Mon, 01/09/2017 - 01:10

John Davidson

Recently, talking heads have spent way too much time discussing about whether or not the Dow will pierce 20,000 and what that means for the future of the stock market. First, for some background, the Dow Jones Industrial Index is made up of 30 stocks, weighted by the price of a single share of each stock. Through times, shares have split (i.e. one share worth $100 becomes 2 shares worth $50 each), companies have been acquired, and the make up of the Index has changed. In order to facilitate the calculation, a divisor is utilized so that the impact of the above mentioned events appear to have no impact on the Index. The current divisor is 0.14602128057775 so a $1 change in the share price of a single stock has an impact of $6.87 on the index.

We have been fixated on benchmarks with zeros on the end. Each achievement of 1,000 or 10,000 points on the Dow stirs up the media. There is really no significant difference between 19,999 and 20,001 and the fact that the Dow might cross than milestone has no significance in future values of the index. Technical analysts will look at measures of momentum, moving averages, and stochastics to analyze the markets. Fundamental analysts will look at the overall economy, earnings, P/E ratios, and dividends to value equities. Neither should be depending on a statistic measure like 20,000 on the Dow even as the Index closed this week 36 points from that demarcation.

Economic Releases: US Employment

Nonfarm Payrolls (blue in the chart below) gained 156,000 in December, on the low end of the range of expectations, but revisions to prior months added 19,000. Private Payrolls (red in the chart below) similarly gained 144,000. The Participation rate remained at 62.7%. As a sign of strength in the labor market, Average Hourly Earnings rose +0.4%, the second such gain in the last three months; the annual increase of +2.9% was the best since 2009. The Unemployment Rate ticked up to 4.7% and the Average Workweek ticked town to 34.3 hours. The December report affirmed wage improvement, but subdued growth in employment. In other employment news, the weekly Initial Claims for Unemployment Benefits fell -28,000 to 235,000; the 4-week average of Claims fell to 256,750 the week of December 31st; Continuous Claims, reported on a 1-week lag, rose 16,000 to 2,112 million.

For a longer term view of the last 8 years, the Wall Street Journal reported that Nonfarm Payrolls gained 1.0% per year, which matched the record under President Ford, but exceeded the records under Eisenhower, and under both Bushes; the records under Kennedy, Johnson, Nixon, Carter, Reagan, and Clinton exceeded 1.0%. The Unemployment Rate fell -0.4% per year in the last 8 years, exceeded only by the Johnson years -0.5%. The Labor Participation rate fell -0.4% per year in the last 8 years, the most negative average change of any of the above administrations. Inflation-adjusted hourly earnings increased +0.5%, exceeded only by the Clinton, and GW Bush years at +0.8%. The overall growth in the economy of 2.1% (through the 3rd quarter) is the slowest growth in any of the expansions since 1949.

Source: St Louis Federal Reserve, FRED, Econoday via WSJ.com

Other US Releases:

Purchasing Managers' Indices
for December		Manufacturing		Services
US ISM	↑	54.7		57.2
US Markit	↑	54.3	↑	53.9

The Purchasing Managers' Indices (PMIs) rose and remained well in the expansion zone in December. Factory Orders fell -2.4% in November.

You will note that the format of the table has changed. The + and - sign in front of the number has been replaced by an up or down arrow to reflect the change from the previous month.

Source: Econoday and the Wall Street Journal

Economic Releases outside the U.S.

Purchasing Managers' Indices
for December		Manufacturing		Composite		Services
European Union	↑	54.9	↑	54.4	↑	53.7
Germany	↑	55.6	↑	55.2	↓	54.3
France	↑	53.5	↑	53.1	↑	52.9
UK CIPS	↑	56.1			↑	56.2
China CFLP	↓	51.4
China	↑	51.9	↑	53.5	↑	53.4
Japan	↓	51.3	↑	52.8	↑	52.3

Around the globe, most PMIs rose and all remained well into the expansion zone, above 50. In the Eurozone Retail Sales slipped -0.4% in November, but October's Sales were revised 3 ticks higher to 1.4%. In December, EU Economic, Industrial, and Consumer Sentiment improved. In November, Germany's Manufactures' Orders fell -2.5% and Retail Sales fell -1.8%.

