The Weekly Economic & Market Recap Image

The Weekly Economic & Market Recap

The Weekly Economic & Market Recap

February 16, 2018  

The equity market melt-up in December and January was caused by optimism over economic expectations and earnings for 2018 as investors assessed the positive economic impact of corporate tax reform. The S&P 500 index rose 8.7% from Thanksgiving to New Year’s Day. The increase was uncomfortably fast for many traders and technicians. Some fundamental analysts cautioned that valuations were extended and ahead of the fundamentals. Rising real bond yields and modestly higher inflation expectations created a brief market dislocation in February as market participants considered the appropriate discount rate for equity earnings. Equities were ripe for a drawdown. Investors have been speculating that the equity market was “due for a correction” for many months. Often the collective psychology of investors creates the very condition that is feared. Fundamentals ultimately emerge and drive markets in the appropriate direction. Despite higher rates, equities recovered this week as investors became more comfortable with valuations after robust earnings releases. According to Zacks Research, total earnings for the S&P 500 for the fourth quarter are expected to be up 13.9% from the same period last year. The days of extremely low inflation and interest rates are over, for now, so we can expect high volatility and very limited multiple expansion for equities. For the near-term, fundamentals remain solid.

Read more


Click below to listen to this week's Peapack-Gladstone Bank Market Report as heard on WCBS NewsRadio 880.

CBS Radio Logo Listen


February 9, 2018  

Volatility is back! The Dow Jones Industrial Average is down 9.1% from its high two weeks ago, and wide market fluctuations have appeared for the first time in a number of years. The most commonly used measure for market volatility is the Chicago Board Options Exchange Volatility Index (VIX). This is also considered a gauge of investor “fear” level. Historically, a VIX reading over 30 constitutes high volatility, and a VIX reading below 20 denotes low volatility. During the depths of the Great Recession panic in 2009, the VIX rose to almost 90, and it has generally trended downward ever since. In 2017, the average was 11, the lowest in 27 years. Last Tuesday the VIX jumped to 50, reflecting an increased level of volatility and anxiety in the marketplace. As global central banks reduce or unwind their quantitative easing efforts, we can expect to see greater volatility going forward. The nearly one-directional stock market with ever-lower volatility that we experienced over the past nine years will most likely adjust to a more normalized operating environment in the future.

Read more


February 2, 2018  

Equity market volatility picked up markedly this past week due to investor concern over rising interest rates. The 10-year U.S. Treasury yield broke above the 2.80% level and approached a four-year high. Since the end of last August, the 10-year Treasury yield has risen from 2.05% to 2.84% or roughly a 35% increase in yield. Inflation expectations are tightly correlated with the 10-year Treasury yield and a key driver of the recent increase in bond yields. Tightening labor market conditions coupled with a weak dollar and poor productivity are creating an environment that should lead to higher inflation. The fiscal stimulus provided by the recent tax cut and the prospect of a $1.5 trillion infra-structure proposal from President Trump adds fuel to inflation expectations. The Fed Reserve concluded its first policy meeting of 2018 on Wednesday (which was Janet Yellen’s last as Fed Chair). The Fed left the fed funds rate unchanged, but it expects inflation to continue to rise and approach their 2% target. The magnitude of the recent rate move is meaningful, but there have been more extreme rate moves in recent memory. The bond market corrected over 100 basis points during the 2013 taper tantrum and after the 2016 presidential election. During the taper tantrum, the U.S. 10-year Treasury broke 3% and the S&P 500 corrected over 10%. At a certain point, rising interest rates will create volatility regardless of short-term earnings momentum.

Read more


January 26, 2018  

Abundant and freely flowing liquidity coupled with coordinated global economic growth fueled the risk-on theme that drove investment returns in 2017 and has continued thus far in 2018. Year-to-date, the global equity market is up over 6.6% in less than one month. From a valuation perspective, the global equity market is trading at 21.3 times trailing 12-month earnings, which is expensive when compared to the 10-year median of 17.1. However, forward 12-month earnings expectations are extremely robust which allows the forward price to earnings ratio to fall closer to the 10-year median. If earnings expectations continue their upward trajectory, equity valuations should be supported but there are other risk factors to consider. One of the main risks apparent in the domestic market right now centers around inflation. Moreover, with consumer confidence high, leading economic indicators accelerating and the dollar depreciating, inflation could increase more rapidly than the Fed currently anticipates. The 5-year forward break-even inflation rate according to the Treasury Inflation Protected Securities market (TIPS) currently stands at 2.02%, which is up 18 basis points in the last month, but is still slightly below the 1-year high of 2.06%. With the FOMC scheduled to meet next week, it will be interesting to see if they make any adjustments to their inflation expectations.

Read more


January 19, 2018  

A remarkable element of financial markets over the last couple of years has been the lack of volatility. The most often cited measure of equity market volatility is the CBOE Volatility Index which has been abnormally placid since the beginning of 2017. In our view, two primary factors have led to the lack of volatility. First, financial market conditions have been stable for many years, so the expectations of market participants have been relatively consistent. Market volatility is caused when investor expectations change. The economy has been stubbornly stuck at two percent GDP growth since the Great Recession ended. Inflation has remained modestly below the Fed’s target, and interest rates have been extremely low. Second, global central banks have continued to provide new liquidity. Investors have become conditioned to use any weakness as a buying opportunity. The factors that have dampened market volatility are unlikely to persist through 2018. U.S. GDP growth seems to have accelerated to approximately 3% and implied inflation expectations are beginning to increase. Interest rates have recently lifted to reflect better economic growth. Central banks are likely to guide markets to anticipate a reduction of accommodation in 2019. These conditions, coupled with elevated equity valuations, lead us to expect equity prices to be more active as 2018 unfolds.

Read more


January 12, 2018

Investor optimism regarding economic growth has been lifted by the recently passed tax reform bill. As economists have adjusted their estimates for real GDP growth for 2018, expectations for Federal Reserve rate increases over the near-term have been rising. The two-year Treasury note is heavily influenced by Fed rate expectations and is a barometer of current economic health. This week the two-year Treasury broke the two percent level for the first time since the 2008 financial crisis. The fiscal stimulus generated by over a trillion dollar tax reduction should have a positive economic impact in 2018 and 2019, driving the U.S. economy to above-trend growth. Although wage growth has been a disappointment, labor markets with unemployment at 4.1% seem relatively tight. An accelerating economy, given the tightening labor conditions, has the potential to finally translate into higher wages. Perhaps in anticipation of this, a number of large companies (Target and Walmart) that typically employ people at the lower-end of the wage spectrum have announced increases in their starting pay. As the trend in wage growth picks up, inflation should drift towards the Federal Reserve’s two percent inflation target. We expect that the Fed will have good reason to justify three rate increases in 2018. In the meantime, better economic growth is lifting earnings expectations. The Bloomberg forward earnings estimate for the S&P 500 has risen from$146.56 at the end of 2017 to $151.45 today. According to Zacks Investment Research, index earnings are expected to be up 13.7% in 2018, notwithstanding the tax cut, this earnings growth expectation seems to us to be a high bar.

