The economic calendar is normal, but there will be a lot of competing news – Korean talks, China negotiations, and the Trump legal team’s announcement about whether the President will meet with Special Counsel Mueller. And those are just the items we know about.

Sometimes there are great themes that do not get the deserved attention in financial media. Readers have encouraged me to identify and discuss such themes, and this week provides a good opportunity. Pundits should be asking: Which equity sectors benefit most from Trump policy changes? 

Last Week Recap

In my last edition of WTWA I asked why stocks were “stuck in neutral” given the recent economic strength and the strong corporate earnings. I also noted the significance of the week’s inflation data, even though the Fed’s favorite gauge was not on the calendar. That was all quite accurate. It was the key topic at the start of the week, and stocks responded well to the tame inflation data released mid-week.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. I especially like the version updated each week by Jill Mislinski. She includes a lot of valuable information in a single visual. The full post has even more charts and analysis, so check it out.

The market had a nice rally, up 2.4% for the week. The trading range was about 3.4%, consistent with recent volatility. I summarize actual and implied volatility each week in our Indicator Snapshot section below. As you can see, volatility has been moving lower, and is back into the long-term range.

The News

Each week I break down events into good and bad. For our purposes, “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.

The overall picture remains positive. Economic strength is reasonable, and inflation is low. New Deal Democrat’s analysis of high-frequency indicators shows some deterioration but retains the overall outlook.

The Good

• NFIB small business optimism nudged higher to 104.8 vs. 104.7 last month and expected. The record of improved profits was the highest in the 45-year history of the survey. (NFIB)
• Hotel occupancy is on pace for a record year. (Calculated Risk).
• Bank lending is getting easier. New Deal Democrat notes that an ongoing criticism of the economy has been the deceleration of commercial and industrial loans. The Senior Loan Officer Survey tends to lead lending by about six months. He concludes, “Credit remains loose, and indicates continuing economic growth over the next 12 months”.
• JOLTS showed labor market strength. Nick Bunker provides the best analysis of this report, covering and interpreting all the key elements. This month there is a small rebound in the quits rate, the all-time low of the ratio between unemployed workers and open jobs, and the overall structure represented in the Beveridge curve.

• Inflation remained tame. The PPI increased 0.1% with the core up 0.2%. The CPI increased 0.2% with the core up 0.1%. These reports comforted observers who are concerned about Fed rate hikes. Jill Mislinski provides an “X-Ray View” of inflation component using year-over-year changes instead of seasonal adjustments. James Picerno observers that the data are unlikely to influence Fed policy.

• Initial jobless claims matched last week’s low of 211K and beat expectations of 220K.

The Bad

• Oil and gasoline prices move higher. Iran sanctions, the Venezuelan economic crisis, and seasonality are all factors. (MarketWatch)

• No progress in the US/China trade talks. Some were optimistic since the delegations included top-level officials. (NYT)

The Ugly

The Central States Pension Fund is expected to be insolvent in seven years. (Michelle Jones, VW) Some businesses in the plan have failed, and investments have not met expected returns.

The Calendar

The economic calendar is normal, with an emphasis housing data. Retail sales and industrial production are important, and some swear by the leading indicators. Geopolitical and investigation news may once again claim the spotlight.

Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.

Next Week’s Theme

It may well be a big week for news, but there is no clear focus for the punditry. Don’t worry. They will find a way to fill the air time. I am taking the occasion to discuss a topic that should be getting more attention. Pundits and financial writers should be asking: Which equity sectors benefit most from Trump policy changes? 

Please note that this is an investment question, not a political one. A good investor is politically agnostic but must also be realistic. Policy changes are facts and the gauging the likely investment impacts is analysis. We know much more about Trump policies than we did at the start of his term. There are several key effects worth further research. In the list below, I sometimes include a link which provides a viewpoint or analysis as a starting point. The links do not necessarily represent my personal views. Good research requires considering all sides. I have included (in brackets) a few comments of my own. The topics are all worth further study with significant investment implications.

The estimates of the hit to GDP is a reduction in growth of 0.3% for China and even less for the US. Could the trade conflict expand? Timothy Taylor considers the overall economic effects of US Import restraints. Few understand that many products have a complicated history of contributions and cross many borders. Here is a fascinating example.

As usual, I’ll save my overall personal conclusions for today’s Final Thought.

Quant Corner

We follow some regular featured sources and other quant news from the week.

Risk Analysis

I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

Short-term trading conditions have improved. The borderline rating was almost poor enough to take our trading models out of the market. A strength of our modeling approach (Thanks, Vince) is a touch more patience than shown by many technical systems. This has a mild cost, and can reap great rewards. This week was a good example. We continue to monitor the technical health measures on a daily basis. The long-term fundamentals and outlook are little changed.

A notable feature of the chart is that we have increased the nine-month recession odds to a chance of 25%. While this is significantly higher than it has been during the rally, it does not yet represent a real threat. Instead of thinking of the odds as higher than before, we must keep in mind the continuing evidence that a near-term recession is unlikely. The odds are only slightly higher than the long term average.

That said, we watch this quite closely and plan to reduce position sizes if the risk grows much larger.

The Featured Sources:

Bob Dieli: Business cycle analysis via the “C Score.

RecessionAlert: Strong quantitative indicators for both economic and market analysis.

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.

Georg Vrba: Business cycle indicator and market timing tools. None of Georg’s indicators signal recession.

Doug Short and Jill Mislinski: Regular updating of an array of indicators. Great charts and analysis.

