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This holiday season we’re excited to grant a Christmas Wish through STAR 102.5’s Christmas Wish, on behalf of Silvercap and our clients.   There are so many incredible people in our community who are making a difference; it gives us great joy to have the ability to assist those who are helping others.  Please take a moment to listen to the below clip of Ken & Colleen interviewing Bobbi, who this Christmas is making a difference in the lives of Iowa Veterans.

We are very grateful for our clients’ long-term support and confidence, and look forward to many more years ahead.

Sincerely,

Josh, Paul, Brent & Danielle

Global growth estimates continued to grind higher in November and U.S. tax reform bills in Congress provided an additional tailwind to U.S. equity markets.  Valuations and geopolitics remain concerning and while the tax cut induced rally may have been a little optimistic, the cyclical picture remains favorable from both economic and policy perspectives.

Market Anecdotes

• The House and Senate passed tax reform bills, projected to boost GDP by 0.8% over the ten-year budget window.  The bill is front end loaded with several provisions expiring or phasing out after five years.  2018 and 2019 real GDP are expected to increase 0.2%-0.3%.
• Corporate taxes are expected to fall by $350b over ten years, taking the effective corporate tax rate from 19% to 17%, increasing cash flow by approximately 2.5% – a fair shake less than the market run up over the past several weeks.
• Jerome Powell was nominated in early November to succeed Janet Yellen as the new Fed Chair.  Markets view the nomination as a safe choice, and a very similar trajectory as Yellen’s Fed.
• The BoE hiked rates by 0.25%, its first move in a decade.  The ECB QE program took its balance sheet to a new record high of €4.4 trillion, equal to 40.9% of Eurozone GDP.  The BoJ opted to keep its foot on the gas, holding rates at -0.1% and buying bonds to keep the 10yr Japanese government bond at 0%.
• Third quarter S&P 500 earnings registered 6.3% year over year growth.  Energy grew 135% on favorable y/y comps while financials and utilities lagged.  74% of companies beat earnings expectations and 44 companies issues positive guidance, the highest number since Q2 2010.
• November saw the S&P 500 pass the 500-day mark without a 5% correction and it broke the all-time record of 370 consecutive days without a 3% correction.  The NASDAQ is amid its longest 20%+ rally in history (inception 1985), well past the tech bull market of the 1990’s.
• The forward 12-month P/E ratio for the S&P 500 is 18.2. This P/E ratio is above the 5-year average (15.8) and above the 10-year average (14.2).
• High yield spreads hit post crisis lows in late October of 3.38%, widening to 3.84% mid-November, before settling back to 3.6%.  Selling pressure was not broad based but high yield funds had their largest week of outflows ($5.1b) since August 2014 (Russian invasion of Ukraine).
• The 2yr/10yr yield spread fell from 0.78% to a 10 year low of 0.58% during the month.  Bespoke noted that while an inverted yield curve did happen prior to each of the last three recessions, it led recessions by at least 18 months and as much as three years in one case.  A nice reminder that yield curve inversion is a leading, not a coincidental, indicator.
• Equity market volatility hit a low for the year in November with the VIX touching 9.1.
• Slowed production growth from U.S. shale and quota constrained OPEC exports have taken U.S. oil inventories down below levels at this time last year.  Prices have jumped from $42 to $59 since mid-year in response.

Economic Highlights

• The economy generated 228,000 jobs in November, beating expectations.  The 4.1% unemployment rate is the lowest level in 17 years.  An upward revision to September’s result moved it from net negative to net positive, re-establishing the record streak of 86 consecutive months without net job losses.
• The tight labor market has yet to translate to wage inflation which registered only 2.5% y/y in November.
• The second estimate of 3Q GDP was revised 3 tenths higher to a 3.3 percent annualized rate.
• Industrial production was revised higher for July, August, and September and surged 0.9% in October.  The industrial sector is now growing close to 3% over the past 12 months.
• November’s ISM Non-Manufacturing index pulled back more than expected from October’s 12-year high.  The reading of 57.4 missed expectations for 59-60.
• University of Michigan Consumer Sentiment for December, albeit off from October’s expansion high of 100.7, registered a strong reading of 96.8

Despite a triple dose of hurricanes, tension with North Korea, and a month known to be challenging and volatile, the S&P 500 delivered its biggest September since 2013 within one of the narrowest trading bands on record.  Not to be left out, the NASDAQ and Russell 2000 hit all-time highs and the DJIA fell only 0.06% short.  European equity markets led the way while emerging markets generated their first negative month in 2017.  With constructive economic reports prevailing both here and abroad, attention will now turn to third quarter earnings season and ongoing political developments both here and abroad.