Read more


January 5, 2018

Despite the attention received by the Tax Cuts and Jobs Act (TCJA) we are only expecting a modest increase in 2018 GDP growth. Quarterly GDP figures should surpass 2.00% in 2018, but without a pickup in productivity growth it will be a challenge to achieve 3.00% growth for the entire year. Productivity did move higher in the third quarter, but it has only advanced by 1.5% over the last year and 0.8% over the last five years. Business equipment spending is a key component of productivity gains, and this segment has picked up significantly over the last twelve months. We like to focus on “core” shipments (non-defense capital goods ex-aircraft) and these figures have increased by approximately ten percent over the last year. Another important component will be job gains and improvement in the labor force participation rate. The unemployment rate is currently at 4.1%, and the participation rate is now at 62.7%. We also keep a close eye on the U-6 measure of unemployment, which topped out at 17.1% during the Great Recession and now resides at 8.0%. In the past year payrolls are up an average of 173,000 per month. Monthly employment gains should be similar in 2018, with the average settling in between 150,000 – 160,000. The consumer enters 2018 on strong footing, as we have seen confidence levels soar, retail sales data post impressive numbers, and monthly job gains very consistent month to month. On the negative side the personal savings rate has plummeted to 2.9% a 10 year low, and the lowest level since just before the last recession began in late 2007. Historically speaking when savings rates get down to 2% - 3% it usually implies that there is no more pent-up demand, and the economic expansion is running out of steam. Recently personal income and consumption figures were reported and the year-overyear numbers were impressive (+3.8% and +4.5%). Finally and probably the biggest wild card for 2018, the Federal Reserve. The Fed has been increasing interest rates, and will continue to do so. It appears the Fed will increase rates 3-4 times in 2018, and the increases will be modest (+25 basis points). At the moment inflation is under control (core CPI +1.7% year-over-year), but if inflation data comes in stronger the Fed will have to be more aggressive with their rate increases. A more aggressive Fed is positive for fighting inflation, but not positive for an economic expansion now entering its tenth year.

Read more


December 29, 2017
Top 10 Financial Stories in 2017 | Factors that influenced the financial markets:
10) Geopolitical Risks – Geopolitical events never impacted the financial markets in a meaningful way despite pundit’s predictions.
9) Washington Dysfunction – Washington faced a tough year with lawmakers struggling to come to an agreement over many significant policy initiatives.
8) Rise of the Cryptocurrencies – Cryptocurrencies saw large inflows from speculators looking to make astronomical returns in a short period of time.
7) New Fed Chair – Jerome Powell was elected to take the place of former Fed Chair Janet Yellen. Fed Chairman Jerome Powell is expected to continue the Fed's path to interest rate normalization.
6) U.S. Treasury Curve – The flattening of the yield curve has continued throughout the year. The yield spread between the 2- year and 10-year treasury yield is at its lowest level since 2008.
5) Inflation Remains – Using the Consumer Price Index (CPI) to measure inflation, the U.S. inflation rate was above 2.1%. This is the highest rate of inflation since 2012.
4) Fed Normalization – The Federal Reserve is normalizing rates and reducing their security holdings.
3) Dollar Weakness – The dollar declined approximately 9.8% this year, the first annual decline in five years and worst performance since 2005.
2) Earnings – The S&P 500 Index is estimated to have earnings of $131.50 for 2017 compared to $106.26 in 2016, an increase of approximately 24%.
1) Tax Reform Drives Equities – The restructured tax bill will make America more competitive by reducing the corporate tax rate from 35% to 21%. Individuals are expected to benefit from the tax reform as well.

Read more


December 15, 2017
There were several noteworthy and potentially market-moving events this week. Both the Federal Reserve and the European Central Bank had rate meetings, and Congressional Republicans continued to wrestle with reconciling the House and Senate versions of tax reform. Relative importance is a matter of perspective. Bond investors were more interested in the Federal Reserve’s forward rate view and their economic forecasts. The Federal Reserve, as expected, raised their target on Fed Funds by 25 basis points and maintained their guidance of three more rate increases in 2018. The Fed has done such a good job telegraphing their intentions that there was little market reaction. Equity investors remain focused on the news regarding tax reform. Investor sentiment lifts as the confidence of passage of tax reform grows. The House-Senate conference committee working on the tax bill is working on modifications that will bring the remaining Republican holdouts on board. Major sticking points have been the size of the child tax credit (Marco Rubio and Mike Lee) and the elimination of the tax deduction for healthcare spending. Passage of the bill can be scuttled by just one or two holdouts. We expect Congressional Republicans to be able to navigate the remaining issues. The equity market has priced in much of the successful passage of tax reform.

Read more


December 8, 2017
The FOMC meets this upcoming week and the markets are pricing in an extremely high probability that they will lift the Fed funds rate another 25 basis points. If the FOMC does hike rates on December 13th, it will be the third rate hike of the year and will take the Fed funds rate to between 1.25 to 1.50%. It is interesting to note that according to the FOMC’s most recent statement, both headline and core “inflation measures have declined this year and are running below 2%.” So, why is the FOMC raising interest rates while inflation resides below its 2%target? The answer may reside in the fact that the Fed’s preferred inflation measure (personal consumption expenditures or PCE) does not take into consideration real and financial asset prices and relies mainly on a dynamic consumption bucket. Moreover, the staff at the New York Fed has developed a new inflation gauge that now incorporates asset values along with a consumption bucket, which shows that inflation is actually up roughly 3% on an annual basis as of October. If this new inflation gauge does measure inflation more accurately than PCE, then the Fed may have more data to support further interest rate hikes.

Read more


December 1, 2017
U.S. equity markets hit record highs this week with the progression of tax reform through the Senate being the main short-term catalyst. At this point, it is looking probable that this week’s negotiations will produce the 50 votes that are needed to move the bill forward in the Senate and allow for the reconciliation process to begin. The last hurdle to pass the tax bill will be to reconcile both the House and Senate versions of the bill in order for it to be sent to President Trump for approval. There are still some major sticking points between both sides of Congress with respect to the tax reform bill; however, we anticipate that Republicans will come together and gather enough support to pass the bill in early 2018. On a more cautious note, emerging market equities were down almost 3% for the week as some signs of liquidity stress are beginning to surface in China. Moreover, short-term funding costs for smaller borrowers have increased recently as the People’s Bank of China works on reigning in the shadow banking sector. Chinese officials are watching this situation closely and will most likely provide liquidity if credit spreads widen too quickly. The market is not too concerned with the minor liquidity stress surfacing in China as 5-year sovereign credit default swaps ended the week at only 57 basis points (bps) which is well below the year-to-date average of 75 bps.

Read more


November 17, 2017
The Trump Administration’s goal is to pass a tax reform bill by year-end. It strikes us that this could be too ambitious unless House and Senate Republicans are considerably more willing to compromise than they have been on other major legislative initiatives. The House of Representatives on Thursday passed a sweeping reform bill that will be the largest change the tax coded in 31 years. The Senate’s recent version is broadly similar to the House bill, but there are several fundamental differences that need to be reconciled. One of the major stumbling blocks will be the deduction for state and local taxes (SALT deduction). The House version allows the deduction with a cap, but the Senate version scraps the SALT deduction altogether. Eliminating the SALT deduction is a significant problem for House Republicans from high-tax states such as New Jersey. The Senate bill repeals the individual mandate that forces healthy people to buy insurance. This is very unpopular for some moderate Republican Senators because it would result in higher premiums and a drop in insurance coverage. Another major problem is that ultimately the reconciled bill will have to comply with the budget resolution that has already capped the deficit increase at $1.5 trillion over the next ten years. If the tax bill does not meet this test, it would require a full 60 votes in the Senate, which the Republicans do not have. The Republicans are very motivated to pass a tax reform bill, but their narrow majority in the Senate and their need to appeal to competing interests will make for delicate negotiations. We think they will pass a tax reform bill, but it will likely slip to next year and will be a somewhat watered down version.

