How Big a Risk is a Trade or Military Dispute? February 16, 2017

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Earlier this week I began profiling non-political risks to explore when making decisions for your clients and talking with prospects. Here’s number three:

Non-Political Risk #3: Surprise Trade or Military Dispute

Surprisingly, and potentially dangerously, the market has fully embraced Trump’s pro-growth “big three” of tax cuts, infrastructure spending, and deregulation while totally ignoring the hostile trade (and to a lesser degree) military rhetoric—and that selective focus has helped fuel this rally in stocks.

How big a risk is a trade conflict with China?

Part of the reason investors have somewhat ignored the rhetoric is because they assumed that once Trump got into power, the realities of global trade would soften his tone. To a point, that has happened. Last week, Trump embraced the “One China” policy of governance over Taiwan. And, this past weekend visit with Japanese PM Abe came and went with no explicit mention of currency manipulation or unfair trade. But, while those are positives it’d be foolish to think there isn’t a real risk of a trade dispute/war with China.

Originally, the fear was that Trump would instruct the Treasury Department to label China a “currency manipulator” in its semi-annual currency report, due out in late March/early April. That would likely ignite some sort of a trade war as it would place automatic tariffs on Chinese goods. Obviously, that wouldn’t be good for stocks.

Trump appears to have backed away from such a direct confrontation, but as a WSJ article detailed, the administration is looking for a less “in your face” way to punish China for its trade practices (you can read the article if you’re really interested) but basically the strategy is to label currency manipulation an “unfair subsidy,” not just by the Chinese, but by every country. If that’s done, then individual US companies can lobby the Commerce Department to impose du-ties on competitive goods from countries they believe use currency manipulation. It’s basically a less-direct way to put duties/tariffs on Chinese goods.

Here’s the problem: Other countries can retaliate and do the same thing to the US, and cite the Fed’s ultra-low rates as manipulating the US dollar lower.

This will obviously be a fluid situation, but with Peter Navarro as the head of the National Trade Council (remember he wrote the book, Death by China) it’s un-likely that we won’t at least have a trade scare this year with China.

Looking militarily, the only real area of concern right now (well, there are multiple areas of concern, but the most pressing one) is the growing conflict between the US and China regarding their bases in the South China Sea. Trump advisor Bannon is particularly focused on this issue, and military officials have flat-out said that China won’t be allowed to operate a functioning naval or air base on these manufactured islands. Again, this is a low-probability event, but it remains a possibility.

Probability of a disruptive trade war? <30%. While the possibility is there, I’d expect marginal moves to try and correct trade imbalances with China, not all out tariffs or import duties (although I’m sure they will be publicly threatened, which will be negative for sentiment).

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Economic Cheat Sheet: February 13, 2017

Last Week:

There was very little incremental economic data last week, and what reports did come met expectations and importantly did nothing to change the perception that economic activity is legitimately accelerating—a perception that continues to support stocks broadly.

From a domestic data viewpoint, there isn’t a lot to talk about. Jobless claims continued to fall and hit another multi-decade low (a 43-year low), and that’s even more impressive when you consider how much the population has grown since then. Internationally, there was mixed data from China as their foreign exchange reserves dropped below the psychologically important $3 trillion level. While that was ignored by markets this week, China continues to bubble as a potential macro surprise in Q1/early Q2. These foreign currency reserves are a story we need to continue to watch.

But, January Trade Balance was much stronger than expected (exports up 7.9% vs. (E) 3.1%), and that data point early Friday helped alleviate some concern. Still, China’s currency reserves are declining, and authorities are actively trying to pull leverage from their economy and cool growth. More often than not, that leads to some sort of macro-economic growth scare—so just a heads up for the coming months.

Bottom line, economic growth remains an important pillar of this rally, and nothing last week changed that set up, which again was why at worst stocks were flat before the political headlines caused the late-week rally.

This Week:

As we’ve said, two of the biggest risks to the rally outside of Washington remain 1) Lackluster data and 2) A more hawkish Fed. Given those risks, the growth and inflation data this week is important.

