The economic calendar is huge, including all of the major reports. The market week, already shortened to four days, may get off to a slow start as many grudgingly return to work. Despite the very active calendar, there is a lot of interest in the frequent geopolitical shifts (and related market volatility). Pundits are starting to wonder whether it is all overdone. They willl be asking:

Should investors just ignore the shifting geopolitical winds?

Last Week Recap

In my last edition of WTWA I suggested that the week lacked a dominant theme. That part was right. I took the occasion to discuss which stocks might benefit from Trump policy changes. While few pundits took up the topic, it was still a useful exercise for me, and I hope for my readers as well.

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, including commentary on volume. Check it out.

The market rose 0.31% with a trading range of only 1.3%. This was even quieter than last week, despite plenty of news. 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.

Personal Note

Mrs. OldProf and I are enjoying a long weekend, but she is reading and playing Words with Friends. I have a little time and some ideas to share.

Thanks to the Intelligent Economist for once again including me among the Top 100 Economics Blogs. Most readers know that my labor of love is fueled by the knowledge that people find the work useful.

Noteworthy

From Visual Capitalist.

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 Good

• The best news was from the FOMC minutes, suggesting extended patience under Chairman Powell.
• Michigan sentiment and jobless claims remain at excellent levels but were slightly below expectations.

The Bad

• Durable goods orders declined 1.7%, reversing the prior month’s gain and slightly worse than expectations.

• Home sales missed expectations. Calculated Risk comments on existing and new home sales.

The Ugly

Over $1 million in student loans? This dentist is one of over 100 such people. Josh Mitchell’s account (WSJ) explains how this can happen.

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

The Calendar

The economic calendar is huge, and the week is short. The most important data is all on the calendar. The employment report will attract the most attention. The ISM index, the Fed’s favorite inflation indicator (core PCE prices), personal income and spending, consumer confidence, auto sales, and pending home sales are all on the schedule. And those are just the big reports. Factor in some late arrivals back on the job on Tuesday, and there is the potential for plenty of action in four days.

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

There is an avalanche of economic news in the shortened week ahead. While this will provide plenty to talk about, I expect many to be asking:

Should investors basically ignore the daily geopolitical news?

• The Pundit-in-Chief commented that the market is getting it wrong every day, mistakenly trying to trade every swing in the news flow.
• Art Cashin observed that traders seem to be learning a pattern. Aggressive statements by world leaders, including the Trump Administration, followed by more moderate policies. Art sees this understanding as part of the recent reduction in volatility.

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

Quant Corner

We follow some regular featured sources and the best 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 improved dramatically. Despite the recent borderline ratings suggesting “bad weather” it was not quite enough to take us 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, as it has in the last few weeks.

A notable feature of the chart is that we recently increased the nine-month recession odds to a chance of 25%. While this is significantly higher than it has been during the long stock 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.

Insight for Traders

Check out our weekly Stock Exchange post. We combine links to important posts about trading, themes of current interest, and ideas from our trading models. This week we discussed the costliest trading mistakes, featuring a very helpful list from Charles Kirk. As usual, we included varying expert opinions and a comparison with our trading models. We also discussed some stock ideas and updated the ratings lists for Felix and Oscar, this week featuring the S&P 400 Midcaps. Blue Harbinger is back from his travels. He resumed his role of editor and ringleader of this information.

While I emphasize trading in the Stock Exchange series, it often has implications for long-term investors. Here are the first five “amateur mistakes” form the Charles Kirk list. There are twenty more, many relevant for investors.

The Most Common Mistakes of Amateurs

1. selling out because of fear

2. putting money to work out of FOMO

3. having ONLY a very short-term focus

4. always trying to hit home runs in very high-risk trades

5. trying to trade the news and especially your political bias

Insight for Investors

Investors should have a long-term horizon. They can often exploit trading volatility.

Best of the Week

If I had to pick a single most important source for investors to read this week it would be The White Coat Investor’s discussion of “extreme” portfolios.

There are certain people in this world with some very….ahem….unique (i.e. extreme) political, economic, and investing viewpoints. Sometimes these people sound VERY smart on their blogs, in comments, or on internet forums. They rattle off all kinds of interesting economic factoids, throw out a lot of fancy acronyms that you’ve never heard of, and suggest that they’re in the know about the future and you are not. What I prefer to do when I run into people like this is to simply ask them what their asset allocation is.