Read more


November 10, 2017
Domestic equity markets took a break from their recent upward trajectory as the details of U.S. tax reform started to emerge from both chambers of Congress. Moreover, key differences in the two proposed bills thus far are likely to make the passage of tax reform rather difficult in the near term. Credit markets reacted to the news in a risk-off fashion with the high yield option adjusted spread widening approximately 20 basis points on the week. A real-time indicator that we closely follow to gauge the degree of risk-off sentiment is the level of generic high yield credit default swap spreads (CDX HY). Currently, the CDX HY is approximately 329 basis points, which is up roughly 20 basis points since November 1st, but is still extremely low. The 5-year high of 600 basis points was reached in early 2016, when domestic large cap stocks were down roughly 10% to begin the year. Much of the rally in the equities in September and October was predicated on the prospect of tax reform; it is not surprising to see modest profit-taking on the uncertainty created from the legislative process.

Read more


November 3, 2017
Consumers and investors are brimming with confidence. The consumer confidence index for October increased to 125.9 which was the highest reading in seventeen years. Both the current conditions and the expectations components rose to levels we have not seen since prior to the Great Recession. It is relatively easy to understand why consumers are feeling so positive. Jobs are plentiful and wages are rising faster than the general level of prices. In the consumer confidence survey 36.3% indicated that jobs were easy to find which was the highest level since January of 2004. Conditions seem good for healthy retail spending over the holiday season. Investors’ confidence has allowed the financial markets to shrug off uncertainty that would normally cause consternation and concern. The naming of a new Fed Chair during a period of rising interest rates and extended valuations would usually cause some financial market volatility. Typically, concern would show up in credit markets first, but credit markets are remarkably sanguine. Credit spreads in the 5-year tenor for both corporates and high yield sectors of the bond market are exceptionally tight, with investment grade and high yield spreads above treasuries only 58 and 249 respectively. Tight spreads indicate that bond investors are extremely confident in the near-term future. History suggests that when investors become too confident and do not demand a reasonable risk premium, markets find a reason to correct and bring a dose of reality to investors.

Read more


October 27, 2017
Interest rates have been driven to historically low levels as global central banks have purposefully ballooned their balance sheets to create liquidity to reinvigorate economic growth. As an example, the European Central Bank has expanded their balance sheet by over 2 trillion euros over the last 18 months. The German 10-year bund trades at a yield around 0.38%. Low yields and cheap capital have certainly encouraged risk-taking and asset speculation. The efficacy of central bank efforts to lift economic production has been hotly debated, but clearly, there is an element of diminishing returns. Without a doubt, the incremental liquidity is also causing asset prices to rise and waning asset price volatility. Coincident with the flood of liquidity from central banks, and perhaps to some degree because of it, many more investors have embraced passive investing. Passive investors tend to be more insensitive to valuations, especially in low volatility environments. Price discovery is lacking. Value investors have had a very difficult time as equity market returns have become increasingly narrow and focused on a select number of growth names. The preference for growth stocks in a low-growth world made sense at some point, but now valuation differentials are so extreme between growth and value that we would expect money to shift to value-oriented sectors.

Read more


October 20, 2017
The risk-on trade continued this week with large cap U.S. equities hitting new highs and U.S. Treasury yields widening approximately 10 basis points at the longer end of the curve. The main catalyst behind the bullish equity sentiment was the forward movement of possible tax reform with the Senate approving a fiscal 2018 budget. The next step will be for the House of Representatives to vote in favor of the budget, which will then open up a special procedure that allows the Republicans to potentially pass tax reform without the necessity of Democratic support. Looking back on how the Republicans were not able to reach a consensus on repealing and replacing Obamacare, some may question their ability to agree on tax reform. However, the markets are indicating that the Republicans will be more willing to compromise with each other on tax reform because failure to do so could hinder the party going into the 2018 midterm elections. At this point, a rough framework for tax reform has been proposed and it will be up to the House and Senate tax-writing committees to fill in the details of the legislation, which will then be heavily negotiated by numerous interests given the tremendous weight of what is at stake.

Read more


October 13, 2017
Rising equity values and the absence of volatility has been a consistent theme this year even with the U.S. Fed slowly increasing interest rates and beginning the process of gradually decreasing the size of its balance sheet. The previously mentioned statement should come as no surprise given the enormous amount of liquidity that has been pumped into the U.S. economy since the financial crisis. Moreover, according the Federal Reserve, the aggregate amount of reserves above the penalty-free band at depository institutions stood at over $2.16 trillion at the end of September. This is roughly $500 billion less than the peak achieved in August of 2014, but still incredibly high. Ample liquidity has made it inexpensive for consumers, corporations and the public sector to increase or refinance their debt loads. Using the U.S. commercial paper spread to T-bills as a proxy for liquidity availability, the current spread of 24 basis points (bps) is 18 bps below the average going back to 1996. By comparison, the aforementioned spread increased to over 300 bps in September of 2008. Moving forward, we believe the Fed will continue to gradually remove excess liquidity from the economy as long as inflations stays within close proximity to their 2% target.

Read more


October 6, 2017
We have frequently discussed equity market valuations that appear extended by most metrics. Valuations can remain uncomfortably elevated for extended periods of time. Waiting for the inevitable inflection point when valuations correct, either by stock prices falling or earnings rising, can be lengthy and very costly from missed investment opportunities. We indeed seem overdue for an equity market correction, but the conditions for a bear market are not evident. The economy continues to grow without significant excesses, and global central banks remain accommodative. There is less discussion in the business press of bond market valuations which seem high as well. Recently, former Fed Chair Alan Greenspan said, “the bubble is in bonds, not stocks.” Interest rates remain very low considering the domestic economy is operating with an unemployment rate of 4.2%, and we are many years from the crisis that caused the need for quantitative easing. With negative yields abroad and inflation expectations anchored below the Fed’s 2.0%inflation target, demand for treasuries remains strong. We do not anticipate a meaningful valuation adjustment for either fixed income or equity markets until higher inflation systematically manifests itself.

Read more


September 29, 2017
The Trump Administration released their framework for tax reform on Wednesday. Unlike the many failed Republican attempts at repealing and replacing Obamacare, there seems to be a strong coordination between Republican leadership in Congress and the Administration regarding tax reform. Passing tax reform requires a high willingness to compromise because the margins for success are so thin. If the Democrats vote as a block, the Republican Party can only afford to have two senators or 22 congressmen defect. There are several controversial aspects that make tax reform a heavy lift. The impact on the deficit will be dependent on how much economic growth is generated from tax reform and the revenue offsets that are selected to reduce the budgetary impact of lower rates. Estimates of the effect on GDP growth of lower corporate and personal tax rates vary widely and will be vociferously debated on both sides of the aisle. The Freedom Caucus contains 36 Republican members in the House that are budget hawks and are unlikely to go along with a significant expansion of the deficit. Additionally, eliminating or limiting deductions for state and local taxes will pit high tax states versus low tax states. Given the complexity and the myriad of constituencies, we expect a lengthy process before a potentially workable bill can be produced.

