A week ago, the world was on edge after the US took out Iranian Major General Soleimani in a drone strike at the Baghdad airport. Luckily Iran’s retaliation was minor and the political uproar that followed this bold and unforeseen event seems to have dissipated. Nevertheless, the first few weeks of 2020 have been an emotional roller coaster for investors, and we believe the year will continue to be marked by more unexpected political incidents. The predictable narratives are the Democratic primary election, the presidential election and Brexit; but these are only the obvious ones. Investors should stay on their toes while keeping a solid focus on fundamentals. 

Currently the financial press is dominated by more mundane economic stories such as the content of this week’s Chinese-US phase one trade deal and the positive earnings results reported by several large US banks. JPMorgan Chase (JPM – $138.80) reported a 9% increase in revenues in its fourth quarter. Citigroup (C – $81.91) reported a 7% increase. Chase reported their credit card, merchant services and auto revenue surged $6.3 billion or 9% at year end, with credit card loans up 8%. Citi beat profit estimates due to a jump in trading revenue and strong credit card sales. These revenue and earnings increases paint a favorable picture for fourth quarter GDP which will be released at the end of this month. Economists will get another clue to fourth quarter activity when December’s retail sales are released later this week. The consensus is looking for a 0.4% month-over-month gain in total sales versus the 0.2% recorded in November. Anything stronger would be an excellent sign that the consumer is doing better than expected. Wall Street is forecasting GDP growth of 1.6% in the fourth quarter, but it is worth noting that the consensus has been too pessimistic all year. The combination of a stronger-than-consensus fourth quarter and a signed phase one US-China trade deal could set the stage for a big positive surprise in the first quarter of 2020. 

TARGET TWEAKING 

In our OUTLOOK FOR 2020 (December 18, 2019) we noted that our SPX earnings forecast of $184 and our price target of SPX 3300 could prove too conservative. We are not surprised that equities are closing in on our SPX 3300 target this week. Yet since it is, we should remind readers that the top of our valuation model’s predicted range allows for a much higher target of SPX 3500 by December 2020. But SPX 3500 would require a perfect combination of strong earnings, low inflation, an accommodating Fed, and no upsetting political or geopolitical events. And while this is not impossible, we believe it is likely that the SPX 3300 level becomes upside resistance in the near term. Even so a signed trade deal, better than expected fourth quarter SPX earnings and a GDP report of 2% or more for 4Q19, could lead us to raise our target in coming weeks. 

A FEDERAL RESERVE ON HOLD 

Recent data releases suggest the Federal Reserve should be on hold for the foreseeable future. Employment in December was healthy, but not particularly strong. The 145,000 increase in payrolls was well below the 6-month average of 188,500 new jobs per month. And while the unemployment rate fell fractionally, it still rounded to 3.5%, or unchanged from November. Average weekly earnings for total private employees rose 2.3% YOY, down from 2.8% YOY in November. Average weekly earnings for production and nonsupervisory employees rose 2.4% YOY, down from 2.8% YOY in November. 2222 

Our favorite employment statistics are the annual growth rates in the number of people employed. In December, employment increased 1.4% YOY in the establishment survey and 1.3% YOY in the household survey. Both of these gains were slightly below their respective long-term average growth rates. Still, it is difficult to criticize these growth rates since the current expansion is now 10 ½ years old. Slow and steady is usually a better long-term trend than fast and extreme. Over 2.1 million jobs were created in 2019 and the number of unemployed workers receiving unemployment insurance fell by 533,000. These are all favorable numbers; but in our view, the most impressive statistics in December’s job report were not the headline data points. The percentage of those currently not in the labor force but wanting a job fell from 5.3% in December 2018 to 4.8% in December, after hitting a record low of 4.6% in October 2019. Discouraged workers, or those out of work who feel they will not be able to find work, fell to 277,000 in December, the lowest level since September 2007. These latter data points suggest the job market has definitely become healthier in 2019. See pages 3 and 4. 

The NFIB Small Business Optimism Index fell from 104.7 in November to 102.7 in December. This decline reversed some of the gains seen in the prior two months, yet the index remains generally strong. There were small declines in plans for capital expenditures, employment expansion, job openings, compensation increases, general expansion, and price increases. But there were small increases in the percentage of respondents that expect the economy and real sales to improve in the next twelve months. See page 5. 

December’s inflation data also supports the Federal Reserve’s neutral standing. December’s not-seasonally-adjusted CPI index showed a 2.3% YOY rise, which was just slightly higher than the 2.1% YOY gain seen in November. Meanwhile, core CPI was unchanged from November’s 2.3% YOY pace. Energy prices fell 0.8% for the month but rose 3.4% YOY. Food was up 0.1% for the month and up 1.8% YOY. See page 6. Of the largest components of the CPI, transportation, with a 16.4% weighting, tends to be the most volatile due to the erratic price of oil. For example, transportation prices rose 1.9% YOY in December after falling for three consecutive months. But medical care, with an 8.8% weighting, is the most concerning. Medical care had the largest year-over-year increase, up 4.6% YOY in December. The major driver of recent medical care inflation is health insurance, where prices have been increasing 20% YOY or more for three consecutive months. See page 7. 

Conversely, housing, which carries a 42.3% weight in the index, has been decelerating from a 3.0% pace to 2.6%. This has helped to dampen inflation trends. Prices for rent of primary residence, owners’ equivalent rent and household furnishings and operations are all slowing. This is favorable for consumers and should help keep headline and core inflation indices rising modestly between 2.0% and 2.3% for 2020. See page 8. 

TECHNICAL INDICATORS HOLD STRONG AND STEADY 

The 25-day up/down volume oscillator is 2.87 (preliminarily) and neutral after being in overbought territory for 11 of the last 15 consecutive trading sessions. This overbought reading, which began in December, represented the sixth consecutive overbought reading of 2019. Strong and repetitive overbought readings reveal solid and persistent buying pressure and are a classic characteristic of a bull market cycle. In short, this is a positive sequence for this indicator. See page 11. Breadth data continues to be strong and favorable. The 10-day average of new highs rose to an average of 343 this week, while the average number of daily new lows fell to 35. The NYSE cumulative advance decline line recorded a new high on January 14, which confirms the new highs recorded by most of the popular averages last week. See page 12. Equally important are the lack of extremes in sentiment. As of January 8, AAII bullish sentiment fell 4.1% to 33.1% and bearish sentiment rose 8.0% to 29.9%. The 8-week bull/bear spread remains neutral. The ISE Sentiment index which measures option sentiment is also neutral. In sum, sentiment indicators are not giving early warning signals of a peak in the market.

December’s payrolls increased by 145,000 workers, previous months were revised lower by 13,000 and the unemployment rate fell fractionally, but still rounded to 3.5%. See below. Employment grew 1.4% YOY in the establishment survey and 1.3% YOY in the household. Both of these paces were slightly below the long-term average employment growth rate; however, the job market remains robust considering the expansion is currently 10 ½ years old. 

Regulation AC Analyst Certification 

I, Gail Dudack, hereby certify that all the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific views contained in this report. 

IMPORTANT DISCLOSURES 

RATINGS DEFINITIONS: 

Sectors/Industries: 

“Overweight”: Overweight relative to S&P Index weighting 

“Neutral”: Neutral relative to S&P Index weighting 

“Underweight”: Underweight relative to S&P Index weighting 

Other Disclosures 

This report has been written without regard for the specific investment objectives, financial situation or particular needs of any specific recipient, and should not be regarded by recipients as a substitute for the exercise of their own judgment. The report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell securities or related financial instruments. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. The report is based on information obtained from sources believed to be reliable, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the report. Any opinions expressed in this report are subject to change without notice and Dudack Research Group division of Wellington Shields & Co. LLC. (DRG/Wellington) is under no obligation to update or keep current the information contained herein. Options, derivative products, and futures are not suitable for all investors, and trading in these instruments is considered risky. Past performance is not necessarily indicative of future results, and yield from securities, if any, may fluctuate as a security’s price or value changes. Accordingly, an investor may receive back less than originally invested. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report. 

DRG/Wellington relies on information barriers, such as “Chinese Walls,” to control the flow of information from one or more areas of DRG/Wellington into other areas, units, divisions, groups or affiliates. DRG/Wellington accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report. 

The content of this report is aimed solely at institutional investors and investment professionals. To the extent communicated in the U.K., this report is intended for distribution only to (and is directed only at) investment professionals and high net worth companies and other businesses of the type set out in Articles 19 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. This report is not directed at any other U.K. persons and should not be acted upon by any other U.K. person. Moreover, the content of this report has not been approved by an authorized person in accordance with the rules of the U.K. Financial Services Authority, approval of which is required (unless an exemption applies) by Section 21 of the Financial Services and Markets Act 2000. 

Additional information will be made available upon request. 

©2020. All rights reserved. No part of this report may be reproduced or distributed in any manner without the written permission of Dudack Research Group division of Wellington Shields & Co. LLC. The Company specifically prohibits the re-distribution of this report, via the internet or otherwise, and accepts no liability whatsoever for the actions of third parties in this respect. 

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The new year began with a US drone strike at the Baghdad airport which killed Iranian Major General Qassem Soleimani and Iraqi militia leader, Abu Mahdi al-Muhandis, who had greeted him at the airport. To the extent that Iran retaliates and whether this is the start of an escalating conflict in the Middle East is a huge unknown. But it certainly could become the overriding issue of 2020. Still, it is important to note that history shows that stocks have performed surprisingly well during military conflicts. For example, equity prices rose in 1991 even though the US began a military operation – Operation Desert Storm – in January to expel Iraqi forces from Kuwait. (An interesting connection between 1991 and the current operation is that Muhandis had been labeled a terrorist and sentenced to death by a Kuwaiti court for the 1983 bombings of the American and French embassies in Kuwait.) 

Another significant factor to consider with regard to the Middle East is that the US has recently become the world’s largest energy producer. In 2018 the US delivered 18% of the world’s total oil production exceeding Saudi Arabia’s 12%. In November, the US had a petroleum trade surplus of $0.8 billion, the highest on record. This is an important difference between 1991 and 2020 since the US is now a greater force in global energy production, has become a more energy efficient economy and currently benefits economically from the rising price of oil. A rise in oil prices could also increase corporate earnings for energy companies and boost S&P 500 earnings. All of this could explain why the US equity market has performed better since the drone attack than many would have expected. 

