Wake Up Call or a Bump in the Road?

Since last November, many investors became comfortable with what has been called the Trump Trade. Now, they’re a little uneasy.

The Trump Trade was to buy assets that seem likely to benefit from the proposed policies of the new Trump administration. The primary beneficiaries were U.S. stocks, especially stocks of companies with mostly domestic revenues.

The momentum in favor of the trade propelled stocks higher and higher after the election, save for a pause in December and early January. But last Tuesday’s market action was different.

After a series of news reports cast doubt on President Trump’s likelihood of implementing his proposals, stocks fell. The S&P 500 finally ended its streak of 109 consecutive days without a 1% or greater decline.

The previous greater-than-1% decline occurred on October 16, 2016. Only 11 other times have there been periods of 100 or more days with no decline greater than 1%.

The market decline prompted headlines stating that the Trump Trade was over.

As I’ve been pointing out in Retirement Watch, however, most investors are missing the big story of the year. Non-U.S. stocks are doing better than U.S. stocks. This trend started in 2016 but was interrupted by the market turmoil following the Nov. 8 election. In 2017, foreign stocks again are setting the pace.

Look at these charts from Bespoke Investment. They show that since the market bottom in 2009, U.S. stocks returned 250%. The global market, excluding U.S. stocks, returned only 98%, and emerging market stocks returned 100%. The U.S. really began to leave the rest of the globe behind beginning in 2011. That coincides with the Fed’s heavy use of quantitative easing and with the European debt crisis.

So far in 2017, however, emerging market stocks are leading the pack, and U.S. stocks are tied with the global markets. Those returns are dollar-adjusted, so they don’t reflect any currency gains or losses, only changes in stock prices.

The data that matter to the markets tell me that U.S. stocks aren’t likely to continue the dominance they had through 2016. The Fed no longer is trying to force stock prices higher. Several forces are putting pressure on U.S. profit margins and revenues. Many companies overseas have more room to increase revenues and expand profit margins. The overseas companies and economies also are starting from much lower levels. They don’t need as much help to grow from here as U.S. companies do.

It’s a good time to be diversified and balanced. Instead of restricting yourself to one source of potential profits, take advantage of all the investments that have margins of safety.

The Data

We’re starting to see some data backing up the anecdotal reports of an improvement in manufacturing. Industrial Production had a headline number of no change. But the manufacturing segment had a 0.5% increase. That’s the largest increase for manufacturing since July 2015.

Consumer Sentiment, as measured by the University of Michigan, is edging toward its recovery highs. After a couple of months of small declines, the measure increased to 97.6 from 96.3.

The Index of Leading Economic Indicators from The Conference Board increased by 0.6% for the second consecutive month.

Existing home sales were down 3.7% for the latest month and were a little below expectations. That’s not surprising, since the previous month’s release (for January sales) had a sharp, unexpected increase that was the highest of the economic recovery. Sales still are 5.4% higher over the last 12 months.

Home prices, as reported in the FHFA House Price Index, were a negative surprise. The index had no change for the month. That’s the lowest change in four years. That brings the 12-month price change down to 5.7%, which is the lowest in two and one-half years.

I wrote this week’s update early, so I’ll report and analyze today’s economic data next week.

The Markets

The rally after the Fed’s meeting was short-lived.

The S&P 500 declined 1.53% for the week ended with Wednesday’s close. The Dow Jones Industrial Average fell 1.32%. The Russell 2000 lost 2.71%. The All-Country World Index fell 0.60%. Emerging market equities gained 0.97%.

Long-term treasuries rose 1.79%. Investment-grade bonds added 0.82%. Treasury Inflation-Protected Securities (TIPS) appreciated 0.54%, while high-yield bonds fell 0.92%.

In addition, the U.S. dollar lost 0.96%.

Energy-based commodities declined 0.96%. Broader-based commodities fell 0.13%, while gold returned 2.39%.

Bob’s News & Updates

Do your heirs know how to handle an inherited IRA? If not, they’ll join the long list of heirs who made simple mistakes that triggered additional taxes and penalties. To avoid this result, be sure your heirs have a copy of Bob Carlson’s Guide to Inheriting IRAs.

The missing link in many retirement plans is a strategy for withdrawing money from the nest egg to ensure it lasts 30 years or more. If you don’t have a plan, learn more in the revised edition of “The New Rules of Retirement.”