Today we bring forward the witticism of Lord Dundreary’s conundrum as he mused, “the Cincinnati Convention to control the Democratic party would be the tail wagging the dog.” This appears certainly true with the state of Washington gridlock today. Voters high hopes for a break from the seven years of dysfunction were clearly misguided. Currently we are left with a Democratic party which morphed into the “party of NO”. Onto the other side of the aisle which holds majorities in both houses along with the White House we find a house divided held captive by a small but ultimately powerful faction, the Freedom Caucus. This band of forty recognizing the stranglehold they wield appears to be taking an all or nothing stance on all issues presented to date on ideological lines. They birthed this stance seven years ago under the prior administration. The only hope for progress needs to come from this groups transformation from obstructionists to negotiators. Absent this move to reasonableness the new President’s agenda, further market gains and America’s economic recovery prospects are in jeopardy. There is too much at stake. Luckily, legislators are loathe to hit the mid-term elections forced to explain to constituents their inability to lead and accomplish any of the trifecta they were charged with enacting. We remain guardedly optimistic compromise will prevail eventually. 

Where we are:

Jobs - The job market continues to firm as independent payroll processor ADP recently released their proprietary jobs compilation showing another solid add of +263,000 new jobs. One other independent jobs report released by LinkedIn which has 467 million subscribers along with 128 million monthly active users reflected a very solid +5.6% growth year over year. The granddaddy of reports, the official Non-Farm payroll figure will be released prior to the markets open on Friday by the Bureau of Labor Statistics (BLS) where we look for another strong showing of +220,000 following February’s +235,000. We’ll be scouring the Average Hourly Earnings component along with the Average Hourly Workweek for clues to how workers/consumers wallets and purses are faring. Thus far Very Good.

ISM Manufacturing (ISMM). ISMM dipped -.5% to +57.2% down modestly from February’s 2 ½ year high hurdle. There was a bit of softness hitting a few internals with New Orders -.6% to a still robust +64.5%. The Production Index -5.3% to a still comfortable +57.6% and Imports off -.5% to +53.5%.  Areas witnessing an acceleration included the Employment Index +4.7% to +58.9%, Order Backlog +.5% to +57.5% and the New Orders Index +4% to +59%. Overall of the eighteen sectors reporting, seventeen registered growth. Very Good.  

ISM Non-Manufacturing (ISMNM).  ISMNM for March clocked in at +55.2% off February’s +57.6% which still remains firmly above the 50 level signaling continued expansion. There was a bit of squishiness across many of the internals. However, all remains in fairly robust growth territory. Of the eighteen NM industries, fifteen reported growth. Many respondents expressed concerns around healthcare regulations and costs as well as worker shortages but overall remain largely optimistic. Very Good. 

Gross Domestic Product (GDP). The final revision to fourth quarter GDP came in at  +2.1% bringing the 2016 tally to another disappointing close of +2% annualized rate of expansion. A bright spot within data came from corporate earnings which rose +22.3% year over year the best showing in five years.  For all of 2016 earnings rose +4.3%. As we shift to the just closed first quarter's prospects analysts estimates are all over the map from +.9% from a few money center financials to the New York Federal Reserve’s Real Time tracker indicating a +2.9% rate of expansion. Again good news on the corporate side as analysts see first quarter earnings popping +/- 10% which would justify current market levels while leaving room for the market to potentially grinding higher.

National Federation of Independent Business Index (NFIB)- The NFIB Confidence and Optimism Index dipped -.6% to +105.3% while remaining at one of the highest levels in 43 years and the third consecutive reading above 105. Chief Economist Bill Dunkelberg noted “optimism remains elevated while growth is a problem due to restrictive government policies”. As we know the President has staked easing over-regulation as a cornerstone of his policy agenda so, help is on the way. Further Mr. Dunkelberg states, “many small businesses are being squeezed by this historically tight labor market” which we also heard from respondents to the ISMNM. Problems but solvable on regulatory burdens while the tightness in labor suggests a strengthening economy. Good News. 

Leading Economic Indicators(LEI). LEI increased in February to the highest level in over a decade adding +.6% following up on January’s +.6% rise.  Nine of the ten components contributed to the monthly gains. The LEI strength points towards continued economic expansion out through the next quarter. Good News.

Where We Are Going:

The market sits at levels that appear fairly valued awaiting the catalyst to define the direction of the next move, higher, lower or sideways. Obviously, the hard data such as home sales, corporate profitability, and jobs suggests growth is on solid footing and gaining traction. We also factor in the soft data such as consumer confidence and business optimism as we formulate our thesis for better times ahead. The fly in the ointment yields our attention to Washington. Market participants were lead to believe tax reform, healthcare overhaul along with $1 trillion in infrastructure spending were a shoo-in.  We’ve since come to realize these three pro-growth strategies are questionable for 2017 if at all. A pretty big fly. We believe progress and compromise will rule the day giving investors a more modest healthcare bill and business tax cuts later in 2017 along with an infrastructure spending plan tied to that tax bill to gain Democratic support. We also would be lax in not noting the powerful steps taken by President Trump’s executive orders repealing onerous regulations with more to come. These should not be overlooked as these savings are significant estimated by business leaders to shave $50 to $100 billion in spending. This is a huge (bigly) story as corporate funds are shifted from compliance overhead and banks over-reserving towards growth initiatives. These regulatory rollbacks free up monies for banks to lend which can lead to increased investment in new plants, additional hires along with unleashing entrepreneurial spirits leading to business establishment.  All pro-growth and very powerful.  In the short run, markets should continue to experience dicey trading as we shift our views to Capitol Hill and follow the moves and commentary from Congressional leaders. Investors should remain wary of the rhetoric spewed and ignore some of the noise as buying into the narrative that gridlock prevails and nothing gets done, well that dog just don’t hunt.​

For now we maintain our aggressive posture to the market looking to add to positions on any weakness.   

Thank you again for your continued confidence in this very challenging investment environment.