Janet Yellen (AP Photo/Jacquelyn Martin)

However, the most important event of the week will be Fed Chair Yellen’s semi-annual Humphrey-Hawkins testimony to Congress, on Tuesday (the Senate) and Wednesday (the House). While she isn’t going to telegraph when the Fed will raise rates, her comments are still important considering the market remains complacent with regards to a Fed rate hike. There is no expectation of a March or May hike, and we continue to think the market is a little too complacent with regards to the potential for a May hike (we admit March seems remote).

Staying on the theme of Fed expectations, the next most important number this week is the January CPI report out Tuesday. The Fed does not believe inflation is accelerating meaningfully (due to the data), but if inflation does pick up pace that will be hawkish and will send yields higher—and most likely stocks lower.

Looking at growth data, Wednesday and Thursday are the key days to watch as we get January Retail Sales (Wed), Empire Manufacturing (Wed), January Industrial Production (Wed) and Feb. Philly Fed (Thursday). Of those four reports, the retail sales number is the most important, because consumer spending has been the engine of growth for the US economy, and it needs to maintain a decent pace because while business investment has picked up, it won’t offset a continued moderation in consumer spending.

The Empire and Philly Fed Indices are the next most important numbers next week, as they will give us the first look at February activity. Since better growth is a key support to this rally, they need to show continued strength. Neither number needs to accelerate meaningfully, but we can’t see much of a retracement, either. Bottom line, strong economic data and benign inflation data (Goldilocks numbers) have been an important support for this market as Washington reverts to the mean (gets more dysfunctional), and that needs to continue if stocks can hold recent gains in the face of confusing political headlines.

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Stock Market Update: January 26, 2017

Here is a “Stock Market Update” from The Sevens Report: Stocks finally moved Tuesday, as the S&P 500 staged a modest rally following good economic data and well received (but not really positive) political headlines. The S&P 500 rose 0.66%.

stock market updateStocks were flat to start Wednesday trade thanks to generally “ok” economic data from Europe (the European and German flash PMIs were light). There were also a lot of earnings reports, but they were the normal gives and takes, and none of the big companies reporting really moved markets beyond their specific sector (JNJ weighed on healthcare, but that’s it).

After the flat open, stocks started moving higher following a strong January flash manufacturing PMI, and the gains accelerated following several political headlines.

First, the Trump/auto company CEOs meeting was uneventful; then Democrats unveiled a $ 1 trillion infrastructure spending bill, and finally the president signed executive orders to reopen negotiations on the Keystone and Dakota Access pipelines. Stocks hit their highs early afternoon, and the S&P 500 made a new fractional all-time high before backing off just a bit into the close.

Stock Market Update: Trading Color

Yesterday was the first big Trump On day in markets since the first few days of 2017, as small caps and cyclicals handily outperformed.

The Russell 2000 rose 1.5%, more than doubling the S&P 500’s performance while cyclical sectors handily outperformed. Banks (KRE), financials (XLF), industrials (XLI) and basic materials (XLB) all rose more than 1%, with the

latter rising nearly 3% on a big DuPont (DD) earnings beat that pushed the Dow higher (they are heavily weighted in XLB, so the strength there was chemicals based, not commodity based).

Outside of DD earnings there weren’t really any big market movers, with the exception of JNJ weighing on the healthcare sector. XLV dropped 0.70% on the JNJ miss, although the weakness was somewhat isolated as the Healthcare Providers ETF (IHF) rose 0.29%.

Most of the remaining SPDRs we track were up about 0.60% (including consumer staples, which traded pretty well), although utilities were only fractionally higher on the rise in bond yields.

Bottom line, none of the political actions mentioned yesterday were surprises, but overall it was a generally business friendly day of headlines from Washington. That, combined with the PMIs, helped stocks rally.