September Market Anecdotes:

• POTUS reached across the aisle to cut a deal on the debt ceiling which shortly thereafter led to a renewed push for tax reform in Washington.  Tax reform is a clear tailwind for markets, particularly smaller companies who do not spend for lobbying loopholes nearly as much as larger companies.  Bespoke estimates the proposed 15% cut in corporate taxes will boost S&P 500 ESP by 23.1%.
• Tensions with North Korea ebbed and flowed throughout the month yet market anxiety remained in check for the most part.  While the human toll of any armed conflict is devastating, the associated market inflections are typically fast moving, short lived, and most importantly, very difficult to navigate from an investment perspective.
• The 2-year UST closed at its highest yield of the year based on upbeat economic data and Fed Chair Yellen’s seeming desire to hike rates at the December FOMC meeting.  CME futures contracts are currently pricing in an 86% likelihood of a 25bps hike in December.  The Fed also clarified plans to begin reducing its balance sheet in October at a level the markets didn’t find to be a material concern one way or the other.
• September brought three substantial hurricanes to the mainland U.S. and its territories.  While the regional impact has been material, particularly in Puerto Rico, national economic ramifications are not very significant.
• The S&P has now logged eight consecutive positive quarters and eleven consecutive positive months, the latter of which hasn’t happened since 1962.  So far in 2017 there have been 39 closing highs, on pace for 52 for the year.  There have only been four years in history with over 50 record closing highs (1961, 1964, 1995, 2014).
• Market leadership rotated noticeably in September.  The 30 worst performing stocks YTD through August (energy, financials, materials) were up sharply in September, while the 30 best through August (technology, healthcare) were mostly flat.  Additionally, while small caps had been notably weak relative to large caps through August, they beat large caps in September by over 4%.
• The low volatility trend continued in September.  Since 1928, there has been only one 200 day stretch (1960’s) where the average daily market move was less than the trailing 200 days ending 9/30/17.

Key Economic Updates:

• Inflation… increases in energy and shelter accounted for the bulk of August price inflation announced last month.  Headline inflation of 1.9% increased the probability of a December Fed hike.
• GDP… second quarter GDP has been revised higher from the first estimate of 2.6% to the final growth rate of 3.1%.
• Unemployment… As expected, the September employment report reflected the impact of the hurricanes but the headline rate fell to 4.2%, signaling excessive labor market tightness and average hourly earnings spiked 0.5 percent with the year-on-year rate jumping 4 tenths to 2.9 percent.
• Sentiment…  Consumer confidence remained high for the month of September, coming in only five points below its recent high and well above the long-term average of 93.9.  Bullish investor sentiment seems to finally have caught up to consumer sentiment as it broke a 34-week streak of sub 40% readings, jumping from 29% to 40% in a single week last month.

Positive corporate earnings and economic data propelled global equity markets to an eighth consecutive positive month.  Emerging and developed international markets outperformed the U.S. aided by a weaker U.S. dollar and a spike in commodity prices (excluding oil).  Major news items included tension with North Korea, Hurricane Harvey, the Jackson Hole Economic Symposium, and the political climate in D.C. (staff purges, Charlottesville).  Large multinational stocks outperformed small cap stocks again and by a wide margin due to encouraging non-U.S. economic trajectory and currency fluctuations. Information technology stocks led the way, continuing the trend of 2017 while financials and energy stocks lagged due to falling interest rates and oil prices respectively.

August Market Anecdotes:

• Crude oil fell over $3/barrel (6%) in August due to a sharp short-term demand decline from gulf coast refinery shutdowns (Harvey) and shale oil profitability concerns of sub $50 oil.
• Second quarter y/y U.S. corporate earnings posted a second consecutive double digit growth rate thanks in part to depressed earnings hurdles in first half of 2016.  Second half 2016 results will start to present more formidable comps as we move into 3Q and 4Q earnings seasons.
• The U.S. dollar continued to weaken against all major currencies in August, currently -6.6% on a trade weighted basis in 2017.  Strength in the euro benefited European equity markets in August but is expected to pose challenges longer term for Europe’s export oriented economy.  The Euro is +6.2% on a trade weighted basis in 2017 which makes European exports more expensive to other countries and will act as a deflationary force across the continent.
• The Jackson Hole conference did not deliver any market moving central bank narratives.  The ECB is expected to begin tapering their QE program before year end while the Fed has a dot problem on its hands – the market is only pricing in 0.22% of rate hikes through 2018 while the Fed is on record forecasting one hike in December and three in 2018.
• The lack of headline inflationary pressures in the U.S. offset by commodity price increases and emerging signs of wage pressures lead us to believe the Fed will begin balance sheet reduction and affect one more hike in 2017 but only one or two hikes in 2018.
• Abenomics reform initiatives over the past few years have been notable.  From 2013-2016, the percentage of companies with independent directors has risen from 18% to 78%.  The number of companies employing performance based compensation rose from 640 to 941 and those making public disclosures rose from 679 to 1055.  Japan posted 4% GDP growth and inflation appears to be bottoming, and Japanese stocks trade at a 19% discount to the MSCI World equity index.

Economic Updates:

• All 45 member-states of the OECD reported positive economic growth for the first time since 2007 and only the third time in the past 50 years.  If the U.S. expansion lasts through the second half of 2019, it would mark the longest economic recovery/expansion on record.
• August job growth of 156,000 missed expectations for 180,000 but is a decent result given the U.S. is at full employment.  The official unemployment rate rose 0.1% to 4.4%.
• The August ISM manufacturing index registered 58.8, well over expectations for 56.6.  Production and new orders both registered over 60 for the third straight month and have the ISM registering its highest level since April 2011.
• Core PCE, one of the Fed’s preferred inflation measures, remained benign at 1.4% y/y.
• August revealed an encouraging look at July’s retail sales, registering 0.6% growth, exceeding top expectations and included sizable upward revisions to May and June figures.

June put a bow on a very friendly first half 2017 for global equity investors but a quiet month it was not.  Comey congressional testimony, a Fed rate hike, closely watched elections in France and the U.K., and ample central bank narratives dominated the headlines.  Markets absorbed the information in step and, as opposed to recent years, we enter the second half of the year without a tangible dark shadow akin to the Greek debt crises or Brexit weighing heavily on sentiment.  Global economy, corporate profits, and the trajectory of central bank accommodation will be key focal points for risk assets looking forward.

Key Market Anecdotes:

• A decent June enabled the S&P to turn in its best first half performance in four years while the NASDAQ posted its best result since 2009.  The U.S. dollar lost ground for a fourth consecutive month providing a boost to small caps, international developed, and emerging market equities.  

• Since early June, the market has rotated out of what HAD been working on the year (mega cap, tech, high P/E, international revenues) into the areas that HAD NOT been working on the year (small cap, low P/E, high dividend, U.S. revenues).
• From a sector standpoint, financials and healthcare stocks were clear winners while technology and defensives like utilities, consumer staples, and telecom stocks struggled.  Banks were helped by passing the Fed’s stress test which unleashed a windfall $390 billion in stock repurchases.  According to Birinyi Associates, JPMorgan, Citi, and Bank of America’s $92.8 billion of buybacks set a single-day record on data that goes back to 1984.
• Highlighting benign volatility, Bespoke noted it has been over 250 trading days since the S&P 500 had a 5% correction, the longest streak since 1996.  Only once in history (1995) has the S&P 500 experienced a smaller drawdown in the first half of the year.
• In June, the CAPE Shiller P/E crossed above 30x for the third time in history, the others being August ‘29 and June ‘97.  What happened after August 1929 is well documented.  Post June 1997, the market proceeded to rally 80% to a 43x peak multiple in March 2000.
• Investors are anxious that the BoE and ECB will be joining the Fed and begin to normalize monetary policy.  Historically high correlations between interest rate volatility (MOVE) and equity market volatility (VIX) is a sign that the stock market won’t appreciate rising interest rates.
• In a sign of the times, Argentina, having defaulted on its debt eight times in the past 200 years, issued 100-year sovereign debt during the month.  Yield free risk anyone?
• Risk markets appreciated a push back against the populist movement with a French parliamentary victory for the Macron/centrists and a May/conservative party defeat in the U.K. snap elections.  The French parliamentary victory gave Macron’s political party, formed just last year, the first minor party to hold a majority in the French parliament since WWII.  The U.K. snap elections will make Brexit negotiations, which officially began last month with David Davis meeting with the EU’s chief negotiator, a more difficult proposition.
• Elevated U.S. oil production pushed energy stocks into bear market territory (-20%).  U.S. production is up 7.3% since OPEC announced plans to cut production in November 2016 and active rig counts are at a 2-year high.
• DJT’s push for tax and healthcare reform is looking less likely with each passing day.  However, the market friendly deregulation agenda is clearly on track.  The number of pages (96,994) in the Federal Register grows nearly every year and is one measure of Federal regulatory activity.  If the deregulatory pace of the first half of 2017 is maintained, the year-end volume will fall to 61,229 pages, a 40% drop, which has never happened in history.