Source: Econoday and the Wall Street Journal

Equity and Bond Index Returns:

In the first week of the year equity markets rose across the globe, a continuation of the post election rally that now included the Asian markets. Valuations remain high at 17.1 times S&P 500 earnings; that ratio is close to the average over the past 20 years, but well above the 10-year average of 14.4. Falling interest rates gave the US fixed income indices a positive start to the year as well.

In the tables below I have kept the Election to Date (ETD) data because Quarter to Date (QTD) would be a repetition of another column.

Equity Indices % Change	Price	% Chg since:	ETD	Calendar	'08-'16
	01 /06/ 17	12 /30/ 16	11 /04/ 16	2016	12/31/08
Dow Jones Industrials	19,964	1.0%	11.6%	13.4%	125.2%
S&P 500 Index	2,277	1.7%	9.2%	9.5%	147.9%
Nasdaq	5,521	2.6%	9.4%	7.5%	241.3%
S&P/TSX Composite	15,496	1.4%	6.8%	17.5%	70.1%
FTSE 100 Index	7,210	0.9%	7.7%	14.4%	61.1%
CAC 40 Index	4,910	1.0%	12.2%	4.9%	51.1%
DAX Index	11,599	1.0%	13.1%	6.9%	138.7%
Swiss Market Index	8,417	2.4%	10.9%	-6.8%	48.5%
Nikkei 225 Index	19,454	1.8%	15.1%	0.4%	115.7%
HK Hang Seng Index	22,503	2.3%	-0.6%	0.4%	52.9%
Shanghai CSI 300	3348	1.1%	-0.2%	-11.3%	82.1%
Bond Indices % Total Return
Bloomberg Treasury Index 6.0	124.4	0.2%	-3.2%	1.0%	19.5%
Bloomberg Corporate Index 7.0	144.1	0.3%	-1.8%	5.9%	72.1%
Bloomberg High Yield Index 4.2	171.5	1.0%	3.0%	17.4%	167.4%
Valuation					20-Year Ave
Factset forward S&P 500 Earnings	$132.89		$130.69	$132.79	17.2
% Change in Earnings			1.7%	4.5%	10-Year Ave
Price/Earnings Ratio	17.1		16.9	16.9	14.4

Data Source: Bloomberg app for the Iphone; Earning Estimates from Factset

Bond Yields and Spreads:

In the first week of the new year, US yields were mostly lower, but European yields were mostly higher. The TIPS spread held showing that higher inflation expectations remain since the election. Credit spreads for the high yield sector have narrowed further in the first week of the new year.

Government Bonds	Bond Yields (%)	bp chg since	ETD	Calendar	'08-'16
	01 /06/ 17	12 /30/ 16	11 /04/ 16	2016	12/31/08
UST 2-Year	1.21	2	43	14	42
UST 10-Year	2.42	-2	64	17	23
US TIP 10-Year	0.42	-4	34	-23	-163
UST 30-Year	3.01	-6	45	5	39
Canadian 10-Year	1.72	1	57	32	-97
UK 10-Year	1.38	15	25	-73	-179
French 10-Year	0.82	14	36	-30	-273
German 10-Year	0.29	9	16	-43	-275
Swiss 10-Year	-0.16	10	25	-14	-236
Japan 10-Year	0.05	1	12	-22	-113
Credit Spreads		bp chg	bp chg	bp chg	bp chg
Bloomberg Corp OAS BUSC	129	1	-15	-43	-445
Bloomberg HY OAS BUHY	401	-28	-111	-304	-1374
Rates		bp chg	bp chg	bp chg	bp chg
US Mort 30-yr %	3.99	1	50	16	-117
10-Year TIPS Spread	2.00	2	31	40	185

Data Source: Bloomberg app for the Iphone

Currency and Commodity Markets:

The Loonie was the strongest currency in the first week of the new year; the US dollar was mixed against the other currencies in the table. Metals and Corn commodity prices gained in the first week of the year. Natural Gas dropped, but Oil prices were little changed in the first week of the year.

