The economic calendar is loaded, especially with reports on housing. Despite this, the calendar and recent events will stimulate pundits to get out their crystal balls. I expect many to be asking:

Can the rally in stocks find fresh legs in 2018?

Last Week Recap

In the last edition of WTWA I observed that Santa might need a GPS to deliver on the typical year-end rally. The various sideshows – the Alabama election, the Fed meeting, the tax cut saga – played out and the market celebration continued.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. Jill Mislinski’s weekly version is first-rate, pulling together several key points in a single look. She notes the new record for the market in addition to the daily moves. Friday’s rally was the key feature of the week. Her article also takes note of the big increase in volatility this week.

Despite the excitement of the record high and Friday’s trading, the weekly trading range was again less than one percent.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

The economic news continues to be strong. New Deal Democrat notes a small deterioration in his long-range indicators. Take a look, as I do every week, at his helpful list of high-frequency indicators as well as his summary. For those of us with a serious interest in the economy, it is an efficient way to see items you would otherwise miss.

The Good

  • Job openings told a positive story. The JOLTs report is widely misunderstood and most of the commentary is unhelpful. The most important elements are the quit rate and the labor market structure. Voluntary quits are at a rate of 3.2 million per month, better than before the recession. Structure of the labor market is best understood via the Beveridge Curve. Here is the BLS explanation.

  • Inflation remained tame with both PPI and CPI core rates rising at or below expectations of 0.2%. There are many that view this as a sign of a weak economy, but that is not consistent with the rest of the data.
  • Initial jobless claims made another new low. Bespoke’s chart combines both a long- and short-term look. You might wonder how someone could view this as bad news, but see below for the answer.

  • The FOMC decision to raise short-term interest rates was not a surprise, and the markets took it in stride. This is despite the continuing plan for three more hikes next year, as illustrated by the Fed “Dot Plot.” Perhaps the calm is because few market observers have much confidence in the dot plot forecasts!

  • Tax cut legislation neared passage. With several key Senators either getting concessions or dropping their demands, Senate passage seems nearly certain. With the loss of a Senate seat and some serious illnesses, the GOP has a strong incentive to move quickly. (I know that many readers oppose these changes. Please note my description of “good” as “market-friendly.” It is one perspective, and the one most important to us in our investing roles.
  • Industrial production was up 0.2%, slightly less than expectations, but the prior month was revised upward from a gain of 0.9% to 1.2%. This is a noisy series. New Deal Democrat takes note of this case of “hard data” confirming prior survey data. Sometimes the surveys serve as solid leading indicators.
  • Small business optimism reached a 34-year high. (HORAN) If the survey opinions lead to action, small business investment and hiring could take an increased role as an economic driver.

  • Retail sales grew at a very strong pace, 0.8% versus expectations of 0.3%. The prior month was also revised higher, from 0.2% to 0.5%. This is very encouraging for a sector regarded as under pressure.

    • The Bad

    Not much bad news last week. Feel free to add comments about anything I missed.

  • Investor sentiment turns more bullish, a contrarian indicator. David Templeton (HORAN Capital Advisors) notes this as a story mostly about the decline in bearish sentiment.

  • Imports and exports, measured by sea container data, suggest an increasing trade deficit. Steven Hansen’s excellent regular update on this story provides, data, charts and analysis.

    • The Ugly

    Student loans. Nearly 5 million students in default, double that of last year? Despite a strengthening economy? (WSJ). Student loans account for the largest asset of the U.S. government, $1.37 trillion. That includes only debt that is at the repayment stage. Mrs. OldProf (a former banker) sees this as a big problem. We need the contributions of graduates. Taking away their bank accounts and professional licenses does not help on that front. She notes that there are precedents for leniency as an incentive to take certain jobs or to work in certain locations. It is a very challenging issue.

    Noteworthy

    Wired has a great article on the increase in data collection and integration in China. Some will find it disturbing, but everyone should be interested. Imagine that you had a score, relevant for credit, and various other perks. It was influenced by whom you chose as friends. And so were their scores. Would it affect your choice of friends? Even George Orwell could not have imagined this! And how close are US methods?

    The Week Ahead

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