Week In Brief: November 17

November 22, 2017

Stocks posted their second consecutive weekly loss following a two-month stretch of gains boosted by strong corporate earnings and solid global economic growth.
We believe this bull market has room to run. But evidence reveals we're much closer to the end than the beginning. Consider the following anecdote.
History shows that major market peaks are usually preceded by ridiculous behavior among the ultra-wealthy. When you see that luxury assets -- like high-end property, boats, planes, artwork, and collectibles -- begin trading hands at absurd new records? Rest assured we're closer to the end than the beginning.
Last week saw one of the most extreme examples yet. As a rediscovered painting by Leonardo da Vinci became the most expensive work ever sold. Soaring to $450.3 million at a Christie's auction in New York.
Alex Rotter, the auction house's co-chairman of postwar and contemporary art in the Americas, placed the winning bid on behalf of an unidentified client after a 19-minute battle that saw offers at $200 million, $300 million and $350 million fall short.
The sale didn't simply surpass previous records. It shattered them. More than doubling the highest price ever paid for any piece of art. And nearly six times higher than the previous sale price for an "Old Master" painting.
No, this doesn't mean the end of the bull is nigh. But it's much nearer than it was the week before. Much like last week's note on the market cap-to-GDP ratio, this simply adds to the tapestry of evidence that will eventually lead us to conclude that the bull market is over.
For now, however, Animal Spirits appear to be strengthening.
Halfway through Q4, monthly data releases show real GDP growing at a three percent plus annual rate. Should that hold, it would be the third consecutive quarter of growth at three percent or higher. The last time that happened? 2004.
Last week saw retail sales, industrial production, and housing starts all come in better than expected. Moreover, October factory output surged 1.3 percent. Tying the second highest monthly gain since 2010. Production at factories is now up 2.5 percent year over year. By contrast, factory production was down 0.1 percent in the year ending October 2016, and unchanged in the year ending October 2015.
All of which portends an accelerating economy. Underscored by the Atlanta Fed's GDP Now model which places real GDP growth at a 3.4 percent annualized rate in Q4. The New York Fed's Nowcast tool shows a 3.8 percent growth rate.
Why the growth? Because after years of the meandering, muted economic growth that smothered the potential for the amazing new technologies being introduced, the government has finally gotten out of the way.
Piece by piece, the Obama/Bush regulatory State is being dismantled. And government spending growth has slowed relative to GDP. Tax cuts appear to be moving forward. All of which contributes to accelerating monetary velocity, which is the speed at which money moves through the economy. The biggest signal yet that, at long last, the Animal spirits have been roused.
The massive deregulatory effort currently underway will join with the incoming (do pray) tax cuts to truly stir economic growth. Even though the Congressional growth forecasts will not admit it. Because when Congress assesses the "cost" of tax cuts, it still ignores the positive economic effects of tax cuts on growth. Yet, while refusing to "score" better GDP growth, the budget scorekeepers assume tax cuts lead to higher interest rates, which add to the cost of the tax cuts. Meaning that the scorekeepers will use dynamic models to count the negative effects of tax cuts on the overall economy, but not the positive ones.
This rigged scoring system reveals why the current tax proposals don't cut tax rates on dividends or capital gains, and why some of the tax cuts are temporary. It also explains why the top tax rate on regular income for the highest earners is likely to end up near the current tax rate of 39.6 percent.
A concession in which, by our estimate, amounts to a missed opportunity. But some tax reform will be better than none.
Still, most of the news remains positive. Better policies have finally placed growth on a positive trajectory. While getting to real three percent annualized GDP growth would probably require major changes to entitlement spending programs. Though we doubt today's Congress has the stomach for it. But recent improvements are welcome. And show that that entrepreneurship remains the economic lifeblood in these United States.
For now, markets in the U.S., U.K., Indonesia, Brazil, South Korea, Germany, and India all sit at or near all-time highs. Further, at least eight other nation's can brag that their stock markets also rest near record highs. And many of these nation's sport cheaper valuations than the U.S. Leaving investors with plenty of choices as to where they might allocate capital. Even if (or when) U.S. equities show signs of toppiness.
Overseas, the AP reported last week that Iraqi security forces have retaken Rawah in western Anbar province, the final urban refuge of ISIS in Iraq. The city lies 175 miles northwest of Baghdad. Leaving ISIS with only five percent of the territory it once gained at the height of its caliphate three years ago.
Staying the the Middle East, tensions continue to mount between Saudi Arabia and Iran. As military build ups have appeared on both sides. Saudi Arabia is having a hard time figuring out how to contend with its regional rival. As Iran, currently involved in multiple proxy wars across the region, appears to be ascendant.
Last Thursday, Congress sent President Trump a sweeping defense policy bill authorizing a $700 billion military budget. Which includes billions more for missile defense programs to counter the growing nuclear threat from North Korea.
The defense authorization bill for 2018 sailed through the Senate by voice vote. The House had approved the measure earlier this week.
For this reason -- among others -- we've touted the defense sector for some time. Believing that, in a sea of volatility (financial and military) select defense stocks will offer bastions of strength.
Culturally, it appears that "autonomy" will be next "big data." A buzzword that will finds enter the machinations of academia, defense and commerce alike.
Take the Pentagon, which is pushing for more autonomous technology. And Boeing recently reorganized its four business segments to include an "Autonomous Systems" group.
Seen as expanding human capability, autonomous machines and learning technologies will continue to push into our lives. Personally and professionally. Of course, we've always believed that individual autonomy was among life's most enlightened objectives.
Weekly Results
Major indices finished mixed last week. The DJIA lost 0.27%. The S&P 500 fell 0.14%. The Nasdaq climbed 0.47%. While small cap stocks gained 1.18%. 10-year Treasury bond yields fell 5.5 basis points to 2.34%. And gold closed at $1,293.77, up $18.30 per ounce or 1.43%.

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