Monthly Archives: November 2016

Covenant Weekly Market Synopsis as of November 25, 2016

November 27, 2016

An abridged version this week due to the holiday and family time…

Traders were undeterred by the Thanksgiving-shortened week, pushing equity markets higher. Indeed, major domestic indices tacked on gains of 1.5% or more for the week with the S&P 500, Dow Jones Industrial Average, Nasdaq, and Russell 2000 all reaching record levels. International equities rallied as well, with European stocks gaining 1% and Japanese stocks moving higher by 2.3%. Emerging markets gained 1.3%, but are still down more than 5% month-to-date. Interest rates exhibited less volatility last week, though it is notable that the yield on the 10-year US Treasury Note closed the week at 2.36% – a 52-week high. On the other hand, the price of crude oil was volatile as traders adjusted their views on the odds of OPEC agreeing to production cuts. For the week, WTI Crude gained 1.4% to $46.06 per barrel. Precious metals declined for the week, while Copper continued its reflationary-driven run pushing higher by 8.1% which puts it up more than 21% for the month.  The US Dollar moved higher by 0.3% on the week, though its upward momentum appears to be waning after coming into the week on the heels of ten consecutive daily gains resulting in a 4.3% move.

For a detailed view of weekly, month-to-date and year-to-date asset class performance see below or click here.




Be well and Godspeed,


Covenant Weekly Market Synopsis as of November 18, 2016

November 21, 2016

Developed market equities continued to move higher last week following the election. The move was more pronounced in the U.S., ground-zero for President-elect Trump’s new policies, where large capitalization stocks moved higher by about 1%. Small capitalization stocks (which are expected to benefit from reduced regulation and a lower corporate tax rate under the new administration) moved up by 2.6% and are now up 10.5% on the month and 17.3% year-to-date. Strength of the US Dollar (+2.8% month-to-date) has yet to weigh on domestic equities, but has made its presence felt on emerging and frontier market equities, both of which fell last week, and have declined 6.7% and 4.6% month-to-date, respectively. Yields on fixed income investments continued their post-election ascent, with the yield on the 10-year US Treasury bond rising 0.2% to 2.35% (the highest level since last summer). Precious metals had another tough week, while WTI Crude gained 5.3%. As investors have revved up risk taking, the VIX Index fell another 12.8% to 12.85, and is down nearly 25% for the month.

For a detailed view of weekly, month-to-date and year-to-date asset class performance click here.

Many, many questions remain as to what President Trump’s ultimate policies will be and how quickly they can impact the real economy. There is a lot of optimism priced into markets, but investors should not lose sight of the economic reality in which we find ourselves long after the Financial Crisis. Both the optimistic view and a reality check are summarized below.

Optimistic View: President Trump is able to implement the changes he campaigned on, reducing regulations on business, “fixing” Obamacare and reducing corporate and household income taxes. These changes will usher in a new age of prosperity and a Ronald Reagan-style economic recovery. This is what the markets are currently reflecting as indicated by market action in the two weeks since the election:

  • $25.4 billion of new cash invested into equity ETFs
  • Inflation expectations have risen…
  • …causing massive outflows from bonds which resulted in the largest two-week loss in at least 26 years in the Barclays Global Aggregate Bond Index. The 10-year US Treasury yield, at 2.35%, is nearly one percent higher than its post-Brexit lows in early July.
  • The US Dollar rallied to a one-year high
  • The Dow Jones Industrial Average and the S&P 500 are within a percent or so of new highs (19,000 and 2,200, respectively).


Sources: Bloomberg and Covenant Investment Research


Reality Check – President-elect Trump is still nine weeks from taking office and the market has seemingly determined that not only have the policies he campaigned on been implemented, but that they are having a similar positive impact as ‘Reaganomics’ did in the 1980’s. Of course, the market is a forward discounting mechanism, meaning that it prices assets now based on the future. But importantly, the forward discounting is determined by humans (for the most part) and humans are emotional creatures swayed by powerful feelings of greed and fear. It is these hard-wired emotions that push markets too high in good times and too low in bad times. The market’s forecasts may well prove accurate, but it is worth considering current economic conditions relative to the time when Reagan took office:

  • Reagan’s tax cuts were implemented during a time in which the Fed was slashing interest rates (rates were reduced from a peak of 19% in 1981 to 8.35% by 1985). The Fed funds rate today is 0.5% and the Fed is biased towards increasing rates – the odds of a December rate hike are nearly 100% according to Bloomberg.


