Dave Moenning

A Fool’s Errand

As we entered calendar year 2017, hope reigned supreme. There was hope for tax reform, reduced legislation, and a plan to rebuild America’s infrastructure. And with Republicans controlling the White House and both houses of Congress, getting the new administration’s agenda implemented was expected to be a snap.

After eight years of sup-par economic growth (if memory serves, the current expansion has been the weakest of the modern era), all of the above was going to jump-start the economy. Economic growth was going to shift from a “plow horse” pace to the “race horse” (hat tip to First Trust’s Brian Wesbury) rate that investors needed/wanted.

Everybody on Wall Street agreed. Inflation would rise. Stock market valuations would improve. And bond yields had nowhere to go but up. It was obvious – and investors large and small planned accordingly.

“If It’s Obvious, It’s Obviously…”

However, as Joe “I’m the Greatest” Granville became famous for saying, “If it’s obvious, it’s obviously wrong!” And so far at least, Mr. Granville’s view has been spot-on in terms of the bond market.

The battle cry for bonds coming into 2017 was to move away from long-dated treasuries. The thinking was that bonds had entered a mega bear phase that was going to destroy value like nothing anyone had ever seen. The plan was to shorten duration, shy away from governments, increase exposure to corporates and junk, and to employ alternatives in your portfolio.

So what has happened to the bond market since the beginning of the year? Oh that’s right, the consensus has once again been dead wrong.

The yield on the 10-Year US Gov’t T-Note closed yesterday at the low for the year at 2.137% – down from 2.446% at the end of last year. And as the chart below clearly illustrates, the current trend of bond yields is now moving from the upper left to the lower right.

10-Year US Treasury Yield – Daily

View Image Online

In the investing game, it is important to remember that reality eventually trumps expectations. Instead of the “race horse economy” that Trump & Co. were supposed to generate, GDP growth has remained tepid and as our models have been saying, inflation has faltered in recent months. In short, President Donald Trump’s presidency hasn’t yet triggered the surge in economic growth that everyone expected.

Instead, according to the latest Commerce Department data, GDP grew at an annual pace of just 1.2% in the first three months of the year. And while the numbers for Q2 appear to be better, they are a far cry from expectations.

The bottom line for the bond market is investors have spent the last three and one-half months paring their expectations for the economy, inflation, and fiscal policy. And what happens to yields when expectations for the economy and inflation fall? Yep, that’s right; prices rise and yields decline.

In a note to clients regarding the state of the 10-year yield, Torsten Slok, who is the chief international economist at Deutsche Bank, wrote, “The problem is that Wall Street economists have been consistently too optimistic for the past 15 years.”

Slok points out that the Fed has had similar difficulty in predicting economic growth. According to Deutsche, growth projections for the ensuing 12 months by the Federal Reserve Bank of Philadelphia’s quarterly survey of professional forecasters have been 0.6 percentage points too high on average since 2003.

The Deutsche report goes to point out that the latest survey, which was released last month, projects a 2.9% yield in the April-to-June period of next year. Adjusting for the average over-shoot, this suggests the yield on the 10-year will likely be in the 2.3% range, just a smidgen higher than current levels. So much for the great advance in rates everyone is looking for.

The same story holds true when looking for the great bond bear, which has been an obsession of many analysts for years now. But a funny thing has happened on the way to the bond debacle – it just hasn’t happened.

From my seat, the action on the long-term chart of bond yields suggests that a classic bottoming phase has been in place for more than five years now and that sideways may be the new down for bond yields – well, until the economy actually perks up, that is.

10-Year US Treasury Yield – Monthly

View Image Online

To be sure, rates can surprise to the upside at any time, for any reason. The analysts are correct, if the economic growth begins to strengthen and inflation heats up, yields will rise. However, trying to call when the 30+ year trend lower in bond yields will morph into a bear has so far been a fool’s errand.

Thought For The Day:

Don’t jump to conclusions, there may be a perfectly good explanation for what you just saw. -Proverbs 25:8

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the U.S. Economy

      2. The State of Earning Growth

      3. The State of Trump Administration Policies

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.

Looking for a “Modern” approach to Asset Allocation and Portfolio Design?

Looking for More on the State of the Markets?


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.

Dave Moenning

Remember: Fundamentals “Trump” Politics

Don’t you just love this game? One minute the stock market is rallying to new heights on the back of Trump’s big plans (and the related odds of said plans being implemented). The next thing you know, “repeal and replace” is dead on arrival, tax reform is looking less and less likely in 2017 (if at all), and nobody’s talking anymore about that stimulus plan to make America great again.

Add in the Russian scandal (which seems unlikely to go away any time soon), the President’s insistence on tweeting things that shouldn’t be tweeted, the fiasco with Comey’s firing, and the never-ending “high level White House shake ups,” and well, it is increasingly difficult to be optimistic about the administration’s ability to get anything done – let alone everything that was on the pro-growth agenda.

Now mix in more terror attacks in London and some fresh “hard” economic data that was much weaker than expected, and one can’t be blamed for thinking that the bulls might be in trouble. You remember all those traders that told us, in no uncertain terms, that the economy had nowhere to but up and that stocks were sure to follow, right?

So, I ask you… How are you feeling about that “reflation” argument (aka the “Trump Trade”) right about now?