Economic Anecdotes:

• The U.S. job market remained robust throughout June adding to the record streak of 121 consecutive weeks of sub 300,000 jobless claims.  The unemployment rate stands at 4.4%.
• Final Q1 U.S. GDP was revised higher, from 1.15% to 1.42%.  The U.S. economic expansion has now reached 8 years, making it the third longest expansion in the post-war era.
• Core PCE, the inflation indicator closely watched by the Fed fell to 1.4% annual clip in May, a third decline in a row for the yearly rate and the weakest showing in 1 ½ years.

Global equity markets continued to rally in April, navigating several high-profile developments throughout the month including a U.S. missile strike in Syria, saber rattling with North Korea, positive results in the French election, and the heart of first quarter U.S. corporate earnings season. Soft inflation data and geopolitical events during the month made U.S. treasury bonds more attractive to investors, pressuring interest rates lower in contrast to consensus calls for rising rates. Emerging markets outperformed developed markets again in April with South Korea and Europe leading the way.

April Market Anecdotes:

• The Q1 2017 blended earnings growth rate for the S&P 500 is coming in close to 15%. This marks the highest (year-over-year) earnings growth since Q3 2011 (16.7%). A high percentage of revenue numbers beating estimates is a bullish sign because top line figures are not nearly as ‘managed’ by corporations. Even ex-energy, the market growth rate is nearly 11%.
• From a technical perspective, global equity markets look encouraging. The S&P 500 is currently featuring robust advance/decline ratios, high percentages of stocks making new 52 week highs, and many stocks trading above their 50 day moving averages.
• Non-U.S. equity markets recent outperformance has caught many investors attention. Fundamentals, cheaper valuations, and relative performance do support a relatively constructive view on international equities. Non-U.S. markets have a long way to go to catch up with the U.S. Ten year returns for the US, Germany, France, and Japan are +59%, -5.4%, -26%, and -9.8% respectively and while the U.S. is trading 50% above its 2007 high, international stocks remain 20% below the same mark.
• Technology stocks have been a standout performer on the month and year to date, pushing the NASDAQ over the 6,000-mark last month. In a nod to the tech bubble, each 1,000-point threshold from 2,000 to 5,000 took 1,095-475-56-71 days respectively to travel the distance. Remarkably, the mere 20% increase from 5,000 to 6,000 took 6,256 days.
• Risk aversion in the form of credit spreads are sending a clear message at this time. In basis point terms, 5-year credit default swaps (CDS) of U.S. and European banks and sovereigns are down 20-30 YTD and 40-50 since Brexit.
• Despite real GDP growth of just 1.6% in 2016, the median S&P 500 company earned a net profit margin of 9.7%, only 40 basis points below the record high established in 2014
• At 2,984 calendar days, this is now the second longest bull market on record for the S&P 500 going back to 1928. In terms of bull market strength, the current bull ranks third all-time with a gain of 254.70%. To move into second place, the index only needs to gain a few more percentage points from here, though.

Economic Updates:

• The Fed’s preferred inflation gauge, core PCE, registered a mere -0.1% growth (m/m) signaling soft inflation pressures for the month of April. Regardless, strong labor markets and improving economic fundamentals have odds of a 25 basis point June Fed rate hike at 74%.
• Q1 U.S. GDP grew 0.7%, falling short of estimates for 1%. The quarter was held down by the weakest showing for consumer spending since the last recession, despite exceptionally strong business and consumer sentiment readings. An interesting observation from Bespoke was how initial Q1 estimate rarely beat expectations – in only 4 of the past 19, 1 of the past 15, and 0 of the last 9 years has Q1 initial estimate beat expectations.
• Consumer spending in April rebounded, registered an encouraging 0.4% rate, the largest gain in three months and a welcomed one after a soft March and Q1 results.
• The April U.S. payroll figure of 211,000 new jobs handily beat expectations and marked a nice jump from the 79,000 number posted in March, dropping the unemployment rate to 4.4%, a level not seen since May 2007. Weekly jobless claims maintained its extraordinary streak of consecutive reports with less than 300,000 claims, the longest such streak since 1970.