And one of several examples:

Let me give you some examples of portfolios that are being used or recommended by some of these folks:

1/3 Land (not income property, just vacant land)

1/3 Gold (not a gold ETF, not coins, the actual bullion)

1/3 Fine Art (not an art fund, the actual paintings)

Check out the full post for more ideas.

Stock Ideas

Chuck Carnevale discusses his concerns about valuation in many of the leading dividend stocks. This week he features General Mills (GIS) in a new series designed to discover stocks that have corrected to more reasonable levels.

Outlook

Mike Williams presents an excellent summary of recent economic strength and takes note of the gap between reality and headlines.

Stocks dipped 10.2% from their most recent highs during the latest window of chop spanning from January 26 to February 8 of this year.While that was unfolding – the media flooded the idea that liquidity was “drying up.”

The usual scapegoat was the chatter about the Fed’s quantitative tightening, which started during October of last year. Anyone listening for the last five years will note that the bears have been predicting that our next bear market would be driven by the Fed unwinding its QE program.

Yet, that same group told us that the next bear market would be driven by the end of QE as well – which is now three years old.

You could drive a truck through the space between the financial facts and financial headlines.

It all depends on what you want to believe.

Personal Finance

Seeking Alpha Senior Editor Gil Weinreich has expanded his excellent series for financial advisors (and serious individual investors) to include some podcasts. This week I especially enjoyed his thoughtful and kind commentary on the last installment of WTWA. Gil adds his own valuable insights and points to some great posts from other contributors. He also continued his podcast series with his take on behavioral finance questions.

Abnormal Returns is always worth reading, with many links on an array of interesting topics. Wednesday the focus is on personal finance. Among many good choices, I especially appreciated Ben Carlson’s discussion of whether young investors need bonds.

Watch out for…

ETFs sensitive to interest rates. (ETF.com)

Bitcoin fraud (WSJ).

Final Thoughts

This week’s narrative rapidly shifted from concern about inflation and a ten-year note over 3% to questions about deflation. Those who have been citing the likelihood of more Fed rate hikes as a sign of danger were surprised by the FOMC minutes. The Fed has long stated that it would tolerate slightly higher inflation levels for a time, even above the 2% target for PCE prices. This approach (like every other Fed policy) has many critics.

Investors should make decisions based upon what they expect from Fed policy in the near term, not on some theoretical critique from the punditry.

My travels have once again included casual discussions with many individual investors. I always enjoy the opportunity to listen. I ask about their own businesses, their spending and travel plans, their current investment attitude, and their biggest concerns. In general, their own businesses are doing well, and they are enjoying some travel and recreation. A problem with this sort of anecdotal evidence is that I am meeting the people who are traveling, not the ones who are staying home!

The investment concerns are repeated by many:

1. There is so much more volatility in stocks. Isn’t that a sign of trouble?
2. There seem to be new geopolitical issues or disasters every week. Isn’t this a risk for stocks?
3. Everyone talks about the aging bull market. Is that a sign that death is near?

These have all been among my favorite recent topics, but those I am meeting are not among my regular readers. They do not know the following:

1. Volatility is now normal, returning from recent lows. A one percent daily move is the historic average. Volatility is not a predictor of declining stocks. It is a trailing or coincident indicator.
2. Geopolitical questions are difficult to evaluate in this ever-changing landscape. Many issues that are important to us as citizens do not translate into corporate earnings and stock prices.
3. Bull markets do not die of old age, despite the many false narratives we hear. There is no statistical evidence between age and prospects for, say, the next two years. It is not like comparing a young person to an elderly one, no matter how seductive that analogy may seem.

The implication: The wise investor can still benefit from the baseless fears of others.

It is easy to get lost in the noise of the news, distracted from your goals and how to reach them. If that sounds familiar, send for my free paper on the Top Investor Pitfalls. Whether you are trying to preserve wealth or to build your assets, there are some great opportunities right now. If you are having trouble pulling the trigger, organizing your thoughts, or finding attractive stocks, send a note to main at newarc dot com. I have written papers on each of these topics. We will happily send some free resources and provide a consultation if you wish.

Worries? A reader, with some justification, noted that I was switching from more worried to less worried about Korea – and back again – fairly frequently. This is mostly a reflection of reality and the news flow, but it does not have immediate investment relevance. I can’t keep up with it unless I write several times a day. I continue to hope for steps toward peace.

And I especially hope that we can celebrate Memorial Day without deploying more brave forces into combat.