Monthly Dollars & Sense Newsletter

Here is the e-version of our popular and informative monthly newsletter, Dollars & Sense. It briefly discusses topics we believe to be important this month.


We seem to be off to a good start for the year, scuppering pundits’ pre-election proclamations of the world going to hades in a handbasket, to modify an oft-quoted allegorical locution. There are worse things that could befall our economy than a spike in stock prices, rampant consumer optimism, and rising economic growth. No, sixty-plus days does not a trend make, but having begun in the wee hours of November 9, 2016, it shows few signs of abating thus far. As a new administration assumed power on January 20, it promises to lower taxes, spend on infrastructure, and generate jobs. It remains to be seen which, if any, of these declarations will come to pass, but if the market is an indicator, investors are voting with their pocketbooks open, as asset prices (and financials, in particular) are on the rise.

As our reporting period came to an end, the market began to recede, as investors may be recognizing that markets ebb and flow, and lest we think we know its future direction, that few prognosticators are accurate all the time. According to Howard Marks, co-chairman of Oaktree Capital, and quoting from the NFL Bettor’s Guide as an example of forecasting, the best expert was right 55.1% of the time, the worst was accurate 48.8% of the time, and the average was 51.6%. He also points out that economists don’t publish their performance data, and argues that investors’ taking action based on the Federal Reserve’s (Fed) next move or the global macro outlook can be dangerous. Mark Twain summed it up cogently, if not in the King’s English, “It ain’t what you don’t know that gets you into trouble. It’s what you know for certain that just ain’t true.”[1]

On December 14, 2016 both the Dow Jones Industrial Average (DJIA) and the Standard and Poor’s’ 500 Index (S&P) had risen to new highs, 19,792 and 2,253, respectively, and oil closed at $50.11 per barrel. Gold had plummeted to $1,132 per ounce, and the dollar was at $1.04 versus the Euro. The yield on the 10-Year Treasury Note (10-Year) was 2.58%. On January 13, 2017, the DJIA closed at 19,886 (after coming within $.37 of breaking 20,000 just a week earlier, on January 6.[2] (If any of the index’s components had increased by as little as five cents, the barrier would have been pierced). The S&P closed at 2,275, its high for the reporting period, and oil rose to $52.53. Gold had recovered to $1,198, the dollar had retreated to $1.06, and the yield on the 10-Year, which declined steadily throughout the period, ended at 2.39%.


The ADP employment change for December was disappointing, with only 153,000 new jobs created in the private sector, versus 215,000 in November.[3] The bright spot may be that most of these jobs were in the service sector,[4] which is a larger portion of the job market. Results of The Employment Situation Report, released on January 6, 2017, also missed the mark: Nonfarm payrolls increased by 156,000 versus 175,000 forecast, and nonfarm private payrolls rose by 144,000 versus 170,000 anticipated (even our research sources are prone to err when delivering forecasts). And the unemployment rate ticked up to 4.7% from 4.6% for the prior period.[5] But the silver lining was hourly earnings, rising 0.4% for the month, and 2.9% year-over-year, with 5,598,000 jobs still open.[6]


The US dollar strengthened in December, as foreign investors’ purchases and rising interest rates suggested a belief in the economy’s growth outlook.[7] However, the dollar retreated when the Federal Open Market Committee’s (FOMC) minutes hinted that its more modest pace for rate hikes could give way to a “different path of policy than the currently expected.”[8] Even so, Philadelphia Fed President Harker still sees three rate hikes in 2017.[9] (We acknowledge that as the Fed has begun to normalize rates, the need for the ‘will they/won’t they’ commentary in previous issues of Dollars and Sense has subsided).


Oil prices are another story, meriting more ink. Prices ranged from a low of $51.79 on January 9, 2017 to a high of $53.89 on December 30, 2016, vacillating on concerns of compliance with OPEC’s production agreement announced the end of November. On December 29, 2016, the Energy Information Administration (EIA) reported a 600,000-barrel inventory build, and prices dropped on January 3, 2017, driven by a rising dollar (making oil more expensive for other countries to purchase it) and Libya’s ramping up output.[10] Prices fell again on January 9, 2017 (their largest loss in a month), as Iraq and Iran’s high production appeared to fly in the face of OPEC’s promised cuts, with traders noting that these countries have cheated output quotas in the past.[11]

