As some market worries have been put to rest, there is a growing appetite for new ones. Pundits who say that things look OK are not very exciting. Last week we saw a shift in attention. Despite healthy earnings and good economic data, I expect pundits to be asking:
What should investors be worried about?
Last Week
Last week the economic news was good, but mostly ignored.
Theme Recap
In my last WTWA I predicted a week focused on geopolitical risks. Despite some attention to earnings, economic data, and the latest Trump Administration pronouncements, that proved to be a reasonable guess.
The Story in One Chart
I always start my personal review of the week by looking at a chart of market performance for the week. There was little change for the week. The Thursday rebound was attributed to comments suggesting quicker movement on a tax reform package. If we measure the gain from the prior week’s close it is about 0.80%.
Whatever the news, the net market effect was (once again) very small.
The News
Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something very positive. My working definition of “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!
Once again, the economic news last week was good. The market got a little boost.
The Good
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Trucking data is improving despite the mixed headline data. Steven Hansen (GEI) explains.
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Mortgage delinquencies declined to an 11-year low. (Calculated Risk).
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Industrial production rose 0.5%. Eddy Elfenbein notes the weakness in factories and the strength in utilities.
Tim Duy also takes a closer look, noting the weakness in autos and the strength in utilities. He also cites the American interest in larger cars.
And fewer companies are citing President Trump as a factor. It is a small sample so far, but interesting to watch.
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Philly Fed remained strong with a reading of 22. This is especially good for a diffusion index, which measures month-over month changes. We cannot expect the pace of increases to be maintained. Few understand this and fewer mention it.
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Initial jobless claims rose to 244K, which some may see as bad. Most follow this noisy series via the four-week moving average, which moved lower.
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Existing home sales were up 4.4%. Calculated Risk notes that warmer weather was a factor. Bill also expects increasing inventory, which will help future sales.
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Chinese economic growth was 6.9%, beating expectations. (FT)
Our Stock Exchange always has some fresh ideas. There are ideas from five different approaches. This week Felix emphasizes energy while Holmes likes Discover Financial Services (DFS).
Personal Finance
Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, this is a must-read. Even the more casual long-term investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. As usual, investors will find value in several of them, but my favorite is the analysis of annuities. Here is how a variable annuity works (without the regular sales pitch). Here is how to create one yourself.
I have emphasized the regular personal finance feature at Abnormal Returns, but the offerings have become much more diverse. I follow them all, often finding items of personal interest as well as ideas for WTWA. If you have not recently checked out the site, it is time for another look. You can also get special benefits by becoming a member.
Seeking Alpha Editor Gil Weinreich’s series for investment advisors is useful for individual investors as well. The well-chosen topics span important questions and provide helpful links. I loved this week’s post on the value of time. Here is a key quote:
Sadly, many people who reach “retirement” (I confess, I do not like that word) experience depression because they don’t know what to do with themselves. My two cents: Whatever your ideal vision of retirement may be, start enjoying it now to ensure that you will enjoy it even more then.
How true! In my research this week, I learned that the average daily use of mobile devices for Americans is…..Make your guess and see the answer at the end of the post. Also, Netflix reports that members have spent 500 million hours watching Adam Sandler movies.
Market Outlook
Schwab has an excellent discussion of reflation – a key market theme. The term is frequently used, but many do not understand it.
Reflation is the process of getting economic growth and price broadly back to pre-recession levels. While progress has been made, growth is still not accelerating. First quarter real gross domestic product (GDP) is forecasted to come in around a 1% annualized level according to Bloomberg. Add in disappointment with the political developments—the hoped for stimulus coming from Washington is at least delayed; the Federal Reserve is talking about reducing its balance sheet; and geopolitical tensions are rising—and you have a good mix for investors to pare back some risk. Stocks have trended modestly downward, while more cyclical areas of the stock market have struggled at the expense of more defensive areas. We’ve also seen yields reverse course after surging on hoped for fiscal stimulus and rising economic growth.
Their overall conclusions are constructive. They address many key concerns – examining and charting the data.
Watch out for…
Value traps. Simply Safe Dividends does a typically fine analysis of Cardinal Health (CAH). Even though it is a dividend aristocrat, there are warning signs.
Final Thoughts
What should we think about today’s key questions?
- Government shutdown. I expect this to be avoided. The ideal solution would be an element of bipartisan compromise. The danger? Too many “extras” tacked on.
- French election. I have no special insight into the outcome. (FiveThirtyEight says it is way too close to call). By the time you read this, we may have the result for this round. One safe prediction is that this story, whatever the initial outcome, will be with us for a couple of months as the runoff occurs, followed by legislative elections. There are plenty of stories with dire predictions. Historically, the press (especially the financial press) has dramatically over-estimated these effects. We shall see. (Some other opinions).
- Trump agenda. There has been a challenging learning curve in the first 100 days. For those who think the post-election rally was all about Trump, this is a problem. For those of us who expected this rebound, regardless of the election outcome, market-friendly policy changes remain as potential upside. Charlie Bilello has a nice, chart-packed analysis of the market’s “false narratives.” He has a great analysis of the “Trump stocks” and themes.
- Market valuations. The table pounding continues. I have written on this topic in detail, including analyses of all the “favorite” valuation indicators – none of which are currently used by the inventors. “Skin in the game” is usually an important test for market cynics. Why do they think that others (like Paul Tudor Jones) can interpret the Buffett indicator better than Mr. B? Check out his reasoning here in his Dow 100K comment.
I am going to attempt a simple and brief explanation of the current valuation issue. It involves a “thought experiment” like Einstein’s in developing the Theory of Relativity. (I love and recommend Walter Isaacson’s biography).
Suppose you are given the chance to purchase an asset for $100,000 with an annual payment of $10,800, a rate of 10.80%. Your personal rate of inflation is 13.5%.
Suppose instead that you are given the chance to purchase an asset for $100,000 with an annual payment of $2224, a rate of 2.24%. Your personal rate of inflation is 1.8%.
Which is the better buy? Which should cost more? When inflation is high, both assets look cheap. When it is low, both look dear. BTW, the examples use actual data from 1980 and 2017.
If you understand this example, you see why prospective inflation and interest rates are important for valuing both stocks and bonds. Sources that discusses stock valuation, using only historical data, are telling only part of the story. Ignore them.
Valuation for all assets is relative. If Einstein were with us, he would agree with Mr. Buffett.
[Answer to mobile device question: Five hours per day. That includes streaming Adam Sandler movies.]
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