Read more


September 22, 2017
The current state of extraordinarily accommodative monetary policy was dealt a blow this week, with the official announcement of the start date of the Fed’s balance sheet normalization process. Starting in October the Fed will allow up to $10 billion per month, comprised of up to $6 billion of U.S. Treasury securities and up to $4 billion of agency debt and agency mortgage backed securities, to mature from its $4.2 trillion securities portfolio. Up until this point, the Fed has been maintaining the size of its enormous balance sheet by reinvesting all the principal payments by purchasing new bonds. The Fed intends to increase the pace of portfolio roll off by $10 billion per quarter up to a maximum monthly amount of$50 billion. With that being said, the Fed’s securities portfolio is not projected to drop below $4 trillion until August of 2018. The Fed raised its GDP forecast for 2017 from 2.2% back in June to 2.4% and stated that economic activity has been rising moderately and risks moving forward in the near term appear to be balanced. Moving forward 12 of the 16 FOMC members would like to hike interest rates at least 25 basis points in December, so at this point another rate increase this year is looking probable.

Read more


September 15, 2017
Inflation reports (August CPI) this week gave investors an indication that the Federal Reserve was correct in its assessment that softening inflation gauges in the second quarter were transitory. After an initial boost in inflation early in 2017 due to a rebound in energy prices, pricing measures consistently came in below estimates which lowered investors’ anticipation of additional rate hikes this year. Fed funds futures are suggesting that another rate hike in December is a real possibility. Regardless of additional rate increases, we expect the Fed to announce the reduction of its $4.2 trillion balance sheet at their meeting next week. We also envision other central banks to begin moving in a less accommodative direction. On Thursday, the Bank of England signaled its intention to raise rates soon to restrain accelerating inflation pressure in the United Kingdom. The Eurozone economy is growing at its fastest rate since 2007 and suggests less need for the ECB’s QE program expanding at €60 billion per month rate. By early 2018, we could have three major central banks becoming more restrictive with their monetary policy.

Read more


September 8, 2017
With European economic momentum gaining strength in 2017, the ECB had an opportunity this week to address the future of its quantitative easing program, but decided to delay the announcement until it meets again in October. The ECB left rates unchanged and increased its GDP growth forecast for 2017 to 2.2% which, if achieved, would be the fastest rate of growth in 10 years. The recovery in Europe is largely attributable to the extraordinary accommodative monetary policy that the ECB has instituted over the past 2.5 years, which has been comprised of negative interest rates along with asset purchases of over $2 trillion euros. Even with the aforementioned accommodation, inflation in Europe has been elusive and is not expected to hit the 2% target through 2019. The recent appreciation of the euro currency has been an additional headwind for inflation and has reduced recent inflation forecasts by 10 basis points over the next 2 years. The ECB is going to have to gradually tighten monetary policy in the near term by reducing the pace of its asset purchases. The markets will be keenly focused on the October ECB meeting with respect to any hints at the shape of the quantitative easing program for 2018.

Read more


September 1, 2017
Investors received two important indicators on the current status of the domestic economy this week. The U.S. Commerce Department released their revised estimate of GDP growth for the second quarter on Wednesday. Real GDP increased 3.0%, revised up from 2.6%, with consumption accounting for most of the revision, but almost every category was adjusted higher. The August employment report was modestly weaker than expected with nonfarm payrolls up 156,000. Despite the slight disappointment, the economy is continuing to produce an average of 175,0000 new jobs per month over the last 12 months. Collectively, these two reports indicate that the U.S. economy is in solid shape as we head into the back half of 2017. The domestic economy is growing at a reasonable pace and should not alter the Federal Reserve to maintain its measured approach to normalization. The situation can be characterized as a “goldilocks” environment for financial markets. There does not appear to be anything on the near-term horizon to meaningfully shift the path of the economy. The concern for financial markets will be the challenge as pressure builds on central bankers to adjust policy. We expect both the Fed and the ECB to be more demonstrative regarding rate and balance sheet plans in the next few months.

Read more


August 25, 2017
Chinese Government 5-Year credit default swaps are currently trading around 60 basis points, which is the lowest level since December of 2012 and is an indication that market in not worried about a hard landing in China anytime soon. Moreover, capital outflows from China, which had been in a downward trajectory from June of 2014 through January of 2017, have reversed course recently and grown approximately $80 billion over the course of 2017. Much of the current economic momentum in China has been fueled by accommodative monetary policy along with fiscal stimulus. Policy makers in China realize that the recent pace of credit expansion cannot continue in perpetuity. Last month China’s central bank released figures on the size of the shadow banking system and the results were more than double previous figures. Furthermore, President Xi Jinping has placed financial stability and prudent credit growth as priorities moving forward, which may add headwinds to Chinese GDP growth moving forward. However, with GDP currently growing at a year-over-year pace of 6.9% through the second quarter of 2017, China has a great deal of economic momentum to help it through its current transitionary period.

Read more


August 18, 2017
Risk assets started the week on a positive note with North Korean tensions subsiding, however, volatility returned to the market on Thursday as terrorist attacks in Barcelona and dysfunction in Washington took center stage. Moreover, Trump’s response to the violence in Charlottesville caused outrage across the country and led to the dissolution of two advisory groups that were designed to give corporate leaders a direct line to President Trump. Matters only intensified when rumors spread that Gary Cohn, the National Economic Council Director and key player in pushing forward potential tax reform, had resigned. This rumor was quickly discredited, but it left investors questioning the probability of Trump being able to pull through with his pro-growth policies. Another headline that caught our attention this week was that Mario Draghi will not discuss tapering the ECB quanti-tative easing purchase plan at Jackson Hole later this month and will wait to address the topic in the fall. Draghi’s patience with regard to the tightening monetary policy fully aligns with our view that monetary policy normalization will evolve at an extremely slow pace and may slow further if political leadership cannot work together in a coordinated manner.

Read more


August 11, 2017
The flare up in tensions between the United States and North Korea, over North Korea’s nuclear ambitions, roiled the financial markets this week. Conflict is an inherent element of the human condition, so geopolitical risks are always a concern for investors. We have highlighted in the past the potential spike in volatility that a geopolitical incident could cause. The increase in volatility can be especially pronounced when valuations are uncomfortably high. Indeed credit-oriented fixed income has been trading at historically tight spreads, and equities are at the top of recent trading ranges. The timing of geopolitical events and their long-term significance is highly unpredictable. Given the inherent uncertainty in geopolitical events, investors tend to over react and return correlations for higher risk assets tend to migrate upward. The speed with which this process happens is often surprisingly rapid, which is why we advocate well-diversified portfolios for risk control.