Both U.S. equity markets and interest rates ended the month close to where they began but getting there was far from a straight line. Emerging markets and international developed markets outperformed the U.S. in March as political risks in Europe abated slightly (Dutch elections) and the U.S. dollar weakened relative to most foreign currencies.  Credit spreads compressed slightly over the course of the month while the yield curve flattened in sympathy with the Fed tightening rates.  From a sector standpoint, we saw a continued rotation away from the 2016 year end/post-election trend (energy, financials, industrials) and into technology and consumer discretionary names.

Market Anecdotes:

• The March FOMC meeting delivered a widely anticipated 0.25% hike, the third thus far in the tightening campaign. Edson Gould, the late great market technician, once remarked, “three steps and a stumble” referring to three Fed rate hikes. That said, the S&P 500 has posted its best ‘first three hike’ total return performance on record. This is very likely due to monetary policy still being extraordinarily accommodative.
• The ECB, BoE, and BoJ elected to stay on their accommodative tracks in March regarding interest rate and quantitative easing programs. Only the Fed and the PBOC moved to tighten policy.
• The S&P 500 ended its impressive streak of 109 consecutive trading days without a -1% decline on March 22nd. -1% pull backs typically happen every couple of weeks. The last time we had a streak this long was 1995. It has been pretty smooth sailing since October 11, 2016.
• Much attention has been given to U.S. equity market valuations. At a P/E of 21.8x, it rests comfortably above the past 30-year median (18.2x) and average (19.2x). However, it’s only ⅔ of the way to the 1999 peak and has been higher more than 25% of the time over the past 30 years. A return to average or median levels would mean an 11%-16% fall in the market.
• Crude oil touched its lowest level of the year in March on the back of record U.S. stockpiles and increasing U.S. production. Thanks to shale, the U.S. producing more oil than it has in nearly 50 years, with crude production on pace to top the record level set in 1970.
• On March 29th, UK PM Theresa May invoked Article 50 of the Treaty of Lisbon, formally triggering the two-year clock for the country to complete negotiations and exit the European Union. Trade, immigration, pre-existing EU commitments, Scottish independence, and the Irish border are all on the table.
• Non-U.S. markets, Europe posted strong returns in March. A weaker U.S. dollar and a bounce in the more volatile political hotbeds of Italy (+9.3%), France (+6.3%), and Spain (+11.2%) provided the boost.
• Growth (EPS and sales) and quality (ROE and low leverage) were the best performing factors for the month, possibly indicating a transition from liquidity driven markets to fundamentally driven markets.

Economic Anecdotes:

• The final revision of 4Q U.S. GDP came in at 2.1%. Not spectacular but slightly better than final expectations.
• The February PCE, the Fed’s preferred inflation gauge, registered 2.1%. This is the first time in five years it has come in higher than the Fed’s formal 2% target rate of inflation. Core PCE remained below 2%, at 1.8%. February headline and core CPI are also trending higher at 2.7% and 2.2% respectively.
• The Citi Economic Surprise Index for emerging markets turned positive in December 2016 and now is at its highest level since 2010.
• Weekly jobless claims maintained its extraordinary streak, currently 108 consecutive weeks, of under 300,000, the longest such streak since 1970.
• The Conference Board’s March reading on consumer confidence blew the doors off at 125.6 versus 114.8 in February. This metric is now higher than the highs of the previous expansion.

Equity markets in February rallied sharply as markets rotated away from risk aversion and toward more of a growth and inflation mindset. Encouraging corporate earnings in the U.S., stable markets overseas, and moderately positive U.S. economic data all worked to support the rally in risk assets and uptick in bond yields.  Fed watchers and market gauges read the February tape as a green light for a 0.25% rate hike at the upcoming March FOMC meetings.