The point is that the initial premise for stocks rallying post-election is clearly sagging. As a result, stocks closed last week at fresh all-time highs. Wait, what?

That’s right, despite all the administration’s misfires, false starts, and political blundering, the stock market appears to be none the worse for wear. For example, as of the May 31st, the S&P 500 sported a gain of 8.66% for 2017 – and the year isn’t even half over yet.

So what gives? Does the market not see the political risks of what some are calling a modern-day Watergate? Didn’t traders “get” that the Jobs report was surprisingly weak? Isn’t the Fed about to hike rates again? Has anybody noticed that the market’s gains are being driven by a handful of tech stocks? Isn’t this the second longest bull market without a 20% decline in history? Aren’t valuations at levels only seen prior to massive bear market declines? And, in short, shouldn’t the market be more worried?

Don’t look now fans, but it looks like the market’s focus has shifted. Yep, while you were focusing on Junior’s graduation, finalizing those summer vacation plans, and perfecting your Memorial Day cookout menu, things changed. Gone is the obsession over every tweet out of 1600 Pennsylvania Avenue and the gaming of exactly when that massive tax reform bill will hit.

In its place is a bunch of stuff that is a lot less exciting. Like earnings exceeding expectations. Like economic growth perking up around the globe. Like interest rates pulling back. And like Central Bankers deciding it’s time to walk away.

Lest we forget, the U.S. economic expansion is entering its ninth year. Both rates and inflation remain low by historic standards. And that plow-horse economic growth rate (hat tip to First Trust’s Brian Wesbury) in the U.S. is expected to continue.

Corporate earnings and profits are improving. JPMorgan reports that S&P 500 earnings were up almost 14% in the first quarter. And Bob Doll’s gang expects earnings to peak at close to 20% growth later this year before moderating in 2018.

In short, THIS is what the market looks to be focused on at this time. And THIS is why the bulls have refused to yield.

Sure, stocks could dive at any time and for just about any reason. Stocks are overbought, valuations are stretched, and my models are not as happy as they should be given the market’s recent ascent to all-time highs. As such, a correction is to be expected at some point.

However, from a big-picture, macro perspective, as long as the economy and earnings continue to improve, stocks still have a pretty good fundamental footing. And as long as decent fundamentals remain in place, the secular bull can continue.

Thought For The Day:

“There’s a force in the universe that makes things happen; all you have to do is get in touch with it. Stop thinking…let things happen…and be…the ball.” Ty Webb (Caddyshack)

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the U.S. Economy

      2. The State of Earning Growth

      3. The State of Trump Administration Policies

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.

Looking for a “Modern” approach to Asset Allocation and Portfolio Design?

Looking for More on the State of the Markets?


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.

Dave Moenning

Friday Quick Take: Jobs, France, Buffett and Oil

There are several items in focus this morning including Warren Buffett’s big meeting (as well as his take on both IBM and Apple), the election in France on Sunday (Macron continues to hold a 20-point lead – but strange things have been happening at voting booths around the world lately), the latest move in oil (don’t look now, but oil was trading below $44 this morning based on supply concerns – and remains something to watch), and of course, the Big Kahuna of economic data – the Jobs Report.

The latter is attracting most of the attention at the moment as job creation in April rebounded from the surprisingly weak March reading. According to the Labor Department, the U.S. economy created 211,000 jobs last month, which was above the consensus expectation for 185,000.

Next, the nation’s official Unemployment Rate fell to 4.4%, which was down from March’s reading of 4.5% and two-tenths below analysts expectations of 4.6%. It is worth noting that the current level is the lowest seen since May 2007.

However, there are numerous ways to look at the rate of the unemployed. For example, there is the now-popular U-6 rate, which includes those not actively looking for jobs and folks looking for part-time work. The U-6 dropped to 8.6% in April, which is down from the 8.9% level in March, and the best reading since November 2007.

Another way to view unemployment is to take the number of employed people relative to the population. This ratio rose to 60.2% in April, which is the highest level seen since February 2009.

As usual, there were revisions to the prior two months’ job creation totals. March was revised down to 79K from 98K while February’s numbers went up to 232K from 219K.

On the income front, Average Hourly Earnings rose by 0.3% in April to $26.19 per hour and hourly wages grew by 2.5% on a year-over-year basis.

The Takeaway

What jumps out at me in this report is the “best reading since” numbers. For example, the Unemployment Rate is the best since May 2007. The U-6 is the best since November 2007. And the ratio of employed-to-population is the highest since February 2009.

Thus, it is fairly easy to argue that the jobs market has returned to levels seen before the Great Recession. And as such, the Fed is justified in returning rates to more normalized levels.

In addition, it would appear that the Fed’s view that the weakness seen in Q1 may indeed have been “transitory” as hiring clearly perked up again after March’s hiccup. And from a big-picture standpoint, I believe the idea of the economy rebounding from the usual late-winter swoon is critical to the current market levels and trader narrative. Therefore, we need to continue to watch the incoming data in May/June for signs of confirmation.

Thought For The Day:

Remember that it pays to be open minded (in more ways than one)…

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Trump Administration Policies

      2. The State of the U.S. Economy

      3. The State of Earning Season

      4. The State of World Politics

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.

Looking for a “Modern” approach to Asset Allocation and Portfolio Design?

Looking for More on the State of the Markets?


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.