Read more


August 4, 2017
The U.S. dollar Index (DXY), which is an index of the value of the dollar relative to a broad basket of foreign currencies, has significantly weakened over the last five months. The DXY is down over 7% from the end of the first quarter. Most of this decline has been driven by the appreciation of the Euro relative to the U.S. dollar. The Euro/$ exchange rate has gone from 1.065 to 1.175. The sentiment from forex traders is that dollar weakness will continue for a while despite the Fed raising short-term interest rates three times since December. The fundamental issue that seems to be at play driving the dollar lower is the relative economic growth expectations for the U.S. versus Europe. International economies, including the EU, are accelerating relative to flat growth domestically. Ultimately, better European growth will cause the ECB to be more hawkish. Another plausible explanation is the political train wreck Washington has become. Political risks in the U.S. certainly have risen which is creating uncertainty for the global investor. Regardless of the cause, the weaker dollar will be supportive of S&P 500 earnings due to both a translation effect and ultimately from an economic impact.

Read more


July 28, 2017
With the three main developed market central bank balance sheets (U.S. Fed, ECB and BOJ) holding approximately $14 trillion in combined assets and benchmark interest rates on the front end of the yield curve hovering around 0% for close to nine years, one would think inflation would be an issue. However, year-over-year inflation at the core level in the developed markets mentioned above currently range from a low of negative 0.2% in Japan to 1.4% in the U.S. Moreover, the U.S. Fed is the only central bank in the developed market that has embarked on a very slow path of monetary policy normalization by raising rates 4 times since December of 2015. As a result, core inflation has dropped 40 basis points since February of this year, which exemplifies the moderate pace of the current economic expansion. Just last month the Fed released details on how it plans to shrink its balance sheet moving forward. It was vague on the start date by saying it should start relatively soon provided the economy evolves in line with its economic projections. Nevertheless, if core inflation does not reverse its recent downward trajectory, monetary policy normalization will be pushed further off into the future.

Read more


July 21, 2017
Complacency reigns. Implied volatility of both equities and bonds are at new lows. Financial markets are clearly unconcerned regarding the potential for a meaningful shift in economic fortunes. The markets seem to be predicting continued modest economic growth, low inflation and benign central banks that will remain supportive of markets. The 5-year real yield on TIPS (Treasure Inflation Protected Securities) is only at 0.15%, indicating the market does not expect a significant pick up in either growth or inflation over investors’ typical investment horizon. Additionally, there is almost $12 trillion in bank savings deposits earning meager interest which suggests many people are reticent to take market risk. There are plenty of short-term risks to be concerned with from geopolitical risks to a major policy mistake. A systemic concern is the crushing debt burdens in many regions and markets that will potentially impact long-term growth prospects. On the other hand, financial markets are not pricing in the potential for a fundamental shift in tax policy that could adjust the trajectory of the domestic economy and earnings. We are hopeful, but not optimistic, that the Trump administration and Congress can get something done before the congressional election cycle begins.

Read more


July 14, 2017

Earnings reports for the second quarter are just beginning. It is broadly expected that earnings momentum in the second quarter will continue after a very strong first quarter of greater than 10% earnings growth. According to Zacks Investment Research, total 2Q earnings are expected to be up 5.6% versus a year ago on 4.6% revenue growth. Analysts expect earnings in energy and industrial sectors to be especially strong as they continue to recover. Technology companies should continue to post strong relative earnings as well. Given the competitive disruption caused by internet retailing and a weakening in automotive sales, earnings in the consumer discretionary sector will probably show some deterioration. Speaking broadly, domestic growth is sufficiently strong to allow for modest earnings expansion for the domestic equity market. We would not expect significant multiple expansion in a moderately rising rate environment, so solid earnings growth is extremely important to drive the equity market higher.

Read more


July 7, 2017

Investors had the opportunity to review and digest minutes from the last Federal Reserve Open Market Committee meeting in June. Coincidentally, the European Central Bank released their minutes as well this week. The impression we were left with, both from reading the minutes and from recent comments by global central bankers, is that central bankers are becoming increasingly focused on balance sheet and rate normalization. There appears to be a shift in the mindset. The Fed has already raised rates 3 times in the past 7 months, and despite weaker than expected economic growth and eroding domestic inflation forecasts, the Fed clearly seems committed to continuing the process of normalization. The Fed believes the economic softness is transitory. They received some evidence to support this view with a relatively strong employment report on Friday. The change in sentiment regarding additional accommodation from central bankers will be a headwind to both the bond and equity markets.

Read more


June 30, 2017

Equity and fixed income investors were both treated to favorable markets in the first half of 2017. Positive earnings surprises in the first quarter and accommodative global central banks have been the key drivers of solid returns this year. Financial markets have been accustomed to central banks providing liquidity whenever economic conditions soften or risk concerns creep into investor’s psychology. The second half of the year is likely to be more difficult as central banks are becoming less of a supportive factor. Recent rhetoric from the Bank of England, Bank of Canada, and even the ECB is suggesting a shifting attitude toward tightening. Perhaps, the central banks are finally getting concerned with potential asset inflation as reflationary forces take hold. Regardless of the reason, it is likely to be an additional challenge for both the bond and equity markets.

Read more


June 23, 2017

Dominating the financial news this week was the Federal Reserve’s decision to raise its target on the Fed Funds rate by one quarter of a point to between 1 and 1.25 percent. The Fed also gave specifics regarding its plan to reduce the $4.3 trillion balance sheet. Notably, the yield curve continued to flatten. Over the last three months, the Treasury 2-to-10 year spread has contracted 40 basis points (bps) to 83 bps. The Fed’s three rate increases over the last six months and anticipated future rate hikes have lifted the short end of the yield curve. Declining inflation expectations and a weaker first half domestic economic environment have caused yields for longer maturities to decline. The 2-to-10 year spread that we monitor closely is a predictor of economic health. It would be disconcerting to see this indicator continue to decline, especially with implied 5-year inflation expectations at 1.50%. Indicators that have been reliable in the past may have less predictive value in the future due to the market distortion caused by global central banks.

Read more


June 16, 2017

Dominating the financial news this week was the Federal Reserve’s decision to raise its target on the Fed Funds rate by one quarter of a point to between 1 and 1.25 percent. The Fed also gave specifics regarding its plan to reduce the $4.3 trillion balance sheet. Notably, the yield curve continued to flatten. Over the last three months, the Treasury 2-to-10 year spread has contracted 40 basis points (bps) to 83 bps. The Fed’s three rate increases over the last six months and anticipated future rate hikes have lifted the short end of the yield curve. Declining inflation expectations and a weaker first half domestic economic environment have caused yields for longer maturities to decline. The 2-to-10 year spread that we monitor closely is a predictor of economic health. It would be disconcerting to see this indicator continue to decline, especially with implied 5-year inflation expectations at 1.50%. Indicators that have been reliable in the past may have less predictive value in the future due to the market distortion caused by global central banks.

