Vince Lombardi put it well when he stated “the difference between a successful person and others is not a lack of strength, not a lack of knowledge but rather a lack of will”. That strong will has cost some investors dearly over the last seven years of this current equity bull market. I’m not referring to retail investors solely I’m also talking about the so called sophisticated investors as well.  Far too many times these experts were blinded to underlying strength in the economy and consumers. They focused on one off blips in data points rather than longer term trends. They reacted to “what if’s” that never materialized i.e., confusing a slow growth environment as signs of another imminent recession or predicting Armageddon resulting from events that actually did occur such as the Brexit vote. These predictions were well covered by the media daily and continuously by every medium. You couldn’t pick up a paper, turn on a tv or power up your web browser without being bombarded by these calls for doom and despair. It’s precisely when you hear these renewed calls for the next market collapse that investors need to do a deep dive into the data and figures to gain a better understanding of events and fundamentals then, act decisively if warranted. So, let’s start with the figures. 

Jobs. The real time reading of the jobs market, weekly unemployment claims remain stubbornly low (good news) having just reported this morning that claims dropped 5,000 to 249,000 tying the lows hit in April and the smallest tally in nearly forty three years. The monthly Non-Farm Payroll figures will be released this Friday. We look for a rebound closer to +200,000 which would be in the range of the three month average gains of +231,000. Good news if Friday’s figure comes in anywhere 170,000-220,000. 

ISM Purchasing Managers Manufacturing Index-PMMI. PMMI was released Monday the reading was a pleasant surprise inching  back into expansion territory +2.1% to +51.5% from August’s +49.4%. Digging into the release we saw the New Orders Index jumped +6% to +55.1%. The Production Index also leapt +3.2% to +52.8%. Lastly the Employment Index improved+1.4% to +49.6%. Summarizing 9 of 18 industries reports increases in New Orders. 10 of 18  industries reported increased production. All in all pretty good, just not great but in line with the weakness in mining and the energy sector regrouping. 

Leading Economic Indicators-LEI. LEI dipped -.2% in August after July’s strong +.5% and June’s +.2%. Now, we could look at the latest reading independently and conclude the economy may begin to roll over or look at the three month moving average +.167% and conclude nothing has really changed yet and continue monitoring for any signs of a shift in trend and growth.  We suggest staying the course and monitoring. Conclusion: not good, but okay and needs watching. 

Consumer Confidence. The Conference Board’s Consumer Confidence Index improved to the best levels since the recession at +104.1 up from August’s +101.8. There is strength across the board here. The Present Situation Index increased +2.2% to +128.5% while the Expectations Index moved to +87.8 up +1.7%. Consumers remain optimistic regarding the labor market. Generally consumers remain positive and look for continued moderate economic expansion. This confidence is key as consumption accounts for over 2/3rds  of economic growth. Very positive.    

Gross Domestic Product-GDP. Third quarter GDP will be released later on this month. Analysts look to a smart rebound from the second quarter reading of +1.4% to a range of +2.7%-+3.25% boosted by improving exports and an end to the destocking of inventories which impacted the first half of the year. The surge should be driving by a healthy consumer, increased spending on the corporate side and a restocking of shelves in anticipation of a solid holiday season. Very good news. 

Where we are going.

Fed speak is abundant and redundant. My advice ignore the day to day Fed blather and focus on the Fed meetings. As GSA has pointed out over and over this Chairman Yellen lead Federal Reserve is traveling the road the Greenspan Fed erred not taking. Chairman Greenspan correctly identified the tech bubble and coined the now famous “Irrational Exuberance”. He then relied on market forces to correct the mispricing of assets. Chairman Yellen’s Fed sensing oncoming market froth harkens hawkish verbiage and that froth, like the head on a fresh poured beer melts away and settles in. Take nothing more from the Feds hawkish (raise rates) or dovish (keep rates at current levels) comments in this current domestic and global growth environment. The low borrowing rates we currently enjoy are not moving aggressively higher anytime soon. Lower for much longer is now the consensus, that is until Chairman Yellen is replaced. This easily translates to higher than most have penciled in for equity prices. 

Let me share one prevailing argument for why the Federal Reserve needs to hike interest rates immediately. Here goes. The Federal Reserve needs to move quickly now so when the next recession arrives they’ll have room to cut or ease rates. HUH! That’s like saying you should put a brace on your ankle today which may restrict movement and possible blood flow because at some point you’re likely to sprain your ankle and want to be prepared. Again, HUH!

The current Fed policy is meant to achieve multiple goals. One not talked about enough is captured in two words, wealth effect. The Federal Reserve starting with Bernanke and carried on by Chair Yellen stated explicitly they wish to inflate asset prices. They look directly at the pricing of stocks, bonds and effects on real estate prices among others to rise. Why you ask?  People’s attitudes are directly correlated to their feeling of safety, security both personal and financial. When people feel financially well off and secure their spending tends to be, no surprise more robust and lavish. Since the US economy is strongly supported by consumer demand and spending this was crucial to successfully pulling the US economy from the brink of tipping from recession to depression. The Fed Chief and most Fed Governors don’t believe their work is completed. Yellen is a principle supporter of erring on the easy money side.  Luckily for the rest of us she’s the current Fed President and the big dog in the room with the loudest bark.

In closing the markets appear to be coiling yet again. This pattern has played out a number of times over 2015 and 2016. Churning for weeks at a time making little progress on either the upside or downside awaiting a catalyst to identify the path of least resistance. That coiling pattern has raised the fear levels at times forcing some weaker hands out of the markets and onto the sidelines. We are at that point again as the market retested newly minted highs only to fail. Selling pressure has picked up pace as we’ve seen in the past. Fears will be resurrected, wills shall be tested. For now we stand pat looking patiently forward to Friday to jump start the market breakout. We’re in the Peyton Manning camp “ just snap the ball already”. 

For now we remained committed to the market patiently deploying our cash.   

Thank you again for your patience in these very challenging markets.