair more than 6.8 percent.EndFragment
We’ve said before that we tend to favor the S&P 500 for a number of reasons, one of them being its a far more representative view of the stock market. Five hundred stocks vs. 30, and what that means is the Dow can be influenced by just a handful of stocks. That’s exactly what’s happened with this latest 1,000 point move — it was primarily due to Apple (AAPL), Goldman Sachs (GS) and Boeing (BA).
Why do we point this out?
Lest one think the market is moving higher across the board, it’s really less than a handful of stocks that are driving the Dow higher. We saw this toward the end of 2016, when if you didn’t own Goldman Sachs shares, odds are you were left trailing the market. We’re seeing this reflected in more than 115 hedge funds have imploded since late 2016 according to ImplodeNet that tracks implosions in the hedge fund, mortgage lending and homebuilding markets.
Given the moves we’ve seen in several positions on the Tematica Select List that have galloped ahead of the market, led by our Disruptive Technology, Connected Society and Aging of the Population investment themes, we’re hardly ones to complain.
Rather than fall victim we fall victim to the easy trap that is patting ourselves too hard on the back, we prefer to understand the realities of the market’s movements to both appreciate its move higher as well as comprehend the risks that could move it lower. At more than 18x forward earnings for the S&P 500 that have already started to tick lower, and on signs the near-term economy is likely stuck in low gear near-term we’ll continue to tread cautiously.
Other data points that factor into our cautious stance following the market’s continued melt include:
As we look at those items, as much as we would are hopeful for the domestic economy and the market over the next year, we continue to question what the potential catalyst could be that would take some wind out of the market’s sail near-term? While we ponder that question, we’ll continue to look for companies with strong multi-year tailwinds like those that have powered our Disruptive Technology, Connected Society, Content is King and Aging of the Population positions on the Tematica Select List higher.
The Week Ahead – March 6, 2017
Looking at the economic calendar for next week, it’s a robust one that starts off with January Factory Orders and concludes with the February Employment Report. In between, we’ll get several other indicators like the 4Q 2016 reading on Unit Labor Costs and the usual smattering of private sector jobs data for February from ADP and Challenger Gray & Christmas.
We’d note the February Employment Report comes just a few days ahead of the Fed’s next FOMC meeting on March 15-16. We suspect it will be ample fodder for the market, which following last week’s ISM indices and Final February PMI reports from Markit Economics sees a greater chance of a March rate hike than it did just a few weeks ago. Friday’s speech by Fed Chairwoman Yellen opened the door for such a rate hike, but even as the odds of that happening have jumped significantly over the last week the Fed isn’t exactly known for its rational thinking at times. Consider that as Yellen opened the March rate hike door, the Atlanta Fed GDPNow assessment of 1Q 2017 GDP dropped to 1.8 percent from the prior forecast of 2.5 percent.
While the folks at the Atlanta Fed revised their forecast due to weaker than expected real personal income expenditures as well as contracting core capital goods orders and shipments in January, the NY Fed’s FRBNY Staff Nowcast stood 3.1% for 1Q 2017. Makes one wonder if they talk with each other at these 12 regional Federal Reserve banks.
While recent data has shown a more sure-footed global economy and signs inflation is picking up, we still question whether we will see a rate hike in the very near-term. Remember, Fed Chairwoman Janet Yellen’s comments during her recent Congressional testimony regarding having time to digest and assess the economic impact of President Trump’s fiscal policies.
With next to no details on those policies having emerged, and 8 days until the Fed breaks from its next FOMC meeting, we continue to think May is a more likely time frame for the next rate hike; even so, we’ll continue to watch the data over the coming days so as to no be asleep at the switch. That data includes watching both the Financial Select Sector SPDR Fund (XLF) and the PowerShares DB US Dollar Index Bullish (UUP). The fact that UUP shares tumbled on Friday following Yellen’s speech would suggest the stock market has yet to be convinced a March rate hike is a lock.
With exactly four weeks to go until the close of the current quarter, we’ve got another week that is simply jam packed with investor conferences. Here’s a short list for the week ahead as well as some stocks and ETFs that are likely to see some action from these events:
And while you may be thinking that with four weeks to go until we close the current quarter, surely there can’t be anymore companies left to report quarterly earnings. We hate to break it to you, but yes, there are more to be had and we’ve spelled them out for you below. The two greatest buckets of earnings reports to be had this week fall into our Fattening of the Population, Food with Integrity and Rise & Fall of the Middle Class investing themes.
The answers to those question in more in the week ahead.