Corporate Beige Book: It Keeps Getting Better

After a very strong first quarter earnings season, we expected to see management sentiment also improve. And similar to how earnings results and the guidance from management were better than we expected, so was our measure of corporate sentiment based on earnings conference call transcripts, which we call our Corporate Beige Book. We saw a sharp increase in the strong and positive words over the prior quarter, with no change in the weak and negative words. There was virtually no talk of recession — as expected — and far less attention was paid toward potential policy changes out of Washington, D.C.

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June Preview

Summer will soon be here, as June 2017 brings with it longer days and summer vacations in the United States. It is also a month with three major central bank meetings. So far in 2017, the global equity rally has continued with new highs in the U.S., Europe, and emerging markets (EM). The global earnings backdrop is strong as well, supporting the moves to new highs. Not to mention 2017 has been one of the least volatile ever, with only four 1% moves for the S&P 500 Index in the first 100 trading days of the year. As we turn the page to June, it is important to stay on top of the most significant upcoming events. To help, we’ve created this guide to the June 2017 market calendar, providing an overview of the key events.

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Inflation Watch Update

Over the last several months, inflation has increasingly taken center stage for Federal Reserve (Fed) watchers. While the deflation theme of early 2016 has all but disappeared, and conviction around higher but still healthy inflation (“reflation”) that appeared in the months following the U.S. election has settled considerably, a largely healthy labor market is putting a spotlight on the other half of the Fed’s dual mandate, low and stable inflation. We believe modestly higher inflation over the next year is likely as U.S. and global growth accelerates and wage pressure increases as the labor market tightens further. However, forces are in play that should keep any larger buildup of inflationary pressures at bay, including below-historical capacity utilization, stable commodity prices, potential for labor force expansion through a rise in the participation rate, and low inflation expectations. This week, we look at some of the factors that may impact inflation in the next year.

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Focus on Fundamentals

What are we telling our investors? Focus on fundamentals. It was an up-anddown week for stocks as market participants became increasingly worried that the Trump administration’s agenda was in danger following the latest news surrounding the Russian investigation. On Wednesday (May 17), the S&P 500 Index suffered its biggest one-day drop in nearly a year (-1.8%), while the Nasdaq Composite (-2.6%) and Russell 2000 Index (-2.8%) suffered even bigger losses.

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Earnings Update: Raising The Bar

Excellent earnings season but bar will soon be raised. First quarter earnings season has been excellent by almost any measure. Results beat expectations by more than usual. The overall growth rate is very strong, even without the big boost from energy. The ratio of companies lowering versus raising second (current) quarter earnings forecasts is well above average and guidance has provided better-than-usual support for analysts’ estimates for the balance of 2017. In total, these are all good things.

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U.S. Housing Update – Mind The Gap

Housing prices hit what was then an all-time high ten years ago; the bursting of the housing bubble was arguably the primary cause of what we would come to call “The Great Recession.” Housing prices surpassed the levels reached a decade ago in November of 2015, and have continued to move higher since. Yet, the market is very different today as the portion of households renting has increased even though, thanks to low mortgage rates, home affordability is still reasonable. Two major factors may boost home prices going forward, the impact of the slowdown in new home sales, which has reduced supply, and the fact that the first wave of the millennial generation has entered its prime home buying years.

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Jobs Count: But How Do We Count Them?

The U.S. Bureau of Labor Statistics (BLS) released its monthly jobs report on Friday, May 5, 2017. As usual, investors and economists (including those at the Federal Reserve [Fed]) will pour over the data for clues regarding the health of the economy, as well as for insight into interest rates and other policies. Lately, many questions arise with each data release. Different rates measure a different scope of the labor market, specifically how those who have given up looking for work, or people working part time when they would rather work full time, are counted. The difference between these rates gives rise to questions, including which rate is correct and how to interpret the data.

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Five Reasons Not to Sell in May

“Sell in May and go away” is probably the most widely cited cliché in stock market history. May is upon us, which sparks a barrage of Wall Street commentaries, media stories, and investor questions every year about the popular stock market adage. This week, we tackle this widely cited seasonal pattern, but focus on some reasons it might not work this year.

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Reflecting on NASDAQ 6,000

The Nasdaq Composite hit 6,000 last week, more than 17 years after first reaching 5,000 in March 2000. The road from the first break above 5,000 to the 6,000 milestone was a long one. During the internet boom in the late 1990s, moves from 3,000 to 4,000 and 4,000 to 5,000 were quick, at 56 and 71 days respectively, before the long and winding road to 6,000 over the course of 6,256 days [Figure 1]. But after the 15-year journey back to 5,000 was completed in 2015, the Nasdaq traversed the next 1,000 points relatively quickly to break through the 6,000 level on April 25, 2017.

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