Week In Brief: January 13

January 16, 2017

Hope your new year has begun on a high note. As we'd like to think your among the nine percent of Americans who, according Statistic Brain, will be successful in achieving their New Year's resolutions. By the way, that figure quadruples when describing those who never succeed and fail at their resolutions each year.
Each and every year? Sounds like resolutions may not be a strength.
Seriously. We hope that you find the gifts you seek in 2017. Most among them the ability to recognize your talents, originality and shocking potential. To continue upon a path of self discovery. And find the strength to slough off the yoke of the societal herd and trust in yourself.

To enhance your stead, and that of your family and community by rising daily and doing your best work. By contemplating the issues close to you. Ignoring the mindless tedium. Expressing your opinions. Standing for your beliefs. And avoiding the tidal currents of conformity, mediocrity and servitude.
Having made this simple choice, yours is nothing less than a date with destiny. Regardless the difficulties that lay ahead. As Henley wrote in his timeless poem, Invictus:
Out of the night that covers me,
Black as the pit from pole to pole,
I thank whatever gods may be
For my unconquerable soul.
In the fell clutch of circumstance
I have not winced nor cried aloud.
Under the bludgeonings of chance
My head is bloody, but unbowed.
Beyond this place of wrath and tears
Looms but the Horror of the shade,
And yet the menace of the years
Finds and shall find me unafraid.
It matters not how strait the gate,
How charged with punishments the scroll,
I am the master of my fate,
I am the captain of my soul.
We look forward to learning of what your year entails. Its victories. Defeats. Challenges. And lessons. Knowing that, whatever the obstacle, you will meet it head on. Determined. Confident. Ready to push ever further out into the frontiers of life's possibilities.
How about that stock market? That, dear friends, is how to end a year. The S&P 500 lost two percent in October. Then careened higher after the election. Adding 3.42 and 1.82 percent in November and December respectively.
To what might we attribute such exuberance?
First, Q3 earnings put an end to the four previous quarter's declining earnings streak. The first such period of year-over-year earnings declines since The Credit Crisis. As investors detected that companies were back to increasing their earning per share results, they became increasingly sanguine about allocating capital to stocks.
Second, the surprising election outcome has ushered in a candidate who -- like him or not -- represents the White House's first free-market capitalist in years. And his stated goals of cutting tax rates, dropping burdensome regulatory constraints and repealing and replacing the poorly executed overhaul of 18 percent of the economy -- the Affordable Care Act.
The index rose nearly 12 percent in 2016. As Q4 alone saw the S&P 500 leap by five percent. Decapitating the idea that one should never invest at new highs.
Moreover, today's six-percent trailing-three-month return emphatically reveals that new highs can be a productive time to buy. The data reveals that investors buying at new highs have typically been rewarded with positive returns. Especially amid a rising sense of optimism, as we're currently seeing.
Since the election, consumer confidence has jumped. And businesses have begun to view the road ahead more optimistically.
In fact, last week's most important news pertained to business optimism. As small business hopefulness incurred its biggest-ever monthly gain.
The December NFIB small business optimism index rocketed to 105.8. Up from November's 98.4, and well ahead of the 99.6 consensus. Achieving the largest monthly increase on record and highest level since 2004. This confirms the sharp rise in optimism following the election. As 50 percent of respondents expect the economy to improve. A 12-percentage point increase from the prior month. 31 percent expect sales to increase. A 20 percent jump.
Importantly, small business owners believe that now is a good time to expand. A sentiment that has long been absent. And their job creation plans improved to a nine-year high.
Finally, the report noted that improving small-business optimism will lead to increased business activity. Including capital investment. All of which amounts to economic rocket fuel. As small and medium-sized businesses are the lifeblood of the nation's economic interests. Providing nearly 70 percent of jobs. And so exerting an outsized influence on both consumer and commercial expenditures. Not to mention the electorate's confidence, posture and ethos.
Long-time readers recognize that we've long contended that the the economic recovery's biggest problem has been the lack of confidence among small and medium-sized businesses -- the nation's entrepreneurial base. The Affordable Care Act, not to mention unprecedented regulatory constraints, have prevented entrepreneurs from gaining the confidence required to commit to growing their businesses. Which, in turn, has prevented the economy from growing to the point where it attains the escape velocity required to leave 2008 behind.
