"Since the Great Recession, which is now eight years old, we've been growing at 1.5 to 2 percent in spite of stupidity and political gridlock, because the American business sector is powerful and strong... It's almost embarrassing being an American citizen, and listening to the stupid shit we have to deal with in this country... What I'm saying is that it would be much stronger growth if there were more intelligent decisions and less gridlock... We need infrastructure reform. We need corporate tax reform. We need better skills and education. If we don't focus on these things, we are hurting average Americans every day."
-Jamie Dimon, CEO of JPMorgan Chase, railing against Washington gridlock and the inability to deliver policy changes on taxes, regulation and infrastructure
Last Week in Brief
Spent the last two weeks in Colorado. Family. Friends. Hiking. Fishing. Biking. Reading. Eating. Drinking. Even visited clients. In all, another restorative visit to what ranks among the nation's loveliest, most remarkable areas.

In Colorado's southwestern environs, one finds some of the most independent thinker one will ever meet. Cowboys. Sportsmen. Entrepreneurs. Daredevils. Often rolled into one. The region's rugged terrain, beautiful vistas, sky-scraping mountains and broad, rolling rivers invite the gamut of unique, self-sufficient and adventure thinking human beings.
All the more apropos that the book I read while there was on two of the twentieth century's most unique thinkers. Entitled Churchill and Orwell: The Fight For Freedom, it went down like good bourbon. Bold. Enjoyable. With a bit of a masculine edge tucked in among the myriad of its deeply considered ruminations.
More later...
June's completion closed out the second quarter. Early in the month, anxious investors pulled $11 billion from U.S. equity markets. Understandably. As stocks have had an excellent year. Part of the parabolic run-up since the Credit Crisis ended. Also, the S&P 500 had achieved its highest price-to-sales ratio (2.0) of the last 17 years. The highest P/S ratio since 2000. Confirming investor fears of hefty stock valuations.
Of course, during the dot-com bull market, the S&P 500 crested the same P/S ratio in 1998. After which the index ran up another 26 percent over two years. While the Nasdaq soared 131 percent.
Importantly, two other valuation metrics balance out the narrative. One says the S&P 500 remains well below its 2000 valuation levels. As the price-to-earnings ratio on the S&P 500 remains 34 percent below the dot-com highs. And the price-to-book ratio sits 59 percent beneath the 2000 apex.
While capital outflows reveal investor weariness, we are emboldened. Because the market has likely not finished its "melt-up" stage. That final time frame in a bull market during which everyone buys. Sending the market ever higher as investor apathy reaches its zenith.
We believe that the time to sell has not arrived. Stocks will likely push higher for the foreseeable future. Even if we incur a near-term pullback. The trend line, for now, points higher.
Moving on, as the second quarter rescinds from view, serious investors will take time to review the market's performance, trend lines and valuation metrics. How else can those attempting to navigate the uncertain investment seas learn from experience, and chart a course amid rapidly evolving geopolitical and economic seas?
Q2 saw the S&P 500 return 3.09 percent to investors. Bringing trailing-twelve month returns to 17.90 percent. And yet, the mainstay U.S. equity index was not the top performer. As international equities returned 6.12 percent. While emerging markets delivered 6.27 percent.
On the other side of the balance sheet, the U.S. aggregate bond index returned 1.45 percent. Though the trailing-twelve month return remained red, at negtive -0.31 percent.
We've long contended that, as U.S. equity valuations continue to climb, ample opportunities will be found in overseas markets that have legged the U.S. indices since the Credit Crisis.
Since January, foreign markets have surged ahead of domestic indices. More importantly, valuation and longer-term performance data portend that such outperformance could continue.
Foreign developed equities (MSCI EAFE) have returned 8.7 percent to investors these last five years. That compares to the 14.6 percent that the S&P 500 has provided. Longer term, the MSCI EAFE has returned only one percent per year over the last decade. While the S&P 500 return equates to 7.2 percent per year.
The emerging market equity index (MSCI EM), perennially the best performing equity index over the long run, has provided investors with a four percent annualized return over the last five years. And a 1.9 percent return per year over the last decade.
Recently, valuations for the S&P 500 have hit 10-year highs. With the cyclically-adjusted price-to-earnings ratio surpassing 27 of late. A level at which, historically, real inflation-adjusted equity returns have become stunted.
Simultaneously, equity valuations in Europe, Asia, and emerging markets have remained within a range typified by their 25-year averages. Leaving them more upside from a valuation perspective. In addition to continuing improvement in foreign developed and emerging markets earnings growth. Adding further wind in their sails.
For nine years, U.S. equities have carried the baton. Since the year's beginning we've watched the telltale signs of mean reversion. Leading us to believe that foreign markets will offer investors better risk-to-reward ratios over the next few years.
And the Q2 economy?
Since 2009, the economy has grown at an annual rate of 2.1 percent. So Q2's 2.6 percent represents a small improvement. Averaged with Q1, which was 1.2 percent, and we land on a meager 1.9 percent growth rate.
Nor did the government's annual revisions to GDP data for the past few years amount to much.
The economy's real GDP was 0.2 percent larger in Q1 than previously estimated. With real GDP growing more than estimated in 2014 - 2015. And slightly slower in 2016.
The best news in the Q2 report was that all three parts of business fixed investment -- investments in equipment, intellectual property and commercial construction -- grew in both quarters this year. Don't read too much into this, but an acceleration in business investment can reflect a tightening of the labor market. Which may mean that much-desired wage inflation could be next.
There were improvements in the regulatory environment. And it seems growth in government spending and employment has leveled off. Yet, lower tax rates and free-market health care reforms remain undone.
All of which leads us to believe that recession odds remain low. But any real acceleration in economic growth will require bipartisan action in the Congress and the White House.
And for nine years, the only bi-partisan offering in D.C. has been incompetence.
Obamacare passed on 100% partisan vote. Repeal will be same. For the first time ever, economic growth has stagnated below three percent for a decade. Can't fix immigration. 20M people remain here illegally... imagine if they were paying into the system? We've no national energy plan. No agreement on fixing a broken tax system. Nor on repatriating billions of corporate dollars. We're losing jobs to China and India because they're graduating more engineers each year. Because we lack a national education plan.
Why? Because the idiots in D.C. can't get along. Or, more likely, don't care. So long as they're re-elected and sent back to D.C. each election cycle. Where they can become wealthy. Don't have to use ObamaCare. And can get paid and have their egos stroked while they, quite literally, accomplish little to nothing.
Despite suspicions of Russia having colluded with the Trump administration in attaining the White House, U.S.-Russo relations hit a new low last week. Russia responded to the American push for additional sanctions by expelling hundreds of U.S. government employees from their Moscow offices. Telling the U.S. to vacate multiple diplomatic venues.
About which the Russians said, "The passage of the new law on sanctions shows with all obviousness that relations with Russia have become hostage to the domestic political battle within the U.S. ... The latest events show that in well-known circles in the United States, Russophobia and a course toward open confrontation with our country have taken hold."
Sounds like collusion is paying real dividends.
Weekly Results
Major indices finished mixed last week. DJIA gained 1.16%, S&P 500 fell 0.02%. The Nasdaq dropped 0.20%. 10-year Treasury bond rose 2.32%. Gold futures closed up 1.17%.