Key February Market Anecdotes:

• In early February, President Trump signed an executive order pertaining to the DOL ‘Fiduciary Rule’ which proposed a 60 day stay on implementing the rule. Many people expected a 6 month delay but a 15 day comment period and 45 day Q&A period is what materialized. The proposed extension would move the applicability date from April 10^th to June 9th, 2017.
• The Federal Open Market Committee, Bank of Japan, and Bank of England all met last month and surprised no one by keeping their respective policies unchanged.
• January’s U.S. dollar weakness was followed by strength in February, rallying 1.62%. This translated into headwinds for local currency foreign stocks and bonds on the month.
• Q4 ‘16/Q1 ‘17 were the first back to back positive year over year earnings quarters in two years. Market appreciation has placed a high valuation on this rebound in corporate earnings. The current forward 12-month P/E ratio (17.6) is the highest mark since 2004 and sits above the four most recent historical averages: 5-year (15.2), 10-year (14.4), 15-year (15.2), and 20-year (17.2).
• We are in the midst of the longest streak without a 1% decline since 2006 and before that, you have to go back to 1995. Volatility remains inordinately low. Bespoke noted the 50 day average intraday high/low dipped to 0.523% in February, the lowest on record since 1983.
• The Dow Jones pierced 21,000 last month, only 35 days after it broke 20,000. This was the fastest time between 1,000 intervals on record.
• The 10yr U.S. Treasury yield began the month near 2.5% and drifted lower to 2.31% at which point it did an about face in the last week of the month. At one point, the 10yr yield increased 10bps on a single day – the largest single day move since the November elections. Growth mindset, rising inflation expectations, and a March Fed rate hike are all factors for the rise.
• Fed Chair Janet Yellen signaled a high likelihood for a rate hike at the upcoming March 15-16 FOMC meetings. Markets are pricing in a 90% probability at this point so the hike is unlikely to surprise markets and is probably fairly well priced in.

Key February Economic Anecdotes:

• The second revision of 4Q U.S. GDP came in at only 1.9%, missing expectations for an upward revision to 2.1%.
• The robust job market continues to impress. Last month’s weekly jobless claims hit the second lowest mark (223,000) of the current cycle. Claims have come in under 300,000 for the 101st consecutive week, the longest such streak since 1970. These weekly jobless figures are at levels not seen 1973 when our country’s population was 212 million (today we are 323 million).
• Headline and core CPI registered 2.5% and 2.3% respectively, the highest headline rate in 5 years. Much of the increase can be attributed to easy year over year comps due to the depressed energy market in early 2016.
• Manufacturing and service sector indicators are flashing green. The February ISM Manufacturing survey registered 57.7, the highest mark since August 2014. The ISM Non-Manufacturing survey registered 57.6. Any reading over 50 means that the segment is expanding.
• Strong consumer confidence persisted in February with a reading of 114.8, the highest mark since July 2001.

January introduced us formally to the new President of the United States who took office with the same bold style as on the campaign trail. Markets moved sideways for a couple of weeks but ultimately continued the risk rally that began in early November. With regard to U.S. and European political climate, we feel it is safe to say that it has been years, maybe decades, since political winds have held this much potential to drastically impact the financial and capital markets. In the U.S., the current mix of pro-growth (tax code reform, streamlining regulation, fiscal spending) and anti-growth (restrictive trade, tariffs, anti-immigration) initiatives are still in a nascent stage at this time and hold both promise and risk looking forward. In Europe, the nationalist/populist movement also holds great potential to impact markets and, like the U.S., is still in the process of taking shape. Ultimately, liquidity usually matters most and that backdrop remains constructive but both the Fed and ECB seem to be at the early stages of curtailing accommodation looking forward into 2017 and 2018.

Key January Market Anecdotes:

• In true D.C. form, it will take a significant amount of time to work through policy initiatives which means corporate earnings carry real significance. Welcomed news is that Q4 results are set to grow at their fastest pace in 2 years, with both earnings and revenue growth of 5%, beating expectations.

• FOMC members have been on the speaking circuit discussing options they have, beyond raising the Fed Funds rate, to begin to tighten conditions. Tapering the reinvestment of Fed balance sheet interest income is one particular option that has been openly discussed.

• The economy’s ability to withstand the cash flow impact of higher interest rates is an ongoing debate. Whether stress will be felt at a 1% increase or 3% increase is debatable, but that there is a tipping point where risk markets will become volatile is not debatable.

• After rallying nearly 5% between the election and year end, the U.S. dollar weakened in January after DJT signaled his preference for a weaker dollar in order to help U.S. manufacturers.

• The DJIA finally hit the symbolic 20,000 mark last month, after nibbling at it for several weeks. Many who recall the DJIA hitting 10,000 in 1999 probably didn’t think 18 years would pass for another double to 20,000.

