'I'm going to Pittsburgh for fun'
This is what an advisor remarked to his colleague as we were introduced in Atlanta, the first leg of my travel this week. His friend laughed. Excuse me!! The advisor was going to the ’Burgh to golf at Oakmont, home to nine U.S. Open championships. The following day, a different advisor said he “loves Pittsburgh,” remarking about our excellent restaurants. (In 2015, Zagat ranked my hometown’s culinary scene No. 1 in the nation, and the choices are only getting better.) One Atlanta advisor, a consummate gentleman, observed that politics are sucking the air out of the room. “People used to be subject to a 24-hour news cycle as regards to politics; now it is being directly injected into them.” This, he says, made his summer very busy. Clients called asking what a particular tweet means to their portfolio. He reported a common view in this conservative area, stated by a wealthy client: “I loved everything Obama said, but little that he did. I don’t like much of what Trump says, but everything that he is doing.” The economy clearly is performing at a higher level, with this week’s bullish economic reports (more below) appearing to be a major catalyst behind the run-up in 10-year Treasury yields. With inflation stable, the bond market seems to be focused on re-rating U.S. economic growth higher. Lower tax and regulatory burdens, coupled with little credit risk (this week high-yield spreads made new cycle lows vs. Treasuries), are among the reasons. So is a Fed that seems to be signaling a neutral funds rate of 3% or a little higher and a geopolitical environment where tensions have eased amid a reconfigured Nafta (more below) and falling Italian bond yields. So long as signs continue to point to a growth-driven move in yields, stocks should fare well over the medium term, although rapid moves such as this week’s historically have created short-term sloppiness—a characteristic also typical heading into midterm elections. But a post-election rally is common: the S&P 500 has posted positive fourth-quarter returns in all but four of the past 27 years, with the biggest gains coming the final two months of midterm years.
Even though the calendar has turned to fall, it seems like the dog days of summer have persisted. Indeed, at an 8-person advisor meeting in Atlanta, two gentlemen fell asleep during my discussion. During my discussion!! Anyway, before the midweek spike in yields, volatility in the stock, bond, commodity and currency markets had seldom been more modest, with average weekly volatility running just above 2%—only 8% of the time has it been as low or lower since 1976! Calm may be good for the heart but whenever volatility has fallen into this lowest decile, Leuthold Group says the S&P has returned an average 3.27% the following year, with more than a 1-in-3 chance of an outright decline. Since late August, even the strongest of the market breadth measures—the NYSE Daily Advance/Decline Line—has failed to confirm highs, while the weakest—52-week highs and lows—has continued to erode. Further, while the percentage of bullish newsletter writers last week jumped above the 60% threshold (indicating extreme optimism, a contrarian negative), the percentage of NYSE issues above their 30-week moving average dropped below 50% (indicating a narrowing market, a technical negative). .
I spent the back half of the week in Florida, speaking at advisor symposiums in Orlando and Tampa. The topic was behavioral finance and how our humanness affects our investing and thus our returns. After my Orlando presentation, an advisor who has been in the business since 1987 approached and said that right at the market bottom in 2002, his phone was ringing off the hook with many clients calling to say, “Sell everything now!’’ A first-hand view of capitulation. He further spoke of a client who had sold everything during the 2008-09 bear market, and when it reached its bottom in March 2009, he told the client, “OK, you won the lottery. Turn your ticket in.’’ But the guy never got back in. Now there are those who are nervous about the health of the rally and fretting about sliding Treasury prices as a consequence of the best economy in this century. Really? (Perhaps they should come to Pittsburgh for some fun!) To the contrary, stronger growth should allow companies to meet or exceed extremely sanguine profit forecasts in the coming quarters. FBN Securities notes when stocks plunged this past winter, the S&P forward P/E multiple peaked at 18.4, its most elevated since the aftermath of the dot-com bubble. It’s now 16.8. An expansion to 17.4, the peak prior to Trump’s inauguration and after the correction bottom, seems reasonable. But that’s not what’s on the mind of investors. Everywhere I went this week, advisors said all their clients want to do is talk politics. Politics is much overrated as markets are concerned. As the Atlanta advisor at my first stop of the week said, there is a bull market in politics “and we need a crash.”
- Business is looking good September ISM services jumped to a 21-year high and its second highest on record. The gain comes on top of August’s unexpectedly big increase, suggesting acceleration into summer’s closing months. The manufacturing gauge slowed but remained elevated near a 14-year high and a level historically associated with 5.1% annualized GDP growth. Markit’s companion measures weren’t as robust but were indicative of above-trend growth, while August factory orders rose the most in 11 months.
- Consumers looking good A weekly measure of chain store sales surged 3.7% the final week of the September, the most in six months. A separate Redbook weekly survey found sales climbed the most since at least 2005. Monthly vehicle sales also unexpectedly increased the most in a year, to a 17.4 million annual rate, the highest level since last November. Despite the improvement, though, year-over-year sales remain negative.
- The jobs keep coming Headline September jobs missed, apparently due to Hurricane Florence. But a big upward revision to August lifted the year-to-date monthly average gain to 208K, well above the year-ago pace, and the jobless rate fell to 3.7%, its lowest since 1969. ADP’s payroll count rose well above expectations and the most in seven months, pushing 2018's average monthly gains to 204K, far stronger than the 179K through 2017's first nine months. Online job postings hit a 5-month high.
- Tariffs starting to bite Despite robust manufacturing in the U.S., global activity has slowed considerably as the global PMI fell again in September to a 22-month low. It’s been down every month but one this year, with trade the big drag. With tit-for-tat tariffs starting to kick in, global export orders contracted for the first time since June 2016, with China, Germany and Japan all reporting declines.
- Tariffs starting to bite The nation’s trade deficit widened some more in August to $53.2 billion, led by a plunge in soybean exports, which have been caught in the tariff battle between the U.S. and China.
- More bad housing news A marginal headline gain of 0.1% in August construction spending masked significant declines in residential spending. Notably, single-family fell 0.7% and multi-unit was down 1.7%.
How do you pronounce USMCA? Trump’s push to get tougher on trade appears to be paying dividends, with Evercore ISI saying the United States-Mexico-Canada Agreement, aka new Nafta, will be market positive for many industries, including agriculture and autos. It calls the new agreement the strongest signal yet that the Trump administration intends to follow through on "aggressive but between the lines" promises to modernize and keep trade agreements while remaining within the parameters of the World Trade Organization.
Counterpoint In what it says is an admittedly out-of-consensus view, UBS Securities posits that tariffs will disrupt the newly resurgent manufacturing industry, causing job losses, a hit to consumer spending and ultimately, the Fed skipping its planned December hike. It’s reasoning? The U.S. has not had tariffs of this level since 1971, and the U.S. is now three times as open an economy as it was then.
Come to Pittsburgh and have some fun! Newspapers reported that an entourage of 80 Central Florida leaders, including Orlando Mayor Buddy Dyer and Orange County Mayor-elect Jerry Demings, are in Pittsburgh this week to see what they can learn from the Steel City, a city that has remade itself. The delegation is focusing on Pittsburgh's economic renaissance and studying its community philosophy which is centered on creating broad-based prosperity, an effort summarized in its economic development campaign, “If it’s not for all, it’s not for us.”
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