Read more


June 9, 2017

The equity market has been a very pleasant surprise for most investors this year. Few market pundits expected the market to be as strong as it has been in the first half of 2017. There is clearly an element of disbeliefon the part of some investors. That is partially related to the divergence within the market. Investors with a value orientation have not experienced the same ebullient market as have investors that concentrate on growth opportunities. Through May, the Russell 1000 Value index is up only 1.9% versus the Russell 1000 Growth index which has rallied 13.6%. That is a striking divergence. The difference is largely related to the strength of five large technology stocks (Facebook, Apple, Amazon, Microsoft and Alphabet). Collectively, these five stocks haveaccounted for an astounding one-third of the gain for the S&P 500 (YTD). Return clustering in a handful of names has occurred four other times in the last 20 years. We would be more comfortable to see a broader-based market advance.

Read more


June 2, 2017

The release of the Non-Farm Payroll report was rather disappointing relative to expectations, with only 138,000 jobs created in the month of May. This number was significantly below ADP’s 253,000 projection and a consensus estimate of 185,000. In addition, the results for the prior two months were cut by a total of 66,000 jobs. The unemployment rate fell from 4.40% to 4.29% but the participation rate also declined to 62.7%. Average hourly earnings grew by .2% which met expectations but a revision to April’s data kept the year over rate of increase at 2.5% below the expected 2.6%. Upon the Bureau of Labor Statistics release, the dollar sold off and Treasury yields rallied with further curve flattening. Overall, we feel May’s employment numbers were strong enough to keep the Fed’s anticipated June rate hike on track but additional sub-par economic results could cloud the picture for the rest of this year. Several Fed officials commented this week that the Fed tightening cycle will accelerate. We will be closely listening to the commentary after the next Fed meeting to see if there is any moderation in their rate views, after the weaker job report.

Read more


May 26, 2017

It was interesting timing that the Organization of the Petroleum Exporting Countries met in Vienna to discuss extending production cuts immediately after President Trump’s successful visit to Saudi Arabia given his outspoken desire to drive U.S. energy independence. OPEC’s efforts to moderate production, assuming members have the discipline to adhere to the cuts, have the potential to do little more than modestly impact the oil inventory cycle. OPEC’s real problems are secular.

Read more


May 19, 2017

Volatility picked up dramatically this week as the financial markets reacted to the turmoil in Washington. Allegedly, President Trump asked FBI Director James Comey to drop a probe of his former national security advisor. That revelation ultimately prompted the Justice Department to appoint a special prosecutor to review the matter. President Trump is losing control of the political agenda as he becomes mired in political infighting with both Democrats and establishment Republicans. Given the dysfunction in Washington and the poisonous atmosphere, it appears that tax reform and fiscal stimulus could be sidelined for the time being. The financial markets have been expecting, and perhaps to some extent pricing in, a lift to earnings from tax reform. Tax reform, if done correctly, has the promise of changing the trajectory of economic growth by driving incremental capital formation and indirectly fostering innovation.

Read more


May 12, 2017

Markets have been able to shrug off news and events that in the recent past would have rattled market participants. The dysfunction and contention in Washington had minimal negative impact on the equity markets. More significantly, it was not too long ago, investors worried that Federal policy would be too constrictive and would damage the economic recovery. This week, Kansas City President Esther George said not only should the Fed continue to raise rates gradually, but it should begin to shrink the balance sheet later this year. Both fixed income and equity markets largely ignored her comments. It seems that investors are increasingly tuning out the Fed, even as the Fed is actively withdrawing accommodation from the financial system. The market’s complacency is clearly related to the very strong first quarter earnings. With over 90% of companies in the S&P 500 having reported first quarter earnings, year-over-year earnings are up over 15%, and 74% of companies exceeded earnings expectations. The insensitivity of financial markets to central bank policy is somewhat disconcerting.

Read more


May 5, 2017

The domestic equity markets have been trading in a relatively flat and tight trading range since the third week of February. The listless trading pattern has evolved as the expectation of an economic regime shift, due to new political leadership, has confronted the difficulty of enacting real change. This week the House Financial Services Committee voted along party lines to submit the Financial Choice Act to the full House. The bill would rollback significant elements of the Dodd-Frank law. The banking and financial services industries strongly support lifting some of the burdensome restrictions of the Dodd-Frank law. The Financial Choice Act should easily pass out of the House, but Senate approval seems problematic. This is one example of the plodding efforts under way in Washington. Many asset classes have embedded in their valuations the expectations of significant reduction in regulation and tax reform. Given the political climate, the timing and magnitude of implementation remain highly uncertain. In the meantime, we sense some market complacency creeping into investor psychology regarding international economies, especially in regard to China. If financial market volatility picks up in China as Chinese officials begin to address high debt levels and risks to their banking system, investor attention could quickly shift away from Washington.

Read more


April 28, 2017

It is not unusual for a barrage of headline news to grab the attention of equity investors. In the past few months, concerns about future Fed rate hikes, geopolitical tensions in Syria/North Korea, French elections and the Trump agenda have had an impact on investor sentiment. This is a legitimate reaction as any one of these events could have significant economic implications. What seems to have been under-reported, however, are more fundamental factors that dictate the valuation of individual companies and the market as a whole. Currently, about 287 companies have reported their 1st Quarter results. Earnings for the group are up 15.6% with revenues advancing by 7.9% over the same period last year. Approximately 80% of the reports have beaten analyst expectations and 65% have exceeded top-line expectations. Factoring in the estimates for the companies yet to report, S&P 500 earnings growth for the quarter could be 9.7% with revenues 5.9% higher than last year. Importantly, these results are broad based with multiple sectors contributing to the uptrend. Also, this is not a one quarter phenomenon as the trajectory began in last year’s 3rd Quarter and could continue over the balance of 2017. Obviously, it is necessary to incorporate both internal and external factors in any investment evaluation.

Read more


April 21, 2017

First quarter GDP expectations continue to drift lower as economic releases indicate the U.S. economy softened at the beginning of the year. The Atlanta Fed has an econometric model they update as economic statistics are released. That model suggests the economy grew a negligible 0.45% in the first quarter. There are also a number of indexes we track that examine economic surprises and have some predictive value for future economic releases. These surprise indexes point toward continuing weakness into the current quarter. Despite the tepid beginning to 2017, the Fed appears to be committed to at least two more rate hikes this year. Fed officials speaking at public events have been consistent and firm in their intention to raise rates. It would be difficult for them to reverse course without eroding credibility. Investors remain skeptical as “Fed funds” futures suggest that there is only one more increase likely in 2017. The Fed has a history of not delivering on rate hikes due to economic weakness and financial market instability. We expect them to deliver on at least another hike given the recent resilience of the financial markets and better economic strength in Europe. In the meantime, the markets will be focused on the French election this weekend that could spark some near-term volatility.

Read more


April 14, 2017

Tax season comes mercifully to an end on Monday. Through last week, tax receipts are running ahead by 5.5% as compared to last year. The growth rate of tax receipts in 2016 was 3.0%. Tax receipts are tightly correlated with the growth rate of nominal income and that has been growing at a 4% annualized rate since the last recession. Nominal income is largely driven by employment, wages and hours worked. Strong tax receipts are indicative of a healthy employment situation. Despite the generally positive jobs environment, we have noted an increase in the number of consumer defaults. Subprime auto loan defaults have risen dramatically and there is some evidence that default rates are edging higher in other consumer loans. During the middle-to-late portion of the business cycle the relationship between consumer spending and delinquencies is tenuous. Our concern would be heightened with the emergence of credit tightening. Currently, available credit is not an issue, but it bears watching since consumer spending is such a large component of the economy.