S&P Chart: Strikes New All-Time High

S&P Chart: “A new high” is the oldest confirmation signal of a bull market in technical analysis and the S&P reached a new all-time high yesterday leaving the path of least resistance higher still from here.


Stock Market Update: January 17th, 2017

Stock Market UpdateStock Market Update excerpt from the Sevens Report: Foreign markets were open yesterday, and generally traded lower on consolidation, but overall the weekend was quiet and nothing negative occurred.

Stocks finished last week little changed, as a Friday rally helped recoup losses from earlier in the week. Some of the shine was taken off the “Trump Trade” following a disappointing press conference. The S&P 500 slid 0.10%.

The important price action last week didn’t come until Wednesday, when Trump’s first press conference as president-elect failed to deliver any specifics on timing for tax cuts, infrastructure spending or deregulation. Following the press conference on Wednesday, stocks immediately dropped and turned modestly negative, although buyers stepped in and the markets recovered in the afternoon to close slightly higher.

Then, stocks dropped nearly 1% in early Thursday trade, again on Trump disappointment. But support at 2250 held, and stocks were able to recover most of the day’s losses to finish down slightly (-0.28%).

On Friday, markets rallied thanks to generally “ok” economic data, and following the two resilient performances following the Wednesday/Thursday sell-off. Stocks were higher most of the day, although they gave back some of their gains Friday afternoon to finish slightly higher.

Stock Market Update: Trading Color

Tech and healthcare remain the two surprise star performers of 2017. Tech was driven higher by internet stocks (which have become the recipient of capital inflows again as investors search for value in an extended market) as (ETFs Restricted to Subscribers) our preferred internet ETF, rose more than 1%. Semiconductors also traded well despite a profit warning from TSM.

Healthcare, meanwhile, weathered a surprising negative comment by Trump and still rose last week. Healthcare remains one of our preferred contrarian allocations for 2017 based on too-negative sentiment, valuation and overdone political risk.

Looking at broad trends, the Trump trade sectors took a breather last week as banks rose slightly while energy declined on the fall in oil, and industrials underperformed. However, despite the slight decline in stocks, defensive sectors lagged as utilities and consumer staples finished modestly weaker. We expect that consolidation of the Trump trade to continue until there are hints of policy specifics.

Bigger picture, there was no clear rotation out of defensives and into cyclicals, and sector trading has been more catalyst driven in 2017. From an activity standpoint, volumes have returned to pre-holiday levels and we expect that to continue.

Stock Market Update: Bottom Line

Some shine came off the Trumpenomics rally last week due to his lack of specifics on tax cuts, deregulation and infrastructure spending at his press conference. But as we said in the Report last week, and as the resilient price action confirmed, the market will continue to give Trump/Republicans the benefit of the doubt through most of Q1. As a result, policy disappointment alone will likely not cause a near-term pullback in stocks. However, it is important to realize that the single-biggest medium/longer-term threat to the markets is political disappointment (which could cause a steep pullback in Q2/Q3).

Focusing on the near term, there are two specific reasons that the market is giving the new administration/government leeway. First, economic data was getting better pre-election, and if the data continues to improve, that means that one of the two reasons behind the Q4 rally will remain in place. Second, the market knows Washington is slow, even with one party in power. So, it’ll take something besides lack of policy clarity to cause a near-term pullback in stocks, (some risks to watch there are slowing economic data, more than three Fed rate hikes in 2017, or Chinese trade tensions).

On the flip side, if stocks are to break materially higher, we will have to get specifics on corporate tax cuts in the coming weeks. The other two pro-growth initiatives championed by Republicans (deregulation and infrastructure spending) aren’t as critical as corporate tax cuts, and that remains the key to helping the S&P 500 break materially above 2300.

From a tactical standpoint, we would continue to hold broad allocations to stocks. If you’re putting new money to work, we would focus on the value sector of the market (ETFs Restricted to Subscribers) over cyclicals or defensives.