January Economic Anecdotes:

• 4Q GDP grew 1.9%, missing consensus expectations for 2.2% growth. Private inventory build contributed a full 1% to the 4Q growth rate, which will have to be worked off in future quarters.

• PCE (personal consumption expenditures) rose at a 2.5 percent pace last month, a positive sign that the U.S. consumer spending remains healthy, although down from 3.0 and 4.3 percent in the prior quarters.

• The January jobs report was the strongest in four months with employers adding 227,000 jobs, beating expectations for 180,000. New entrants into the labor market pushed the unemployment rate up 0.1% to 4.8%.

• January jobs report also reported soft wage gains with average hourly earnings only increasing 0.1% and December was revised downward. This provided some calm to market observers concerned about recent trends in wage inflation.

• In defending their currency from falling further, China’s foreign exchange reserves fell to their lowest level in six years, at $3.011 trillion. China’s reserves had reached $4.0 trillion in 2014.

• Consumer confidence continues to jump higher. January jumped to 111.8, nearly 20 points above the long term average of 93.6.

Global equity markets, outside of China and Brazil, followed up a strong November with an encouraging December to finish out the year. The risk rally was clearly driven by optimism surrounding a rebound in corporate earnings and hopes for market friendly reforms in Washington. The importance of healthy earnings to bridge the gap of 2017 is high given the time and shape of new policies in Washington clearly fall more in the 2018 timeframe.

With regard to Washington, market friendly initiatives include lower business and individual tax rates, defense and infrastructure spending, financial and environmental deregulation, and an end to the Affordable Care Act (ACA). Opposing forces of uncertainty include the shape and long term impact of immigration policy reform, protectionist trade policies, domestic social policy, and unorthodox foreign policy. Ultimately, policy changes will enlist all three branches of government and require a great deal of time, thought, and compromise.

Key December Market Anecdotes:

• Central banks had a busy month. The Fed delivered a 25bps rate hike as expected and telegraphed three expected hikes in 2017, at odds with market expectations of just under two hikes in 2017. The ECB left rates alone but delivered a modified taper, extending the duration of QE through December 2017 but reducing the amount from €80b to €60b. A last QE hurrah? The BOE held firm on rates while the BOJ (Bank of Japan) maintained its QE with the yield curve control program intact and announced plans for a record $830b fiscal spending package.
• Italians voted an overwhelming “No” on a highly publicized referendum in early December. The “No” vote was essentially a referendum on Prime Minister Rezi who announced plans to resign from office after conceding defeat. The fate of several Italian banks immediately became unclear – political uncertainty prompted the ECB to reject Monte Paschi’s request for an extension to January 20th to complete their plan to raise rescue financing.
• WSJ Dollar Index touched its highest closing value in more than 14 years. The U.S. dollar has moved sharply against both the Yen and Euro – the Euro hitting its lowest level against the U.S. dollar since 2003 during the month.
• Mark Constantine (@vexmark) noted that at 8.8 million barrels a day, US pumps almost as much crude as two years ago, with just a third of the rigs it operated at the peak.
• University of Michigan’s consumer sentiment survey hit its highest level in 12 years and the Conference Board’s measure of consumer confidence was a monster (113.7), rising to its highest level since August of 2001.
• Evercore ISI thinks, even using the speediest process available (special budget reconciliation), it could take until August to achieve any legislative priority in Washington. While the 3.8% tax on investment income could end immediately, resulting in $65b of stimulus, more comprehensive tax reform will most likely be a 2018 boost. It took Regan almost two years after winning 49 of 50 states to pass the 1986 tax reform.

December Economic Anecdotes:

• Inflation benchmarks of PCE and CPI are trending slightly higher at 1.4% and 1.7% respectively (1.6% and 2.1% core readings).
• December was the 75th straight month where employers added jobs, extending the longest such streak on record dating back to 1939. Unemployment has fallen from 10% to 4.7% over the past 8 years. Year over year wage growth of 2.9% is the highest since May 2009 and the 12 month average wage growth is up to 2.6%, the highest since February 2010.
• The ISM manufacturing index registered a healthy 54.7 in December, the best reading in a year while the non-manufacturing index printed a 57.2, beating expectations of 56.8.
• December auto sales came in at an 18.13mm annual rate which made December the best month for auto sales since July 2005!!!