Dow Jones: 24103 YTD -1.96% S&P 500: 2640 YTD - …

Dow Jones: 24103 YTD -1.96% S&P 500: 2640 YTD -0.76% NASDAQ: 7063 YTD +2.59%

Weekly Market Insights

April 2, 2018

Something for Everyone

The equity markets closed the week on an up note, but the quarter ended disappointingly down. Rising interest rates, continued tariff tit-for-tat, the possibility of a trade war, White House personnel shake-ups, and the President turning his guns on Mexico accusing them of being lax in fighting drug traffic and illegal immigrants traveling through Mexico into the United States. The biggest signal for market participants appears to be a return of volatility. All of these frighten investors. Interestingly, the economic news points to more growth and increased earnings, which are normally positive for equity markets. All these moving parts make it difficult for investors to have any sense of certainty about the future and as we know, markets hate uncertainty. This week we try to isolate some of these factors to see if there is a consistent theme, either bullish or bearish, that we can ferret out.

We do not believe the world is about to enter a trade war. As we wrote last week, it would be far too damaging for all concerned. We are reasonably confident that some agreement will come out of the NAFTA negotiations. A nagging concern is the President's tweets about Mexico. Every time the President threatens Mexico, even if it is only a bargaining maneuver, he gives more ammunition to the populist candidate for the presidency of Mexico, Andres Manuel Lopez Obrador, who has consistently spoken out against NAFTA. The tax cuts have clearly been appreciated by taxpayers, but it is not clear that the corporate part is having the promised effect. At least for the time being, most of the increased earnings and repatriated earnings are going to stock buy backs, increased dividends and mergers. Yes, there certainly have been some high profile bonuses paid out by companies and investments made, but they are not large enough to be meaningful. Increased dividends will work their way through the system and positively affect the economy, but this is a slow process and has large scale leakages. Leakages means that if dividends increase by $100,000.00, only a percentage finally is spent in the economy. Mergers and acquisitions behave almost in contrast to what was hoped for. Mergers and acquisitions do work toward greater efficiency, but that often means the same amount of goods are produced with less labor. If the program was to produce jobs, it won't work as hoped.

All this seems a bit bearish but when analyzing economic releases and most economic forecasts, that does not seem to be the case. There is a positive bias.

Inflation, although rising a bit, remains under control, employment and wage growth continue to move higher and, as one would expect, personal consumption expenditures are rising. None of these statistics are increasing at a rate that would indicate the economy is going to overheat and cause the Federal Reserve to aggressively increase rates. All these statistics are telling us what happened to the economy in the past. What we need to know, of course, is what will occur in the future. The best we can do is look at a sampling of some of the world's most acute economic forecasters. Happily, the March issue of the National Association for Business Economics, Quarterly Outlook,1 has just been issued and addresses this issue. The forecast for the remainder of 2018 is positive. The forecasters are looking for 2018 GDP to come in at 2.9%, consumer prices to rise by 2%, precisely the Federal Reserve's target, which has implications for moderate increases in inflation. Job and wage growth will continue, albeit at a moderate pace, and both long and short interest rates will rise. The Fed Funds rate is estimated to be 2.125% and the ten year Treasury bond will yield 3.16%. This is not a forecast that should frighten investors, but should instill confidence.

___________________________ 1 I am a member.

Dow Jones: 24103 YTD -1.96% S&P 500: 2640 YTD -0.76% NASDAQ: 7063 YTD +2.59%

Weekly Market Insights

April 2, 2018

As we have warned in the past, forecasts can change quickly and dramatically. Analysts are dealing with incomplete and imperfect information. But they are well worth paying attention to. "What cannot be totally known ought not to be totally neglected; for the knowledge of a part is better than the ignorance of the whole".2

___________________________ 2 Abu-Fida,1321AD, Alexander Bevilacqua, Harvard University Press, Feb. 2018

- Michael Olin Clark moclark@

The Week Ahead: MONDAY: U.S. Markit US Manufacturing PMI expected at 55.7; U.S. Construction Spending m/m expected at 0.40% TUESDAY: U.S. Wards Total Vehicle Sales expected at 16.90m; EC Markit Eurozone Manufacturing PMI expected at 56.6 Germany Retail Sales m/m expected at 0.70% WEDNESDAY: U.S. ADP Employment Change expected at 205k; U.S. ISM Non-Manf. Composite expected at 59; U.S. Factory Orders expected at 1.70% THURSDAY: EC Markit Eurozone Services PMI expected at 55; EC Retail Sales m/m expected at 0.60%; U.S. Trade Balance expected at -$56.5b FRIDAY: U.S. Change in Nonfarm Payrolls expected at 189k; U.S. Unemployment Rate expected at 4.00%; Canada Unemployment Rate expected at 5.80%

The views expressed are subject to change. Any data cited have been obtained from sources believed to be reliable. The accuracy and completeness of data cannot be guaranteed. Past performance is no guarantee of future results.

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