WHAT HAS CHANGED? 

Although the geopolitical landscape is quite different today from when we published our 2020 outlook in December, there is little that we would change in our forecasts. The SPX is trading at 20 times trailing operating earnings this week, the same multiple as seen in mid-December. Our earnings forecast of $184 is likely to be too conservative, particularly if energy sector earnings rebound more than expected in 2020. And in turn, we believe our SPX price target of 3300 (PE multiple of 17.9 times) could prove to be too conservative. However, given the uncertainty that the Middle East now poses, it is possible that the SPX 3300 level will be a hurdle in the intermediate-term, or at least until the risk of conflict subsides. Conversely, sell offs related to the Middle East should be viewed as longer-term buying opportunities. As we go to print there are reports that there are rocket attacks on multiple US facilities in Iraq and US equity futures are down 1%. 

ASSESSING ECONOMIC STRENGTH 

The majority of recent data releases indicate that economic activity is improving. November’s trade data pointed to a goods-only trade deficit that declined 5.8% to $63.9 billion and a total trade deficit that fell 8.2% to $43.1 billion. Both of these monthly figures are the lowest deficits recorded since October 2016. The petroleum surplus mentioned earlier, contributed to the declines in deficits. Most importantly, the trade deficit as a percentage of GDP is ratcheting lower which means it could be less of a drag on GDP in future quarters. Last but far from least, trade with China continues to decline and Mexico and Canada remain our number one and two trading partners. See page 3. 

One of the most promising segments of the US economy is housing. Pending home sales – a leading indicator of single-family home, condo and co-op sales – rebounded in November despite a shrinking 2222 

level of available inventory. This report was accompanied by large jumps in building permits and housing starts, which are now at their highest levels in twelve years. See page 4. Since pending home sales are based upon signed real estate contracts, November’s report suggests that existing home sales and prices should rise in the first quarter of 2020. See page 5. 

Given this housing backdrop it is not surprising that home builder confidence is also rising. In November, the NAHB housing market index was approaching levels last seen in 1999. This is good news for the stock market. Housing is an important part of the US economy and the trickle-down effect from new and existing home sales is influential to many other parts of the economy. Therefore, it is not surprising that the NAHB housing market index and the SPX are strongly correlated. As seen on page 6, with the exception of 2006 and 2007, homebuilder confidence has moved in close step with stock prices. In fact, the weakness in the NAHM index in 2006-2007 was an excellent, although early, predictor of the mortgage crisis that led to the financial crisis in 2008. 

In our OUTLOOK FOR 2020 (December 18, 2019) we outlined the strengths we see in the household sector which included a healthy job market, solid gains in real wages, record household net worth, homeowners’ equity of 64% (the best since 1991), and debt service ratios that remain at or near 40 year lows. Recent data on personal income and personal expenditures also point to a strong consumer base. In November, personal income grew 4.85% year-over-year and personal disposable income rose 4.6% year-over-year. And despite the increase in the CPI from 1.8% to 2.1% in November, our calculation for real personal disposable income showed an increase from 2.4% to 2.5%. In short, purchasing power continues to improve. The cyclicality in personal consumption is another encouraging factor for the US economy. As seen on page 7, PCE tends to decline and hit a low every two to four years. There were cyclical slumps in personal consumption in 2009, 2013, 2015 and in 2019. However, the slump in 2019 is now a good omen for 2020 since it implies there should be a rebound ahead. 

Not everything is bright for the US economy. The ISM manufacturing index fell from 48.1 in November to 47.2 in December, recording its third consecutive decline and its fifth consecutive reading below 50. The manufacturing sector continues to be in the doldrums. Conversely, the ISM nonmanufacturing index rose from 53.9 to 55.0 in November. The employment survey in each ISM series edged lower in December but since the unemployment rate is low, we are less concerned about these employment indices than we were. More importantly, the nonmanufacturing employment index was 55.2 in November, a level that indicates expansion. Keep in mind that nonmanufacturing represents 80% of the US workforce. See page 8. 

TECHNICAL INDICATORS REMAIN BULLISH 

One of the most bullish indicators we monitor is the 25-day up/down volume oscillator. This indicator is an excellent barometer of underlying buying and selling pressure and it helps us determine if a bull or bear market is strong, getting stronger or running out of steam. The oscillator is currently 2.84 and neutral this week but it was in overbought territory for 7 of 8 consecutive trading sessions at year end. This represented the sixth consecutive overbought reading (without an intervening oversold condition) in 2019 and is distinctly bullish. The cumulative advance decline line made an all-time high on January 6, which confirmed the new highs seen in the indices on January 2. And since the equity market has been setting a series of record highs, we plan to monitor sentiment indicators more closely. Sentiment indicators tend to be an early warning system for extended bull market cycles since extreme bullishness usually accompanies bull market peaks. The good news today is that sentiment indicators are not recording high levels of optimism. The AAII bullish sentiment reading for January 1 was 37.2%, down 4.7% from the previous week. Bearish sentiment rose 0.3% to 21.9% in the same week. The ISE Sentiment index edged toward positive territory but was also in neutral territory this week. In sum, there are no extremes in the technical arena that would suggest that the bull market advance is over. All in all, this suggests that future market weakness should provide investors with a favorable buying opportunity. 

Regulation AC Analyst Certification 

I, Gail Dudack, hereby certify that all the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific views contained in this report. 

IMPORTANT DISCLOSURES 

RATINGS DEFINITIONS: 

Sectors/Industries: 

“Overweight”: Overweight relative to S&P Index weighting 

“Neutral”: Neutral relative to S&P Index weighting 

“Underweight”: Underweight relative to S&P Index weighting 

Other Disclosures 

This report has been written without regard for the specific investment objectives, financial situation or particular needs of any specific recipient, and should not be regarded by recipients as a substitute for the exercise of their own judgment. The report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell securities or related financial instruments. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. The report is based on information obtained from sources believed to be reliable, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the report. Any opinions expressed in this report are subject to change without notice and Dudack Research Group division of Wellington Shields & Co. LLC. (DRG/Wellington) is under no obligation to update or keep current the information contained herein. Options, derivative products, and futures are not suitable for all investors, and trading in these instruments is considered risky. Past performance is not necessarily indicative of future results, and yield from securities, if any, may fluctuate as a security’s price or value changes. Accordingly, an investor may receive back less than originally invested. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report. 

DRG/Wellington relies on information barriers, such as “Chinese Walls,” to control the flow of information from one or more areas of DRG/Wellington into other areas, units, divisions, groups or affiliates. DRG/Wellington accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report. 

The content of this report is aimed solely at institutional investors and investment professionals. To the extent communicated in the U.K., this report is intended for distribution only to (and is directed only at) investment professionals and high net worth companies and other businesses of the type set out in Articles 19 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. This report is not directed at any other U.K. persons and should not be acted upon by any other U.K. person. Moreover, the content of this report has not been approved by an authorized person in accordance with the rules of the U.K. Financial Services Authority, approval of which is required (unless an exemption applies) by Section 21 of the Financial Services and Markets Act 2000. 

Additional information will be made available upon request. 

©2020. All rights reserved. No part of this report may be reproduced or distributed in any manner without the written permission of Dudack Research Group division of Wellington Shields & Co. LLC. The Company specifically prohibits the re-distribution of this report, via the internet or otherwise, and accepts no liability whatsoever for the actions of third parties in this respect. 

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Historic Events

This week can be marked as historic with Democrats from the House of Representatives, led by House Leader Nancy Pelosi, announcing two articles of impeachment, abuse of power and obstruction of Congress, against President Trump. This was long anticipated. But in an odd act of timing, Leader Pelosi followed one hour later with a press conference indicating the House is likely to pass an amended and long-delayed USMCA trade deal. Earlier this week, The Washington Post exposed a confidential trove of government documents showing that, throughout an 18-year campaign, senior US officials failed to tell the truth about the war in Afghanistan, made pronouncements they knew were false and hid evidence from the press and the American public that the war had become unwinnable. In short, Washington DC is all abuzz.

This week will continue to be busy since it includes the December FOMC meeting, a December 12^th UK parliamentary vote, the results of which could determine the fate of Brexit, EU monetary policy and the debut press conference of the new head of the European Central Bank, Christine Lagarde. Key economic reports on the CPI, PPI, import and export prices and retail sales will also be released. We do not expect any change to monetary policy in December, so the key report of the week is apt to be November’s retail sales report. This release should have preliminary data for Black Friday sales, but it will not include Cyber Monday online sales which are reported to have totaled $9.4 billion, up nearly 19% YOY according to Adobe Analytics. Estimates for Black Friday sales are currently $7.4 billion. All in all, these retail sales numbers point to the start of a healthy holiday selling season and it bodes well for the fourth quarter economy.

Employment is Better than Expected

November’s payroll numbers also suggest the economy is doing better than many economists have been predicting. Job gains for the month surged to 266,000, their best performance since January, while revisions to the two prior months added 41, 000 more jobs. Although the reversal of October’s auto strike losses was expected to add 54,000 jobs to the month, payroll gains still exceeded 200,000 in November. This was an impressive increase since the usual holiday lift in retail payrolls failed to materialize. Employment gains in November were strongest in healthcare and professional and technical services. See page 3.

Our favorite job statistic is measuring year-over-year growth in both employment surveys. The establishment survey had a 1.47% YOY increase in jobs in November, slightly below its long-term average of 1.77%. The household survey had a 1.14% YOY increase in jobs, just under its long-term average of 1.5%. In fact, both surveys have exhibited below average growth for most of 2019, even though the pace of employment gains have been positive and steady. Yet slow and steady is much different from a sharp deceleration in the rate of job growth; deceleration is a typical precursor of a pending recession. But this is not a concern today. In the 12-months ended in November there have been 2.2 million new jobs created and this contributed to a 3.5% unemployment rate which matches September 2019. These are the lowest unemployment rates since the 3.4% reported in June 1969. See page 4.