Read more


April 7, 2017

Despite a bevy of interesting and meaningful news items this week, financial markets were generally quiet. Equities drifted slightly lower with some volatility around the release of the minutes from the Federal Reserve’s March meeting. Insight into the current thinking of Fed officials was arguably the most significant news event. FOMC minutes indicated that a number of Fed officials believe the process of normalizing the Fed’s $4.5 trillion balance sheet should begin later this year. After the financial crisis the Fed aggressively purchased MBS and Treasuries to provide support for the recovery, causing their balance sheet to dramatically expand. Whenever they do begin unwinding the unusual stimulus, the Fed will likely take up to five years to reduce the balance sheet down to a level they feel is optimal. An elongated approach will minimize the impact on the long end of the yield curve. As global growth trends slightly higher, the Fed should have room to continue to gradually increase rates at the short end of the curve. Given the overall tepid economic growth and the approach we anticipate the Fed will pursue, we expect the yield curve to moderately flatten as the year progresses.

Read more


March 31, 2017

Although returns were unevenly distributed, global equity markets generally had a robust first quarter. The fixed income markets offered modestly positive returns as well. Looking ahead to the second quarter, clearly political uncertainty has risen in both Europe and the United States since the beginning of the year. The political environment in Europe is clouded due to concern over election outcomes and the long, slow breakup of the European Union and the United Kingdom. Despite these concerns, latest investment flows out of domestic equities into European equities has been quite strong. The macro economic news has been steadily improving in Europe and the general perception is that European equities are undervalued compared to U.S. equities. European equities outperformed U.S. equity markets by slightly less than 300 basis points in March. With a more hawkish Federal Reserve and an uncertain hand-off from monetary and fiscal policies domestically, we would expect more capital flows into European equities assuming the French election resolves itself favorably.

Read more


March 24, 2017

The financial markets have been keenly focused on the progress of the Obamacare replacement bill constructed by Speaker Paul Ryan, and championed by President Trump, that has struggled to find enough support to pass a predominantly Republican House. The difficulty that the Republicans have had on repealing and replacing Obamacare has made many observers question their ability to accomplish tax reform in a reasonable timeframe. While this has the potential to have meaningful short-term market implications, we are also watching China’s reaction to last week’s Fed rate hike. Rate increases by the Federal Reserve put pressure on China to also increase rates to support the yuan. The yuan has been eroding against the dollar since the middle of 2014. The Chinese have spent roughly 1 trillion dollars in foreign reserves in an attempt to support the yuan. Additionally, as China cuts back on infrastructure spending in an effort to transition toward a more consumer-led economy, it is counting on the private sector to ameliorate the economic slowdown. Rising rates would be an impediment to private sector growth. Although the Chinese have raised some secondary rates after the Fed hike, they have left the benchmark 1-year lending rate unchanged. We think China’s reaction to rising short rates in the U.S. has very important implications for financial markets.

Read more

March 17, 2017

Monetary policy was in the headlines this week with the FOMC announcing a 25 basis point (bp) rate increase in the Fed funds rate on Wednesday afternoon. Markets had accurately priced in the 25 bp increase, but were surprised by the lack of a hawkish tone. The FOMC reiterated their guidance of two more 25 bp rate hikes in 2017 even though headline inflation has moved close to the Fed’s target. The Fed pays considerable attention to core Personal Consumption Expenditures (PCE) and according to their numbers, core PCE was little changed since they last met and is still running slightly below their two percent target. The FOMC predicts that GDP will grow by 2.1% in 2017 and if global economic conditions continue to strengthen, volatility remains low and core inflation does not increase much, we believe the Fed funds rate should end the year up an additional 50 bps.

The rise in populism took a pause with the Dutch voters not showing much support for Geert Wilders and the Freedom Party. With the Netherlands being one of the EU’s six founding members, the election showed the EU still has unity at its core. That unity will be tested in April and May when France goes to the polls and again in September with the German elections. However, we feel that the French and German voters will follow the Netherland’s lead and populism should remain contained in both countries.

Read more


March 10, 2017

Market participants are looking for the Fed to hike the Fed Funds rate at their March 15th meeting. According to the Reuters poll of more than 100 economists, the economic data is strong enough to support this rate hike. The Bloomberg implied probability of a rate hike next week is now at 100% after a number of hawkish comments last week. If the Fed is able to orchestrate three rate hikes this year at 25 basis points each, the Fed Funds target rate would be 1.25%-1.50% by year-end. The commentary from the meeting and the update to the Fed’s economic forecast will be closely watched and compared to what was released at December’s meeting. Mario Draghi announced on Thursday that the European Central Bank is maintaining its benchmark rate and will continue with the monthly asset purchase program at a reduced level. The tone was more positive on the Eurozone economy and gave a lift to the European banking sector. The rise in U. S. interest rates and change in policy is a break from the coordinated global stimulus since the 2008 financial crisis. The Fed will be closely watching and balancing interest rate normalization with economic growth and financial stability. We expect that there will be increasing volatility in both the fixed income and equity markets as the Fed embarks on this new course.

Read more


March 3, 2017

Once again, the market’s focus has been drawn back to watching the Federal Reserve. Since the election the equity markets have rallied on expectations of fiscal stimulus, and the underlying fundamentals for both the economy and earnings have modestly improved. Market participants, despite the Fed rate increase in December, have been heavily focused on the Trump Administration and less on the Fed. This week, Multiple Federal Reserve officials have signaled in speeches that the Fed will be raising rates at their March meeting. A March increase opens the door to perhaps as many as three increases in 2017. Is the Fed feeling pressure to raise rates? Using CPI as the inflation gauge, the real yield on the 10-year Treasury bond is currently barely positive. The effective Fed funds rate is 0.63% and with inflation north of 2.0%, real rates are negative at the short end of the curve and have been for a long time. These low rates have driven equity valuations, as future equity cash flows are being discounted back at very low discount rates. Given today’s low rate structure, the next few rate increases will not materially impact valuations. At some point, it will matter to the markets and they will be very focused on the Fed.

Read more


February 24, 2017

We are all aware that the U.S. Equity markets have been on fire with the S&P 500 increasing by 5.25% year to date. Less apparent is the fact that the 10-Year Treasury has also advanced in value with its yield declining from 2.45% to 2.31% over the same period. This is somewhat unusual as these two asset classes tend to be negatively correlated. We think the current relationship may be routed in a difference in the timing of current market expectations. Since last November’s presidential election, stock investors have been focused on the prospects of a dramatic increase in GDP and corporate earnings growth resulting from fiscal spending policies, tax reform and the relaxation of various business regulations. The bond market is not totally discounting these potential growth catalysts as rates overall have risen since Trump was elected President, although signaling it may take longer than expected to become reality. This week, Treasury Secretary Mnuchin acknowledged that his goal for significant tax reform by August was ambitious. Furthermore, Arios Media cited Republican sources saying infrastructure could fall into 2018 because of prioritization of healthcare changes, immigration policies and regulatory reform.