This stance was apparently confirmed on January 10, 2017, as Iraq announced its intention to raise exports to an all-time high from its Basra port.[12] The EIA confirmed that higher US output will reach 9 million barrels per day (MBD) in 2017, versus December 2016’s forecast of 8.89 MBD, although total output cuts are still projected at 2% of global production. “Uncertainty in the production response from Libya, Nigeria, and the United States in the coming months presents some of the largest risks to the timeline of oil market rebalancing,” the EIA said.[13] Even with Saudi Arabia’s confirming its intention to reduce supplies to some Asian customers,[14] doubts persisted that OPEC’s promised cuts would materialize.[15] We note, however, that prices have risen 16% since OPEC announced production cuts in November, and if they are adhered to by both OPEC and non-OPEC members, it could take 1.8 MBD out of supply.


Gold prices enjoyed a modest recovery this period, ranging from a low of $1,120 per ounce on December 22, 2016, to a high of $1,198 on January 13, 2017. As gold tends to move in opposition to the dollar, it suffered as the dollar rose to a 14-year high on January 3, 2017, following rising stock prices, the ISIS attack in Berlin, and the shooting of Russia’s envoy in Istanbul.[16] However, gold began to rise when both stock prices and the dollar declined,[17] as gold is priced in dollars, and when the dollar falls, gold prices tend to escalate. Prices reached a five-week high on January 5, 2017, as the aforementioned FOMC minutes hinted at “considerable uncertainty” over the new administration’s policies, and signaled a possibly different pace of rate hikes.[18] (Although our reporting period ended on January 13, 2017, gold prices were propelled further, reaching $1,201 on January 16, 2017).


Consumer-related data was positive this period, with a few bumps. November housing starts fell by 18.7% to 1,090,000.[19] However, December’s reading rose 11.3% to 1.226 million. New home sales declined 1.9% in October to 563,000 versus a 587,000 forecast.[20] But existing home sales rose by 2.0% to 5,600,000 on the back of an upward prior-period revision of 5,490,000 for October. First-time buyers accounted for 33%--an important statistic, as they pave the way for existing owners to purchase higher-priced houses and/or move to a new geographic area, where they can purchase new, and potentially more expensive, homes. More noteworthy, this figure was the highest since February 2007’s figure.[21] New home sales increased 5.2 percent to a seasonally adjusted annual rate of 592,000 units in November. October's sales pace was unrevised at 563,000 units.

The consumer seems to be on a roll, with Michigan Sentiment logging a 98.2 reading, and surveys indicating optimism over new economic policies.[22] Consumer confidence roared to 113.7,[23] with the prior period revised up to 109.4 from 107.1, gob smacking some nervous Nellies who had predicted a post-election financial disaster. Nearly one-fourth of consumers (24%) see business improving; 44% see stock prices accelerating, and 55% of small businesses say conditions are improving—the most upbeat figures since 2004.[24] Their enthusiasm is further substantiated by a rise in consumer credit, up $24.6 Billion (when concerned about the economic outlook, consumers tend to avoid assuming additional credit).[25] A contrast to strong consumer data was retail sales, which increased by 0.6%, but when gasoline is removed from the calculation, sales were flat, indicating restrained spending in December.[26]

Business-related data led with an upward revision to third-quarter GDP: 3.5% from 3.2% posted previously, as economic activity picked up.[27] Construction spending rose by 1.9% in November, for a year-over-year increase of 4.1%.[28] The December Institute for Supply Managers Index (ISMI), at 54.7, was its highest reading of the year,[29] and was followed by the Institute for Supply Managers Services Index (ISM) posting 57.2, above consensus expectations of 56.6, and its 83rd month above 50 (the level that indicates expansion). Ford Motor Company agreed to expand its Michigan production facility, rather than build another factory in Mexico, another plus for US business.[30] Although November factory orders dropped -2.4% (their first decline in five months, and attributed to lower nondefense aircraft and parts sales) the previous period was revised up to 2.8% from 2.7%.[31] Small business optimism, measured by the National Federation of Independent Business (NFIB), reached a 12-year high of 105.8.[32]