November’s participation rate of 63.2% is only slightly above the September 2015 low of 62.4% and this lackluster performance is due to Baby Boomers leaving the labor force. Baby Boomer retirements mean this ratio is unlikely to improve in the years ahead. Conversely, the employment population ratio was 61% in November and has moved steadily higher since its July 2011 low of 58.2%. This is an indication of a strengthening labor market. The fact that the percentage of people who are not in the labor force but want a job was 4.7% in November, close to previous month’s all-time low of 4.6%, is another sign of a strong market. See page 5. Historically, a 3-month average of job gains or losses has had a strong correlation with consumer confidence. In November the 3-month average job gain rose from 189,330 to 205,000; confidence is also rising. This relationship has been stronger than that of the unemployment rate and GDP. See page 6. November’s average hourly earnings grew 3.7% YOY, an acceleration over the 3.4% YOY rate seen a year ago. Average weekly earnings rose 3.0% YOY in November which is down from the 3.4% YOY pace seen in November 2018. In sum, November marked a deceleration in the pace of weekly earnings growth, but the rate still well above the 2.2% YOY pace seen between 2011 and 2016. See page 7. Based upon this, it is no surprise that consumer confidence is on the rise.

Trade is Better than Expected

Trade data also points to fourth quarter strength. The trade deficit narrowed from $51.1 billion in September to $47.2 billion in October, the second consecutive monthly decline and the fourth decline in the past five months. On an annualized basis, the trade deficit is running at 4% of GDP versus the 4.25% of GDP recorded in 2018. See page 8. Most of this improvement in the deficit is the result of declining trade with China. The US trade deficit with China is running at 1.6% of GDP this year versus 2.04% in 2018. Some of this falloff with China is becoming a boon for other countries. Trade is expanding with countries in the European Union, Japan and Canada; but Mexico has been the biggest beneficiary of the trade war. Imports from Mexico are up 4.5% and exports have declined 2%, year-to-date. As a result, the trade deficit with Mexico is running at 0.48% of GDP versus the 0.39% seen in 2018. Another factor improving US trade is energy. This can be seen by the fact that in the first 10 months of 2019, the US is experiencing a $7.7 billion surplus with OPEC nations. See pages 9-11.

Technical Indicators Continue to be Strong

After strong advances from the mid-October lows to December’s record highs, the popular indices are consolidating this week. But trends remain favorable and indices are trading above all moving averages. The Russell 2000 index has been our biggest concern in 2019 since it has lagged the larger capitalization indices most of the year. However, the RUT has broken above the 1600 resistance level and it continues to hold above this level which is bullish. See page 13. The 25-day up/down volume oscillator is at 0.83 and is neutral this week. But the last reading in this indicator was a five-day overbought reading, the fifth such reading in 2019, which represents a bullish pattern of solid buying pressure. See page 14. Average daily new highs remain above 100 per day and average daily new lows remain below 100 per day, which is classically bullish. The NYSE cumulative advance decline line made an all-time high on November 27^th confirming the new highs in the indices. And last, we are encouraged that sentiment indicators remain in neutral territory even as the market continues to climb to new heights. In short, there are no signs of excessive optimism that tends to mark major bull market peaks.

Summary

Economic data including reports on jobs, trade, sentiment, housing, and GDP continue to show a stellar US economy led by a consumer supported by the best job market in years. This bodes well for the fourth quarter economy and for earnings. We continue to believe that our 2020 SPX target of 3300 could prove to be conservative.

Next week we will publish our Outlook for 2020 on Wednesday December 18^th.

November’s payroll gain of 266,000 jobs was strikingly strong even after adjusting for the 54,000 job increase attributed to the UAW settlement. Moreover, revisions added 41,000 jobs to the prior two months. The 6-month averages rose to 196,330 in the establishment survey and to 305,830 in the household survey.

Regulation AC Analyst Certification 

I, Gail Dudack, hereby certify that all the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific views contained in this report. 

IMPORTANT DISCLOSURES 

RATINGS DEFINITIONS: 

Sectors/Industries: 

“Overweight”: Overweight relative to S&P Index weighting 

“Neutral”: Neutral relative to S&P Index weighting 

“Underweight”: Underweight relative to S&P Index weighting 

Other Disclosures 

This report has been written without regard for the specific investment objectives, financial situation or particular needs of any specific recipient, and should not be regarded by recipients as a substitute for the exercise of their own judgment. The report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell securities or related financial instruments. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. The report is based on information obtained from sources believed to be reliable, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the report. Any opinions expressed in this report are subject to change without notice and Dudack Research Group division of Wellington Shields & Co. LLC. (DRG/Wellington) is under no obligation to update or keep current the information contained herein. Options, derivative products, and futures are not suitable for all investors, and trading in these instruments is considered risky. Past performance is not necessarily indicative of future results, and yield from securities, if any, may fluctuate as a security’s price or value changes. Accordingly, an investor may receive back less than originally invested. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report. 

DRG/Wellington relies on information barriers, such as “Chinese Walls,” to control the flow of information from one or more areas of DRG/Wellington into other areas, units, divisions, groups or affiliates. DRG/Wellington accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report. 

The content of this report is aimed solely at institutional investors and investment professionals. To the extent communicated in the U.K., this report is intended for distribution only to (and is directed only at) investment professionals and high net worth companies and other businesses of the type set out in Articles 19 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. This report is not directed at any other U.K. persons and should not be acted upon by any other U.K. person. Moreover, the content of this report has not been approved by an authorized person in accordance with the rules of the U.K. Financial Services Authority, approval of which is required (unless an exemption applies) by Section 21 of the Financial Services and Markets Act 2000. 

Additional information will be made available upon request. 

©2019. All rights reserved. No part of this report may be reproduced or distributed in any manner without the written permission of Dudack Research Group division of Wellington Shields & Co. LLC. The Company specifically prohibits the re-distribution of this report, via the internet or otherwise, and accepts no liability whatsoever for the actions of third parties in this respect. 

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Lowering EPS Estimates but Valuations Remain Healthy

The market hit our 2019 target of SPX 3110 this week and this inspired us to review our price targets, earnings and assumptions for 2019 and 2020. With third quarter earnings results for the SP500 now 90% complete, our second half EPS estimates appear high. Bringing our third and fourth quarter estimates more in line with the S&P Dow Jones consensus benchmark, our calendar 2019 earnings forecast falls from $167 to $160 and our 2020 earnings estimate for the SP500 eases slightly from $186 to $184.

Next, we put our new estimates into our valuation model which is stress-tested for 2020 inflation of 2.6% and a 10-year Treasury bond yield of 3.8%. Despite newly lowered earnings estimates and inflation and interest rates well above our expectations, our valuation model suggests an SPX 2020 range of SPX 2800 to 3450. We prefer to remain on the conservative side and are initiating a new 2020 SPX target of 3300. Should a trade agreement materialize in the next six months, this target would likely be revised. See page 11.

It is worth pointing out that the SPX has been hugging the upper end of our model’s projected fair value range since late 2016. This does not surprise us since an environment of low and steady inflation supports a higher PE multiple. Assuming inflation remains benign, one could expect the SPX to continue to trade in the upper half of the fair value range. The top of this range in late 2020 implies a move to SPX 3450.

Conversely, if the UK fails to solve its Brexit issues, if impeachment investigations wear on investor sentiment, or if unexpected events shock the market, our model suggests equities have substantial valuation support at the SPX 2800 in 2020.

Quarterly EPS Results

IBES Refinitiv is currently forecasting third quarter SP500 earnings to decline 0.4%. However, excluding the energy sector, the earnings growth estimate increases to 2.2%. Of the 461 companies in the SP500 that have reported earnings to date for 3Q19, 74.6% have reported earnings above analyst estimates and 18% missed estimates. This is comfortably above the long-term average of 64.8% and the average of 74.1% seen in the prior four quarters. In a typical quarter, 65% of companies beat estimates and 20% miss estimates. Third quarter revenue is expected to increase 3.8% from a year ago and excluding the energy sector, the revenue growth estimate rises to 5.2%. The healthcare and utilities sectors have the highest earnings growth rates for the quarter at 9.4% and 6.7%, respectively; and the energy sector has the weakest anticipated growth rate at negative 37.8%. Third quarter earnings comparisons for energy help to explain the sector’s underperformance in 2019. However, the good earnings performance by both healthcare and utilities make their price performance less understandable. Both sectors rank just above energy on a year-to-date basis. See page 16.

Economic Reports Support a Dovish Fed

A medley of data was reported this week on retail sales, inflation and trade and overall, it supports a dovish Fed, in our view. Retail sales rebounded modestly in October after falling in September. More specifically, sales rose 0.3% after declining 0.3% the previous month. On a year-over-year basis, total retail sales rose 3.1% In October versus a 4.1% gain in September; however, October sales could have been hurt by Hurricane Dorian, weak iPhone sales and the General Motors (GM – $36.38) strike. October’s sales, excluding motor vehicles, rose 2.8% YOY. See page 3. On the whole, this report was neutral in our view.

The US-China trade conflict has been a major topic of concern for investors, yet it has only made a small dent in the total US trade. The trade deficit is running at an annualized $862.7 billion as of September versus $874.8 billion in 2018. Department of Commerce data shows the trade deficit is currently at an estimated 4% of current GDP, while the Census BOP basis, shows the 12-month running ratio to be 3.1% of GDP. Merchandise trade data is available on both custom-based trade statistics and on a balance of payments (BOP) basis. Note that data on services is only available on a BOP basis, which means the real trade deficit is apt to be closer to the BOP 3.1% of GDP which includes services. See page 4.

While headline trade numbers have not changed dramatically, trade is changing beneath the surface. China is no longer our top trading partner and as of September 2019 fell to third place behind Mexico and Canada. Nevertheless, China continues to have the largest trade deficit with the US at $263 billion year-to-date, which is 3 ½ times larger than Mexico which ranks second with a $76 billion deficit. Ironically, the trading partner with the largest surplus with the US is Hong Kong at $20.3 billion. See page 5.

The inflation backdrop is favorable for monetary policy. PPI final demand prices rose 1.0% YOY in October, while intermediate processed goods prices fell 3.7% YOY. CPI rose a benign 1.8% YOY in October however core CPI rose 2.3% YOY. The rise in core prices was due primarily to services. See page 6. The trade war has not generated the rise in consumer prices most economists predicted for 2019. In fact, import prices, excluding petroleum products, fell 1.5% YOY. The effective fed funds rate of 1.55% is comfortably above September’s PCE index of 1.3% YOY. See page 7.

