We have an important calendar with employment and housing news. Some important market worries have been avoided, at least for a time. What is behind the rebound in stocks. Trying to explain the reasons for changed market perceptions is a wonderful topic for pundits. Anyone can play since no credentials or expertise are required. Everyone can have an opinion. There is no way to determine who is right. I expect many to be asking: What assumptions are baked into current market prices?

Last Week Recap

In my last edition of WTWA (two weeks ago) I questioned whether those who had inferred economic disaster from December’s stock decline now had a different viewpoint. That was a good guess. The daily commentary, while still featuring recession stories, has taken note of the new market mood. On to the next worry.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. This week I am featuring Jill Mislinski. She includes a lot of relevant information in a single picture – worth more than a thousand words. Read the full post for more great charts and background analysis.

There was a lot of news last week, but stocks gained only 0.4% and the trading range was only 1.4%. You can see volatility comparisons in our Quant Corner (below).

Noteworthy

Generation Z is entering the workforce. Visual Capitalist has its customary comprehensive infographic, which you can only appreciate by seeing it in its entirety. Here is a very small part.

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.

When relevant, I include expectations (E) and the prior reading (P).

New Deal Democrat’s high frequency indicators are an important part of our regular research. This week’s update notes that short-term indicators remain negative while long-term and coincident indicators remain neutral. It will take another week before all effects upon data from the government shutdown are gone.

The Good

• Powell Testimony did not provide much fresh news but seemed to satisfy the markets. Tim Duy analyzes the data preceding the testimony concluding that Fed patience is justified.
• Q419 GDP registered 2.6% beating expectations of 2.3%. Eddy Elfenbein looks at growth trends for past decades, with results that would surprise many. See Scott Grannis, who emphasizes that the economy is barely at the overall trend rate of growth.

• Building permits were 1326K (SAAR) beating expectations of 1285K.
• Consumer confidence from the Conference Board clocked in at 131.4 beating expectations of 125.0 and P 121.7.
• Personal income grew 1.0% in December, beating estimates and the prior reading, both 0.3%. Jill Mislinski looks at the real disposable income per capita, arguably a more meaningful measure.

• Core PCE of 0.2% was higher than the expected 0.1%, but remains in the Fed’s desired range.

The Bad

• Initial jobless claims rose to 225K, slightly worse than expectations of 221K and the prior of 217K. New Deal Democrat has some warning levels for claims which have not yet been triggered.

• Personal spending declined 0.5%, worse than expectations for a 0.2% decline and much worse than November’s 0.6% gain.
• ISM manufacturing was 54.2 missing expectations of 56.0 and below January’s 56.6. Get details and color from the ISM site. Their research concludes that this reading, if annualized, corresponds to real GDP growth of 3.3%. Put another way, it is slightly above the long-term trend.
• University of Michigan sentiment declined to 93.8 below expectations of 95.6.
• Rail traffic remains in contraction for the economically intuitive sectors. (Steven Hansen, GEI).

The Ugly

North Korea refusal to denuclearize.

The Calendar

We have a big economic calendar with a focus on employment data and housing. The ISM Non-Manufacturing Index is important and some will try to find meaning in the Fed Beige book.

News on the US/China trade negotiations will remain most important.

Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.

Next Week’s Theme

After the events of the last three months, many are wondering about two different questions:

1. What is the most likely outcome of for several key matters?
2. What outcome is expected, and therefore already factored into current market prices.

Economists say that these outcomes are “discounted” by which they mean already reflected. This is confusing since the ordinary definition implies that the outcomes are ignored. The punditry prefers “baked in,” so they will be asking: What is already baked into current market prices?

This is a wonderful topic since it is important, but strictly a matter of opinion. There is no way to know in advance the aggregated decision of millions of market participants. Here are some key items for dispute, including my guesses about the prevailing market belief. My personal conclusions follow each point in italics.

• Business cycle aging with a recession in the (near) future. Stock prices were at near-recession levels in December. The rebound has changed perceptions a bit, but most seem to view this as temporary. [The belief that the economy and the market are in “late cycle” seems virtually universal. Oppenheimer has a paper suggesting that the cycle could last five more years. In fact, no one really knows. The best we can do is to conclude that a recession is unlikely in the next year. A year from now we might well conclude the same. We experienced a sharp and serious decline in 2008, and the recovery has been slow and gradual].
• The Fed has reversed course and further rate increases are on hold. This could change rapidly with signs of economic strength. [The Fed reversal, especially about the balance sheet, was not as dramatic as it seems to many. The Fed sees a stronger economy, so higher rates will eventually come. This seems unlikely until the ten-year note yield has increased reflecting higher rates in Europe and more concern about inflation].
• The Fed has little ammunition to fight a new recession. [This depends upon when a recession might occur. Fed participants have been emphasizing an array of tools. More importantly, those who harp on this point are not really focused on stock and bond market results over the next year or so].
• The treaty to replace NAFTA will face Democratic opposition and an uncertain future. [This is very important and getting much less attention than it deserves. There will be some bargaining involved, but I expect it to be passed fairly soon in the US.]
• “Medicare for all” is a major threat to any hope of a balanced budget. [It would certainly be a costly program requiring a new source of funding. This does not have any chance of passing in the next two years and will probably not even get to the House floor. The health insurance stocks over-reacted to this issue, which will be relevant in the 2020 election].
• A US/China trade agreement is expected to be reached soon. [I expect an agreement soon, but I don’t think it is reflected in current prices.]

