Weekly Update: It's too bad about his personality

05-19-2017

My travel this week took me to upstate New York and Harrisburg. Client events in Rochester and Buffalo greeted me with vocal detractors of President Trump, and if there were supporters, they were quiet. I heard calls to impeach Trump and complaints that legislators are working for Wall Street and not for the people. “They want to be trillionaires and don’t care about investing for growth.” Although, in Buffalo I may have met a supporter—he was a soft-spoken owner of a rifle manufacturing company. What is generally the target of the rifles you sell, I asked. “People.” Whoa! Another gentleman, possibly a supporter, came up to me after the meeting to say that Trump’s agenda would be good for the country, only “it’s too bad about his personality.” LOL! A great irony is that Trump, who demands loyalty from his subordinates, does not give it in return and a growing cast of Republicans may not be willing to fight for him. IEBS wonders if Paul Ryan, Mitch McConnell or even Mike Pence have any great loyalty to the president. So now we head into murky waters, with subpoenas and hearings and more bombshells from anonymous leakers. Can Trump hang on? In an effort to save his presidency, Trump could become even more erratic—there’s nothing like a foreign adventure to divert attention. Here's the math: A simple majority—218 votes in the House—would be required to impeach; the Republicans have 238 seats, with 4 vacancies. To convict, it would take a two-thirds vote in the Senate, a very high bar to clear, since the Republicans have 52 seats. 

On Monday, the S&P 500 closed at a record high of 2,402 and the VIX fell to 9.77, its lowest reading since December 1993. Then came Wednesday, with the S&P posting its biggest drop since September and the VIX spiking 46%, its largest increase since Brexit. Before then, the stock market seemed to be tuning out all the ear-splitting noise emanating from Washington since Election Day, although throughout the advisor meetings this week, I repeatedly heard that many (including millennials) are holding lots of cash, afraid to invest. What the market has been focused on is the signal, i.e., Trump’s commitment to cut corporate taxes. Strategas Research believes the Senate Finance Committee is rallying around a tax reform plan that reduces the corporate tax rate to 23-25% without a border-adjustment tax or major changes to the interest deduction. The issue Republicans need to figure out is how to get the entire party on board with raising the debt ceiling to avoid Democratic leverage. This may be the toughest fight of the year and could be happening in the fall as the investigations and negative headlines creep up. Now that Trump seems to be increasingly getting sucked up by the swamp rather than draining it, investors may be losing confidence in his ability to get much of anything done for a while. The one important exception is deregulation, which remains bullish for the stock market. Evercore ISI notes if the S&P fell another 5%, it would “only” be back where it was at the time of the December Fed meeting; even a 10% decline would “only” wipe out the gains since the day before the election. It is not obvious either consumption or investment were highly sensitive to those moves on the way up, though it’s possible they could be more sensitive on the way down.

At the end of the day, the market trades on earnings and the news there is bullish. During the past week, forward earnings for the S&P 500, 400 and 600 remained in record-high territory. Yardeni Research puts consensus earnings estimates for the S&P 500 at a stable $147 per share for 2018—11.8% above the current estimate of $131.57 for this year, which is up 11.5% from last year. This directly contradicts a comment from a woman at a mostly ladies client event in Rochester, that “U.S. earnings will never go higher.’’ I vehemently disagreed with that statement. These ladies, one of whom wasn’t familiar with the term “animal spirits,” were dubious about the future. Their city is home to the Rochester Institute of Technology, which has a lot of engineers, and there was discussion of the “stunning’’ pace of artificial intelligence (AI) and worries for where the jobs may go. “Siri will one day balance our portfolios!” Could AI be responsible for the lack of wage growth even as the economy has improved? I also met a “reformed goalie” in Rochester who had an interesting theory about when to invest, built around peak performance cycles. The A game peaks halfway through the first 90 minutes after we wake up in the morning and is at its worst in the middle of the next 30 minutes (the B game), a pattern which repeats itself throughout the day—the peak performance cycle. I don’t know that I followed all of his theory, but we did agree on one thing. Fear is in the left brain, and investing should be done with the right brain. Most of investing is psychology, something which will be important to bear in mind as the summer unfolds in D.C.