But we remain bothered by the pace of inflation seen in the medical care sector where prices rose 4.3% YOY in October. All components of healthcare rose, but the 20.1% YOY jump in health insurance is most disturbing. See page 8. This could be a cyclical pricing cycle for insurers, or it could be in anticipation of a new rule requiring more transparency in hospital and insurance pricing. In a new executive order, the Trump administration is requiring hospitals to disclose for the first time the prices they negotiated with health insurers for a wide range of services, as well as the prices they charge patients who are paying with their own money. Hospitals will also be asked to create a list of 300 so-called “shoppable” services that patients can use, targeted to more elective services where customers could have the opportunity to shop around. The Trump administration is hoping a little bit of sunlight could help disinfect the high costs of US healthcare.

Technicals Continue to Support Equities

The technical scoreboard has not changed much in the last week, although the NYSE cumulative advance decline line made a new high on November 15 which now confirms the ongoing advance in the popular indices. The Russell 2000 index continues to lag behind the popular indices, but like last week, it is close, but has not yet broken above the top of its recent trading band of 1450-1600. A breakout would be bullish. An uptrend line that has supported the DJIA since the 2016 low was recently tested successfully and this strengthens the longer-term bullish trend. See page 12. The 25-day up/down volume oscillator is 1.76 and neutral after being in overbought territory for five of six trading sessions last week. This was the fifth consecutive overbought reading of 2019 and it followed an overbought condition that lasted for eight of ten trading sessions between September 10 and September 23. Consecutive overbought readings denote steady buying pressure and only appear in a bull market cycle. In sum, this is a positive sequence in this indicator.

Regulation AC Analyst Certification

I, Gail Dudack, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.

IMPORTANT DISCLOSURES

RATINGS DEFINITIONS:

Sectors/Industries:

“Overweight”: Overweight relative to S&P Index weighting

“Neutral”: Neutral relative to S&P Index weighting

“Underweight”: Underweight relative to S&P Index weighting

OTHER DISCLOSURES
This report has been written without regard for the specific investment objectives, financial situation or particular needs of any specific recipient, and should not be regarded by recipients as a substitute for the exercise of their own judgment.  The report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell securities or related financial instruments.  The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors.  The report is based on information obtained from sources believed to be reliable, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the report.  Any opinions expressed in this report are subject to change without notice and Dudack Research Group division of Wellington Shields & Co. LLC. (DRG/Wellington) is under no obligation to update or keep current the information contained herein.  Options, derivative products, and futures are not suitable for all investors, and trading in these instruments is considered risky.  Past performance is not necessarily indicative of future results, and yield from securities, if any, may fluctuate as a security’s price or value changes.   Accordingly, an investor may receive back less than originally invested.  Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report.

DRG/Wellington relies on information barriers, such as “Chinese Walls,” to control the flow of information from one or more areas of DRG/Wellington into other areas, units, divisions, groups or affiliates. DRG/Wellington accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report.

The content of this report is aimed solely at institutional investors and investment professionals. To the extent communicated in the U.K., this report is intended for distribution only to (and is directed only at) investment professionals and high net worth companies and other businesses of the type set out in Articles 19 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. This report is not directed at any other U.K. persons and should not be acted upon by any other U.K. person. Moreover, the content of this report has not been approved by an authorized person in accordance with the rules of the U.K. Financial Services Authority, approval of which is required (unless an exemption applies) by Section 21 of the Financial Services and Markets Act 2000.

Additional information will be made available upon request.

©2018.  All rights reserved.  No part of this report may be reproduced or distributed in any manner without the written permission of Dudack Research Group division of Wellington Shields & Co. LLC. The Company specifically prohibits the re-distribution of this report, via the internet or otherwise, and accepts no liability whatsoever for the actions of third parties in this respect.

For more information contact Andrea Costello – Andrea@DudackResearchGroup.com

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This is destined to be a busy week. The next few days will include a first look at third quarter GDP, the October FOMC meeting, personal income and expenditures for September, the Fed’s favorite inflation benchmark – the personal consumption expenditures (PCE) deflator – for September, the ISM Manufacturing index for October and the employment report for October. And in the background, on the one-year anniversary of the Lion Air’s 737 MAX plane crash, Boeing’s Co-chief Executive Dennis Muilenburg is being grilled by members of a Senate panel, Britain has proposed a date of December 12 for a national election to break the Brexit deadlock, Argentina’s center-left candidate Alberto Fernandez was victorious in a surprise upset election, Lebanon’s Prime Minister Saad al-Hariri resigns in response to violent protests, negotiators are warning that a US-China trade deal may not be ready in time for signing at the Asia-Pacific Economic Cooperation summit in Chile on November 16-17, Democrats are presenting legislation calling for a vote on public hearings in the House of Representatives impeachment inquiry against President Donald Trump and wildfires are continuing to rage havoc in Los Angeles.

Record Highs

And in the midst of this flurry of events, the SP500 index inched into record high territory earlier this week. The reason for this apparent dichotomy between the stock market’s performance and disruptive political events could be steadfast consumer demand. Visa Inc.’s (V – $177.63) third quarter profit beat forecasts this week due to stronger household spending. Visa’s total payments volume rose 8.7% to $2.27 trillion on a constant dollar basis, with the US accounting for 45% of that total. The number of processed transactions rose 13.2% to 47.8 billion. Moreover, this week’s FOMC meeting should result in another fed funds rate cut and the combination of lower interest rates and rising wages should continue to support consumption. This should be true for two important segments of the US economy – housing and autos.

In sum, fundamentals are lifting the market to new heights even before a US-China trade deal is confirmed. Technical indicators are also supporting this move and our SPX target of 3110 is unchanged. We believe this forecast could prove to be too conservative.

Economic Data is Mixed but Tilts Positive

The seasonally adjusted annualized-rate for new-home sales was 701,000 in September and this was down 0.7% from a negatively revised figure of 706,000 for August. Nonetheless, September’s sales were up 15.5% year-over-year suggesting that housing momentum is favorable. The University of Michigan’s home buying index was unchanged in September with households saying it was a good time to buy remaining at 65 which is down slightly from a recent high of 70 reported in June 2019. See page 3.

But there was good news in third quarter homeownership as rates rose across the board. The overall percentage for homeownership in the US rose from 64.1% to 64.8%, with the sharpest gains reported in the West and among those under 35 years of age. See page 4.

The University of Michigan’s preliminary consumer sentiment index for October was 95.5, up from 93.2 in September. This rebound was also seen in expected personal finances which rose from 123 in August to 128 in September. Plus, we were encouraged by the survey on buying conditions for vehicles, which rose from 58 in August to 62 in September. See page 5. However, the Conference Board Sentiment for October fell from 126.3 to 125.9, even though the present conditions index rose from 170.6 to 172.3. In addition, the NAR pending home sales index rose 1.5% to 108.7, its highest level in 12 months, which is an excellent sign for the housing sector. See page 6.

Nonetheless, the dark cloud hanging over the equity market is the sluggish economic growth forecasted for 2019 and 2020. Moody’s has been consistently bearish on US and global growth with forecasts of 2.3% and 2.4% for 2019 and 1.7% and 2.5% for 2020, respectively. Moody’s global and country estimates suggest that the only improvement in 2020 growth will be the economic rebounds in Venezuela and Turkey. In our opinion, economic forecasts for global growth could prove to be too pessimistic since it is unlikely that economists are including the possibility of a future trade agreement or current global monetary stimulus. Still, an interesting tidbit from Moody’s data is that China is forecasted to fall from the best growing economy in 2019 to third place in 2020. See page 7. Yet China is not the only country experiencing slower economic growth. Europe has been steadily decelerating and Germany’s GDP growth has been lower than the US since 2018. The only European country with 2019 economic activity estimated to be stronger than the 2.3% expected in the US is Ireland at 5.1%. For Ireland, this 5.1% estimate is down from the 8.3% growth rate seen in 2018.

But Moody’s Analytics has been forced to increase its US forecast several times in the last twelve months and we believe Moody’s US growth estimate for 2020 of 1.7% may prove to be too bearish once again. Even so, it is important to look at how weak European economic activity is since this explains the historically low sovereign long-term interest rates in Europe. These interest rates are the underlying factor behind the low 10-year Treasury bond yields seen in the US. See page 8.

Keep in mind that Friday’s employment report for October will be impacted by the United Auto Workers strike. The Bureau of Labor Statistics released its Strike Report last week and it showed 46,000 workers were impacted by the UAW strike. There is always some spillover effect from an auto strike and economists are estimating an additional 15,000 workers may have been laid off in the month. Therefore, October’s employment report is apt to be weak since it could be reduced by 61,000 jobs as a result of the strike. With the strike now resolved, October should be a one-off event.

Technical Indicators Support the SPX New High

The SPX, DJIA and Nasdaq Composite closed 0.08%, 1.05% and 0.64% away from their all-time highs on October 29, which means they are up 21.1%, 16.1% and 24.7%, respectively, year-to-date. The Russell 2000 index continues to be the laggard index, but it is currently less than 10% below its record high. The technical charts of the individual indices suggest that the uptrends that have been in place since 2009 remain intact. See page 10. In addition, our favorite 25-day up/down volume oscillator is at 1.78 (preliminarily) this week and moving toward another overbought reading this week. The last signal from this indicator was the overbought condition that lasted for eight of ten trading sessions between September 10 and September 23. The September reading was the fourth overbought condition recorded in 2019 without an intervening oversold reading. This was a positive sequence since consecutive overbought readings are a sign of steady demand for equities and a classic characteristic of a bull market cycle. See page 11. The 10-day average of daily new highs rose dramatically to 224 this week and is above the 100 per day level defined as bullish. The average of daily new lows is 52 and below the 100 per day defined as bearish. The combination is positive. The NYSE cumulative advance/decline line made a new record high on October 29, 2019, which confirms the new high in the SPX. In sum, technical indicators are supporting the bullish case.

Regulation AC Analyst Certification

I, Gail Dudack, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.

