Weekly Market Update
April 17, 2017
Presented By:  Todd Day, Portfolio Manager


Geopolitics and Economic Worries Cloud the Start to Earning Season

In a holiday shortened trading week, it was another disappointing week for the major averages and the small caps, as measured by the Russell 2000 have now gone negative for the year.  Geopolitics! 

You choose -

The U.S. is firing missiles in Syria - the U.S. dropping the "Mother of All Bombs" in Afghanistan - or the rhetoric out of North Korea - tensions are elevated to say the "very least".

I would point out that it could have been worse, a lot worse.  With the major averages only giving up 1% to 1.25%, we could take that as a win, although it doesn't "feel" like it.   

Bank earnings are upon us.

JP Morgan, PNC Financial, and Citigroup all reported strong earnings and revenues, Wells Fargo reported good earnings but revenues were a bit shy.  JPM chief, Jamie Dimon said, "U.S. consumers and businesses are healthy overall and with pro-growth initiatives and improving collaboration between government and business, the U.S. economy can continue to improve. 

So, optimism on the economy is running high, and banks are supposed to be able to demonstrate that. More demand for loans!  Steeper yield curve! 

But there are concerns. Investors are trying to reconcile a more optimistic outlook on the economy with troubling trends in bond yields and loan growth.  Here's the problem: a lot is expected to go right with bank earnings.  Financials are expected to see a 15 percent gain in earnings in the first quarter. That is a lot. The gain is based on expectations that interest rates would be moving up, loan growth would improve, and credit risks would remain low.

But it's not quite playing out that way.  Here's what's happening.

Interest rates are indeed up - the 10-year yield was at roughly 1.75 percent a year ago, it's at roughly 2.21 percent today. That's a big jump, and it's happened because the Fed has been raising rates and inflation expectations were higher.  But rates have been trending downward recently--we were at 2.6% a month ago.  What's that all about?  How can investors reconcile expected FED rate hikes with rates trending lower?  That's a problem.

Further, there have been some cracks in the credit market.  For example, delinquencies have been rising on auto loans and non-prime card loans.  It's small, but it has investors talking.

Most importantly, loan growth has been anemic.  How anemic?  Total loan growth is up only 0.4 percent in Q1 compared to the same period last year, and has been particularly disappointing with Commercial & Industrial (C&I) loans, where there has been virtually no growth.

And another thing - deposits are up, but loan growth is flat.  That is not a good sign.  In an expansionary environment, you see deposits go down and loan growth going up.  The opposite is happening.

In other words - corporate America is sitting on their hands, and we don't know why. The optimism has not found its way into corporate behavior."

There is so much interest in bank earnings and particularly in the management outlook.  They will avoid talking about Trump tax cuts but they can't avoid talking about loan growth and why bond yields are moving down and what the impact of a flatter yield curve will mean for them.

For the moment, the optimists are still in charge. Bank stocks are 10% off their recent multiyear highs in early March but still nearly 20% above where they were on the eve of the election (the S&P 500 is up only 10%).
Bottom line: a lot is riding on the commentary of a couple dozen bank CEOs in the next few weeks.


Last week, the National Federation of Independent Business (NFIB) reported that 85% of those hiring or trying to hire reported few or no qualified applicants for their open positions - that could be a problem. 

Producer Prices (PPI) were light across the board.  Inflation - what inflation?

But, Friday's economic data was very weak and points to a slow first quarter.  Retail sales fell 0.2 percent in March with February revised a sharp 4 tenths lower to minus 0.3 percent.  Most components show declines, especially motor vehicles for a 3rd straight month and restaurants for a 2nd straight month. In another unexpected result, consumer prices fell 0.3 percent in March with the core rate also negative, at minus 0.1 percent.

This news points to slooooow growth with little inflation, a combination that should push back expectations for Federal Reserve rate hikes.

BUT - SURPRISE - The University of Michigan Consumer Sentiment Index is on fire and continues to push higher. 


European and Asian markets were mixed to down last week, once again following the U.S.'s lead, not only because of geopolitics, but concerns heading into the French elections have investors nervous.  And there are still concerns that Greece will try to leave the Euro, or get kicked out, and Italy is still cause for concern. 

In Asia, China reported their GDP was growing faster than expectations. 


Earnings season will kick into high gear this week and we will be hearing from more big banks.  Goldman Sachs, Bank of America, Morgan Stanley, Travelers and BB&T.  As I said earlier, there will be a lot of focus not just on the previous quarter's numbers, but more importantly, their outlook. 

The economic calendar consists of some housing data, industrial production and the leading indicators. 

While the fundamentals of the earnings and the economic data are important - I expect that more attention will be on the geopolitical landscape - and as I said last week, there is slim to no chance of them fading any time soon, so stay tuned and we'll keep you posted.  


Homemade Whipped Cream in a Jar

Ditch your whisk for this simple, tasty recipe!