Tactically, Europe (ETFs Restricted to Subscribers) and healthcare (ETFs Restricted to Subscribers) are two attractive contrarian opportunities, in our opinion, while banks (ETFs Restricted to Subscribers) remain attractive longer term but seem to be consolidating. We therefore wouldn’t initiate a position here (we’re holding our position and waiting for a further pullback to add to it). Bottom line, lack of policy specifics won’t reverse the rally, but some specifics have to emerge soon if this rally can continue.

This Week

Earnings come into focus this week, as it’s the first week of major company reports from virtually every sector. Unless the results are terrible or fantastic, they shouldn’t move markets too much, as potential fiscal stimulus remains the key focus right now.

From a macro standpoint, there is consistent economic data throughout the week, but CPI on Wednesday is the key number. Then we have Yellen making two speeches (Wednesday and Thursday), and comments on policy could pop up given the topic of both speeches.

Finally, as if I needed to remind anyone, Inauguration Day is Friday, and though it likely won’t have any direct market impact, it is a positive in so much as we will move forward (hopefully) towards some policy clarity.

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Stock Market Update: January 10th, 2017

Stock Market Update excerpt from the Sevens Report: Stocks gave back most of Friday’s gains on Monday thanks mostly to digestion of last week’s rally ahead of some important catalysts later this week (Trump’s speech Wednesday specifically). A sharp drop in oil also weighed on the averages. The S&P 500 fell 0.35%.

Stocks started Monday mostly flat following a quiet weekend. There were actually macro positives yesterday, primary of which was the Chinese currency reserve data. But economic numbers from Germany were also strong Monday morning.

Then a drop in oil offset those positives, and as a result stocks opened lower and fell basically to the lows of the day within the first 30 minutes of trade, again thanks almost entirely to oil.

From those lows, stocks basically traded sideways for the remainder of the session. There were potential catalysts including Fed speakers and the Consumer Credit number at 3:00 p.m. yesterday, but none of it provided any material surprises, and nothing changed the general outlook for markets. Stocks chopped sideways in the afternoon before closing near the lows of the day.

Stock Market Update: Trading Color

Healthcare and super cap internet stocks were again the positive story yesterday, and five trading days into 2017 they are the clear surprise winners so far.

Healthcare was the lone positive SPDR yesterday, rising 0.42% again mainly on biotech strength. Meanwhile, super cap internet stocks (think FANG—FB/AMZN/NFLX/GOOG) rallied again yesterday and FDN, our preferred super cap internet ETF, rose 0.25%.

Away from healthcare and internet names, selling was broad yesterday as eight of the nine SPDRs we track declined. Energy was an obvious laggard due to the drop in oil, as XLE fell 1.45%. Oddly, utilities also fell sharply (down 1.3%) despite the decline in bond yields.

Financials, industrials and consumer staples all relatively lagged the S&P 500, but didn’t fall by more than 1% while tech was again another relative outperformer, with XLK down fractionally.

Single stock news was virtually non-existent yesterday,  and trading from an activity and volume standpoint was very quiet. General digestion remains the best way to describe yesterday’s price action.

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S&P 500 Chart

Stocks spent virtually all of Thursday near unchanged in quiet holiday-like trade, as markets ignored economic data and geopolitical news (Russian sanctions). The S&P 500 dipped a slight 0.03%.

The S&P 500 pulled back for a second day yesterday but importantly held our initial support level at 2246 mentioned on pg. 5 of the Sevens Report.

As was to be expected, trading was very quiet yesterday as the S&P 500 moved in just a 10-point range peak to trough. There were multiple economic reports out yesterday morning and they were mixed, but markets aren’t worried about economic data this week, and stocks opened slightly higher initially on a bounce back from Wednesday’s weakness. That initial rally lasted only 60 minutes, and shortly after 10:30 a.m. stocks were negative once again.  View the S&P Chart below.


S&P Chart

There was no real catalyst for the selling, and instead it was just a continuation of the profit taking we saw on Wednesday. Stocks continued to drift lower in quiet trade trough lunch time, and the S&P 500 did make fresh two-week intraday lows.