IMPORTANT DISCLOSURES

RATINGS DEFINITIONS:

Sectors/Industries:

“Overweight”: Overweight relative to S&P Index weighting

“Neutral”: Neutral relative to S&P Index weighting

“Underweight”: Underweight relative to S&P Index weighting

OTHER DISCLOSURES
This report has been written without regard for the specific investment objectives, financial situation or particular needs of any specific recipient, and should not be regarded by recipients as a substitute for the exercise of their own judgment.  The report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell securities or related financial instruments.  The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors.  The report is based on information obtained from sources believed to be reliable, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the report.  Any opinions expressed in this report are subject to change without notice and Dudack Research Group division of Wellington Shields & Co. LLC. (DRG/Wellington) is under no obligation to update or keep current the information contained herein.  Options, derivative products, and futures are not suitable for all investors, and trading in these instruments is considered risky.  Past performance is not necessarily indicative of future results, and yield from securities, if any, may fluctuate as a security’s price or value changes.   Accordingly, an investor may receive back less than originally invested.  Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report.

DRG/Wellington relies on information barriers, such as “Chinese Walls,” to control the flow of information from one or more areas of DRG/Wellington into other areas, units, divisions, groups or affiliates. DRG/Wellington accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report.

The content of this report is aimed solely at institutional investors and investment professionals. To the extent communicated in the U.K., this report is intended for distribution only to (and is directed only at) investment professionals and high net worth companies and other businesses of the type set out in Articles 19 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. This report is not directed at any other U.K. persons and should not be acted upon by any other U.K. person. Moreover, the content of this report has not been approved by an authorized person in accordance with the rules of the U.K. Financial Services Authority, approval of which is required (unless an exemption applies) by Section 21 of the Financial Services and Markets Act 2000.

Additional information will be made available upon request.

©2018.  All rights reserved.  No part of this report may be reproduced or distributed in any manner without the written permission of Dudack Research Group division of Wellington Shields & Co. LLC. The Company specifically prohibits the re-distribution of this report, via the internet or otherwise, and accepts no liability whatsoever for the actions of third parties in this respect.

For more information contact Andrea Costello –Andrea@DudackResearchGroup.com

Click to download

Words with Impact

The last week of September had the potential to be a calm post-FOMC meeting interval with limited economic and earnings releases and no UA-China trade or Brexit deadlines. However, on Tuesday President Trump and Speaker Pelosi turned what could have been tranquility into turmoil.

In a speech to the UN, President Trump called out China and indicated Beijing had not only failed to keep promises it made in 2001 when it joined the World Trade Organization but China was engaged in predatory practices that had cost millions of jobs in the United States and other countries. Trump also indicated he was not interested in a “partial deal” to ease trade tensions with China, but that he would hold out for a “complete deal.” While President Trump’s criticism of Beijing may be well-earned, these sharp words are likely lowering the odds of a deal materializing in the fourth quarter. The equity market began to weaken.

Stocks began to fall in earnest once the media reported that House Speaker Nancy Pelosi would hold a press conference after the market’s close. As predicted, Pelosi announced that the US House of Representatives would launch a formal inquiry into whether President Trump should be impeached, declaring that no one is above the law. President Trump tweeted that his administration would release a complete transcript of a private call with Ukrainian President Volodymyr Zelenskiy that is at the center of the impeachment controversy. Still, this did not keep the market from closing with a decline of 142 points in the DJIA and 25 points in the SPX.

Our Forecast

In the long run the events of the day may not result in any real economic impact; nevertheless, both incidents immediately put a dark cloud over the markets in the near term. The market is likely to trade in a SPX range of 2850-3050 in the short run as it assesses the impact Tuesday’s comments could have on the broad financial environment. However, there is no change in our SPX target of 3110 for 2019 which is based upon conservative fundamental inputs and forecasts. In recent weeks technical indicators have been distinctly bullish and we will be monitoring them closely to see if this week’s developments change, or reverse, these positive readings.

No Excesses in the Background

Although there were few economic releases in recent days, the Federal Reserve Board and the US Treasury released second quarter data on net worth, equity and Treasury ownership and sector debt levels. We found the numbers reassuring on many levels. Long secular bull market cycles, like the current one, tend to create extremes in terms of equity ownership and debt levels; but none of this was evident in any of the data. In short, while investors are focused on the politics of Washington DC and geopolitical strife between China and the US, the big picture shows that the current bull cycle may have many more months or years to go.

Equity ownership levels have been generally stable since 2009. Households own 36.8% of all US equities, which is just slightly above the 34.1% owned at the March 2009 bear market low. Foreign and equity mutual fund ownership has slowly declined in the same period. US Treasury ownership is far more complex; but foreign ownership of Treasuries rebounded recently after a decade of declines. See page 3.

While foreign ownership of US Treasuries has been waning in recent years, foreign net purchases of all US securities have remained positive, running at $152.2 billion in the twelve months ended July. In this period, foreign investors were larger net purchasers of agency and corporate bonds at $260 billion and $44.2 billion, respectively. Foreigners were net sellers of $97.6 billion of corporate stocks and $54.4 billion of US Treasury bonds & notes in the same timeframe. Note that this selling of stocks and bonds had no apparent impact on US markets and stock and bond prices rose in the last twelve months. See page 4.

In terms of US Treasury holdings, the Federal Reserve Bank is the largest holder with $2.1 trillion in Treasuries (September). Treasury data shows Japan ranked second in July with $1.13 trillion and China ranked third with $1.11 trillion in Treasury holdings. It may surprise most investors that Russia, not China, has been the largest single seller of Treasuries in recent years. Their Treasury holdings declined by $102.2 billion since the end of 2017. See page 5.

The performance of the equity market has been pivotal to household net worth in recent quarters. A 3.5% decline in household net worth in the fourth quarter of 2018 was a result of a 16% decline in equity value in the same quarter. But household wealth increased in 2Q19, boosted mostly by a gain in the value of directly and indirectly held corporate equities. Wealth increased from a revised $111.6 trillion in the first quarter (previously $108.6 trillion) to $113.5 trillion in the second quarter. On a year-over-year basis, household wealth was up 4.9% in the second quarter despite a small gain in household liabilities as home mortgage and consumer credit liabilities rose. But all in all, household balance sheets suggest the consumer is in good shape and should remain a key support for the economy. See page 6.

Debt Levels look Healthy

Debt levels can pose a problem at the end of an economic cycle; however, debt as a percentage of nominal GDP has been declining for all sectors in 2019. This improvement was particularly true for households where debt-to-GDP fell from 75% at the end of 2018 to 73.4% in June. See page 7. More importantly, Fed data shows that debt excesses that preceded the 2007 peak do not exist today. Household debt-to-disposable personal income averaged 131% from September 2007 to September 2009 and peaked at 133% in December 2008. This ratio fell to 95.6% in June. Mortgage debt as a percentage of disposable personal income was 63% in June versus its peak of 98.7% in December 2008. It is also worth noting that outstanding federal government debt has grown in the last three years, but this growth has been in line with the pace of annualized GDP growth. The fact that debt is not growing faster than the economy is a very positive trend. See page 8. In sum, the major sectors of the economy do not show the extremes in equity holdings or in debt levels that often appear at major tops in the market.

Technical Indicators are Looking Fine

Even without this week’s events we would not be surprised that equities are encountering resistance at the psychological SPX 3000 level. All indices are currently trading above their 200-day moving averages which is favorable, but we are watching the Russell 2000 index since its 200-day MA could be tested in coming sessions. See page 10. This week the 25-day up/down volume oscillator is 1.87 (preliminarily) and neutral after being overbought for eight of the previous ten trading sessions. This is the fourth overbought reading without an intervening oversold reading this year. Repetitive overbought readings are classic characteristics of a bull market cycle. See page 11. The A/D line made a record high on September 23, 2019, which is better than the performance of the major indices. With the indices now 2% to 4% below their record highs, the AD line is suggesting there will be new highs in the indices.

IMPORTANT DISCLOSURES

RATINGS DEFINITIONS:

Sectors/Industries:

“Overweight”: Overweight relative to S&P Index weighting

“Neutral”: Neutral relative to S&P Index weighting

“Underweight”: Underweight relative to S&P Index weighting

Other Disclosures

This report has been written without regard for the specific investment objectives, financial situation or particular needs of any specific recipient, and should not be regarded by recipients as a substitute for the exercise of their own judgment.  The report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell securities or related financial instruments.  The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors.  The report is based on information obtained from sources believed to be reliable, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the report.  Any opinions expressed in this report are subject to change without notice and Dudack Research Group division of Wellington Shields & Co. LLC. (DRG/Wellington) is under no obligation to update or keep current the information contained herein.  Options, derivative products, and futures are not suitable for all investors, and trading in these instruments is considered risky.  Past performance is not necessarily indicative of future results, and yield from securities, if any, may fluctuate as a security’s price or value changes.   Accordingly, an investor may receive back less than originally invested.  Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report.

DRG/Wellington relies on information barriers, such as “Chinese Walls,” to control the flow of information from one or more areas of DRG/Wellington into other areas, units, divisions, groups or affiliates.  DRG/Wellington accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report.

The content of this report is aimed solely at institutional investors and investment professionals. To the extent communicated in the U.K., this report is intended for distribution only to (and is directed only at) investment professionals and high net worth companies and other businesses of the type set out in Articles 19 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. This report is not directed at any other U.K. persons and should not be acted upon by any other U.K. person. Moreover, the content of this report has not been approved by an authorized person in accordance with the rules of the U.K. Financial Services Authority, approval of which is required (unless an exemption applies) by Section 21 of the Financial Services and Markets Act 2000.

Additional information will be made available upon request.

©2019.  All rights reserved.  No part of this report may be reproduced or distributed in any manner without the written permission of Dudack Research Group division of Wellington Shields & Co. LLC. The Company specifically prohibits the re-distribution of this report, via the internet or otherwise, and accepts no liability whatsoever for the actions of third parties in this respect.

Contact Andrea Costello, Head of Research Sales for additional information (212) 320-2046 or Andrea@DudackResearchGroup.com

Click to download

On August 15^th (Direct from Dudack “Another 90% Down Day”) we pointed out that the 91% down day on August 5^th had been joined by a 94% down day on August 14^th. This was not a surprise since 90% down days are a sign of underlying panic and panic days tend to appear in a series. Panic days often occur on heavy volume and as a result the combination usually creates a washed-out market. In sum, panic 90% days represent risk and opportunity. The reversal of panic is typically identified by a 90% up day. And historically, one 90% up day has signaled that the lows have been found and downside risk is minimized.

