Weighing the Week Ahead: Have the Odds Improved for a Market-Friendly Policy Agenda?

We have a normal data calendar. Central to stock market prospects is the resolution of several key policy issues. The possible outcomes have a wide range of market impacts, from fear to a major boost in corporate earnings. The debt limit/Harvey aid deal between President Trump and Democrats was a surprise to most. Still digesting the implications, the punditry will be wondering:

Have the odds improved for a market-friendly policy agenda?

Last Week Recap

My expectation that of a focus on what might go wrong was partly correct. Then the hurricane news and political reactions became the lead stories. There was little market-moving data.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short via Jill Mislinski. The most notable feature is the narrow range. The supposed “delayed reaction” to the N. Korean H-bomb story was responsible for the Tuesday dip.

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read the entire post for several more charts providing long-term perspective, including the size and frequency of drawdowns.

 

The Silver Bullet

As I indicated recently I am moving the Silver Bullet award to a standalone feature, rather than an item in WTWA. I hope that readers and past winners, listed here, will help me in giving special recognition to those who help to keep data honest. As always, nominations are welcome!

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!

There was little economic news, but it was generally positive. The negatives were not very significant.

The Good

  • Wholesale inventories increased 0.6% more than the expected gain of 0.4%. This is a positive for GDP, assuming that inventory restocking is needed.
  • China economic growth looks better, if one believes in Dr. Copper.
  • Non-farm productivity increased 1.5% compared to 0.9% last month.
  • Debt ceiling deal avoids a government shutdown, so it is basically market-friendly. The full story is more complicated.
  • ISM non-manufacturing recorded 55.3, up from 53.9 in July, and in line with most expectations. (Bespoke)

  • Job gains better than thought. The preliminary benchmark revision shows that the net job gains for the year ending in March was 95,000 more than expected. This report is important as a check on the aggressive spinning done on every “employment Friday.” (BLS)
  • Overall global growth continues. Dr. Ed Yardeni has a good analysis with some interesting charts and explanations. Here is a key quote and a chart example.

    The global economy is running on all six cylinders. It may not be a global synchronized boom, but it is the most synchronized expansion of economic activity that the global economy has had since the recovery from the 2008/2009 recession.

The Bad

  • Harvey could imply more mortgage delinquencies. There could be as many as 300K new delinquencies and 160K more that are past due. (Calculated Risk)
  • Factory orders declined 3.3% versus last month’s gain of 3.0%. A decline of 3.2% was expected.
  • Jobless claims spiked. This was the expected Harvey effect. Jill Mislinski’s chart shows the effect clearly.


 

The Ugly

Irma. Not just another hurricane. The entire state of Florida in the path. Modern modeling and forecasting has helped in evacuating seven million people. One way of measuring the magnitude is the accumulated cyclone energy (ACE), the total wind energy of the tropical system. USA Today has these amazing comparisons:

Irma generated the most ACE (44.2 units) by a tropical cyclone on record in the tropical Atlantic and also the most in a 24-hour period on record, breaking the old record set by Allen (1980).

It also generated more ACE than the first eight named storms of this Atlantic hurricane season (Arlene-Harvey) combined.

Harvey. FiveThirtyEight puts the extent of the damage in perspective.


Equifax. Not only was the confidential information of 143 million people exposed, but the notification was not made for more than a month. Meanwhile, three top executives sold stock before the announcement. Here is a discussion of what might happen and what you can do. There oughta be a law…..but there really isn’t.

Noteworthy

America’s most important trading partners.


 

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

The Calendar

We have a normal economic calendar. Most important is retail sales (August). The only July data of real interest is the JOLTS report, which the Fed uses to analyze tightness in the labor market.

Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.


Next Week’s Theme

Only three weeks ago we were wondering whether a market-friendly policy agenda was in peril. Things can change quickly in the current political climate. The deal between President Trump and the Democrats came late in the week. Avoiding a US credit downgrade is a big threat. A government shutdown would also be a market negative. By contrast, tax reform could provide a major boost, perhaps as much as 8% in expected S&P 500 earnings.

Most of what you see or read on this story will be highly political, perhaps with a soap opera quality. That is not our purpose! Buried beneath the popular discussions is a serious question for investors:

Have the odds improved for a market-friendly policy agenda?

It is early in the discussion, but here are the key viewpoints:

  1. This was an impulsive decision – a reaction to lack of GOP help on his agenda. (The Hill)
  2. The decision has no implications for future bipartisanship. The House vote was 316-90, but all of the Nay votes were Republicans.
  3. The decision just postpones the key issues. Nothing has been solved.
  4. While the circumstances were unusual, it does show that bipartisan action is possible when needed.

As usual, I’ll have more in my Final Thought, emphasizing my own conclusions.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

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


 

Notes on changes:

We have added a distinction between the technical appeal of the market on a short-term (two months or so) and a long-term basis. The mildly bearish interpretation does not imply a full exit from trading. It is a warning that conditions are not as attractive.

The nine-month recession probabilty from the C-Score has moved from <10% to <15%.

The Featured Sources:

 

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

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

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

Georg Vrba: Business cycle indicator and market timing tools. It is a good time to show the chart with the business cycle indicator.

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

 

Guest Sources

New Deal Democrat raises some concern about what he groups as “consumer long-leading indicators.” He notes that several of these are somewhat off their peaks – something to watch.