Currencies vs $	Closing	% Chg since	ETD	Calendar	'08-'16
	01 /06/ 17	12 /30/ 16	11 /04/ 16	2016	12 /31/ 08
Yen	85.48	-0.0%	-11.9%	2.8%	-22.5%
British Pound	1.23	-0.3%	-1.9%	-16.4%	-15.5%
Euro	1.05	0.1%	-5.5%	-3.2%	-24.7%
Canadian Dollar	75.62	1.6%	1.4%	2.9%	-9.5%
China Renminbi	14.44	0.3%	-2.4%	-6.5%	-1.6%
Commodities
West Texas Intermediate	$53.71	-0.2%	21.9%	45.4%	20.7%
Brent Crude	$56.84	0.0%	24.7%	52.4%	58.6%
Natural Gas	$3.27	-12.6%	18.0%	60.5%	-35.6%
Spot Gold	$1173	1.8%	-10.2%	8.5%	32.4%
Spot Silver	$16.48	3.4%	-10.6%	15.2%	40.7%
CBOT Corn	$358.00	1.7%	2.7%	-1.9%	-2.1%
Spreads
Brent-WTI	$3.13	5.0%	107.3%	$0.24	-$8.78

Data Source: Bloomberg app for the Iphone

Equity Index Gains in US dollar terms:

The equity table above shows the percent change of different stock indices in terms of its local currency. To calculate the return to the US dollar investor one must combine the change of each index with the change in the applicable currency. The following table shows the 5-day, quarter-to-date and year-to-date results of investments made in each index in US dollar terms:

Return to USD Investor		% Chg	ETD	Calendar
	since:	12 /30/ 16	11 /04/ 16	2016	'08-'16
S&P 500 Index:	USD	1.7%	9.2%	9.5%	147.9%
Nikkei 225 Index:	Yen	1.8%	1.4%	3.2%	67.3%
FTSE 100 Index:	Pound	0.6%	5.7%	-4.4%	36.0%
DAX Index:	Euro	1.2%	6.9%	3.4%	79.7%
CAC 40 Index:	Euro	1.1%	6.0%	1.5%	13.7%
S&P/TSX Composite:	CAD	3.0%	8.3%	21.0%	54.0%
Shanghai CSI 300:	Yuan	1.4%	-2.6%	-17.0%	82.1%

The strength of the Loonie put the TSX as the best place for US dollar investors to have been in the first week of the year.

Who is John Davidson?

John W. Davidson, CFA, started writing these Comments more than a decade ago as a personal discipline when he was promoted from portfolio manager to chief investment officer and CEO.

Most recently, he was the president of PartnerRe Asset Management Corporation, responsible for the management of PartnerRe's invested assets, which grew from $4 billion to $12 billion during his tenure. After joining PartnerRe in the fall of 2001, he hired the staff, built the trading floor and created the infrastructure to manage both fixed income and equity assets internally. He retired from PartnerRe at the end of 2008 and moved to Maine, where he focused on board work.

He has more than 35 years of industry experience, including positions with investment management responsibility for separate institutional accounts, mutual funds, trusts and insurance assets. Prior to joining PartnerRe, he served as president and chief executive officer of two other investment management companies. For various companies he has held positions as chief investment officer, chief economist, head of fixed income and portfolio manager. As a portfolio manager, Davidson managed and traded U.S. Government Securities as well as futures and options on fixed income instruments.

His real world experience is backed by a strong academic foundation, which includes earning a Master of Business Administration in finance and a Master of Arts in mathematics from Boston College, as well as a Bachelor of Arts, cum laude, in economics from Amherst College. He holds the professional designation of chartered financial analyst.

His experiences and credentials have brought him to the public as a television commentator and conference speaker. In addition to his frequent past appearances on CNBC, CNNfn, Bloomberg TV and Yahoo FinanceVision, he appeared as a special guest on Wall $treet Week with Louis Rukeyser. Reuters, Bloomberg and other business press services have quoted his views on the market. He has taught CFA preparation programs, as well as other courses offered by the Stamford and Boston CFA Societies, and the National Graduate Trust Officers' School.

Davidson is a natural leader in both his professional and personal life, having developed those skills early in his career as a naval officer. He spent three years on active duty, which included a year on the rivers of Vietnam, and 24 years in the Naval Reserve, from which he retired as a captain in 1994.

Davidson is treasurer and board member of the Camden Conference. He is also on the investment committee of the Pen Bay Health Foundation. He serves as an independent trustee for mutual funds.

In his leisure time, he is an active sailor, tennis player and skier. With his wife, Barbara, he renovated a 100+-year-old home in Camden, where they enjoy spending time with their two golden retrievers and having visits from their five children. He can be reached at jwdbond@me.com.