Long-time investors know that markets have the ability to frustrate and vex. Indicators do as well. On August 16^th NYSE upside volume (volume in advancing stocks) was 89% and the downside volume was 10%. Was this good enough to define the bottom? Typically, a reversal day will have a much higher percentage of volume in advancing stocks; but since downside volume was only 10%, we believe that August 16 qualifies as a significant extreme day. In our view the downside risk in the market is limited to the SPX 2800 level, or roughly the low of SPX 2840.60 made on August 14^th.

However, this does not mean that the market is about to have a dramatic advance. There are enough cross currents in the global financial world to contain the market in a neutral trading range for the intermediate term. The boundaries of this range are expected to be the recent all-time highs and the recent lows.

Events in Europe such as Brexit (October 31, 2019) and the resignation of Italy’s Prime Minister Giuseppe Conte are major threats to the European Union and these risks are expected to keep investors cautious. Plus, these developments are combined with China’s decelerating economy, Germany’s economy shrinking in the second quarter and the EU growing at a barely positive 0.2%. In our opinion, European risks are greater than the threat of an escalating trade war between the US and China. Neither the Chinese nor the US economy can truly afford a trading war. However, 19 central banks have joined with the Federal Reserve to implement some form of monetary policy in order to stem the potential weaknesses seen around the globe. China recently unveiled interest rate reforms which are expected to lower corporate borrowing costs. Australia’s central bank has cut rates twice and is discussing further stimulus measures. Mexico’s central bank surprised many by cutting rates last week. The Group of Seven summit will be held in France this weekend and the topics will undoubtedly center on trade friction, slowing economies and monetary policy. In addition, investors will focus on this week’s release of July’s FOMC minutes looking for signs of the timing and size of the next rate cut.

Strong Crosscurrents

The confusion and angst seen among equity investors is understandable given the number of strong crosscurrents battering the financial markets. The weakening economies of China and Europe were discussed and these stand in stark contrast to the US economy which has surprised economists in 2019 with its resilience. The GDP growth rates of 3.1% and 2.1% in the first and second quarters of this year were consistently above consensus estimates and most economists, including the FRB and IMF, were looking for growth under 2% in both quarters. However, the push and pull between the US and global economies makes forecasting future growth difficult, particularly in an environment in which political risk (Brexit, Italy, trade) is high.

The pessimism expressed by many economists may be a result of the crosscurrents within the US economy. The dichotomy between a resilient US consumer and a weak manufacturing sector is perplexing. July’s total retail sales rose 3.4% year-over-year (YOY) and were led by nonstore retail sales which soared 17.4% YOY. These robust nonstore results suggest that Amazon Prime Day was strong. Retail strength was broadly based in July with only a few spots of weakness such as sporting goods and hobby stores, vehicle dealers and drug stores. See page 3. Some of the weakness in US manufacturing stems from July’s soft auto sales. See page 4. Motor vehicle and parts production declined 0.2% in July, after two consecutive monthly gains; though this segment of industrial production was 3.7% higher on a year-ago basis. Nevertheless, production in nonauto manufacturing decreased 0.4% in July and was 0.9% lower on a year-ago basis indicating that weak industrial production was not due solely to flat auto sales. Part of July’s industrial production weakness emanated from Hurricane Barry which triggered a sharp decline in oil extraction in the Gulf of Mexico.

The dichotomy between US and global economies or the contrast between the US consumer and industrial production does not explain the contradiction between the stock market and the bond market. Equities have been at or near all-time highs, reflecting a strong economy while bond yields have dropped to record lows, predicting a recession. After several intra-day inversions in the Treasury yield curve many analysts have begun to worry about a US recession. In our opinion, low bond yields have several sources, but most of them come from outside the US borders. For example, July inflation data shows headline CPI rising at 1.8% YOY, final demand PPI increasing 1.7% YOY and the personal consumption expenditure deflator rising 1.4% YOY. More importantly, import prices fell 1.8% YOY in July and export prices fell 0.9% YOY suggesting that deflation pressures may be seeping into the US economy from abroad. See page 5. Given these statistics and with inflation well below the Fed’s target of 2%, it is not surprising to see bond yields decline. Equally important, even after the fed funds rate dropped to 2.13% this month, the real yield is a positive 30 basis points and gives the Fed room to lower rates. See page 6.

In our view, it is global bond yields that are driving US Treasury yields lower. The weakness seen in the European economies is creating a flight to safety and the Euro Zone 10-year benchmark yield is currently minus 0.689% in line with the German bund. The Swiss sovereign yield is minus 1.00%, the Japanese 10-year government bond yield is minus 0.243% and the UK 10-year gilt yield is positive 0.45%. In this environment it should not be surprising that the 10-year Treasury bond yield is 1.55%. See page 8. In sum, risks are primarily coming from outside the US and though these risks should not be ignored, it should also be noted that most central banks are taking action to ease monetary policy. This may also explain why the financial media is reporting that President Trump is considering lowering the payroll tax rate.

Technical Review

The most important aspect of the market’s technical condition is the 89% up day on August 16 which suggests the worst of the equity decline has been seen. Yet it is also important to note that sentiment indicators never showed excessive bullishness or anything that implied a major top was forming. In fact, the week ended August 7, AAII bullish sentiment fell 10.7% to 27.7% and bearish sentiment rose 24.1% to 48.2%. Bullish sentiment is currently 23.2% and bearish sentiment is 44.8% which is neutral for this indicator. See page 13. On the other hand, the ISE Sentiment Index turned positive in early August – a sign that option traders are defensive. In sum, we remain long-term bullish.

IMPORTANT DISCLOSURES

RATINGS DEFINITIONS:

Sectors/Industries:

“Overweight”: Overweight relative to S&P Index weighting

“Neutral”: Neutral relative to S&P Index weighting

“Underweight”: Underweight relative to S&P Index weighting

Other Disclosures

This report has been written without regard for the specific investment objectives, financial situation or particular needs of any specific recipient, and should not be regarded by recipients as a substitute for the exercise of their own judgment.  The report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell securities or related financial instruments.  The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors.  The report is based on information obtained from sources believed to be reliable, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the report.  Any opinions expressed in this report are subject to change without notice and Dudack Research Group division of Wellington Shields & Co. LLC. (DRG/Wellington) is under no obligation to update or keep current the information contained herein.  Options, derivative products, and futures are not suitable for all investors, and trading in these instruments is considered risky.  Past performance is not necessarily indicative of future results, and yield from securities, if any, may fluctuate as a security’s price or value changes.   Accordingly, an investor may receive back less than originally invested.  Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report.

DRG/Wellington relies on information barriers, such as “Chinese Walls,” to control the flow of information from one or more areas of DRG/Wellington into other areas, units, divisions, groups or affiliates.  DRG/Wellington accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report.

The content of this report is aimed solely at institutional investors and investment professionals. To the extent communicated in the U.K., this report is intended for distribution only to (and is directed only at) investment professionals and high net worth companies and other businesses of the type set out in Articles 19 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. This report is not directed at any other U.K. persons and should not be acted upon by any other U.K. person. Moreover, the content of this report has not been approved by an authorized person in accordance with the rules of the U.K. Financial Services Authority, approval of which is required (unless an exemption applies) by Section 21 of the Financial Services and Markets Act 2000.

Additional information will be made available upon request.

©2019.  All rights reserved.  No part of this report may be reproduced or distributed in any manner without the written permission of Dudack Research Group division of Wellington Shields & Co. LLC. The Company specifically prohibits the re-distribution of this report, via the internet or otherwise, and accepts no liability whatsoever for the actions of third parties in this respect.

Contact Andrea Costello, Head of Research Sales for additional information (212) 320-2046 or Andrea@DudackResearchGroup.com

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Trade fears began to pummel the equity markets this week after President Trump indicated he will impose a deadline of this Friday for a trade agreement with China or tariffs will increase from 10% to 25% on $200 billion worth of Chinese goods. According to Reuters this shift in tone came after US Trade Representative Robert Lighthizer informed President Trump that Chinese negotiators were seeking to deal with policy changes through administrative and regulatory actions, not through changes to Chinese law as previously agreed. A person close to the negotiations indicated that under China’s system — in which the Communist Party has ultimate control — changes in law are the only way to get even a small measure of certainty on compliance. From this perspective, it should not be surprising that President Trump is playing hard-ball with China. A weak or ineffective trade deal with China may not be any better than no deal at all.

China versus US

With a trade deal now in doubt, stock and oil prices declined and bond prices rose. As seen on page 16, over the last five trading days the SPX fell 1.4% but the Shanghai Composite index sank 5.2%, or nearly four times as much as the SPX. The DJIA suffered a 473.39 point, or 1.8% drop on Tuesday, its largest one-day sell-off since January 3 and the SPX fell 1.7%. Nevertheless, the broad indices are less than 2.5% away from their record highs and the current declines are barely visible in long-term charts. In our opinion, the disparity in the performance of the Chinese and the US equity markets is important since it is a reflection of the potential impact tariffs are likely to have on the respective domestic economies.

Given the drama seen in the markets this week we thought it best to bullet point some thoughts:

• President Trump currently has a timely and stronger hand in terms of negotiating with China after the 3.2% GDP growth rate reported in 1Q19 and the record highs recorded by the equity market. Negotiations over intellectual property rights are crucial to a good trade deal.
• Dramatic moves in the stock market tend to be counter-cyclical; that is, major tops tend to be slow and pondering, whereas corrections tend to be sharp and dramatic. The current decline has the earmarks of a correction to the major move.
• A 600-point intra-day decline in the DJIA is intense and tends to bring out bearish commentators however a long-term chart is needed to put the recent 2.5% decline in perspective after the 25% gain seen from the December low. See page 11.
• In early April first quarter earnings growth was estimated to decline 2% YOY, but with roughly 85% of the SP500 now reported, IBES Refinitiv consensus currently shows a 1.5% YOY gain in 1Q19 EPS. This gain may not be strong enough to generate a sustainable advance, but it is nevertheless much better than anticipated. The gain is 2.5% excluding the energy sector.
• Trade contributed to the 3.2% GDP growth rate in 1Q19. Since there was a considerable amount of pre-buying as tariffs were about to go into effect in 2018, 2019’s first quarter could reflect the longer-term impact of the current trade tariffs. And we noted earlier, trade tariffs are negatively impacting US farmers, but agriculture contributes less than 1% to US GDP.

