April 2017
Easy Earnings
U.S. strikes Syria over gas attack
Trump pivots on China
Stocks advance on rising earnings
IMF joins in global effort to eliminate cash
Stocks in April advanced, with international developed countries leading. Bonds and gold were also positive, but commodities, led by oil, slumped:
April began with news that the US launched a missile attack on Syria after reports of the use of chemical weapons on civilians purportedly by the Assad regime, which killed over 70. President Trump wasted little time in a show of US force, sending 59 Tomahawk cruise missiles to destroy Syrian air force assets, including planes and airport facilities. Geopolitical analysts mostly agreed that the orders, issued during a state visit by Chinese Premier Xi Jinping to Florida, put the world on notice that American passivity of the prior administration was over. While some claimed that the chemical strike was a "false flag" attack (where third party actors goaded the US into attacking the current regime), there is no doubt the action was intended to put Russia on notice that their support of Assad will now be actively challenged.
Stock markets mostly yawned at this news, while oil was up about 5% over that weekend, which then promptly retreated the rest of April. Bonds rallied. Syria remains a high risk for the markets, where two nuclear superpowers are now jockeying for position to essentially direct the physical flow of natural gas from East to West (yes this conflict is all about economic benefits, not religion or human rights). Unfortunately, investors need to accept that this chess game will go on, and that anything could happen at anytime, such as a morning headline that reads "US downs Russian warplane over Alleppo-2 pilots killed-Putin vows retaliation".
Economic data in April was mixed. Early in the month, the monthly Non-Farm Payrolls (NFP) report from the Labor Department showed that the U.S. created just 98,000 new jobs last month, its smallest increase in almost a year. However, the unemployment rate fell to 4.5% due to a higher change in workers being employed (+472,000) as the labor force participation rate held steady at 63.0%. Still, payroll growth was soft in contrast to the March ADP report, average hourly earnings growth was only okay, and there was a decline in the average workweek. The key takeaway from the report is that it illustrated an ongoing disconnect between the hard data and the soft data and it will challenge -- or should challenge -- the stock market's economic growth assumptions.

In mid-month, producer prices fell for the first time in seven months as the cost of services and energy products retreated. The Labor Department reported its Producer Price Index for final demand fell 0.1%, its first decline since August. Economists had not expected any change in the PPI. Seasonally-adjusted, wholesale prices are up 2.28% from the same time last year. Prices have risen largely because of the rebound in the price of oil, although analysts point out that the cost of many other goods and services continue to inch higher. Stripping out the volatile fuel, food, and retail trade margins categories, the so-called core producer prices rose 0.1% in March-their tenth consecutive gain. The core rate is up 1.7% over the past 12 months, almost double compared to a year earlier.
For consumers, the cost of goods and services fell for the first time in more than a year last month. The Consumer Price Index, also known as the "cost of living", fell a seasonally adjusted 0.3% according to the Bureau of Labor Statistics. Economists had forecast a 0.1% decline. The rate of inflation over the last 12 months fell to 2.4% in March after hitting a five-year high of 2.7% in February. Still, analysts expect that March's retreat was just temporary and that overall inflation is expected to continue. Ian Shepherdson, chief economist at Pantheon Macroeconomics said, "One very soft month does not make a new trend, so we will be looking for a clear rebound in April." Core inflation, which strips out the volatile food and energy categories, suggests prices are relatively stable. That number fell just 0.1% in March. Core CPI has risen 2% over the past 12 months.
China's outlook for exports this year brightened considerably as trade growth surged 16.4% year-over-year in March.  The increase was the largest jump in two years and the latest sign of improving global demand.  Furthermore, concerns of a potential trade war eased as U.S. President Donald Trump softened his stance towards the world's second largest economy.  Trump reversed course from his earlier campaign promises to label Beijing a currency manipulator and slap punitive tariffs on Chinese imports.  In an interview published in the Wall Street Journal, Trump stated the Chinese weren't currency manipulators (or at least he wouldn't label them as such while the US needs China to help handling North Korea).  March's improvement marked a dramatic turnaround from February's 1.3% year-over-year drop. Trump's reversal is good news and indicates that trade wars are perhaps not as good a solution as it sounded on the campaign trail. 
Earnings reports for Q1 were very positive for investors. As the graph below shows, profits (NTM EPS Growth) were up 11% versus a year ago (LTM EPS Growth) for the S&P 500, when profits were -1.3 for the prior twelve months, making the profit recovery look easy. Note the strong performance of small cap stock profit growth (+28%) and international developed (MSCI EAFE +14%), and remember this the next time you hear someone predicting a coming crash in stock prices:    
  Source:  Eaton Vance
Early in April, the International Monetary Fund (IMF) in Washington published a Working Paper on "de-cashing" economies and the implications thereof. This paper joins the EU study on eliminating cash and clearly demonstrates that governments are planning to implement this globally. IMF-Analyst Alexei Kireyev recommends in his conclusions:
"Although some countries most likely will de-cash in a few years, going completely cashless should be phased in steps. The de-cashing process could build on the initial and largely uncontested steps, such as the phasing out of large denomination bills, the placement of ceilings on cash transactions, and the reporting of cash moves across the borders. Further steps could include creating economic incentives to reduce the use of cash in transactions, simplifying the opening and use of transferrable deposits, and further computerizing the financial system."
Governments are bankrupt and are desperate to keep tax revenue coming in. Do not be fooled by the claim that these measures are needed to "fight terrorism and criminal money-laundering". It's all about eliminating privacy and having every financial transaction everywhere recorded and taxed. This is how socialism will die. You can read more here:
As we publish this Journal, news of the French election victory by the centrist party has produced little reaction in stocks and bonds. We'll visit that topic next month, as well as the US healthcare reform effort. In the meantime, the debt ceiling is set to expire in October of this year, so everything Congress does from now on will involve some component designed to advantage one party over the other in the incessant "blame game" that masquerades as governance. This protracted legislative choreography will dampen investor spirits as everything remains on hold: tax reform, immigration rules, the budget for FY 2018, etc. From our perch, it looks like a sideways market until these critical items are addressed, which is likely to be "last minute" like everything in DC.
Have a great month, and thanks for reading our (slightly delayed) Journal - we were deep "in conference" at the Plan Sponsor Council of America's 70th Annual Conference as a Member of their Investment Committee, and leading a retirement investing presentation session among many other things!

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