  • 1-quart glass jar with lid
  • 1 cup heavy cream
  • 2 TBSP confectioners' sugar
  • 1 TSP pure vanilla extract

Step 1
  1. Combine the ingredients in the glass jar.
  2. Secure the lid.
  3. Freeze the jar for 15 minutes.
Step 2
  1. Take the jar out of the freezer.
  2. Shake the jar continuously and vigorously until you see semisoft peaks (about 3 - 4 minutes).
Top your favorite fruit, dessert, or coffee drink with the cream.
Recipe adapted from Saveur
Paying the Additional Medicare Tax
For taxpayers who have income above a certain threshold, you may have to pay the Additional Medicare Tax. Here are some key details to help you identify your potential tax liabilities.
What is the Additional Medicare Tax rate?
You will pay 0.9% on any income over a certain threshold.
What income is subject to this tax?
Any income that you receive above your threshold amount includes:
  • Wages
  • Self-employment income
  • Railroad retirement (RRTA) compensation
What are the threshold income amounts?
You have to pay the Additional Medicare Tax when your income is above the following amounts:
  • Married Filing Jointly: $250,000
  • Married Filing Separately: $125,000
  • Single: $200,000
  • Head of Household: $200,000
  • Qualifying Widow(er) With Dependent Child: $200,000
If your income requires you to pay this tax, you will need to file Form 8959 . You can find more information on the IRS website .

    Tip courtesy of IRS.gov
Use Your Shadow to Avoid Swaying When You Swing
When you're in the middle of a round, being able to check your swing is challenging - since courses rarely feature mirrors. This is where your shadow can serve you well! With these tips, you can check your swing to see if you're swaying by watching your shadow:
Step 1: Shadow
First, focus on using your shadow to reveal any problems in your stance and swing: 
  1. Stand so your shadow is in front of you and the sun is behind your back.
  2. Stand at the setup.
  3. Locate where you have placed your head and hips by checking your shadow - which should look like a golfer without arms.
  4. Look at your shadow as you swing back to make sure your body is rotating, rather than  swinging back and forth. Also check that you are holding your spine angle.
  5. Look for any tilt away from the target.
  6. Practice a correct swing a few times.
Step 2: Sun
Next, practice your swing facing the sun:
  1. Hold your body alignment and practice swinging with your corrected position.
  2. Focus on how your body feels, instead of looking at your shadow.
  3. When you take a real hit, keep your attention on the back of the ball.
  4. Make sure you're continuing to rotate your body through the hit, never sliding.
Tip Courtesy of Golf Tips Magazine
Manage and Relieve Itchy Skin

Having itchy skin can reflect a serious medical ailment, or it can also be a result of temporary factors such as seasonal weather conditions. Fortunately, with these tips, you have ways to manage and relieve itchy skin, so you can find ongoing relief.
  • Avoid Scratching: Not scratching an itch may seem impossible, but it can help you relieve the annoyance and potential pain. If not scratching is too challenging, cover the itchy area. Also, consider wearing gloves at night that help keep you from scratching in your sleep.
  • Apply Wet Compresses: A wet bandage soaked in cool water can help provide relief. Be sure to completely cover the trouble area to further keep you from scratching.
  • Take a Bath or Shower: Many people report that immersing in water can provide relief for hours. For bath-takers, try a lukewarm bath with baking soda or uncooked- or colloidal oatmeal sprinkled in to soothe the itching sensation. If you prefer showers, either a cold or hot shower can help - choose the temperature that works for you.
  • Reduce Stress: Experiencing stress in your life can make your itchiness worse. If you're suffering from prolonged itching spells, analyze your stress levels and take steps to reduce them.
Tip courtesy of Mayo Clinic
Understand What Those Egg Labels Mean

Choosing to adopt a green lifestyle or make green-living changes can address everything from the food you eat to the clothing you buy, and more. For those looking to buy eggs from humanely raised chickens, you have a variety of terms to navigate. In the United States, more than 90% of eggs come from caged chickens eating a corn or soy diet and have only 67-square-inches to move. They also never go outside. If you want to purchase eggs from chickens raised in more natural surroundings, follow this guide to make sure you understand what the different marketing terms mean.
  • Cage-Free: This environment removes the cages and is a step up from the most factory-based approaches. But, the chickens still live strictly indoors in confined, group spaces with less than 1 square foot of room. They eat a corn or soy diet.
  • Free-Range: Chickens raised in this manner need 2 square feet of room per hen - and surprisingly, they often get to spend less time outside than you might expect. Many hens still eat a corn or soy diet.
  • Pasture-Raised: These chickens are the ones who get the most access to the outdoors, often put outside in the morning and brought back in at night. They must have at least 108 square feet of space each and are able to eat anything they find in the dirt, such as grass, bugs, and worms.
You can help your shopping efforts even further by buying eggs designated with a Certified Humane® pasture seal, which means the farmers have met strict quality standards.

Tip courtesy of Certified Humane
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