I’ll add a bit to my own conclusions in today’s Final Thought.

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 and long-term technical conditions are back at the most favorable level. Our fundamental indicators have remained bullish throughout the December decline and rebound.

The Featured Sources:

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

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

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

Georg Vrba: Business cycle indicator and market timing tools. The BCI does not signal a recession.

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

Guest Commentary

James Picerno has a nice post noting the strength of the small-cap value factor in YTD results. The full analysis is quite interesting and does not get enough attention.

Insight for Traders

Check out our weekly “Stock Exchange”. We combine links to important posts about trading, themes of current interest, and ideas from our trading models. Last week our trading models have edged back into the market. Conditions have improved but are not yet at an “all clear” point. Please note that this is not a short-term bullish or bearish call. It reflects our research on which environment provides the best potential for our own trading systems. Sharp “V” bottoms are a challenge for any system, and the recent period has set records on that front.

This week we explored the question of time frame – momentum versus fundamentals. To this end we focused on a recent model pick, Realty Income (O). In addition to our discussion of the new model ideas we published rankings from Oscar and Felix, featuring the Russell 1000. Pulling this altogether was our regular editor, Blue Harbinger.

Insight for Investors

Investors should embrace volatility. They should join my delight in a well-documented list of worries. As the worries (shutdown, Fed policy, trade) are addressed or even resolved, the investor who looks beyond the obvious can collect handsomely.

Best of the Week

If I had to recommend a single, must-read article for this week, it would be Dividend Sensei’s analysis of The Best Dividend Stocks to Buy Ahead of A Trade Deal. The article provides a complete description of methods, with strong arguments for each. The reader can also see the key sources the author uses. There are plenty of stock ideas including popular key categories:

• High yield (4+% yield)
• Fast dividend growth
• Dividend Aristocrats
• Dividend Kings
• My Bear Market Buy List (my master watchlist of quality low-risk dividend stocks worth owning)

This is a timely and informative article, loaded with good ideas.

Stock Ideas

Interested in Energy?

Chuck Carnevale finds 16 dividend income opportunities in the energy minerals sector.

Kirk Spano highlights a “dirty dozen oil stocks for 2019.” Many will find the list of top Permian oil producers to be especially interesting.

Andrew Hecht looks at natural gas trends and analyzes the rebound in Encana (ECA).

How about Hawaiian Airlines (HA)? Two very different methods provide contrasting answers.

Maybe, given the 30% decline in the last six months (D.M. Martins).

Yes, says Peter F. Way.

Thinking about biotech?

Join me in following Bhavneesh Sharma coverage of these stocks. His post on Alector (ALEC), a company fighting neuroinflammation in neurogenerative diseases is a good example of his work.

Andrew Bary (Barron’s) likes Celgene (CELG) even in the face of opposition to the Bristol-Myers deal. [Jeff – I do too.]

Big Pharma is “diving into gene therapy” says Barron’s. The story covers the key companies involved and includes this explanatory chart.

Marc Gerstein is scouting for oversold stocks in a market that has already rallied.

Personal Finance

Gil Weinreich’s Asset Allocation Daily is consistently both interesting and informative. Each week he highlights stories of interest for both advisers and investors. This week I especially enjoyed his post about the poor U.S. ranking in overall health, #35 out of 169. First and second were Spain and Italy. Read the full post for Gil’s analysis, which emphasizes the financial impacts of poor health. Cuba is #30?

Abnormal Returns is an important daily source for all of us following investment news. I read it daily, finding many good ideas. His Wednesday personal finance theme is of special interest for investors. Among the usual collection of excellent choices, I especially liked Castlebar’s discussion of simplicity in your finances. Don’t “confuse complicated with better.” Also useful is Mia Taylor’s discussion of Money and Marriage.

Special retirement advice for single women. (Barron’s).

Watch out for…

Wendy’s (WEN). Good Execution, But Lacking Catalysts concludes D.M. Martins Research.

IBM versus Microsoft (MSFT). Dividend Sensei sees a clear winner.

Final Thought

I placed special emphasis on investment ideas this week. My indicators identify this as a good time to increase one’s allocation to well-chosen stocks. This is especially so in some key under-valued sectors like non-FAANG technology, financials, biotech, and cyclicals. David Templeton (HORAN) describes the recent improvement of cyclical stocks relative to defensive names. If this is a sign of a stronger economy, it is a good trend to play.

The potential resolution of trade wars would also be a major positive on key fronts of earnings, extending the economic cycle, and relieving growth concerns around the world.

N.B. This does not require an outcome that resolves every point of contention – just one that stops the pain. Andrew Hecht notes that “a trade agreement will ignite the global economy.” One candidate is U.S. Steel (X) which has been hit by tariffs and retaliation.

There are plenty of other companies that are poised for a big rebound.

Trade issues remain the biggest weight on current stock prices.

I’m more worried about:

• The India-Pakistan conflict.
• North Korea

I’m less worried about

• US/China trade matters.