Quote of the Week
“In politics when you are in doubt what to do, do nothing…when you are in doubt what to say, say what you really think.” – Winston Churchill
Last week the markets had a good run up. The Dow was up 0.86%, the S&P 500 was up 0.91%, and the NASDAQ was up 1.57%. I like it when the NASDAQ is up more than the Dow and the S&P 500. It generally means that the upward momentum is strong, just what we like.
The Senate is voting on their version of the Tax Cut/Tax Reform bill this week. The House has already passed their version. Then it will go to the Conference Committee to iron out the differences. The House and the Senate bills are different in many respects. It should be interesting to watch.
The UPI from the trend following software we use is 24 out of 100. This is a one-point drop from 25 last week. Our allocation for most clients remains the same: 85% equities, 0% bonds, 10% alternatives, and 5% cash.
The Consumer is Doing Just Fine – Black Friday and Cyber Monday have just passed. I am sure we will hear how both days went with a blizzard of numbers and reports about the US consumer. So far, these figures show blowout online sales and a mild decline in foot traffic at brick and mortar stores. Both are better than expected given the ongoing transformation of the retail sector.
Everyone concentrates on Black Friday sales and Cyber Monday deals, but they are just part of the story. Sales are starting earlier in November and have become more spread out over the full Christmas shopping season, so the facts and figures we hear about sales over the past several days are not quite as relevant as they were in prior years. Also, this year’s shopping season is longer than usual due to an early Thanksgiving holiday.
Nevertheless, all this focus on the consumer is a mistake. It is backward thinking. In the big picture, it is the innovators, entrepreneurs, and workers combined that generate the material wealth that makes consumer demand possible in the first place. The reason we produce is so we can consume. Consuming does not build wealth, production does.
It looks like we will have excellent sales for November and December combined. The consumer discretionary asset class is at the top of the Leaders and Laggards ranking again this week as it was last week.
Jobs are up 2 million from a year ago. Meanwhile, total earning by workers (excluding irregular bonuses/commissions as well as fringe benefits) are up 4.1%. If you listen to the reports that the “rich are getting richer” from a percentage income basis the facts say otherwise. They are still “getting richer” from a net worth basis, but from an income percentage increase basis, the facts say otherwise. Usual weekly earnings for full-time workers at the bottom 10% are up 4.6% versus a year ago, earning for the bottom 25% are up 5.3% from a year ago. By contrast, usual weekly earnings for the median worker are up 3.9% while incomes for those at the top 25% and top 10% are up less than 2%. This is bullish for spending because the increase in earnings for the bottom 50% is usually spent vs. the spending for the top 50%.
Yes, that is right, incomes are growing faster at the bottom of the income spectrum that at the top. A higher economic tide is lifting all boats and helping those with the smallest boats the most. This is a recipe for increasing sales.
Some are saying it is a consumer debt-fueled bubble. It is true that total household debt is at a new record high. But debts relative to assets are much lower than before the Great Recession. Debts were 19.4% of household assets when the Great Recession started. Now they are at 13.7%, one of the lowest levels in the past generation. Meanwhile for the past four years the financial obligations ratio – debt payment plus the cost of car leases, rents, and other monthly fees relative to incomes – has been hovering near the lowest levels since the early 1980s.
Auto and student loan delinquencies are rising. Total serious (90+ day) delinquencies including not only autos and student loans, but also mortgages, home equity loans, and credit cards were down 61% from the peak in 2010.
The bottom line is that investors should be less worried about consumer debt today than at any time in recent decades. Some time this could change if the Fed continues to raise interest rates while selling off its bond portfolio. However, interest rates are still well below normal levels, and the U.S. banking system is sitting on trillions in excess reserves.
The U.S. economy is less leveraged and looking better in recent quarters than it has in years. The Plow Horse Economy is picking up its pace, and consumer spending is in great shape.
By the Numbers
STREAKING – The S&P 500 is up +1.2 %(total return) for the “month to date” with just 4 trading days remaining in November. If the index does finish “up” for the month, it would be its 13th consecutive “up” month, the best run for the S&P 500 since it ran off 15 straight months of gains from March 1958through May 1959. The S&P 500 consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the index proportionate to its market value (source: BTN Research).- Michael A. Higley, BTN 11-27-2017
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These are the opinions of Larry Lof and Stephanie Mayoral and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs. The S&P 500 is an index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly. Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.