Unlike Wednesday, the selling dissipated below 2245 and stocks traded sideways for the remainder of the afternoon.

News of the Russian sanctions was the only notable headline in the afternoon, but those were more targeted at individuals and won’t have any real economic implications, so the markets largely ignored them.  As mentioned, given the looming administration change, we don’t see poor Russian/US relations as a major macro influence in 2017 as they will likely improve in early Q1 ‘17.  Stocks closed quietly with slight losses.

Trading Color

On Thursday, there was clear profit taking in the “out of safety/into cyclicals” trade that’s outperformed since the election, as cyclical sectors badly underperformed safety and higher-yielding sectors.

Of the nine SPDRs we track only three were down yesterday: Financials/XLF (-0.75%), energy/XLE (-0.37%), and consumer discretionary/XLY (-0.13%). Banks also were down more than 1%.

Conversely, of the six SPDRS that were up, utilities/XLU outperformed, rising 1.4% while consumer staples/XLP rose 0.5%.  Most of the other sectors were little changed.

Given the sector laggards yesterday were the best performers since the election, and the outperformers were the sectors that have fared the worst since the election, it’s not hard to determine we’re seeing some profit taking in that trade.

Given how elevated expectations are for growth in early 2017, continuation of a short-term reversal in the out of safety/into cyclicals trade may well continue in early 2017, although longer term the outlook for bond proxy sectors like utilities and REITs is still challenging. Meanwhile, the outlook for cyclicals/value stocks is more attractive. Point being, the longer-term trend is still towards cyclical outperformance over income-oriented sectors like utilities and REITs.

Finally, continuing the week-long trend, gold and gold stocks surged yesterday with GDX rallying more than 6% mostly on short covering, but also on gold strength. If we see a short-term pullback in the dollar to start 2017, gold and gold stocks will benefit the most and may be of interest for those with a trading bent.




Stock Market Update: 12/28/16

stock market update

Here is an excerpt Stock Market Update from The Sevens Report.  Stocks rallied in quiet trade to start the final week of the year yesterday, as the Nasdaq reached a new all-time high. The S&P 500 gained 0.22% on the day.

Futures were flat early yesterday, but once the bell rang stocks jumped higher out of the gate thanks to economic data that showed an increase in home prices and a spike in consumer confidence.

But with attendance so low between Christmas and New Year’s holidays, and as Hanukah continues, the rally failed to gain any traction and the benchmark averages began to slip from early highs into the lunch hour.

News flow remained extremely quiet, volumes were down and attendance was thin, which allowed stocks to continue to bleed lower into the afternoon until they closed basically in the middle of the day’s trading range.

Technically speaking, the Nasdaq composite hit new highs; however, Dow 20,000 remained elusive for another day despite a run to within 20 points of the psychologically significant level.

Trading Color

Yesterday was slow from both a macro and micro standpoint, as both index and sector movements could best be characterized as drifts. The Russell 2000 and Nasdaq both outperformed the S&P 500, but only slightly, up 0.5% to the S&P 500’s 0.22%.

Internally, the rally was broad as all nine SPDRs we track finished higher, although none came close to rising more than 1%. Basic materials and tech were the two outperformers, up 0.5% and 0.45%, respectively. Materials

were up on the general lift in the commodity complex, while tech rose thanks to preliminary indications of strong holiday sales. AMZN in particular rallied more than 1.5% on reports of strong Amazon branded product sales (Alexa in particular). NFLX also was nearly 2% higher on news of strong holiday subscription sales.

More broadly, there was slight cyclical outperformance yesterday as consumer staples and utilities finished basically unchanged on the day while the aforementioned materials and tech sectors outperformed. But again, the moves were minimal and can be chalked up to random trading noise.

Bottom line, Tuesday was a quiet day in the markets, and with a barren calendar looming for the remainder of the week we can expect more of the same going forward.