In sum, we do not believe a failed trade negotiation with China will trigger a substantial decline in US equities. Conversely, a successful trade agreement should propel the indices back to their recent highs. There is no change in our SPX 3110 target for this year and we continue to believe our target could prove to be conservative.

Strong Economic Numbers with a Few Weak Undertones

Not only was April’s 3.6% unemployment rate the lowest level reported since December 1969, but the 1.9 million people who applied for unemployment insurance in the last five weeks was the lowest since the 1.8 million seen in January 1970. See page 3. These are signs of a strengthening job market. Non-supervisory hourly earnings rose an inflation-adjusted 1.9% YOY in April, well above the 10-year average of 0.8% YOY. Inflation-adjusted weekly earnings were up a similar 1.6% YOY and were also above the 10-year average of 0.8% YOY. See page 4. Still, April’s confidence indices remain below peak 2018 levels. Confidence may improve as households experience the benefit of rising wages and modest inflation. The sum of inflation and the unemployment rate is often called the Misery Index, and this index was 5.2% in April, the lowest since September 2015’s 5.0%. See page 5.

The preliminary estimate for 1Q19 GDP growth was 3.2%, and despite a government shut-down and poor weather, it was substantially better than the 2.2% pace seen in 4Q18. This improvement came despite a slowdown in consumer spending which was not a surprise given recent retail sales numbers. Inventory accumulation increased as expected since inventories declined at yearend. Growth in fixed investment slowed. Real disposable income growth slowed to 2.4% from 4.3%. The saving rate rose to 7%, from 6.8% in the fourth quarter. However, we found the improvement in the trade deficit to be the most encouraging aspect of the quarter. See page 6.

The current expansion is only a few months from becoming the longest in history, yet this economy is not showing the excesses typical of an aging cycle such as rising inflation or gross private domestic investment generating 19% or more of GDP growth. See page 7. In fact, we see pockets of weakness. A 3-month average of retail sales, adjusted for inflation, rose 1.1% in April, the slowest pace since emerging from a recession in 2009. Residential investment rose 0.6% YOY in 1Q19, the lowest since 2011; and as a result, residential investment represented only 3.76% of GDP growth. See page 8.

A number of economists are fearing there will be higher inflation and weaker profit margins due to rising wages. However, we disagree. The employment cost index (ECI) in the first quarter showed total compensation rose 2.8% YOY and wages declined from 3.1% YOY in 4Q18 to 2.9% in 1Q19. Private industry compensation costs were even milder at 2.7% YOY versus government total compensation costs at 3.0% YOY. Union worker total compensation costs rose 3.4% YOY in 1Q19 versus the 2.7% seen for non-union workers. However, we are focused on the private industry costs of 2.7% YOY which are quite benign when compared to the first quarter CPI rise of 1.9% YOY. See page 9. All in all, we believe the US economy is demonstrating solid growth but is still growing below its potential.

Technical Scoreboard

The recent sell-off is barely visible in the charts seen on page 11 and most indices remain near all-time highs. However, the Russell 2000 has been lagging and is the only index with a down-trending 200-day moving average. This underperformance is in stark contrast to our NYSE cumulative advance decline line which recorded a new high on May 3. We will be monitoring the RUT during market weakness and as it tests its 200-day moving average. Holding above this level would be an encouraging sign of strength. The 25-day up/down volume oscillator is at 0.06 (preliminarily) this week despite the recent sell-off. The oscillator made a two-day overbought reading on April 11-12 and April’s reading followed a long 25-consecutive-day overbought reading in January through March. The 10-day average of daily new highs is 189 and above the 100 per day level defined as bullish. The A/D line made a new record high on May 3, 2019 and is also positive. We remain long-term bullish.

IMPORTANT DISCLOSURES

RATINGS DEFINITIONS:

Sectors/Industries:

“Overweight”: Overweight relative to S&P Index weighting

“Neutral”: Neutral relative to S&P Index weighting

“Underweight”: Underweight relative to S&P Index weighting

Other Disclosures

This report has been written without regard for the specific investment objectives, financial situation or particular needs of any specific recipient, and should not be regarded by recipients as a substitute for the exercise of their own judgment. The report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell securities or related financial instruments. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. The report is based on information obtained from sources believed to be reliable, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the report. Any opinions expressed in this report are subject to change without notice and Dudack Research Group division of Wellington Shields & Co. LLC. (DRG/Wellington) is under no obligation to update or keep current the information contained herein. Options, derivative products, and futures are not suitable for all investors, and trading in these instruments is considered risky. Past performance is not necessarily indicative of future results, and yield from securities, if any, may fluctuate as a security’s price or value changes.   Accordingly, an investor may receive back less than originally invested. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report.

DRG/Wellington relies on information barriers, such as “Chinese Walls,” to control the flow of information from one or more areas of DRG/Wellington into other areas, units, divisions, groups or affiliates. DRG/Wellington accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report.

The content of this report is aimed solely at institutional investors and investment professionals. To the extent communicated in the U.K., this report is intended for distribution only to (and is directed only at) investment professionals and high net worth companies and other businesses of the type set out in Articles 19 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. This report is not directed at any other U.K. persons and should not be acted upon by any other U.K. person. Moreover, the content of this report has not been approved by an authorized person in accordance with the rules of the U.K. Financial Services Authority, approval of which is required (unless an exemption applies) by Section 21 of the Financial Services and Markets Act 2000.

©2018. All rights reserved. No part of this report may be reproduced or distributed in any manner without the written permission of Dudack Research Group division of Wellington Shields & Co. LLC. The Company specifically prohibits the re-distribution of this report, via the internet or otherwise, and accepts no liability whatsoever for the actions of third parties in this respect.

Contact Andrea Costello, Head of Research Sales for additional information (212) 320-2046 or Andrea@DudackResearchGroup.com

Click to download

Political Pressure Everywhere

This could prove to be an important week in the political affairs of several countries. British Prime Minister Theresa May is now offering lawmakers the opportunity in mid-March to vote on a disorderly no-deal Brexit or to vote for a delay in Britain’s exit from the European Union. However, May indicated that the only way a no-deal option would be off the table would be to revoke Article 50, which she will not support. In sum, this new development means if May fails to get a deal approved by the current March 12 deadline, Parliament has the opportunity to push the Brexit cliff date out to the end of June. If so, the Brexit saga may simply continue to weigh on the European continent for three additional months. Nevertheless, the pound rallied on the news.

In South America the Venezuelan humanitarian crisis deepens. On a visit to Bogotá, US Vice President Mike Pence stated that President Nicolas Maduro’s action to block aid to the people of Venezuela has solidified America’s resolve to support opposition leader Juan Guaido. The US responded with a new round of sanctions and asked the United Nations Security Council to vote on a draft resolution calling for immediate elections in Venezuela and the delivery of humanitarian aid.

This week also includes another historic summit between President Donald Trump and North Korean leader Kim Jong Un in the Vietnamese capital of Hanoi. This is their second get-together in twelve months and the US delegation hopes this meeting will move both leaders closer to a deal that will include tangible steps by North Korea to dismantle its nuclear weapons program. Meanwhile in Washington DC, Trump’s prison-bound former personal attorney Michael Cohen will respond to questions from lawmakers in both private and public forums regarding President Trump’s personal finances. These meetings are transpiring as reports circulate that Special Counsel Robert Mueller may be nearing the end of his investigation into whether Russia and Trump’s campaign colluded to interfere in the 2016 presidential election. The Democratic-based House of Representatives just passed new legislation to terminate President Trump’s proclaimed national emergency at the U.S.-Mexico border and this sets up a vote for the bill in the narrowly-led Republican US Senate. In our opinion, it would be refreshing if Congress would re-direct its energy from political power plays on the border to more productive work like comprehensive immigration policy reform.

Federal Reserve Chairman Jerome Powell is giving his semi-annual Monetary Policy Report to the Congress this week and it began with Tuesday’s meeting with the Senate Banking Committee. Unfortunately, many questions from Senate Committee members to the Fed Chief were directed more toward politics rather than monetary policy and were frequently statements rather than questions. This trend is apt to escalate as he heads to the House Financial Services Committee on Wednesday which is now led by California Democrat Maxine Waters and now includes new liberal members such as freshmen Representatives Alexandria Ocasio-Cortez, Rashida Tlaib and Katie Porter. Chairman Powell has already expressed skepticism about modern monetary theory and other aspects of the new Democratic-sponsored Green Deal so we expect Wednesday’s testimony could be confrontational and will therefore be watched closely by many.

But the stock market appears surprisingly unfazed by these political events and has focused instead on the expectation that progress appears to be made on a US-China trade deal. The year-to-date gains in the DJIA and SPX are currently 11.7% and 11.5%, respectively, which means the DJIA and SPX are now up 19.6% and 18.8% from their December 2018 lows and only 2.9% and 4.7%, respectively, from their all-time highs. Our technical indicators are implying that the December trough represented a significant low in equities. Equally important, after a decline of 10% or more, history shows that the average DJIA advance lasts an average of 24 months and gains an average 81.7%. The average advance in the SPX after a decline of 10% or more has lasted 15.2 months and generated an average gain of 55.9%. See pages 3 and 4. But while the underpinnings of the current rally are strong, we expect the advance will and should consolidate after solid double-digit gains. In short, we expect a near term trading range market.

Confidence Building

Last week we noted that the preliminary results for February’s University of Michigan consumer sentiment survey showed a gain after some worrisome weakness in January. And we hoped that the rebound in the University of Michigan survey would be the first of a series of better data points in sentiment. (See “Conflicting Economic Data Leaves Fed on Hold” February 20, 2018 page 4.) This week’s release from the Conference Board was reassuring since it too had a recovery. The Conference Board consumer confidence index rose sharply from 121.7 in January to 131.4 in February. Also encouraging is the fact that both surveys had robust gains in the “expectations” index implying that consumers are becoming more hopeful about their financial future. See page 5. This helps to explain the stock market’s recent confidence and shows that investors are more focused on economic factors like trade, than on divisive political rhetoric.

