Theodore Roosevelt once was quoted, “In any moment of decision the best thing you can do is the right thing, the next best thing is the wrong thing, the worst thing you can do is nothing”. Within this year's marathon election process we can at least agree neither candidate has taken the last option. Both candidates seem quite at ease taking option #2. Whether it is the Clinton’s seemingly tireless attempts at enriching themselves and the Clinton Foundation or to what’s being alleged as Trump’s grope-gate scandalous attacks on women. We investors and market participants are plagued daily with the questions, “How did we get here?”, “What did we do to deserve this?”. The good news is the race is coming to an end and we American’s proved we can weather near about any storm and this ones been a doozey. Once tomorrow passes, we should have some certainty surrounding the leadership of this great country for another four years. With that investors will want to return focus to the fundamentals so, let’s see where we’re at.
Gross Domestic Product-GDP. The first reading or estimate for third quarter GDP came in at a +2.9% rate of expansion. Growth was driven by continued strong consumer demand up +2.1%. Business spending also spruced up the headline figure where we witnessed a restocking of inventories in anticipation of a healthy holiday season. Looking forward to the fourth quarters early estimates are tracking right around the +3%-+3.5% rate of expansion. This rates a good not great when considering when the final growth for 2016 figures are tallied.
Employment. This past Friday the Labor Department released the monthly jobs figures better known as the Non-Farm Payroll figures. This was a mixed bag to be sure. The first reading showed the creation of +161,000. This was below estimates coming into the day which ranged around the +175,000-+190,000. This initial reading is subject to revision as the prior two months figures were as well. September’s reading was revised up +35,000 to +191,000 from +156,000 and August’s figures tacked on an additional +9,000 to +176,000. These revisions takes the three month average to +176,000. The good news below the headline lies in the average hourly earnings which spiked +2.8%. This is very good news as many labor force participants have felt left behind. Seeing some of this wealth trickle down to the lower more economically sensitive groups is very positive going forward for sentiment and consumer spending. All in all, pretty good.
Leading Economic Indicators-LEI. LEI rose +.2% with exactly half of the indicators remaining in positive territory. The primary drivers were housing, lower unemployment claims and the interest rate spread. This +.2% leads us to conclude we’re in for more of the same, steady if unspectacular growth for the economy over the coming quarters. Another good not great reading.
Homes Sales. Existing homes sales rose smartly last month +3.2%. On a very positive note first time home buyers returned to the market in force accounting for +34% of overall purchases, the best in four years. The median home price rose +5.6% year over year marking the 55th consecutive month of year over year gains. This very strong showing was most likely restrained by a lack of supply or inventory of homes for sale.
ISM Manufacturing Index-ISMM. ISMM rose +.4% to +51.9%. Reading beneath the headline this reading was a mixed bag but generally positive. The Production and Employment Indexes were up +1.8% and +3.2% to +54.6 and +52.9% while the New Orders Index dipped 3% to a still expansionary level of +52.1%. Out of the 18 Manufacturing Industries ten reported growth. Commentary was virtually very bullish:
Chemicals: “domestic business steady with exports turning higher”.
Computers and Electronics: “Very favorable outlook”.
Machinery: “Due to storms and hurricanes business up significantly”.
This commentary suggests the manufacturing sector should see continued strength going forward. Very positive.
Where we’re going:
We pose the question, should we pull a Sarah Palin and “go rogue”. Should we focus on what if’s. What happens if Clinton wins? What if the US and Russian military accidentally engage fire in Syria? What if Brexit doesn’t take place? We could focus primarily on these what if’s or focus on the data. We at GSA are mindful of these potential Black Swans but deal with reality. The reality is there is no denying this election cycle has had a negative impact on the economy. Consumers are worried, be they Democrat or Republican. Corporate purchasing managers have become hesitant to pull the trigger on big ticket items until the elections have concluded. This makes some sense as both candidates have vastly different agendas that may impact corporate tax rates, the regulatory environment and with it spending plans. The early reads are we should have no super majority in DC with a Republican house balancing out a Democratic White House. This outcome while distasteful for many provides for the best investing backdrop. We see a future with no massive budget busting spending bills. No significant spikes in tax rates either as both parties wish lists will be pared, negotiated and the best part neither party will get exactly what it wants. This is called the art of the compromise and benefits us all.
The markets appear to be fairly valued. Looking forward earnings should continue the positive earnings trajectory just launched as political uncertainty fades and consumers become more jolly as they refocus their attention towards the upcoming holiday season. Finally the pent up demand from delayed corporate spending should be released into the wild creating a pretty nice tailwind as we close out the year and head into ’17. This lack of corporate investment has been a drag throughout the recovery. With this anticipated resurgence we see as the catalyst to drive revenues, earnings and equity prices to new highs. The path will be bumpy. The lame duck session still needs to take care of a number of important issues such as finalizing a new budget agreement and the current administrations final attempt at pushing through the Trans Pacific Partnership, Obama’s signature trade deal. Also, the Federal Reserve will still want to finally hike rates a second time by ¼%. Investors’ psyche, temperament and resolve have been tested and have taken a beating this past year. Both candidates took Teddy’s other quote far too literally. Though neither spoke softly they certainly meted out enough pain with that stick. The pain is about to subside and the skies will clear with that we look for market calm to return along with the launching of the Santa Claus rally. This year looks like there will be plenty of presents for all.
For now we remained committed to the market patiently deploying our cash.
Thank you again for your patience in these very challenging markets.
Yours in pursuit of the KWAN!
