We enter the year with an incoming new administration and renewed optimism, along with many Americans. Contrast that to what greeted President Obama, inheriting a recession and near fatal collapse of the global financial system and economies.
Back in ’2008 it was often riddled with, “what is the difference between a recession and a depression?” There's an old saying--a recession is when your neighbor loses his job...a depression is when you lose yours. Little did we know how much this Great Recession surely would feel like a depression. But, here we are in 2017 and I believe David Bowie captured this period aptly when he belted out, “Time may change me, but I can’t change time”.
To say the least, times are a-changing. Back then we had an academic leading the Federal Reserve named Ben Bernanke. Chair Bernanke turned out to be the modern day Yoda. Wise beyond his years. Bold beyond prediction and savage with his regulatory light saber. In the years immediately following ’'08 the flurry of new regulations came fast and furious from Dodd-Frank to the Affordable Care Act. While well intended and in some cases in dire need hindsight confirms the perils of passing massive and sweeping legislation without details and deliberations in some cases can create headwinds, distrust along with unintended consequences.
Flash forward as we enter in 2017 with promises to re-regulate, clarify and level the playing fields for a pathway to success for both corporations and US citizenry. We are to achieve this through simplified and lower taxes, fairer trade pacts, a better healthcare option, restraining government overreach coupled with a stronger global US presence -- a bold agenda to be sure. President-elect Trump has thus far proven to be unconventional, unpredictable and willing to break ranks with political parties. He’ll need to be the ultimate deal maker to push forward his broad vision for America. The jury has to be out as we await the swearing in and results. However, we have to remain optimistic.
For now, where we’re at:
Jobs. Non-Farm Payrolls, the granddaddy of them all came in this mornings at +156,000. The headline figure was about in line with estimates and overall amounted to a ham on rye. Meaning, nothing too exciting here. The unemployment rate ticked up a tenth to 4.7%. The US workweek remained unchanged at 34.3. If there was a bit of sizzle to this report it rests in the average hourly earnings which moved up nicely +.4%. For all of ’16 earnings improved +2.9%, the best reading since 2009. All in all good, but not great and enough to keep the momentum going in a positive trajectory.
ISM Manufacturing-ISMM. The ISMM ended 2016 on solid footing coming in at +54.7% vs November’s +53.2% up +1.5%. The index was led by the strength in the New Orders Index which jumped +7.2% to +60.2%. Rock solid. The Production Index moved up nicely +4.3% to +60.3%. These were two year highs for both followed by the Employment Index at +53.1% the best showing since July 2015. Of the 18 reporting Industries 11 reported growth in December so clearly a solid showing here.
ISM Non-Manufacturing-ISMNM. The ISMNM (commonly referred to as the services index) continued its strong run with a reading of +57.2. Digging through the data we note again the New Orders Index surging +4.6% to +61.6%. The Prices Index pushed higher +.7% to +57%. Respondents were all generally positive.
Construction: “New business slowed a bit but still growing”
Finance: “Steady with optimism”
Mining: “Very busy end to the fourth quarter”
Transportation and Warehousing: “Distribution of finished goods ahead of last year”.
All in all very positive.
Construction Spending Construction spending hit a ten and a half year high which increased +.9% to $1.18 trillion. This is the best level of confidence and spending since before the recession hit in 2006. Impressively, this release was up a not insignificant +4.1% from Novembers release the prior year.
Monetary Policy. Monetary policy remains highly accommodative as the year closed out. Rates spiked off the lows as represented by the ten year treasury from a low of 1.37% yield to close out at 2.45%. While this doesn’t appear to be a big move, if you’re a bond trader this was a monster shift driven by a shift in sentiment surrounding economic growth and future rate hikes by the Federal Reserve. The Yellen-led Federal Reserve laid bare plans to hike rate three times in 2017. This optimism for higher rates may wane as the reality of the more likely two hikes of .25 basis points or ¼ of 1% each takes root. Still an additional 50 basis points (1/2%) hike to rates would leave policy highly stimulative to future growth and reflect a strengthening US economy.
Where We’re Going
Optimism is the word for the first half of 2017. The shift in DC from the top down has done a one hundred and eighty degree shift from gridlock and obstructionism towards “Time to get back to work”. Businesses and investors appear all aboard and anxious to get started. The CFO Magazine Business Outlook Survey is in a solid uptrend. The Wells Fargo Housing Market Index barometer is in solidly bullish territory and trending higher. Lastly, the National Federation of Independent Business (NFIB) Optimism Index which had remained flat heading into the election then rocketed up to +98.4% immediately after the elections were concluded.
Consumer Confidence also joined the hit parade with the most recent reading of +113.7%. All this warmth and fuzziness gripping business and consumers is welcomed but must be sustained for the markets and economy to continue their respective improvements and that begins in DC. We are cautioned by the Congress getting distracted from the Trump/Ryan Better Way plan and losing the change agent momentum they currently sport.
There are far too many potential external shocks that could derail this rally. We remain wary of how the Trump/Putin relationship develops. There remain elections taking place shortly outside our borders in France and Germany that could have far reaching implications for their respective countries and the Eurozone as a whole. Not to be forgotten, the UK’s Theresa May is a wild card as well. If Prime Minister May is unable to gain consensus for a BREXIT she may resort to snap elections in order to strengthen her party’s position.
Importantly, the Middle East is still en fuego! The US remains engaged in the fight against ISIS in Iraq, Afghanistan, Libya and Yemen while somewhat supportive of rebels in Syria. The US has only begun the process of rebuilding our partnership with Israel and work remains with Egypt along with the ongoing engagement with Iran. The world is a hotbed of activity and we’re wearing toilet paper sandals. One wrong step and we could get second degree burns. A novice diplomat is taking office, albeit one that is skilled in deal making and negotiations. So, undoubtedly there remain some very real risks both domestically and on the global front.
Here at GSA our view is one of optimism. Trump, a novice politician, much like Bill Clinton had done is surrounding himself with very bright experienced people to help navigate the USS America. The combination of lower taxes, responsible regulation, a repatriation of US corporate profits while sprinkling in a bit of stimuli could lead to S&P earnings of $140.00-$145.00. We apply a 17 P/E to come to our twelve month target range of 2380-2465 year-end target or +5.7%-+9.4%. One controversial leader stated, “change will not come if we wait for some other person or some other time. We are the ones we’ve been waiting for. We are the change that we seek.” Not bad, huh. The source of course was outgoing President Obama. In this sense anyway let’s hope incoming President Trump gets his O on.
We remain firmly committed to the markets using any weakness to deploy our cash.
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