Sources: Federal Reserve Bank of St. Louis and Covenant Investment Research

  • Reagan’s tax cuts were far larger, on a relative basis, than those being discussed by Trump.
  • Fed Chairman Volcker orchestrated a major decline in the US dollar through the Plaza Accord in 1985. As noted above, the US Dollar’s strength has accelerated recently primarily because of faith in Trump’s policies – a classic “Catch-22”.
  • Non-bank debt equated to only 135% of GDP when Reagan took office, but today it stands at 251% of GDP. That is to say, the domestic balance sheet is being financed with a lot more debt today than it was when the Gipper took office.
  • The current economic expansion is more than six years old, so pent-up demand for big-ticket items (new vehicles, plant and equipment) is likely waning. Reagan inherited an economic recession when he took office and thus his pro-growth policies were implemented during a time when there was large pent-up demand.

Lacy Hunt of Hoisington Investment Management sums up the current state of the market as follows: “Markets have a pronounced tendency to rush to judgment when policy changes occur. When the Obama stimulus of 2009 was announced the presumption was that it would lead to an inflationary boom. Similarly, the unveiling of QE1 raised expectations of runaway inflation. Yet, neither happened. The economics are not different [this time].”


Bottom Line – With control of the three branches of government, President Trump will be able to implement a lot of the policies he wants. Yet it remains to be seen what those policies will look like once they make it through the highly-politicized Legislative Process. In a perfect world Trump’s policies to reduce regulation, lower taxes and increase fiscal stimulus will be sufficient to overcome the lingering effects of the Financial Crisis, which have yet to be wrung from the system. While they did not all cast their ballot for Trump as President, investors have clearly voted on his policies.

Be well and Godspeed,



Sources: the information above was gleaned from a number of sources including Barron’s, Hoisington Investment Management, Federal Reserve Bank of St. Louis. and Bloomberg.

Covenant Weekly Market Synopsis as of November 11, 2016

November 14, 2016

Wow… what a week. Risk assets began the week moving higher as most polls and pundits agreed that Clinton would win the election and there would be AT LEAST four more years of status quo government. Then the script flipped and equities galloped higher when Trump prevailed and it became clear that there would NOT be four more years of status quo government. The moves in between were very interesting.

After rising more than 2% on Monday (following a Sunday announcement that the FBI found no new evidence in a recently discovered batch of Clinton emails), markets closed relatively unchanged on Tuesday as investors and traders waited to hear about exit polling and the election results. When the Electoral College began to build in Trump’s favor, risk assets sold off. In fact, futures on US equities hit their -5% downside limit around midnight. Then there was another surprise. Rather than spike the football and tell everyone “I told you so” as so many expected, Trump gave what was widely lauded as a “Presidential” acceptance speech.  The change in tone from “Candidate Trump” to “President-elect Trump” also shifted the tone of the markets. Equity futures recovered much of their losses by the time markets opened on Wednesday and by the time they closed the S&P 500 was up 1.1% (a swing of more than 6% in 16 hours). The buying continued over the next two days and by the end of the week domestic equities had risen 3.9%. The buying was not just concentrated in the U.S., as developed international markets rose a respectable 1% – 2% on the week.

While equities rallied, US Treasury bonds were sold, and sold, and sold…. pushing yields higher on short, intermediate and long-term bonds. The yield on the 10-year UST closed the week at 2.15%, while the 30-year UST pushed to 2.94% on Friday and as of this morning is yielding more than 3%. The chart below compares the Treasury Yield Curve from five days ago (yellow dotted line) to today (green solid line). The take away is not only that the entire yield curve shift up, but yields on longer-dated maturities (7, 10 and 30-year) moved much higher than shorter term treasuries (see bar chart at the bottom). This is known as a steepening yield curve and it tends to be beneficial for financial companies (because they can borrow cheap near-term money and lend longer-dated capital at a higher rate).


Source: Bloomberg

For a detailed view of weekly, month-to-date and year-to-date asset class performance click here.


Hmmm… A few additional standout market moves last week included:

  • Small cap stocks, as measured by the Russell 2000, rose 10.3% last week. Presumably small cap stocks should benefit from reduced corporate taxes and less government regulation, key points of a Trump Administration.
  • Value stocks outperformed growth stocks by nearly 2%.
  • FANG – former darlings of the stock market, Facebook, Amazon, Netflix and Google (now called Alphabet) declined between 1% – 2% (Netflix fell by 6%), likely due to investors rotating out of these richly valued companies toward industrials and financials that are expected to benefit from a Trump administration.
  • Emerging markets did not participate in the Trump rally as they benefit from a weaker US dollar and lower interest rates. Trump’s pro-growth policies will have the opposite effect. Our emerging market compadre to the south, Mexico, suffered mightily – the Peso fell 9.6%, interest rates jumped more than 7% and stocks fell approximately 7% over immigration and trade concerns.
  • Copper prices jumped 10.7% on the belief that demand for the industrial metal will increase with infrastructure spending.


