Goldilocks Returns to the Markets

 

Federal Reserve Chair Janet Yellen broke little new ground at last week’s Federal Open Market Committee meeting, but if you listened closely, she made some news.

The FOMC raised the federal funds rate by 0.25% to between 0.75% and 1%, the third time the FOMC has hiked in the last 15 months. It also continued to insist it would raise rates three times this year. If it follows that script, fed funds would be 1.25-1.5% by the end of 2017.

But in her post-meeting news conference, Yellen expressed growing optimism. ”The simple message is the economy is doing well,” she said in plain English, a refreshing improvement over Fed-speak.

“We’re closing in on our unemployment objective, we’re coming closer to the inflation objective,” she said.

To me that indicates Yellen and the FOMC are turning their focus from employment to inflation, the other side of the Fed’s dual mandate. That implies “gradual” rate increases—at least three a year—for the foreseeable future.

What does that mean for markets?

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Jobs Report Is a Boost to Trump Rally

 

The first full jobs report published during the Trump Administration came out Friday morning and I give it a B+.

The economy added 235,000 new jobs in February, slightly above expectations and about in line with January’s gains. Private sector jobs grew by a similar amount. The unemployment rate slipped to 4.7%.

Two things particularly impressed me about the report. First, job growth was strong across the board—not just in the usual suspects, health care and professional & business services, the two stalwarts of the service economy.

Construction—construction!—led the pack with 58,000 new jobs. Maybe February’s uncommonly warm weather gave early spring fever to home buyers and builders. Two wildly different industries—manufacturing and private educational services—also showed big job gains. Only retail, which is in the midst of a big contraction, showed a substantial decline of 26,000.

And labor force participation rose to 81.7% for the prime-age work force (people between 25 and 54). That was the highest prime-age participation since 2011.

So, is President Trump working some kind of magic? Is it good for investors?

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Stocks Be a Lady Tonight

 

When the stocks get so high

They go up to the sky,

That’s euphoria!

Apologies to Dean Martin, who was a terrific singer but was content to play second fiddle to the Chairman of the Board, Frank Sinatra. Then again, who didn’t?

Sinatra, Martin and Sammy Davis Jr. were the three great talents at the heart of the Rat Pack. They ruled the Strip when Vegas was Vegas and men were men. No one was ever more politically incorrect—and no one ever had more fun.

The Rat Pack’s heyday coincided with the peak of the 1960s go-go stock market. Which is why I’m thinking of them now, when stocks are singing “Fly Me to the Moon” again.

Back then, Americans literally went to the moon. Today it’s only the Dow Jones Industrial Average, which hit an all-time high above 21,000 Wednesday following an address to a joint session of Congress by President Donald Trump that the punditocracy declared was “presidential.”

That, and the promise of big tax cuts, regulatory reform, and even infrastructure spending unleashed Wall Street’s animal spirits yet again. But is it for real?

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What Could Derail the Trump Train

 

All good things come to an end. Even Joe DiMaggio’s epic hitting streak, a record that has endured for 75 years, ended at 56 straight games.

The Dow Jones Industrial Average struggled all day Friday but managed to close up a bit to continue an 11-day winning streak. It and other major averages hover near their all-time highs.

I’ve written that President Donald Trump’s big plans to slash regulations, cut individual and business taxes, and build YUGE infrastructure projects have given stocks a second wind after the market spent months digesting 200%+ gains since March 2009 as the election loomed.

But the Standard & Poor’s 500 index has added more than 500 points (29%) since last February’s lows and 10% since Election Day.  The CBOE Volatility Index (VIX) sits below 12, while institutional sentiment is very, very bullish. There appear to be pockets of complacency, if not euphoria.

What could knock this market off its rocket-like trajectory?

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Full Speed Ahead for Stocks?

 

The great market trifecta ended Thursday with slight losses that continued Friday.

On Wednesday, the Dow Jones Industrial Average, Standard & Poor’s 500 index, and Nasdaq Composite index hit record highs for the fifth consecutive day—the first time that’s happened since 1992.

But on Thursday, only the Dow continued its streak. The S&P and Nasdaq were off by less than 1/10th of one percent. (Only the Nasdaq rose Friday.) All three of them, and the Russell 2000 small-cap index, are still near all-time closing highs.

The complacency I wrote about last week has abated a bit as the CBOE S&P 500 Volatility Index—the VIX—rose about  10% from last Friday’s ten-year low. But it still is below 12. And three leading indicators of institutional sentiment—Market Vane, the Consensus Bullish Sentiment index, and Investors Intelligence—are all near their highest readings for this bull market.

So, it’s a good time to sell, right?

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Complacency, Thy Name Is Trump

 

When you’re President Donald Trump and you snap your fingers, the courts and the media don’t stand at attention.

But when you tell Wall Street to jump, the answer always is: “How high”?

On Thursday, the U.S. Court of Appeals for the Ninth Circuit upheld a lower court’s stay on the administration’s controversial travel ban on people from seven mostly Muslim countries that have a history of sponsoring or spawning terrorism.  The legal fight may go to the U.S. Supreme Court.

And despite chief White House strategist Stephen K. Bannon’s admonition to the media to “keep its mouth shut and just listen for a while,” news organizations like The Washington Post and The New York Times have published story after story about internal battles in the administration, extensive leaks, and apparent conflicts of interest in the Trump family.

