Hard To Find Much Bad News

One could certainly say the current economic expansion is long in the tooth, i.e., second longest on record. As we also wrote in our summer Investor Letter, the headlines on news reports seem a lot worse than reality. Personally, I stopped tuning into the daily television business shows not too long ago as news headlines seem disconnected from actual economic and business results. Simply looking at some of the economic and business reports today:

• Initial jobless claims are at their lowest level in nearly half a century, being reported at 207,000.

• The Conference Board's Leading Economic Index (LEI) report increased .5% in June. On a year over year (YOY) basis the LEI is up 5.8%. Also displayed on the below chart is the data for the industrial production report released earlier in the week. Although May's report was revised down to -.5% versus the prior reading of -.1%, June's report was reported up a strong .6%. On a year over year basis industrial production is up 3.8%. When both the LEI and industrial production YOY numbers turn negative this is when one might want to be on the lookout for an economic slowdown. The reports this week are far from negative. Econoday noted in their report on the LEI, "Building permits are the only weakness with the new orders index of the ISM manufacturing report the leading strength in a report that points to steady economic growth ahead."

• The Philadelphia Fed Business Outlook Survey this morning was reported at a strong 25.7 and exceeded consensus of 22.0. One negative from the report was the increase in the prices paid component that rose 11 points to 62.9, which is one of the highest on record. This increase in prices is most likely a result of issues surrounding tariffs and trade. Also notable in the report is the rise in orders, up 13.5 points to 31.4, with unfilled orders jumping to 11.0, a 14 point gain.

• Today The American Association of Individual Investors reported individual investor bullish sentiment declined 8.4 percentage points to 34.7%. Bearish sentiment also declined by 4.2 percentage points to 24.9% with the net result an increase in neutral sentiment by 12.6 percentage points to 40.4% and above its longer term average as seen in the first chart below. The second chart shows the decline in bullish sentiment along with its 8 period moving average. The bullish average is less volatile and remains just below its long term average level. Again, these sentiment measures are contrarian ones and most useful at their extremes. The near average reading for bullishness is some indication of the indecision facing investors, maybe due to the disconnect between news headlines and actual business and economic results;  and thus, the higher than average neutral reading.

Overall, much of the economic and company news seems highly positive. One could surmise this good news might be all priced into equity prices, but the current overall economic and business strength does not seem to be suggestive of an economic downturn any time soon. Certainly the issues around tariffs and trade, and their 'potential' negative impact, are worth maintaining a close watch on.

Consumers Are Buying

If there is one takeaway from today's advanced retail sales report it is the consumer continues to buy. On a year over year basis total retail sales increased 6.6% as of the end of June. For the month, the actual increase was .5% and met consensus expectations. A large positive in the report was the .5% revision higher in May's .8% increase to a 1.3% increase. In Econoday's release covering the report they note,

"What's striking is that autos were very strong in both June and May, up 0.9% and 0.8% respectively, with restaurants really showing unusual acceleration, up 1.5% and 2.6% in the two months. Gains here point to new confidence among consumers and are consistent with the strength underway in the labor market."

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Individual Investors Like The FANG's ex Alphabet

From time to time I review the top 10 stocks that are attracting the interest of members of Better Investing (BI). BI reports the information based on a review of transactions from the company's club accounting website as well as separate member transaction reports. The list has become a little less technology dominated since my last report in March this year. The FANG's ex Alphabet (GOOGL) continue to draw investor interest though. The only top 10 stock seeing net selling activity is Gilead Sciences (GILD)

Full File (xls)

Sentiment Is Widely Positive

Today's Sentiment Survey report from The American Association of Individual Investors (AAII) is further confirmation that sentiment results are widely positive. The AAII report shows bullish individual investor sentiment jumped 15.2 percentage points to 43.1% this week. Ten percentage points came from a decline in bearishness of 10.1 percentage points and a decline of 5.1 percentage points in the neutral category.

This improvement in sentiment coincides with other sentiment measures showing high levels of optimism as well. Yesterday we noted the near record high in the NFIB Small Business Optimim Index. The consumer is optimistic as well with the University of Michigan Sentiment Index at a level that exceeds pre-financial crisis readings.