Investors will get more information about the state of the economy on February 28^th when the initial estimate for fourth quarter GDP is released. Recent data suggests that corporate investment slowed at year end and for that reason economists are expecting to see a sharp decline from the second quarter pace of 4.2% and the third quarter rate of 3.4%. These last two reports indicated that US economic activity was well above the long-term average rate of 3.2%. Many forecasts are looking for the fourth quarter’s pace to fall well below 3% and the Atlanta Fed’s GDPNow forecast is currently at 1.8%. Anything substantially stronger than that could be a boost to sentiment. See page 6. Also released this week will be December’s personal income and personal expenditures. In November, a 3-month average of personal consumption expenditures showed spending was growing at a 4.8% YOY pace, faster than the 4.3% rate in personal income. In our view, the personal income report will be a better indicator of 2019’s economic potential than GDP.  See page 7.

Steady Improvement in Technicals

Technicals continue to be strong and the 200-day moving averages have been exceeded in all three popular indices. The Russell 2000 index is the one index yet to break above this significant resistance level, however it is testing its 200-day MA this week and the trend looks favorable. See page 10. The 25-day up/down volume oscillator is at 3.04 (preliminarily) this week, barely in overbought territory, but this still represents the indicator’s 22^nd consecutive day in overbought territory. As a result the current reading is the longest overbought condition since the 27 of 29 consecutive day overbought reading seen in May 2009. The current signal is now the 4^th longest overbought reading since 2008, up from last week’s 8^th place ranking. Also, the oscillator reached a high of 6.84 at the end of January which was the highest overbought reading since August 13, 2009’s 6.90. Note that this 2009 reading appeared early in a new bull trend. Long and extreme overbought readings are characteristics of bull markets and the strongest overbought level typically appears at the beginning of a new bull market cycle. In short, this oscillator is definitively bullish and we remain bullish for the longer-term with a target of SPX 3150. We would buy all dips.

IMPORTANT DISCLOSURES

RATINGS DEFINITIONS:

Sectors/Industries:

“Overweight”: Overweight relative to S&P Index weighting

“Neutral”: Neutral relative to S&P Index weighting

“Underweight”: Underweight relative to S&P Index weighting

Other Disclosures

This report has been written without regard for the specific investment objectives, financial situation or particular needs of any specific recipient, and should not be regarded by recipients as a substitute for the exercise of their own judgment.  The report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell securities or related financial instruments.  The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors.  The report is based on information obtained from sources believed to be reliable, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the report.  Any opinions expressed in this report are subject to change without notice and Dudack Research Group division of Wellington Shields & Co. LLC. (DRG/Wellington) is under no obligation to update or keep current the information contained herein.  Options, derivative products, and futures are not suitable for all investors, and trading in these instruments is considered risky.  Past performance is not necessarily indicative of future results, and yield from securities, if any, may fluctuate as a security’s price or value changes.   Accordingly, an investor may receive back less than originally invested.  Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report.

DRG/Wellington relies on information barriers, such as “Chinese Walls,” to control the flow of information from one or more areas of DRG/Wellington into other areas, units, divisions, groups or affiliates.  DRG/Wellington accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report.

The content of this report is aimed solely at institutional investors and investment professionals. To the extent communicated in the U.K., this report is intended for distribution only to (and is directed only at) investment professionals and high net worth companies and other businesses of the type set out in Articles 19 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. This report is not directed at any other U.K. persons and should not be acted upon by any other U.K. person. Moreover, the content of this report has not been approved by an authorized person in accordance with the rules of the U.K. Financial Services Authority, approval of which is required (unless an exemption applies) by Section 21 of the Financial Services and Markets Act 2000.

Additional information will be made available upon request.

©2018.  All rights reserved.  No part of this report may be reproduced or distributed in any manner without the written permission of Dudack Research Group division of Wellington Shields & Co. LLC. The Company specifically prohibits the re-distribution of this report, via the internet or otherwise, and accepts no liability whatsoever for the actions of third parties in this respect.

Contact Andrea Costello, Head of Research Sales for additional information (212) 320-2046 or Andrea@DudackResearchGroup.com

Click to download

In our January 10, 2019 report, “The Consensus View” we noted that there was broad agreement among strategists regarding their outlooks for 2019. Most forecasts include the concept that global and US economic activity will decelerate this year, the risk of a US recession grows for 2020, the Federal Reserve is apt to be on hold for much of the next 12 months, the dollar will remain stable, interest rates have peaked for the intermediate term, and emerging markets represent better values than US securities. We tend to be wary of strong consensus views since history suggests that they tend to be wrong. Therefore, we believe investors should be on the lookout for positive surprises in 2019.

Davos, Switzerland

This week the 2019 World Economic Forum in Davos is the big financial story and we remind readers that this forum is famous for misjudging the global mood and events. Last year global financial leaders and executives were brimming with optimism about the world economy and the ability of stock markets to continue to rise. This year the mood is much more subdued and is focused on the political paralysis seen in the US, UK, France and Germany, the stress on trading relationships and rising concerns about the concentration of corporate power, especially among large technology firms. Corporate leaders are eyeing global trade, the potential impact of the US government shutdown, the uncertain state of the economy and a volatile political landscape as the major risks of the current year and many are calling these risks unprecedented. However, while forum participants are downcast and glum this year’s Economic Forum is most notable for the people who did not attend. The list includes President Trump who did not attend due to the federal government shutdown, Prime Minister Theresa May did not participate due to the time pressure she faces to get a Brexit deal and Chinese President Xi Jinping was not there as China announces economic growth has decelerated to the slowest pace in decades. Clearly the consensus view among US equity strategists that we described two weeks ago is also a global view. To us, this suggests that we should be looking for what could go right in the US and global environments in 2019.

In our last weekly publication we listed the most likely positive surprises of 2019 to be a trade agreement between the US and China, a smooth Brexit, a quiet and uneventful end to the Mueller investigation and a bi-partisan US infrastructure spending bill. This list is presented in order of likelihood.

The most plausible positive surprise in 2019 is a trade agreement between the US and China. While the negotiating process has been messy and contentious it seems that President Trump is pressing China for the best possible long-term deal, including the ability for the US to monitor the agreement for compliance. Like many deals, the process can be acrimonious, yet we believe it is in the best interest of both parties to find a solution before additional tariffs are imposed in March. Prime Minister May could be facing a tougher battle to pass a Brexit proposal through Parliament; but the disruption of a hard Brexit could pressure politicians into finding a solution in coming weeks. Of all the items on our list, a bi-partisan infrastructure bill currently seems the least likely. This is a very sad commentary since both sides of the US political aisle actually agree on this concept. The absence of such a bill highlights the dysfunctional state of the US political scene and of the US Congress.

The Economic Backdrop

The current US economic backdrop has its highs and its lows. The most recent low was December’s existing-home sales which fell 6.4% from a revised November number and was down 10.3% from December 2017. This was not due to seasonal factors since both the seasonally adjusted and unadjusted sales figures were down by similar percentages. The median single-family home price in December (SA) was $261,220, down 1.2% from November but still up 3% from December 2017. December’s weakness could be temporary factors since these sales were based on contracts signed one to two months prior to December when mortgage rates were at their peak. Weather was also unseasonably cold and wet in November which hampered potential buyers and the government shutdown may have delayed some transactions which were expected at the end of the year. The good news is that interest rates have moved lower in recent weeks and this could bolster the housing market in 2019. See page 3.

The ISM manufacturing index fell from 59.3 in November to 54.1 in December and is now at its lowest level since late 2016. All components of the manufacturing survey, with the exception of imports and exports were lower in the month. The broadness of this decline depicts a clear slowdown in activity at the end of 2018; however, all components of the ISM index remain above the 50 benchmark which indicates the manufacturing expansion is continuing, albeit at a slower pace. See page 4.

One of our favorite economic surveys is the NFIB small business optimism index and it fell from 104.8 in November to 104.4 in December, the fourth consecutive monthly decline. The decline in optimism was modest and the components of the survey revealed mixed results. Plans to make capital expenditures fell decisively to 24 in December, but a net 23% of small business respondents plan to expand employment. This is better than the 22% reading seen in each of the prior two months. This stability in employment plans is encouraging for the average household. See page 5.

The highpoint of December economic releases was the jobs report which showed payrolls grew above expectations with 312,000 new jobs added during the month. Job growth was strongest in construction, leisure/hospitality and education/healthcare sectors. We were most encouraged by the fact that our favorite indicator, the year-over-year growth rates in both the household and establishment surveys, showed December’s year-over-year growth in employment was above average in both surveys for the first time since September 2016. See page 6.

The key question facing investors is whether the risks seen in 2019 have been fully discounted by December’s decline in prices. Consensus surveys for 2019 show that SP500 forecasted earnings have slumped from double-digit growth levels in October to the current 6.1% YOY growth rate in Thomson IBES data and the 8.1% YOY growth rate in S&P Dow Jones data. These consensus estimates remain above our 2018 SP500 earnings estimate of $156 but have now edged below our 2019 estimate of $172. In our view, the consensus has become too pessimistic about 2019 earnings. See pages 9-10.

Technical Indicators are Favorable

We expect the market to remain in a broad trading range until the geopolitical backdrop improves. Nonetheless, a number of technical indicators indicate that December prices represented the worst of the decline. The most important and bullish feature of breadth data were the 90% up days recorded on December 26 and January 4. These days were reversals of the 90% down days seen in early December and were signals that the decline was both stabilizing and reversing. In addition, the AAII 8-week bull/bear spread is in positive territory for the sixth consecutive week. In sum, both breadth and sentiment are suggesting the market has begun a bottoming phase.

IMPORTANT DISCLOSURES

RATINGS DEFINITIONS:

Sectors/Industries:

“Overweight”: Overweight relative to S&P Index weighting

“Neutral”: Neutral relative to S&P Index weighting

“Underweight”: Underweight relative to S&P Index weighting

OTHER DISCLOSURES
This report has been written without regard for the specific investment objectives, financial situation or particular needs of any specific recipient, and should not be regarded by recipients as a substitute for the exercise of their own judgment.  The report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell securities or related financial instruments.  The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors.  The report is based on information obtained from sources believed to be reliable, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the report.  Any opinions expressed in this report are subject to change without notice and Dudack Research Group division of Wellington Shields & Co. LLC. (DRG/Wellington) is under no obligation to update or keep current the information contained herein.  Options, derivative products, and futures are not suitable for all investors, and trading in these instruments is considered risky.  Past performance is not necessarily indicative of future results, and yield from securities, if any, may fluctuate as a security’s price or value changes.   Accordingly, an investor may receive back less than originally invested.  Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report.

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