Bottom Line: 4 Events To Watch in Q1 2017

In Monday’s issue, I pointed out four policy errors that could adversely affect markets in 2017. With that in mind, I wanted to point out specific events and dates that will give us color on those potential policy errors.

To a point, this is a preliminary catalyst list for Q1 2017, although obviously we will be adding to it as the weeks go by. As we start 2017, though, these are four key dates/events to watch.

1) Trump’s Policies – Will They Meet Very Lofty Expectations (Jan. 20)? Don’t be surprised if we see a “Buy the president-elect, sell the president” market reaction in 2017, as investors could book profits once Trump assumes office. That’s because the single biggest question for markets is whether the actual policies put forward by the new government will meet the very lofty market expectations, and there is serious risk of a disappointment.

We’ll be focused on leading indicators that will tell us whether these policies look likely, because if they don’t, stocks could drop sharply after the inauguration.

2) Fed Meeting (Jan. 31). It’s not a coincidence the hawkish December Fed meeting basically arrested the post-election rally. By the time the January Fed meeting occurs, we’ll have a lot more information on inflation and growth, and it’s entirely possible that the Fed signals another rate hike is coming. If that happens, the 10-year Treasury yield could surge to 3%, and that will hit stocks, regardless of what Trump is doing.

3) Semi-Annual Currency Report (March/April). What if Trump starts a trade war with China? I’m not saying it’s going to happen, but the market is so enamored with potential pro-growth policies that it’s largely ignoring the fact that Trump wants to take a hardline stance on trade. Last week, Trump appointed Peter Navarro, author of the book Death by China, to head a new trade council.

If the Treasury Department labels China a currency manipulator in this Currency Report, automatic tariffs are imposed and a trade conflict could easily ensue.

4) Fed Meeting, (March 15). At this point, we’ll know a lot more about the policies coming out of Washington, and if we’re going to see a lot more fiscal stimulus, then Yellen herself has said the Fed will react with higher rates to prevent inflation.

This March Fed meeting is the first of 2017 with an updated “dot plot,” so if the Fed wants to communicate more hikes in 2017, this is the first opportunity to do so. That will send the dollar and bond yields sharply higher, which will be a headwind on stocks.



Chart of the Day: NASDAQ Powers to New Highs


While the 20,000 mark remained elusive in the Dow Jones Industrial Average, the Nasdaq Composite Index rallied to fresh all-time highs yesterday.


Stock Market Update: 12/21/16

Vorsicht, Kleingedrucktes

Stocks rallied modestly Tuesday, as a mild resumption of the Trump trade carried the major averages close to all-time highs. The S&P 500 rose 0.36%.

Stocks were higher from the outset Tuesday as the BOJ was, on balance, slightly dovish and data from Europe was good (German PPI was hot as was British Distributive Trades).

From a micro-economic standpoint, Jefferies’ earnings were better than expected (a boost to financials). Stocks popped at the open and then, amidst a total dearth of any incremental news, drifted sideways for the remainder of the session.

Mid-morning and mid-afternoon there were two attempts to push stocks down into negative territory, but with no news to disrupt the current positive narrative the selloffs didn’t generate any momentum. Stocks bounced into the close to finish just off their best levels of the day. Overall, it was an extremely quiet and uneventful trading session.

Trading Color

With no bad news to shake the current outlook, the Trump trade was back on in modest form yesterday. Small caps and cyclicals again outperformed, and industrials were also strong (the Dow hit an all-time high, although it failed to break above 20k).

From a sector standpoint, financials led as XLF was the only SPDR we track to close up more than 1%. Banks were also very strong as KRE rose nearly 2%. The Jefferies’ results helped those names rally, but with yields rising again there was already a tailwind there.

Most other sectors were little changed as staples, energy and healthcare closed with very mild losses while basic materials, tech, utilities and industrials all notched small gains.

Consumer discretionary was the only other sector that moved notably as XLY rose 0.80% thanks to some buying in NKE ahead of earnings (which were better than expected). But retail in general is facing an ever-increasing headwind as corporate tax reform begins to take shape .