Weekly Market Summary

Summary:  The major US indices all traded at new all-time highs (ATH) this week. Even the lagging small caps index closed at a new ATH on Friday, and transports are very near a new ATH. Persistent strength like that seen throughout 2017 has almost always continued into year-end. However, like last week, a few studies suggest short-term upside will likely be limited. The third quarter ends on Friday.

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US equities are now in the second longest and second strongest bull market of the post-war era. Enlarge any image by clicking on it.

This bull market is not showing signs of ending. This week, SPX and DJIA made new all-time highs (ATHs) on Wednesday and NYSE and RUT made new ATHs on Friday. All the main US indices have now made a new ATH in the past two weeks.

As an example of how persistent the current trend is, consider this: this week was only the second time since 1995 that SPX did not trade lower than the close of September OpX at least once. The only other exception was 2001 when SPX lost a whopping 12% during OpX week.

A month ago, weakness in transports raised the concern among many pundits that a "Dow Theory" sell signal was likely. Since then, transports have risen 7.5% and closed Friday a mere 0.3% off its ATH.

The rebound in the lagging transports and small caps should reassure those that previously considered their weakness to portend broader weakness in equities. This is yet another example of how breadth weakness is a highly unreliable indicator for anticipating turns in the market. For a fuller explanation of this, read further here.

Further gains into year-end appears to be strongly odds-on.

First, since 1928, when SPX has made a 12-month high in September, it has then risen in the 4th quarter 83% of the time (from Liz Ann Sonders).

Second, since 1928, when SPX has risen in every month from May through September, it has risen in the 4th quarter every time. SPX would have to fall 1.2% this week to invalidate this study (from Ryan Detrick).

Third, active investment managers became bearish last week, with NAAIM sentiment closing under its two standard deviation weekly Bollinger Band (middle panel). This has happened 16 times since the survey started in 2006 and SPX (upper panel) has closed higher 6 weeks later every time (from Cam Hui; his post is here).

This sentiment study is consistent with those presented by BAML in our post last week (read further here). It is also consistent with data from AAII.

Fourth, economic data continues to point to further growth, conditions under which bear markets are very unlikely, especially within a few months. Growth in the index of leading indicators has turned negative ahead of the 3 recessions in the past 30 years; in contrast, current growth is accelerating (from Jim Sullivan).

Even shorter-term, there should be further upside in US equities.

First, the broad NYSE index closed higher 5 days in a row this past week, with that streak ending on Wednesday. In the past 5 years, the SPX has then closed higher within the next week 85% of the time (n=27 instances). This implies a close over Wednesday's ATH at 2508 is likely ahead.

Second, SPX has closed above its rising 10-dma every day for more than 3 weeks. Since 1995, when these long streaks have eventually ended, it has led to at least one higher close within the next week nearly 90% of the time (data from Rob Hanna). Repeating our comment from last week, on weakness, look for first support (and a positive reaction) at the rising 13-ema (which roughly equals a 10-dma; green line).

Third, price highs are most often preceded by a momentum high on the daily chart. In other words, the trend weakens before it reverses (red lines in the top panel; arrows in the main panel). The momentum high so far was on Wednesday and should most likely be followed by a price high. This is consistent with the two short-term studies mentioned above.

All of that said, there are three reasons to suspect any short-term gains will be given back.

First, the one-month average equity-only put/call ratio reached a 9 month low this week. Prior to 2017, current put/call levels had consistently led to downside of at least 3% and often more. Using the backtest engine from Sentimentrader, prior instances in the past 5 years have preceded a lower close within the next month 65% of the time and within the next two months 77% of the time (if you wish to become a Sentimentrader subscriber, please use this link which results in a small contribution to the Fat Pitch).

Second, the volatility term structure, which compares one month volatility (Vix) to three month volatility (Vxv) is now also at one of the largest extremes in several years. After similar instances, SPX has moved sideways or lower over the next 1-3 weeks; if SPX moved higher, those gains were given back (upper panel).

