Seeing a Key Time for Balance

“Asymmetric” best describes our current economic and market environments.

In the current economy, we have decent, sustainable economic growth and an incoming government that has plans to increase that growth. But we also continue to have the large debt overhang from the boom period.

Plus, the incoming Donald Trump administration has some plans that are likely to increase growth and also offset its pro-growth measures. In the markets, there are assets with potential gains ahead, especially if the pro-growth fiscal measures prevail in the coming months.

But there also are potential risks in all the markets. The potential risks are greater than the potential rewards in most markets.

So, in both the economy and the markets we have different forces working against each other. It is hard to tell at this point which will prevail. But the potential damage from the negative forces is higher than the potential gain from the positive forces, unless everything goes right in the coming months.

That’s why I continue to recommend having diversification and balance. The market changes that followed the election weren’t sustainable and have retreated somewhat. Don’t bet on one outcome. Instead, you want positions that are likely to benefit, and not be hurt too badly, in the most probable outcomes.

The Data

Consumer Sentiment as measured by the University of Michigan leveled out at 98.1, declining 0.1. But the survey increased 10 points in the previous month and remains at a recovery high.

The optimism expressed in recent surveys isn’t reflected in retail sales yet. Sales rose 0.6% in December, but after excluding autos they rose only 0.2%. The monthly sales numbers are volatile, so it’s more important to look at the average over three months or six months. We’ll have to wait for future reports. But vehicle sales increased 2.4% in December, so perhaps consumers decided do their holiday shopping at auto dealers.

Inflation is creeping higher, as we expected. Producer Prices increased 0.3% for the month and 1.6% over 12 months. Excluding food and energy, they increased 0.2% for one month and 1.6% for 12 months.

Likewise, the Consumer Price Index (CPI) rose 0.3% for one month and 2.1% for 12 months. Excluding food and energy the CPI rose 0.2% for one month and 2.2% for 12 months. With the bear market in commodities apparently over, the key factors holding down the CPI the last couple of years are fading.

We continue to see signs that the manufacturing recession is over. The Empire State Manufacturing Survey came in at 6.5. That’s down from last month’s 9.0, which was revised down to 7.6. Even so, components of the survey were stronger than the headline number, which could point to higher growth ahead.

The Philadelphia Fed Business Outlook Survey was an unambiguously strong 23.6. That’s above last month’s 19.7, so the gain was substantially above expectations, and the sixth straight increase.

Industrial Production rose 0.8% for the headline number and 0.2% for the manufacturing component. The headline number was exaggerated a bit because bitter cold weather caused the highest monthly increase in utility output since December 1989. This data point has consistently been less promising than other manufacturing data for six months or so.

Home builders continue to be optimistic. The Housing Market Index for NAHB was 67, down just two points from the recovery high of 69 reported last month. All components of the survey were high and appear to indicate higher sales in the coming months.

The latest housing starts report seems to back the optimism from home builders. There was a sharp 11.3% increase in starts after a drop the previous month. But starts in single-family homes declined for the month. For 2016, housing starts increased 4.9%. The number has been very volatile month-to-month, but overall there has been decent growth in new housing for the last couple of years.

New unemployment claims declined by 15,000 down to 234,000. The four-week moving average is down to its lowest level since November 3, 1973.

The Markets

There wasn’t much movement in the markets this week. The S&P 500 lost 0.13% for the week ended with Wednesday’s close. The Dow Jones Industrial Average lost 0.70%. The Russell 2000 lost 1.07% for the week. Overseas stocks did better than U.S. stocks. The All-Country World Index rose 0.48%. Emerging market stocks gained 1.24%.

Long-term treasuries followed a few weeks of gains with a 0.48% decline. Investment-grade bonds lost 0.19%. Treasury Inflation-Protected Securities (TIPS) fell 0.10%. High-yield bonds declined 0.02%.

The dollar dropped again, this time by 0.82%.

Energy-based commodities declined 0.06%. Broader-based commodities gained 1.53%. Gold gained 3.00%.

Bob’s News & Updates

Many people have given friends and family copies of my latest book, the revised edition of “The New Rules of Retirement.” Readers say it has been a big help to them.

We’re about three weeks away from the MoneyShow Orlando, Feb. 8-11, at the Omni Orlando Resort at ChampionsGate. For free registration, use my priority code, 042315, and mention it when you call 1-800-970-4355 to register.