Guests:

Ben Leubsdorf (WSJ) reporting the results of the latest WSJ poll of private sector economists. He does a nice job of describing and analyzing the conclusions, but his lede is that the expansion is likely to end in 2020. (This was the conclusion of 59% of those surveyed).

I made a polite objection on Twitter, noting that no one could forecast a recession more than a year ahead of time, and that the age of the economic cycle was not predictive. I got a polite reply, but I understand that his job is to report the WSJ survey. There must be a better process for covering recession potential. You could, for example, focus on those with special expertise on this topic, instead of looking to generalists.

James Picerno does his annual look at those predicting recessions. Read the entire post to see the range of speculation lacking method. Read the prior two installments to see some “forecasting” history. As I have also recently noted, he sees the bogus forecasts as moving farther out in time to improve the odds.

Insight for Traders

This week we asked fellow traders if they had a real strategy. The key comparison is between a “line on a chart” and interpretive analysis from Dr. Brett Steenbarger. In addition to this customary educational segment, we discussed some stock ideas and updated the ratings lists for Felix and Oscar, this week featuring the S&P 500 stocks. Blue Harbinger has taken the lead role on this post, using information both from me and from the models. He is doing a great job, presenting a wealth of new ideas and information each week.

While I emphasize trading in the Stock Exchange series, it often has implications for long-term investors. It is worth a visit.

Insight for Investors

Investors should have a long-term horizon. They can often exploit trading volatility. I remind investors of this each week, but now is the time to pay attention.

Best of the Week

If I had to pick a single most important source for investors to read this week it would be behavioral scientist Steve Wendel’s article, Biases Don’t Make Investors Foolish. He takes four of the common cognitive biases and shows why they are useful in everyday life. He has a great example of how well they work on hamburgers. Feel free to substitute your favorite food, he invites. He then applies the same useful heuristics to investing. I cannot quote much without giving away the whole story, so please read this excellent, brief post.

The decisions our minds make, which we call biases in the context of investing, are actually quite smart. Investment biases are smart shortcuts, applied to the wrong situation. Thus, there’s a very good reason why they are difficult to overcome: they generally help us. Since we can’t simply ignore them or easily override them, we have to acknowledge them and work with them or around them. Everyone has them: advisors, fund managers, pension investment committees, etc. Our investment biases are a natural part of how our minds are wired; they don’t disappear because someone has a particular base of expertise in investing.

This article provides an excellent test of what you need to do to be successful as an investor – or as a financial advisor.

Market Outlook

Avondale Asset Management covers earnings calls by reviewing transcripts and presentations. This is an excellent source for those of us wondering whether economic growth is reflected in corporate profits. This week’s report highlights overall optimism, solid growth, a strong labor market, and a CEO expectation that the business cycle could continue for several more years. They love tax reform but are feeling some cost pressures.

Corporate buybacks are bullish for investors. (Barron’s cover story). Andrew Bary’s analysis is thorough, looking at many stocks and considering counter-arguments in an even-handed way. Buybacks add an effective “yield” of about 3%, combined with a 1.9% dividend yield on the S&P 500.

Stock Ideas

Energy stocks? Princeton Energy Advisors (HT Calculated Risk) considers both increasing demand and the potential supply additions. The conclusion: “Equities still look to have plenty of running room ahead of them.” The futures forward curve shows the history of each futures contract. The overall levels have increased dramatically, and there is “backwardation” in each contract. This means that for any given contract, the price is lower in the future.

A rebound in Synaptics (SYNA)? Shareholders Unite discusses the company’s plan for diversifying from the mobile phone and into the IoT.

Some high-dividend ideas from Colorado Wealth Management.

Value investing

James Picerno analyzes recent trends, concluding that any rebound in value investing seems to be concentrated in smaller-cap stocks.

Personal Finance

Gil Weinreich has expanded his excellent series for financial advisers (and serious individual investors) to include some podcasts. This week I especially enjoyed his timely post, An Intriguing Investment Recommendation. He expands on Rob Marstrand’s suggestion about investing in South Korean stocks. He presents a nice account of the tension in 2017 and the current improving relations. It is an object lesson in why it is often profitable, but very risky, to buy at times of maximum stress. Patience may lead to a better balance between the two.

Abnormal Returns is always worth reading, with many links on an array of interesting topics. Wednesday the focus is on personal finance. There are always several good choices. My favorite this week is a Bloomberg story (Katherine Chiglinsky and Ben Steverman) on annuities. A key sentence, quoted from a financial adviser: “Historically, insurance products have been sold and not bought.” The commission structure and different regulations for insurance agents have given these products a bad name, even though it may be appropriate for some.

Watch out for

Elite dividend stocks? Barron’s notes that the yield sometimes comes at the cost of a lower stock price. There has been extra pressure on some with the highest yields. The article has a good analysis of what to look for.

Pacific Gas and Electric (PCG). Hale Stewart describes the company’s problems related to last fall’s wildfires. He notes that the risk remains very real.

Final Thoughts

Finding attractive stocks is easier when you have the demographic, political, and economic winds at your back. While I certainly do not have all the answers about the impact of Trump policy initiatives, there is now some clarity. Focusing on price alone is a serious but common mistake.

I’m more worried about:

• Iran. It appears that the European allies may split with the US. The chance for retaliation is higher. Most experts question whether bilateral negotiations are possible.

• Deterioration in the tariff and trade talks. The high-level meetings have produced no progress on an issue of great economic significance. The market rates this as a bigger threat than do economic analysts. I agree with the market.

I’m less worried about:

• North Korea. The upcoming Summit provides an attractive opportunity. Perhaps the time is finally right.
• Technical market concerns. Those watching charts got some relief last week.