Positives

GDP setting up for Q2 rebound Led by broad-based improvement in manufacturing, April industrial production rose the most since February 2014, more than double consensus. Year-over-year (y/y) production is now running at its fastest pace in 2 years. In another sign of strengthening growth momentum, April’s Conference Board leading indicators rose a fourth straight month. The Atlanta Fed’s GDPNow model is now tracking Q2 GDP at a robust 4.1% annualized rate.

Philly Fed strong The regional manufacturing gauge jumped to 38.8 in May, double expectations and the third highest level on record. Shipments, orders and hiring all pointed to strong activity in the months ahead, although a surge in post-election optimism appears to have evaporated. New York’s separate, more volatile Empire index declined slightly for the first time since October, but underlying production activity remained solid with the 6-month outlook conveying a high degree of optimism.

More evidence of online shopping’s ascent E-commerce sales jumped nearly 15% y/y in this year’s first quarter, lifting its share of total sales to a record high 8.5%—a number that seems low given just how widespread the trend has become as consumer preferences continue to shift away from traditional brick-and-mortar stores.

Negatives

Housing starts disappoint They unexpectedly fell in April for the third time in 4 months, with weakness concentrated in multifamily units as single-family starts rose. Still, year-to-date starts are running nearly 6% above the year-ago pace, with the 12-month average now at a 9-year high. Builders remain optimistic, with May sentiment rising to its second-highest level since June 2005. Undergirding single-family activity has been a shift in demand, with Q1 seeing more new households choose to buy rather than rent for the first time in a decade.

The labor market keeps getting tighter The home builder’s survey cited labor shortages as an ongoing challenge, while the latest NFIB survey found more than 30% of small business owners have positions they can’t fill. With the unemployment rate at a 10-year low of 4.4%, jobless claims at multigenerational lows and aging boomers exiting the labor force, companies are struggling to find workers: job openings are at their highest since 2001, with technology, manufacturing and professional & business services industries reporting the most difficulties.

Dollar doldrums The dollar has erased all of its post-election gains, with the sell-off accelerating this week amid all the political drama. The Institutional Strategist says the fate of the greenback appears to be heavily dependent upon tax reform and that any distractions are not good. However, some analysts believe the recent weakness may simply represent a counterbalance to the strength in the euro after the favorable French election. Dudack Research believes the bulk of this trade represents short-covering and the euro rally may prove short-lived.

What else

Inflation Watch The PPI and CPI price increases earlier in the year were driven by the 60% y/y increase in the price of oil between February 2016 and February 2017. Now that oil has stabilized, these pressures are beginning to abate as are the headline and core rates for both indexes. This is a positive for the Fed and markets, and for the consumer.

There’s an index for everything Twenty years ago, there were nearly 7,500 publicly traded U.S. stocks and just a handful of major indexes to track them. Today, the number of individual equities is barely 4,000 and astonishingly, the number of indexes now tops more than 5,000. There are now more indexes than publicly traded U.S. equities!

Rochester is beautiful this time of year Designated the official state bush of New York state in 2006, lilacs have a scent that is stronger than roses and carries quite a distance. There are over 1,000 varieties in several colors (the most popular are lilac and purple), and the bush can live for hundreds of years. According to The Gardener’s Network, Rochester undoubtedly is the Lilac Capital of the World. Its love for lilacs dates back to 1892, when horticulturalist John Dunbar planted 20 varieties on the sunny southern slopes of Highland Park. The Rochester park is the scene of the annual 2-week long Lilac Festival, with over a half a million people attending each year. There are over 500 varieties and 1,200 lilac bushes in the park’s 155 acres.