Week In Brief: May 3, 2019

May 7, 2019

These last two weeks saw stocks storm the castle ramparts. Elude the archers. Scale the walls and wrest control from the bears. By week's end, former record highs were conquered. With bulls establishing camp upon the newly taken plateaus of all-time highs. As equities forged ahead. Endeavoring to unite all asset classes and establish peace throughout the Seven Kingdoms.
Or, I just need a break from Game of Thrones.
Last week, the Nasdaq and S&P 500 added 0.22 percent and 0.20 percent last week, respectively. The Dow fell 0.14 percent. Financials' 1.34 percent climb and Health Care's 1.29 percent gain led all sectors. Internationally, Developed Markets jumped 0.81 percent while Emerging Markets slid 0.34 percent. Small Caps were up on the week as the Russell 2000 gained 0.98 percent. Kinda nice when you pull most of your revenue from the world's best economy (domestic) as the Smalls typically do. The S&P 500 and Nasdaq sit within a whisper of record highs. The Dow is sitting 1.2 percent from its record level.
Overall, the trend continued higher following a blowout Q1 GDP reading of 3.2 percent (2.3 percent was expected). Propelling stocks to new highs. And as Q1 is typically the worst quarter of the year for economic growth, expectations leapt higher regarding overall annual growth.
Further energizing equities? Positive economic data. Which continue to flow like economic fountains of youth. Extending the life of the economic expansion long past traditional expectations.
Friday's Consumer Sentiment report. Which was up month over month. And bested expectations. We also learned that workforce and labor productivity have been growing. Which suggests that the economy could expand further without an inflation acceleration. Another boon for equities.
Now markets have the momentum that typically accompanies the establishment of new highs. Because when individual stocks -- or entire indices -- break out and achieve new highs? The momentum that propelled them typically takes them well beyond those former technical resistance points, the barriers that formerly kept them tethered as all that latent energy escapes. Serving as rocket fuel. Often jettisoning stocks to much more heavenly altitudes.
Also positive, Friday's labor report showed employers added 263,000 jobs in April. Setting the unemployment rate at 3.6 percent, the lowest in five decades. The best news? The biggest beneficiaries of this tight labor market are those who struggled during the slow-growth years of the current expansion. In fact, minorities, and those with high school, associates or vocational degrees enjoyed the biggest gains. As many of the robust job gains came in businesses that hire those with less education. Construction added 33,000 jobs last month, and has added 256,000 over the last year. Most of the new construction jobs last month were in nonresidential and heavy civil engineering work, which suggests that business investment may be picking up after a weak first quarter.
Giving stocks even more reason for optimism? Solid economic growth. Low inflation. Positive earnings reports. A dovish Fed. And global investment liquidity that's hungrily eyeing U.S. equities as if they were the last burgers coming off the grill. Stocks may have already climbed 17+ percentage points higher in a still-youthful year. But the setup playing out portends the possibility of a continuation of current trendlines. There's no recession on the horizon. The economy is roaring. And the expansion looks set to continue for the next few years.
Only time will tell. But until we see otherwise, let the good times roll.
With earnings season at the halfway point, 1,220 companies have reported Q1 earnings. The earnings beat rate stands at 65.9 percent, better than the prior three earnings seasons. The revenue beat rate stands more than 10 points lower than the EPS beat rate, its lowest level since Q3 2016. Should volatility pick up, that data point could elevate uncertainty.
In trade news, the U.S.-Mexico-Canada Agreement (USMCA), President Trump's push to revamp North America's trade rules, hit a roadblock. House Speaker Nancy Pelosi and other Democrats have signaled they won't allow a vote on the administration's new agreement without changes. One of which includes the desire to make it easier to enforce new rules designed to strengthen labor rights in Mexico. Where they believe a lack of worker protections is hurting wages and job prospects for U.S. workers. The first time we've seen trade agreements seek to unilaterally force labor regulations upon the citizens of sovereign trading partners.
The USMCA, must be ratified by all three countries. And has yet to get through that process in Canada and Mexico. But it is now the prospect of resistance in the U.S. that represents the biggest hurdle.
Meanwhile, National Economic Advisor Larry Kudlow said that a U.S.-China trade agreement was 95 percent finished. Both sides have moved to finalizing enforce mechanisms. While U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin met with Chinese Vice Premier Liu He in Beijing on Tuesday. All of which suggests that a trade deal is approaching. Though underlying tensions remain. Recently exacerbated by Trump's weekend tweets.
So, don't pop any corks until the deal signed.
Staying with China, some 40 nations recently gathered there to discuss Beijing's massively ambitious Belt-and-Road Initiative (BRI). About $11 trillion in Memorandums of Understanding (MOUs) were established which, if culminating in contracts and execution, will fundamentally change global trading patterns, capital flows and geographic influence.
What Is Belt and Road? The Belt and Road Initiative is President Xi's signature foreign policy project. Meant to establish a modern version of the ancient Silk Road. Which, 2000 years ago, placed China at the epicenter of global commerce.
Belt and Road includes plans for infrastructure development and investment in 152 countries. The aim being to reestablish traditional land-based connections (the "belt" part of the strategy) from China to other parts of Asia, Europe and beyond. Since the initiative's 2013 launch, China has invested some $90 billion in projects, with banks supplying $200 to $300 billion.
Thus far, China's massive undertaking has proven controversial, with some voicing concerns about local corruption and -- though the project remains in its infancy -- an established legacy of debt and environmental damage. As some of the client nations with which China has done business in Asia and Africa have said that the debt hangover the BRI projects left behind may not be worth salt. Some nations have already attempted to renegotiate more favorable economic terms.
Staying in Asia, we find that certain money managers remain very sanguine regarding Japan. As if the rising sun was still rising. Yet Japan's population decline is accelerating. Its population of 126 million is down from a peak 128 million in 2010. Placing Japan's population at 11th in the world. The U.S. ranks third, following China and India.
By 2050, Japan will be losing about 900,000 people a year. Roughly equivalent to the city of Austin. Longer term, demographic projections suggest Japan's population will fall to just 50 million in a hundred years. Which was where it stood a century ago.
Due to the military's need to increase the population and pave the way for future military and economic power, Japan experienced a baby boom before the second world war. Now those baby boomers are dying at a faster pace than the birth rate. And there will be ripple effects throughout the global economy. As a prolonged drop in consumption for such a big country could prove harmful to global growth.
Interesting to observe. As some of you will recall how, in the Eighties, the overriding concern was that Japan Inc. was leveraging new managerial, engineering and strategic expertise in an effort to take over global commerce. Japanese investors and corporations were purchasing the most luxurious commercial real estate properties in NYC, London and Paris. Japanese companies acquired American banks, movie studios and conglomerates. America became so unnerved that Hollywood made movies and books were penned on the topic of Japan's financial imperialism. Japan Inc. was going to run the world. We could only stand helplessly and watch.
40 years later, Japan continues to play a vital though less menacing role in global commerce. As its shrinking economy and demographic misfortunes have robbed it of much of its former allure. A vacuum into which China easily stepped when its fortunes began to rise. All of which reveals the cyclicality of geopolitical and economic power. One day your King's Landing. The next, you're the Iron Islands. Empirical evidence in the dustbin of history of how quickly a nation's fortunes can change.
Onward and upward...
Weekly Results
Major indices finished mixed last week. The DJIA lost 0.14%. The S&P 500 rose 0.20%. The Nasdaq climbed 0.22%. While small cap stocks gained 1.39%. 10-year Treasury bond yields rose 2 basis points to 2.53%. Gold closed at $1,279.15, down $7.10 per ounce, or 0.55%.

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