“There are no friends in Washington, only enemies and accomplices” and Donald Trump is learning this on the job, the hard way, as BCA recently remarked. Global equity markets absorbed another Washington DC jolt last week on news of possible obstruction of justice by the President of the United States in an ongoing investigation of former National Security Advisor, Michael Flynn. We won’t delve into the merits, or lack thereof, of the newest DC drama but it does seem with each passing day Trump adds to the conviction of those who do not believe he is fit to be the leader of the free world. Sticking to the markets, they (stocks, interest rates, U.S. dollar, credit spreads) had favorably priced in several of the President’s key initiatives including tax reform, infrastructure spending, deregulation, and health care reform. Unfortunately, with a White House in constant damage control mode, the reduced likelihood of accomplishing anything has these markets on a sharper edge.

Weekly Anecdotes:

  • The S&P 500 index on Tuesday marked its 15th session with a move within 0.5%… the longest such streak in about 48 years, according to Dow Jones data. Then Wednesday happened. News of the Comey memo and subsequent investigations led to a 50% spike in equity volatility, but it but it should be noted that volatility remains 35% below long term average levels.
  • The “Trump bump” has turned into a “Trump thump” as markets rethink the likelihood and timing of the reflationary policies that bid risk assets and yields higher after the election. Longer term yields and inflation expectations have fallen precipitously over the past few weeks.
  • Narrow stock market? Top heavy? Bianco Research noted that through May 17, FAANMG stocks accounted for 50% of the S&P 500’s YTD returns but only represent 14% of the index. $500b of the market’s $1t gain in the S&P’s market capitalization went to six stocks. One name (Apple) accounted for 16% of the S&P 500’s return but only accounts for 3.72% of the index. Only the tech bubble in 1999/2000 saw more top heavy/narrow gains.
  • A FactSet look inside Q1 earnings data highlighted impacts of soft dollar and firming overseas growth. Companies that generated more than 50% of sales inside the U.S., the blended earnings growth rate is 9.9%. Companies that generate less than 50% of sales inside the U.S., the blended earnings growth rate is 20.9%. The same skew applies to sales growth, 7.1% versus 9.4%.
  • Yesterday, the Bloomberg USD Index closed at its lowest level since the election, having retraced almost the entirety of the massive gains it saw since then.
  • Washington headlines gave investors another excuse to not like equities. According to the weekly AAII survey, bullish sentiment dropped from 32.73% down to 23.85%. That is the largest one-week decline since July 2015 and takes bullish sentiment down to its lowest level since last November. Bullish sentiment has now been below 50% for a record 124 straight weeks.

Economic Updates:

  • Japanese Q1 GDP growth surprised on the upside, registering 2.2%. Here in the U.S., the Atlanta Fed GDPNow model is forecasting a rebound in the second quarter to a 4.1% rate. The NY Fed Nowcast is predicting 1.9%.
  • Housing starts grew 1.5% Yr/Yr, missing estimates due to weakness in the multi-family sector. Despite an eight year recovery in housing market, starts are only now just at levels typical at depths of prior recessions, not at the peak of an expansion.
  • Last week’s jobless claims of 232k was the second lowest weekly print of the expansion and the 115th straight week where claims were below 300K. For the current week of the year, this is the lowest print since 1973, and it is more than 100K below the average for the current week of the year dating back to 2000 (318.5K). The four-week moving average is at a multi-decade low which, given the size of the economy in 1980 relative to 2017 is even more remarkable.