Sentiment measures tend to be contrarian ones, especially the AAII Sentiment Survey. From a positive standpoint bullish sentiment is not at an extreme high, that is, at a level in excess of 50. In and of themselves, these positive sentiment readings can serve as a tailwind for further positive activity both economically and and for the equity markets.

Looking Under The Headline NFIB Small Business Optimism Index Level

One area that could show an early sign of weakness resulting from the trade/tariff headlines is in sentiment levels, specifically, sentiment of consumers and business. Just yesterday the NFIB Small Business Optimism Index report showed small businesses remain highly optimistic. The report noted,

• "The Small Business Optimism Index posted its sixth highest reading in survey history for the month of June, at 107.2, down 0.6 from May."

• "Since December 2016, the Index has averaged an unprecedented 105.4, well above the 45-year average of 98 and rivaling the all-time high of 108.0 in July 1983."

Juanita Duggan, NFIB President and CEO stated, "Small business owners continue to report astounding optimism as they celebrate strong sales, the creation of jobs, and more profits. The first six months of the year have been very good to small business thanks to tax cuts, regulatory reform, and policies that help them grow."

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Summer 2018 Investor Letter: A Recession In 2020?

The economy is not the stock market and vice versa, but positive economic data tends to be supportive of a positive equity market environment. The current environment seems a bit like a Goldilocks one and that might be a cause of concern for some. If one is a writer for business publications it is difficult to find a great deal of negative news. To that end recent articles are focused on predicting a recession and end to the bull market in 2020. Predicting the end of the equity bull market a few years into the future is something of a stretch when economists and strategists are unable to accurately predict economic growth (GDP) for the next one or two quarters as highlighted in our Summer 2018 Investor Letter. Our current Letter comments on the hunt for bad news in spite of what seems like a strong underlying economy. We discuss issues that could derail the expansion, but the economic and market environment looks sound at this point in time.

For additional insight into our views for the market and economy in the coming year, see our Investor Letter accessible at the below link.

• Spring 2018 Investor Letter

The Economy Is More Than Just Jobs But...

Today's employment report was strong as nonfarm payrolls increased 213,000 and beat expectations of 190,000. The prior month's report of 223,000 jobs was revised higher to 244,000. In short, a strong jobs report. A positive in the report was the increase in the participation rate to 62.9% versus the prior month's participation rate of 62.7%. The number of unemployed actively looking for jobs jumped 499,000 to 6.564 million. Because the change in payrolls was smaller than the change in the number actively looking for a job, the unemployment rate increased to 4.0% from the prior month's rate of 3.8%.

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Dogs Of The Dow Living Up To Their Name This Year

So far in 2018 the Dogs of the Dow investment strategy is a losing one relative to the return on both the Dow Jones Industrial Average and the S&P 500 Index. Through the close of business on July 3, the average return of the 2018 Dogs of the Dow equals -3.8% on a price only basis and -2.0% total return. This compares to the price return for the Dow Index of -2.3% and total return of -1.4%. For the S&P 500 Index, both the price only return and total return are both positive on the year.

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Oil Supply Continues To Trend Lower

Thursday this week markets will get another look at oil inventory levels with the release of the weekly EIA Petroleum Status Report. The past few weeks have confirmed strong declines in oil inventory levels. Last week's draw-down was 9.9 million barrels and the prior week saw a contraction of 5.9 million barrels.

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If Earnings Matter, Equity Valuation Looks Attractive

With last week's final reading on first quarter GDP, the Bureau of Economic Analysis provides a final review of the National Income and Product Accounts (NIPA). One category worth evaluating is the corporate profits figures. Corporate profits from the NIPA tables are true economic profits from IRS data and not simply profits based on GAAP. In the final GDP report last week, corporate profits with IVA & CCAdj totaled $1.92 trillion at a seasonally adjusted annual rate versus $1.64 trillion in the same period a year earlier. This represents a nearly 17% increase in profits from a year earlier.

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