Last week saw most major U.S. equity indices post new highs while interest rates drifted lower for the second week in a row.  The S&P 500’s return thus far in 2017 has been driven largely by technology (23.7%) and healthcare (18.6%) while energy and telecom stocks are both down double digits.  The weak dollar trend continued last week with both the Euro and Yen moving higher versus the U.S. dollar.

Weekly Anecdotes:

  • Bespoke noted last week marked six months since DJT was sworn in as President and the DJIA gain of 9.1% since falls just above the median for all first term Presidents, but significantly above first term GOP Presidents (-0.6%).  Also of interest, since the inauguration, is that the U.S. has lost more than any other country (% of global market cap) – now down to 35%. This reflects economic trajectory, improved international political stability, and a declining USD.
  • BofA global fund flow data suggest caution with the pronounced ‘risk-on’ (equity) fund flows we’ve seen in 2017- given the backdrop of slowing economic data and commodity price weakness.  Flows into Europe of $26b YTD have been particularly strong – likely based on encouraging fundamentals and improved political stability.
  • July 22nd marks the three-year anniversary of WTI crude oil closing high of $107.53.  In a nod to drawbacks of indexing commodities, there has been a significant difference between the front month roll (-74%) and spot price (-57%).  This is because the futures curve has been in contango most of this time. Contango is when future spot prices are greater than the current spot price.
  • The decline in the U.S. dollar has been a notable theme thus far in 2017, currently at a 13-month low.  Emerging markets benefit from a weak dollar as do U.S. companies with a higher percentage of international revenues.  Technology has the second highest percentage of international revenues (44.8%) while utilities, real estate, and telecoms all generate over 95% of their revenues domestically.
  • Citigroup Economic Surprise Indices capture positive economic surprises relative to forecasts.  Emerging markets and Europe are firmly in positive territory but have retraced from multi-year highs in Q1.  The U.S. has recently started to recover from the multi-year lows hit at the end of Q2. In a sign of strength, 16 out of 22 emerging markets are outperforming their 1-year averages from an economic data standpoint.
  • Ecuador, an OPEC member, announced it will begin raising oil production this month, despite the OPEC production cut agreement.  In dire need of money, Ecuador went public with what OPEC members have done ‘privately’ for years – cheating on OPEC production agreements.
  • Stubborn inflation?  Since the Fed established its 2% inflation goal in January 2012, inflation has averaged just 1.3 percent.  The downward trend has been in place for many years – inflation averages for Greenspan, Bernanke, and Yellen have averaged 2.5%, 1.9%, and 1.1% respectively.
  • The GOP health care bill was deemed DOA last week, raising concern of the GOP’s ability to pass significant tax and regulatory reform.
  • The BOJ owns about 71% of all shares in Japan-listed ETFs at the end of June, a significant concern for a functioning free market.
  • Bianco Research noted the Wall Street Journal’s piece, touching on record $2.2t of cash on sidelines, omits adjustments for normal balance sheet growth.  In fact, liquid assets as a percentage of total assets on balance sheets dropped from 56% in 1945 to roughly 10% in 1980 and have remained fairly static ever since.  Debt pay downs and equity buybacks are likely uses of repatriated cash.

Economic Updates:

  • A strong 8.3% rise in June housing starts puts housing market back in the driver’s seat of the U.S. economy.  To the contrary, homebuilder sentiment has declined in three of the past four months. July’s sentiment report missed expectations and was the weakest reading since November.
  • AAII individual investor bullish sentiment survey registered 35.5%.  We’re now at 133 consecutive weeks below 50%, the longest streak on record and a far cry from what we would deem ‘excess enthusiasm’.
  • A decent leading indicator of U.S. capex, the July NY Fed Empire Manufacturing index was a dud.  However, an average of the NY Fed, Philly Fed, and Dallas Fed readings suggest that businesses are likely to add to investment over the coming quarters.