Third, the two weeks at the end of September are typically weak. SPX closed marginally higher this week but poor seasonality is still a headwind. That has most often been the case when SPX rallies into OpX (a week ago): since 1982, SPX has closed lower within the next two weeks 87% of the time, and within the next 2 months 96% of the time (from Sentimentrader).

Net, US equities continue to make new ATHs and the outlook into year-end is favorable. Several studies suggest further short-term upside is likely limited.

The macro calendar this week is heavy: new home sales on Tuesday, durable goods on Wednesday, GDP on Thursday and PCE on Friday. The third quarter also ends on Friday.

Recent hurricanes are likely to have a short-term negative impact to upcoming economic data. In the past, growth has quickly resumed. Thus, jobless claims recently spiked higher after Harvey, as it also did after Katrina and Sandy (first chart; from Bespoke). GDP forecasts have also fallen in the wake of Harvey (second chart; from the Atlanta Fed). This should be only temporary.

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Weekly Market Summary

Summary:  The major US indices all recorded new all-time highs (ATH) this week. The very broad NYSE, covering 2800 stocks, also made a new ATH, suggesting the rally is supported by adequate breadth. Longer-term studies and the fundamental macro data continue to indicate that further upside into year-end is odds-on. Remarkably, a new survey shows that fund managers are the most underweight US equities in 10 years, despite the SPX rising 9 of the last 10 months by an impressive 17%.

On a short-term basis, there are several reasons to be on alert for weakness over the next week or two.    An important FOMC meeting is on deck for Wednesday.

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US equities remain in a long term uptrend. SPX, DJIA, NYSE, COMPQ and NDX all made new all-time highs (ATH) this week.

Long-term uptrends typically weaken before they reverse strongly. Note the bottom panel: the 20-wma will flatten in advance of a significant correction to price (yellow shading). This process has not started yet. That doesn't mean that an intermediate-term fall of 5-8% is unlikely; in fact, a correction by that amount is common in most years. But any such fall is likely to followed by a rebound to the prior highs before a more siginificant correction ensues.

Throughout 2017, we have presented the historical tendency for years with a strong trend, like this one, to rise further (see here, here, here and here). We can add to these the following data: when SPX rises 5 months in a row, as did through August, the index has closed higher after 6 or 12 months every time. The average maximum drawdown during the next year has been a very modest 4% (from @SJD10304).

That conclusion is consistent with the fundamental data. Real retail sales reached a new ATH in July with growth approaching 2%. Employment has slowed in the past year, but an average of 175,000 new jobs are still being added each month and unemployment claims continue to fall. On balance, the risk of an imminent recession is minor. This is important as there have been 10 bear markets since the end of World War II but only 2 have occurred outside of an economic recession. A review of the most recent macro data can be found here.

Continued gains in equities is also supported by longer-term measures of sentiment. Investment fund managers surveyed by BAML this month reported relatively high allocations to cash and modest allocations to equities. This combination is consistent with further upside in equity prices. For example, funds hold nearly 5% cash; prior to the 2008 bear market and significant corrections in 2010 and 2011, cash allocations were 3.5% or less. Read a new post on this here.

Sentiment towards the US equity market is especially bearish: funds are the most underweight US stocks in 10 years. This is when US equities usually outperform on a relative basis.

The short term trend in stocks is also a tailwind into next week. On Friday, the DJIA rose for a 6th day in a row; that momentum tends to carry forward into the days ahead. In the past 5 years, DJIA has risen 6 days in a row 14 other times. Within the next week, the DJIA and the SPX have closed higher 13 of 14 times (93%). The one failure was minor (from indexindicators.com).

There are several other reasons, however, to be on alert for weakness over the next week or two.

First, since March, the short-term risk/reward has been poor when SPY has been "overbought" on a daily basis (top panel). SPY has tended to chop sideways, with downside about 3 times greater than upside (shading). Through price and time, SPY has ultimately moved to its 50-dma (red arrows). Look for first support (and a positive reaction) at the rising 13-ema (green line).