Read more


February 17, 2017

Corporate share buybacks have been an important component to equity market performance over the last five years. Since 2011, companies in the S&P 500 have repurchased more than $2.7 trillion of their own stock. During that same time period, both individual and institutional investors have been net sellers. The share repurchase programs, in many cases, have used borrowed money for the repurchases. The end result is a modestly higher per share earnings at the cost of a risky capital structure. Operational performance, as measured by aggregate operating earnings, has not been good over the last five years; operating earnings on an annualized basis are only marginally higher. At current equity valuations, it is harder for corporate boards to justify continuing to purchase stock. Back in 2011, the S&P 500 was trading around 1100 and was trading at a price-to-earnings multiple of roughly 13x trailing earnings. Today, the S&P 500 is trading at 2,340 with a trailing P/E of 23.9. Over the next few weeks, we expect to hear some details emerging regarding tax reform. We would hope to see an investment tax credit to incentivize companies to invest capital in their businesses rather than using excess cash flow to repurchase shares. In the long run, by making investments that enhance their productivity, companies will be strengthening their growth potential – which is a far more productive use of capital.

Read more


February 10, 2017

The current financial market environment is fraught with uncertainty and seems to be overly responsive to marginal news. Many asset classes have been oscillating due to poor visibility for their potential outcomes. Emerging markets clearly have been subject to this volatility. The EM asset class sold off post election largely as interest rates adjusted higher on expectations of U.S. fiscal stimulus. As rates have stabilized, emerging markets have reversed and are approaching pre-election levels. Emerging market equities rose 11.2% last year, but remain inexpensive after a multi-year bear market. With confidence for improved global growth, especially with respect to the United States, it seems logical that emerging market equities should tangentially benefit. We believe investors should opportunistically add to emerging market equities on weakness. Exogenous risks, such as rising protectionism and Chinese structural changes, remain a concern that could cause corrections in this asset class. Overall, we see value in emerging market equities, and adding exposure will allow portfolios to become more diversified.

Read more


February 3, 2017

Equity markets in developed countries have moved sideways since the second week in December. Despite a noisy and contentious start of the Trump presidency, implied volatility of equity indexes fell to very low levels. Does this calm indifference by the financial markets indicate too much complacency on the part of investors? We think muted market action perhaps reflects current valuations and a dearth of concrete proposals that will have a meaningful impact on the macro environment. The caustic relationship developing between President Trump and the Democrats in Congress could potentially damage or delay the chances of a major fiscal stimulus program. With the domestic economy already exhibiting some acceleration off a tepid level of growth, a delay in fiscal stimulus could negatively impact business confidence. An element in Mr. Trump’s control however is regulation. On Friday, at a White House meeting with corporate leaders, Mr. Trump promised major reductions in financial regulations. The Dodd-Frank and the creation of the Consumer Financial Protection Bureau have been often cited by opponents as government overreach. Lowering financial regulation should allow capital to flow more freely and increase economic activity.

Read more


January 27, 2017

The U.S. Bureau of Economic Analysis released GDP statistics for the fourth quarter of 2016 on Friday. GDP growth was modestly below expectations growing at an annualized rate of 1.9 percent despite solid consumer and investment spending. The disappointment stemmed from a 4.3 percent annualized decline in exports that reversed a 10 percent increase in the third quarter. Net exports is a relatively small contributor to the overall domestic economy, but the GDP release does highlight the importance of the trade environment. Obviously, the global trade system is complex with many influences. Generally, goods should be produced to provide the product at the lowest possible cost. It raises everyone’s standard of living. The Trump administration’s desire to forge mutually beneficial bilateral trade agreements would be very helpful in constructing a healthy trade environment. Punitive border-adjusted tax levies have the potential to be incendiary and could lead to retaliatory trade action. The result of a trade war would be higher-priced products for everyone and a lower standard of living. The real driver of secular growth would be a more competitive corporate (and personal) tax structure. It will be a much more demanding lift given the various fractions in Washington and the current animosity. We would prefer the new administration to focus their efforts on tax reform.

Read more


January 20, 2017

As the new Trump Administration grabs hold of the levers of power in Washington, financial markets wait for clarity regarding economic and regulatory policy to emerge. For over a month many financial pundits, us included, have tried to assess the potential global impact of the various proposals that have been suggested. We would expect the process of sweeping overhauls to the U.S. tax code and broad and invasive laws, such as the Affordable Care Act, to be messy. Given the toxic and contentious tone in Washington, we expect it will take awhile for Congress and the Administration to converge on workable legislation. Investors should expect heightened headline risk and potentially greater volatility in the months ahead. Trade policy is an area where we could see relatively quick action. New trade agreements require congressional approval, but modifying or undoing existing commitments does not. We still have few details on Mr. Trump’s intentions regarding specific trade policy, but would expect him to renegotiate components of NAFTA (rules of origin) and undo the Trans-Pacific Partnership almost immediately.

Read more


January 13, 2017

Aspects of the Trump rally seem to be unravelling to some degree. The dollar has been very strong since the election. The U.S. Dollar Index (DYX) rallied from 97 in early November to over 103 in early January, but weakened to around 101 this week. Dollar selling was more pronounced after Presidential-elect Donald Trump’s press conference on Tuesday. To a large measure, the financial market’s post-election reaction has been predicated on the expectation of tax reform and infrastructure spending. Mr. Trump’s first press conference since being elected president focused on Russia and “fake news”, as opposed to the anticipated economic and tax policy changes. Another sign of reversal has been in the Treasury market. After a selloff that took the 10-year Treasury to a 2.65% yield, Treasuries reversed and the 10-year settled at 2.40% as the week closed. The equity market sectors and industries that have been strong post election have begun to see some consolidation (such as banks). It would not be surprising to see a broader price adjustment as the new administration takes office and confronts the hard work ahead. Often expectations get ahead of reality and financial markets are susceptible to this human behavior.

Read more


January 6, 2017

Expect Tax Reform in 2017

Tax reform has been a frequent topic of discussion in Washington over the last decade. Many members of Congress, both Republicans and Democrats, recognize that the U.S. current corporate tax code places domestic corporations at a competitive disadvantage globally. The combined U.S. federal and state corporate tax rate is over 39% versus roughly a 25% average for other developed nations. Both the Bush (Economic Growth and Tax Relief Reconciliation Act of 2001) and Clinton (Taxpayer Relief Act of 1997) tax cuts were proposed, went through Congressional committee, and were signed into law by summer. Both of these laws were also passed by the controversial budget reconciliation that requires only a 50% majority approval. Given the Republican control of both the Senate and the House, we expect to see a sweeping tax law approved by August. We expect a meaningful reduction in the corporate tax rate (very good for earnings) and perhaps a provision allowing for the immediate expensing of capital equipment (very beneficial for technology companies). The Trump Administration may attempt to affect trade policy through the tax code by creating different levels of deductibility depending on the location of production inputs. This would be very contentious and would delay the process.

Read more

Peapack-Gladstone Financial Corporation Named 2017 Sandler O'Neill Sm-All Star


"All Banking Should Be Private Banking."

PEAPACK-GLADSTONE BANK IS A HIGH-PERFORMING BOUTIQUE BANK, LEADERS IN WEALTH, LENDING AND DEPOSIT SOLUTIONS, KNOWN NATIONALLY FOR UNPARALLELED CLIENT SERVICE, INTEGRITY AND TRUST.