Soaring to a record high this period, the stock market is a big story. The DJIA ranged from a low of 19,762 on December 30, 2017, to a high of 19,975 on December 20, 2016; the S&P ranged from a low of 2,239 on December 30 to a high of 2,275 on January 13, 2017. Investor euphoria over an improving economic outlook can take some credit, but investors may wish to exercise caution, rather than assume that proverbial trees will grow to the sky. Vinny Catalano, President of Blue Marble Research, notes that the first 18 months of a Republican administration have not proven beneficial to stocks (years three and four bode better). He includes a video that suggests rising oil prices are inflection points for inflation and drive policy makers’ decisions.[33]

Sam Stovall, Chief Investment Strategist at CFRA commented that the stock market’s 24% rise from its February low through year-end is below the average low-to-high of 27% since World War II.[34]

Despite these perspectives, the DJIA and S&P soared to new highs of 19,999.63 and 2,277, respectively, on January 6, before withdrawing after the Ft. Lauderdale, FL airport shooting.[35] Strong auto sales helped moved the market needle upward, and China’s mixed inflation data was cited as cause for its decline a few days hence.[36],[37]

As earnings season begins, some analysts are projecting a 3% rise in profits and a 5% increase in sales, their strongest growth since 2012.[38] Sam Stovall makes a case for a 12% jump in earnings in 2017, and perhaps more, based on the new administration’s promise to cut taxes and raise spending on infrastructure, which may boost inflation.[39] (Caveat emptor: Recall Howard Marks’ comments on forecasts, above).


The yield on the 10-Year ranged from 2.34% on January 5, 2017 to a high of 2.59% on December 16, 2016. Perception of a stronger economy and higher inflation pushes up yields, as does a rising stock market, which forces bond issuers to pay higher interest rates to attract investors. Powerhouse bond manager PIMCO’s Bill Gross opined that should the yield on the 10-Year breach 2.60%, it could begin a bear market for bonds. Rising yields, which investors often construe as being safer than volatile stocks, can eventually hurt stock prices. Gross’s comments generated a degree of skepticism on the part of some readers, and one analyst said 3% is the magic number, but investors may do well to tuck the comments away to guide expectations for bond performance.[40]


International -Monetary Fund (IMF) chief Christine LaGarde was found guilty of negligence, but the organization continued its support of her, possibly because her planned rescue efforts may come in handy in the wake of some weaker Eurozone economies.[41]

Scotland announced it may not participate in Brexit, as First Minister Nicola Sturgeon reiterated the country’s preference for the Eurozone’s single trading bloc.[42] Britain’s Prime Minister, Theresa May, is set to give a speech the week of January 16, sketching out her plans for Brexit.

Italy’s banking problems, notably Banca Monti dei Paschi, which warned it has but four months of liquidity (down drastically from eleven months forecast previously), set a nervous tone in the Eurozone[43], but it appeared to be ameliorated when the country’s parliament announced a $21 Billion rescue plan. And in good time: the bank’s shares had been suspended on its adverse liquidity announcement.[44]

Russia has made several headlines. Setting aside the hacking allegations, 35 Russians were expelled on suspicion of spying, and Russia retaliated by ejecting 35 US diplomats.[45] Whether these events move markets or not, they can be unsettling in a world elsewhere rocked by angst.

China announced a 5.5% increase in producer prices (lower than its growth targets below), and a 2.1% rise in consumer prices (above estimates).[46]

Finally, the World Bank asserted that the new administration’s plans to slash taxes and push up infrastructure spending should be good for the global economy, but raised issues over its trade policies. Global growth in 2016 was 2.6%, a drop from 2015’s 2.7%, with the highest number of trade restrictions since the recession. The World Bank expects the US economy to grow by 2.2% in 2017, with Europe forecast to grow at 2.4%, Russia by 1.5%, and China by 6.5%. Global growth is anticipated to be 2.7% in 2017, and 2.8% in 2018.[47]

Reuters reported that industrial output in the Eurozone surged by 1.5% in December, and 3.2% for 2016, outpacing forecasts, and consumer confidence hit a 20-month high in December, continuing a four-consecutive-month rise.[48]


The stock market has marched higher, along with bond yields. Economic data is mostly positive, both in the US and for several global markets. As a new administration takes office, some investors are optimistic, and others are adopting a wait-and-see stance. A new year is a time for hope, yet that hope may be tempered by the realization that despite a rosy outlook, much will depend on how events unfold. Wise investors will remember that forecasters aren’t always prescient, and they are seldom perfect.

- January 2017 Dollars & Sense Data Sources

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