Second, shorter-term measures of sentiment are at a bullish extreme. The one-month average equity-only put/call ratio has reached a level where upside has been minor and and the index has mostly moved lower. Of course, SPY has yet to correct even by 3% in 2017, so downside hasn't been significant. Prior to 2017, current put/call levels had consistently led to downside of at least 3% and often more.

Third, September is seasonally weak in the second half of the month. The upcoming week is the weakest of the year, with SPX closing lower a remarkable 85% of the time since 1990 (read more from Rob Hanna here).

Likewise, when SPX has rallied into September OpX (today), it has closed lower within the next two weeks 87% of the time, and within the next 2 months 96% of the time, since 1982 (from Sentimentrader; if you wish to become a subscriber, please use this link which results in a small contribution to the Fat Pitch).

Net, further upside likely lies ahead for US indices into year-end, but there are a number of studies that suggest limited upside and poor short-term risk/reward over the next week or two.

The macro calendar this week is highlighted by an FOMC meeting on Wednesday, during which a balance sheet unwind may be announced. Housing starts/permits data will be released Tuesday. The week after is data intensive: new home sales (9/26), durable goods (9/27), GDP (9/28) and PCE and quarter end (9/29).

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Fund Managers' Current Asset Allocation - September

Summary: Global equities have risen 12% in the past 6 months and 17% in the past year, yet fund managers continue to hold significant amounts of cash, suggesting lingering risk aversion. They have become more bullish towards equities, but not excessively so with their hedging activity near a 10 month high.

Allocations to US equities dropped to their lowest level in 10 years (since November 2007) in September: this is when US equities usually outperform. In contrast, weightings towards Europe and emerging markets have jumped to levels that suggest these regions are likely to underperform on a relative basis. These weightings also suggest that Europe and/or emerging markets are likely to be the source for any global "risk off' event. Notably, the S&P has outperformed Europe's STOXX600 by 10% the past four months.

Fund managers are modestly underweight global bonds.

The US dollar has gone from overvalued a few months ago to the most undervalued in nearly 3 years. Fund managers had viewed the dollar as overvalued starting in November 2016; since then, the dollar has lost about 8%. Contrarians should be alert to a change in direction for the dollar.

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Among the various ways of measuring investor sentiment, the BAML survey of global fund managers is one of the better as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.

The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal. We did a recap of this pattern in December 2014 (post).

Let's review the highlights from the past month.

Overall: Relative to history, fund managers are very overweight cash and underweight bonds. Their equity allocation is modestly overweight. Enlarge any image by clicking on it.

Within equities, the US is significantly underweight while Europe is significantly overweight. 

A pure contrarian would overweight US equities relative to Europe and emerging markets, and overweight global bonds relative to a 60-30-10 basket. 

Cash: Cash remains high at 4.8% in September (BAML considers cash levels above 4.5% to be a contrarian long for equities). This is still supportive of further gains in equities. A recap:

Fund managers' cash levels rose to 5.8% in October 2016, the highest cash level since November 2001.  This set up a contrarian long in equities.

Cash remained above 5% for almost all of 2016, the longest stretch of elevated cash in the survey's history. 

At current levels (4.8%), some of the tailwind behind the rally is gone but cash is still supportive of further gains in equities. A significant further drop in cash in the month(s) ahead, however, would be bearish.

Similarly, a composite measure of risk (based on allocations to cash, higher risk assets and investment horizon) is only neutral despite the long rally in equities. This also supports further gains in equities.

Global equities: Despite a 19 month rally, equity allocations are only slightly above neutral. There is room for further gains. A recap:

Fund managers were just +5% overweight equities at their low in February 2016; since 2009, allocations had only been lower in mid-2011 and mid-2012, periods which were notable bottoms for equity prices during this bull market. 

Allocations in September have increased to +34% overweight, which is only slightly above neutral (0.2 standard deviations above the long term mean).

Outside of 2013-14, over +50% overweight has historically been bearish (dashed line and shading).

Similarly, only a net 27% of fund managers have not bought equities hedges (i.e., downside protection). Current levels are similar to those prevailing prior to the US election last autumn. This further indicates a lack of complacency.