Mark Hulbert observes that the widely-followed Shiller CAPE indicator is about to turn less bearish. It will not require any decrease in market price nor an increase in earnings. The earnings decline from the Great Recession is about to drop out of the calculation. Most people do not understand exactly how this measure is determined, so this will be a surprise as the CAPE ratio declines by 10% over two years.

Scott Grannis also notes (A Better PE Ratio) that other valuation models show a very different picture.

 

Insight for Traders

We have not quit our discussion of trading ideas. The weekly Stock Exchange column is bigger and better than ever. We combine links to trading articles, topical themes, and ideas from our trading models. This week’s post covered the danger in trying to win every trade. Blue Harbinger has taken the lead role on this post, using information from me and from the models. He is doing a great job.

Insight for Investors

Investors should have a long-term horizon. They can often exploit trading volatility!

Best of the Week

If I had to pick a single most important source for investors to read this week it would be this post from Farnam Street: The Difference Between Amateurs and Professionals. The estimated reading time is two minutes, but I recommend that you linger a bit. Nearly every point is worth pondering. The summary captures the basic idea:

There are a host of other differences, but they can effectively be boiled down to two things: fear and reality.

Amateurs believe that the world should work the way they want it to. Professionals realize that they have to work with the world as they find it. Amateurs are scared — scared to be vulnerable and honest with themselves. Professionals feel like they are capable of handling almost anything.

Luck aside, which approach do you think is going to yield better results?

 

This post is loaded with great ideas to help in analyzing your own investment process.

 

Stock Ideas

 

Our ideas this week have a focus on yield, although the methodology differs.

Chuck Carnevale once again combines an interesting stock idea –Smuckers (SJM) with a lesson on how to perform your own analysis. Of special interest is his discussion of dividends versus retained earnings. Consider that some companies pay dividends but do not diminish their power to grow and execute. Others believe that retaining capital assists growth.

Philip Van Doorn recommends a look at the worst performing of the dividend aristocrats. Check out his list, which includes a few names that we hold.

Simply Safe Dividends notes that Crown Castle (CCI) is the highest-yielding stock held by Bill Gates. I would not use that as my key selection criterion, but it is an interesting idea. He also recommends a look at Chubb (CB).

Contrarian tech stock picks from Lee Jackson’s screen. These are pretty aggressive.

Blue Harbinger has a first-rate analysis, comparing two popular REITs — Ventas (VTR) and Welltower (HCN).

 

Personal Finance

 

Seeking Alpha Senior Editor Gil Weinreich has an interesting topic every day. His own commentary adds insight and ties together key current articles. This week, among several good posts, he has one that shows special value both for advisors and investors. His theme is A Conservative Path to Retirement Investing and he highlights Adam Grossman’s solid and practical analysis of some key life decisions: Job changing, a big investment decision, or downsizing your home. What I especially like about Gil’s series is his interaction with readers. The post stimulated a lot of comments that were worth following up. He did so.

Abnormal Returns has a different topic each day. I read them all, but individual investors might find the Wednesday focus most relevant. There are always many great links, but the story about eliminating (or reducing) usage of your car is particularly interesting. There are also several great retirement stories.

Strategy

David Templeton (HORAN) looks at the trends and reversals in growth and value stocks. The analysis is interesting for those heavily invested in dividend stocks.

A solid investment perspective requires a sound foundation. That is what I do each week with our Indicator Snapshot. Some (including a nearby critic) have suggested that I might possibly, on occasion, be a little verbose. (Moi??) Here is a valuable alternative source.

Eddy Elfenbein has one of his typical market assessments – both clear and wise.

We’re constantly told that it’s a reckless bubble that’s all about to crash. Or it’s all due to manipulation from the Fed, and it’s all about to crash. Please. Predicting that the world is about to end is one of the favorite pastimes on Wall Street. Still, the bull marches on. In fact, this year may turn out to be the lowest year on record for the stock market’s volatility.

If there’s a golden rule for long-term investing, it’s that betting on disaster is always overpriced, and betting on “it’ll all work itself out” is always a bargain.

 

Watch out for….

 

Brian Gilmartin takes a careful look at Coach (COH) and the expected synergies from the Kate Spade (KATE) acquisition. This is a great example of how to use earnings in your stock analysis.

Dividend Sensei warns about Medical Properties Trust (MPW), preferring Omega Health Systems (OHI). So do we.

Final Thoughts

 

Has the political environment improved? Clearly it has. Important legislation was passed that many market participants thought unlikely just a few days ago. These same critics will now have two objections:

  1. The plan is short on specifics;
  2. It only delays the questions.

Those viewpoints demonstrate little understanding of the US political process. Compromise always takes more time than expected, is un-liked by everyone, and never begins with specifics.

The Trump/Democrat deal changes everything. No one knows for sure what the possible new alignments might be. We only know that they could not be worse than the gridlock we had.

 

What worries me…

  • The lack of progress on the North Korean situation and related issues with China. While I do not expect a shooting war, the topic of trade sanctions against North Korea’s partners is a danger. This requires careful monitoring.
  • Wasting the opportunity to shake up existing Washington alliances. Most of the needed policies require bipartisan cooperation between moderates.

…and what doesn’t

  • Market valuation. Some day there will be a reconsideration of the methods that have frightened so many for so long. A continuing focus on growth in earnings expectations has worked well.
  • A recession. We are more likely (finally) to have a stronger rebound rather than a recession.

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