But when the president floated the vague notion that within the next few weeks, he would unveil a “phenomenal” tax plan,  yet provided no details, all three major market indexes achieved new all-time highs.

Like Trump supporters during the campaign, Wall Street has focused on all the positive things the administration may do (tax cuts, deregulation, infrastructure building) while ignoring everything else (possible tariffs, trade wars, etc.)

Is it missing the forest for the trees?

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Two Boosts for the Trump Market

 

The January jobs report had good news for the Trump Administration and the market, though its surveys were taken before Inauguration Day.

The U.S. economy added 227,000 new jobs in January, the best monthly jobs report since last June. Unemployment ticked up to 4.8%, but the labor force participation rate also rose slightly as more people looked for work.

The one down side was that hourly earnings rose by a mere 0.1% in January and only 2.5% during the past 12 months. That’s more than the 2% annual growth they’ve shown over the last few years but weaker than the 2.9% trend that had the Federal Open Market Committee (FOMC) on track to raise the federal funds rate three times this year.

The FOMC held its ground at this week’s meeting and the low wage increases and weak GDP growth of 1.6% in 2016 have Wall Street believing the Fed might raise rates even more slowly.

That was one reason the Dow Jones Industrial Average was up by about 170 points Friday afternoon, while the Standard & Poor’s 500 index was within a few points of the 2,300 mark and its all-time high.

But there was another reason stocks closed the week with a bang.

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Is Dow 20,000 No Big Deal?

 

Another big milestone and the naysayers are out in force.

When markets hit big, round numbers, technicians usually say, “never mind.”

But this time some intellectual heavyweights are, well, weighing in on the Dow Jones Industrial Average reaching the 20,000 benchmark.

Nobel laureate Robert Shiller of Yale, Mr. “Irrational Exuberance,” concedes in The Guardian that Dow 20,000 “will still have a psychological impact on the markets.”

But he calls it a “powerful illusion,” because the Dow is up only 19% in real (inflation-adjusted) terms since 2000, a gain over 17 years he calls “underwhelming.”

And Zachary Karabell writes in Foreign Policy, “The positive economic trajectory that underpinned the rise of liberalism and democracy…is clearly shifting into a lower gear—despite the recent good news from Wall Street.”

What are we to make of this?

First of all, Shiller has one more Nobel Prize than I do, and I have great respect for Karabell as a writer and thinker.

But Shiller’s famed CAPE index, which measures the market’s price vs. earnings over the last ten years, has indicated equities were overvalued in 416 of the last 422 months, according to no less a figure than Jeremy Siegel of the Wharton School.

And how does a market milestone like Dow 20,000 trigger in Karabell a bout of pessimism and weltschmerz worthy of the great German historian Oswald Spengler, he of The Decline of the West fame?

Actually, Dow 20,000 is a mere pretext for Karabell’s ruminations on the limits to growth, a meme some of us remember from the controversial Club of Rome report back in the 1970s.

And underlying much of the commentary—explicitly in Shiller’s case—is the unwillingness to attribute the market’s recent gains to the election of Donald Trump.

We will never know if there would have been a similar relief rally if Hillary Clinton had won the Electoral College as well as the popular vote, three to five million “fraudulent” voters notwithstanding.

But as I wrote here last week, the Dow and Standard & Poor’s 500 index rose more than 150% under President Obama. And as of Thursday, the indices had gained 9% since Election Day, accounting for some 1,600 Dow points.

Those gains will be illusory if Trump’s promises of more infrastructure spending and lower corporate taxes are washed away by trade wars with China and Mexico.

But already strong consumer sentiment has improved since the election and business confidence has soared. That could spur growth and improve corporate earnings, which, along with interest rates, really drive stocks.

Love him or hate him (there’s little in between), the Trump rally is for real, and should continue. At least in this area, we have to give the devil his due.

 

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It’s Trump’s Market Now

 

At around noon Friday, Donald J. Trump took the oath of office and became the 45th President of the United States. Despite much anxiety among people who didn’t vote for him, the world didn’t end and the stock market didn’t crash.

Yet those who expected the new president to reach out to his defeated opponents with conciliatory words and olive branches were disappointed.

President Trump’s inaugural address was bellicose and unyielding, explicitly advocating “protection” and “America first,” in a call to arms against Democrats and Washington Republicans alike. It echoed the dark vision of a country under siege (“American carnage,” he called it) that marked his acceptance speech at the Republican National Convention in Cleveland.

Perhaps reflecting that, stocks sold off from their highs earlier in the day. But who really knows why the stock market moves on any given day? What we do know is that from this day on, President Trump “owns” the economy and the stock market and, fairly or not, his popularity will ride on it.

So, what are his chances?

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Earnings Won’t Wait for Trump

 

Next week at this time, Donald J, Trump will have been inaugurated as the 45th President of the United States. But the markets aren’t waiting.

The so-called Trump rally has stalled, as the Dow Jones Industrial Average, which seemed poised to top 20,000, now finds it hard to surmount the 19,000 barrier, let alone the magic round milestone number.

The Standard & Poor’s 500 index is holding up a little better, around 2,273, while the Nasdaq Composite Index, at about 5,573, is just short of its all-time high as technology, which lagged in the Trump rally, has quietly gained ground.

I think that tells us something particularly important about the market as earnings season begins.

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