The Future – If Trump is able to implement his fiscal stimulus and tax reform policies, he will effectively be injecting steroids into the slowly expanding domestic economy, generating higher growth and inflation, at least in the short to intermediate term. The countervailing force to consider is how fervently Trump will pursue some of his more protectionist campaign promises such as renegotiating trade deals and increasing tariffs on imported goods. Too much protectionism would reduce global trade and act as a headwind against domestic economic growth. It would also increase inflation as the prices of imported goods would be subject to trade tariffs. Too much inflation would have a negative impact on equity and bond prices. There are still a lot of questions to be answered. Thus far however, the markets have not only embraced, but have become a cheerleader for the type of change Trump represents.

Be well and Godspeed,


Covenant Weekly Market Synopsis as of November 4, 2016

November 7, 2016

It was a tough week all over for financial assets, save long volatility products as the VIX Index (sometimes referred to as the “fear gauge”) jumped 39%. Reflecting fear or, more likely, uncertainty about the upcoming presidential election, equity markets the world over declined between 2% and 3% for the week. Investors shifted from risky assets to traditional “safe haven” assets, boosting the price of US Treasuries (causing yields to decline) and precious metals which saw gold (+2.3%) and silver (+3.8%) rise on the week. Meanwhile, doubts around OPEC’s ability to strike a deal to curb production hit oil prices hard, causing the commodity to decline by more than 9% over the last five days.

For a detailed view of weekly, month-to-date and year-to-date asset class performance, please click here.

Morning Market Update – Following FBI director James Comey’s announcement yesterday that the FBI hasn’t changed its opinion about bringing criminal charges against Hillary Clinton after a review of new emails, markets are in full rally mode. As of this writing, international equities are up more than 1.5%, while domestic equity futures are indicating a similar open for domestic stocks.

Losing Streak – Last week and over the weekend, much was written and broadcast about the recent 9-day losing streak of the S&P 500 (which began on October 24 and appears destined to end today). This is what a 9-day losing streak looks like on a Bloomberg terminal….


…but notice the size of the daily losses (% change column on far right). What most of the talking heads have missed (or intentionally overlooked in an effort to hype the story) is that in spite of nine consecutive down days, the market only declined by a little more than 3%. Hardly a travesty. The last time the market fell for nine consecutive days was in 2008. During that time the S&P 500 fell nearly 25%.



Sources:  Bloomberg and Covenant Investment Research

While 2008 was an extreme event, other drawdowns over similar time frames have been in the range of 8% – 10%. Long story short, heretofore, this move is nothing to write home about. Does it have my attention? Yes. But as for now this drawdown has been particularly mild by historical standards, in spite of its protracted nature. And if today’s stock market futures are an indication, we could recover half that loss today. The big test will come when we learn who will be the next President of the United States and which party will control Congress and the House of Representatives.


“Un”Affordable Care Act – Through September spending on healthcare is up 4.7% year-over-year a 3x growth rate versus overall GDP growth of just 1.5%, according to research from Foleynomics.  Much of the increase in healthcare costs can be tied to the “Affordable Care Act”.  The chart below highlights the trend of rising healthcare spending.



Sources:  Foleynomics and Covenant Investment Research

Skyrocketing healthcare costs may be good for many healthcare companies, but they are bad for the consumer and non-healthcare companies. Higher healthcare expenses reduce the ability to save for the future and cannibalize consumer spending on other products and services.  Thus placing downward pressure on retailers and non-health related services as healthcare costs demand greater “wallet-share” of the average consumer. Higher healthcare costs are also increasing the cost of labor for businesses, which indirectly impacts consumption in other ways, including:

  • In response to rising healthcare costs, business owners and managers are hiring more part-time workers to avoid mandated provision of healthcare for full-time employees. Indeed, part-time jobs rose 90,000 in October and are up 520,000 since August. Part-time jobs pay less in total compensation than full-time jobs, leaving fewer dollars to be directed toward discretionary spending.
  • Unlike their full-time counterparts, part-time workers must pay for their own health insurance either directly through an insurance company or via the Affordable Care Act. Direct insurance has never been cheap and as it has become clear of late, neither is the Affordable Care Act. Part-time workers are being squeezed from both sides, lower overall income combined with higher medical expenses.

The healthcare cost situation is, stated simply, untenable.

Economic Data Wrap-up – Personal Income rose 0.3% in September (vs. expectations of 0.4%), while Personal spending increased by 0.5%.  This monthly snapshot is a microcosm of a four-month trend in which annual nominal personal consumption expenditures have exceeded nominal income growth.  That is to say, people are spending more than they are earning.  This trend is not sustainable in the long run and it may revert in Q4 to drag on consumption.  The October ISM Manufacturing Index rose modestly to 51.9 (from 51.5), yet the forward looking components (new orders and backlog) declined putting a damper on hope that the manufacturing sector will experience breakout growth in Q4.  The ISM Non-Manufacturing Index (aka Service Sector) fell back to 54.8 (from 57.1).  Though firmly in expansion territory (i.e. the index is >50), similar to the manufacturing sector, forward indicators such as New Orders were a little squishy with New Orders falling from 60 to 57.7.

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