Financial Markets Weekly: December 8th

December 13, 2017

Here's your financial markets weekly report for December 8, 2017.
Stocks finished mixed last week. With Thursday's gains snapping a four-day losing streak. And a stronger-than-expected jump in U.S. hiring lifting the Dow Jones Industrials and S&P 500 indices on Friday. Both managed to eke out small gains for the week.
Equities remain in their upward trendlines. On the wings of improved earnings, a growing economy, low inflation and swelling growth overseas. Stocks sit in the upper end of the long-term uptrend. And valuations may be stretched. But with no signs of recession on the horizon, attempts to fight the tape could prove quixotic.
Still, two indicators bring us pause.
First, SentimenTrader reports that U.S. households have -- as a percentage of financial assets and as a share of economic output -- the most exposure to stocks (outside of the 2000 bubble) in 65 years. Moreover, pension and mutual funds are all in. This strikes us as an adverse contrarian indicator. Yet, the uptrend can continue so long as new money keeps rolling in from the retirement accounts of all the new job holders, as well as foreign pension and hedge funds seeking to allocate capital.
Next, we count two oft-ignored economic indicators among our most trusted recession-warning signs. The first is a steady increase in weekly jobless claims. Which is not currently happening, as the seven-year downtrend in claims is intact. The second? ISM numbers. And these have recently hit new highs, only to back off a bit. And though they look a bit toppy, we can discern no negative tea leaves yet as they remain just below all-time highs.
Looking at the rest of the month (and year), we expect trading volatility to slow down heading into the holiday season. Equities will likely retain a positive drift as current sentiment remains positive. But we don't expect the rip curl Santa Clause rally we often hope for this time of year. Also, when markets are already up nearly 20 percent, one feels rather greedy hoping for further returns. As it stands, 2017 would rank as the third most productive year since the current bull market began.
The Dow Jones Industrial Average has handily outperformed the S&P 500 by five percentage points this year. Leading the way for the Dow are Boeing, +84 percent; Caterpillar, +55.1 percent; Apple, 46.2 percent; Visa, +44.3 percent; McDonald, +42.2 percent; and UnitedHealth Group, +41.7 percent. The Dow's performance would be more stunning if the former bell cow General Electric wasn't down a whopping 44 percent.
At long last, the Millennials are being exposed to a higher-growth economy. And not a moment too soon. Because an economic system predicated on the distribution of opportunity cannot possibly win the day when mired in a long-term, slow-growth slog.
Yet, while the economy has hampered Millennials entrance into the home-buying market, they have managed to sink a lot of dough into recreational vehicles. Aligning with their desire to incur a variety of experiences while also spending time with their young families. And buying a $15K trailer and parking it at a campground is much less expensive than renting or buying a lake. Not to mention, recreational vehicles are great for out-of-town, weekend soccer tournaments.
The trend has paid off handsomely for the RV manufacturers. With many of these stocks up over 35 percent or more on the year. As recent sales numbers have already outperformed the mid-2000s peak.
Just another positive sign that the economy is finally permitting Millennials to escape their parents' basements.
Looking for timely investment ideas in this frothy market? Consider those tied to the weather.
The Northern Hemisphere is expected to deliver one of the harshest winters in years. In fact, December is forecast to be one of the coldest the U.S. has ever seen. Possibly representing a boon for many fertilizer and agriculture stocks. Not to mention companies making heating and air products. And home sealant and insulation concerns.
From a commodities perspective, the long-struggling wheat market could heat up as the inclement weather ruins some of the bumper crop. Creating less supply for an ever-increasing demand.
All eyes are on The Federal Reserve ahead of a widely expected rate hike this Wednesday. A Reuters article recently discussed how the Fed could be more dovish than expected under incoming chair Jerome Powell. Which we believe will be the case.
In geopolitics, The Washington Post ran a piece over the weekend detailing how North Korea is aggressively expanding its biological weapons programs. Sending engineers overseas to attain biological engineering degrees so that they can return and build out the state's weapons programs. Further, Kim Jong Un's regime has already made it clear that the technology will be for sale to all interested parties. This represents just another facet to this already complex problem. But one that, in our estimation, could offer hope.
As the world's attention becomes more concentrated on North Korea, and regional powers like Japan and South Korea confront increasingly difficult options, China may be forced to more aggressively intervene as the North's continued flouting of international norms becomes increasingly egregious. As we've repeatedly said, China does not want American troops and hardware on its northwestern border. Nor does it want to risk a refugee crisis in the case of war.
The question remains: when does the North Korean regime's rhetoric and actions cross the tipping point of China's tolerance, posing a threat to China's security as opposed to a welcomed distraction for western rivals?
Last week saw the Trump administration announce that the U.S. would relocate its embassy from Tel Aviv to Jerusalem. Contrary to popular reports, U.S. recognition of Jerusalem as Israel's capital occurred under the Clinton administration in the nineties. The U.S. simply never moved its embassy. But, Donald Trump ran on the promise that he would. And now appears to be delivering on that promise.
There was much consternation over the announcement. Much of which has already died down. Interestingly, there was little to no response out of Saudi Arabia. Which provides some insight into what is transpiring there.
The crown prince's recent arrests of powerful people across the country represented a consolidation of power. We believe the future king is firmly committed to modernizing the nation. Consider that he recently permitted women to drive. And has reopened the movie theaters, which had been closed for decades. Mohammad Bin Salman Al Saud has is simply removing the obstacles to modernization. And when there was nary a peep out of Saudi Arabia over the U.S. embassy announcement last weekend, it became obvious it was working.
More compelling, however, will be the reaction out of regional rival Iran. Which is watching the Kingdom's modernization with great interest. Iran's mullahs know that their people aspire to the same modern comforts and freedoms. Only three years ago they staged a failed rebellion. And we're certain the Iranians are seething over what's occurring today. Knowing that, as average Iranians watch average Saudi Arabians gain more freedoms and western-style advantages, they'll grow increasingly agitated. And civil unrest will likely follow.
The Iranians detest the idea that Saudi's leadership is straying from the conservative religious path of governance. And Saudi's leaders, having weaponized their cultural advances, know it.
Stay tuned for your next financial markets weekly update…
Financial Markets Weekly Recap
Major indices finished mixed last week. The DJIA gained 0.40%. The S&P 500 rose 0.35%. The Nasdaq fell 0.11%. While small cap stocks lost 1.00%. 10-year Treasury bond yields rose 1.7 basis points to 2.38%. And gold closed at $1,248.50, down $32.00 per ounce, or -2.50%.
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