Since 2009, there have been more than 20,642 new business regulations enacted in D.C. Imposing more than $22 billion in regulatory costs last year alone. Bringing the total new regulatory burden of the last eight years to more than $100 billion annually. With U.S. federal government regulations amounting to an estimated $2.028 trillion in 2012. And compliance costs allocated disproportionately to small businesses. Costing them nearly $12,000 per year for each employee -- just to remain federally compliant.
This led to the nation's longest-ever period of sub-three-percent GDP growth. To the first time in decades where more businesses failed than were created. To a environment in which entrepreneurialism has been in decline.
Which manifests itself in consequences unforeseen. But hardly unrelated.
All amid the growing sense that those in D.C. have no clue as to how they might solve these problems. Worsened by their lack of will to try.
So we celebrate the bolstered confidence of small-business owners. As entrepreneurialism represents the nation's lifeblood. We cannot overstate how important such news can be. It remains the one rising tide that can lift all boats.
The incoming administration inherits an economy showing steady-though-unspectacular growth. Wage growth continues to be sluggish. Even when compared to statistics from a decade ago. Of course, real GDP growth is generally required to prime the wage pump.
The 2016 economy added 2.2 million jobs. The smallest gain since 2012. More tellingly, the participation rate -- those having or seeking employment -- remained at 62.7 percent, a four-decade low.
And while inflation remained largely absent, December saw a 2.1 percent annualized increase. Representing the fastest pace in two years. And the biggest full-year increase since 2011. Bringing a number of observers to forecast that tectonic plates are shifting from a global deflationary environment to a reflationary one.
Bad for bonds. Good for stocks.
We expect 2017 to see a return of volatility. As the VIX (fear) index has remained below historical averages for years. Finishing December at an average 2016 value of 15.8 -- the fifth straight year of sub-normal levels. With the average year posting a value of 20.7. A level we've not seen since 2011 when the VIX averaged 24.2.
Volatility occurs in cycles. With several years of below-average volatility leading to periods of above-average volatility. After five years, we've hit the second-longest streak of sub-20 VIX. Prior low-VIX stretches reached four years in 2007 and six years in 1996. Data reveals that when the VIX has averaged less than 20 for three or more years, it invariably coincided with a bottom in the VIX. And over the ensuing years it spiked higher. Usually doubling.
Purely from a market perspective, we remain cautiously optimistic. Though even optimists must not allow realism to evade them.
The 35-year bull market in bonds has faltered. Inflation has reappeared around the globe for the first time in years. And the incoming president plans on the most sweeping economic and regulatory changes in a generation.
Some of the most important trends of the past few years -- falling interest rates, deflation and heavy-handed government -- appear to be reversing. So we know that the year ahead will look vastly different than those previous. But certain aspects of the market appear disconcerting.
Short-term models having gone negative on overbought conditions. Moreover, some long-term models have also -- for the first time in a while -- turned mildly negative. Nor is the presidential cycle working in our favor.
Since 1973, five of eleven first year presidencies saw stock markets decline. Three of the five occurred during the first-year of the term. Which we've just entered. So caution is merited.
Contrary to many arguments, stocks remain inexpensive. As investors never face the decision to invest in a vacuum. Instead, they're confronted with choices. Putting money to work in stocks, or investing in less volatile bonds.
With interest rates remaining near historic lows, equities markets -- and all the attendant potential upside -- continues to look palatable. Accordingly, valuation formulas that account for such choices -- those between stocks and bonds -- will continue to posit that equities remain inexpensive on a relative historical basis.
All of which represents a very loquacious means of saying that 2017, though full of promise, could go in any direction. Nor will investment decisions come easy to the faint of heart. So stay tuned...
Weekly Results
Major indexes finished mixed last week. DJIA lost 0.39%, S&P 500 fell 0.10%. The Nasdaq climbed 0.96%. While small cap stocks rose 0.35%. 10-year Treasury bond yield rose 2 basis points to 2.39%. Gold closed up $24.52 per ounce, or 2.09%.

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