In February 2016, more than 20% of fund managers believed profits would be weaker in the next 12 months, the lowest since 2012. They are now more optimistic, but not exceptionally so: 34% expect stronger profits in the next year (red line). Pessimism explained their prior low allocation to equities and high allocation to cash; that has changed a bit.

More (but only a net 25%) expect a better economy in the next year. This explains their generally improved enthusiasm for equities but, like cash levels, investors are far from excessively bullish.

US equities: US equities are strongly out of favor and should outperform. A recap:

Fund managers were consistently and considerably underweight US equities for a year and a half starting in early 2015, during which US equities outperformed.  

That changed in December 2016, with fund managers becoming +13% overweight, and they remained overweight through February: bearish sentiment was no longer a tailwind for US equities and US equities underperformed their global peers. 

Fund managers have now dramatically dropped their allocation to -28% underweight, the lowest since November 2007 (1.2 standard deviations below its long term mean). This is where US equities typically start to outperform again.

Notably, the S&P has outperformed the Europe's STOXX600 by 10% the past four months. 

Above +20% overweight and sentiment typically becomes a strong headwind (dashed line).

Fund managers' positioning in US equities versus Europe is the lowest since April 2007 (1.5 standard deviations below its long term mean), after which the region began to outperform.

Likewise, fund managers' positioning in US equities versus emerging markets is the lowest since November 2007 (1.5 standard deviations below its long term mean), after which the region began to outperform.

European equities: European equities are at high risk of underperforming. A recap:

Fund managers had been excessively overweight European equities in 2015-16, during which time European equities underperformed.  

That changed in July 2016, with the region becoming underweighted for the first time in 3 years. The region then began to outperform. 

European exposure rose to +54% overweight in September, near a 3-1/2 year high. This is well above neutral (1.5 standard deviations above its long term mean). European equities are at high risk of underperforming.

Emerging markets equities: Emerging market equities are at risk of underperforming. A recap:

In January 2016, allocations to emerging markets fell to their second lowest in the survey's history (-33% underweight). 

As the region outperformed in 2016, allocations rose to +31% overweight in October, the highest in 3-1/2 years. That made the region a contrarian short: emerging equities then dropped 10% in the next two months. 

Allocations fell to -6% underweight in January 2017, making the region a contrarian long again: the region has since outperformed. 

This month, allocations jumped to +47% overweight, a 7-year high (1.2 standard deviations above its long term mean). Emerging market equities are at risk of underperforming.

Global bonds: Bonds are a modest contrarian long. A recap:

In July 2016, global bond allocations rose to -35% underweight, nearly a 3-1/2 year high. Bonds subsequently underperformed a 60-30-10 basket. 

A capitulation low in the past has often occurred when bonds were -60% underweight, a level reached in March and April (shading and dashed line). In other words, bonds became a contrarian long. 

In September, fund managers' allocations to bonds rose -48% underweight bonds, the highest in 10 months. This is now just 0.3 standard deviations below its long term mean (i.e., close to neutral). Note: the chart below is from July.

Fund managers' growth expectations relative to inflation are the highest on record (blue line). Similar (but lower) peaks in 2Q 2010, 1Q 2011, 2Q 2014 and 2Q 2015 preceded a fall in yields (second chart).

Commodities: Allocations to commodities dropped to a 1-year low in June (-15% underweight) before rebounding in September (-4% underweight). This is equal to its long term mean (neutral).

Dollar: The US dollar has gone from overvalued to the most undervalued in nearly 3 years. A recap:

Since 2004, fund managers surveyed by BAML have been very good at determining when the dollar is overvalued (highlighted in green). 

In March 2015, they viewed it as overvalued for the first time since 2009; the dollar index fell from 7% in the next two months.

In late 2015, they again viewed the dollar as overvalued and the index lost 7%. 

Fund managers had viewed the dollar as overvalued since November 2016; since then, the dollar has lost about 8%. YTD, the dollar is down 12%.

In September, 23% of fund managers view the dollar as undervalued, the most since December 2014. This has been when the dollar has begun to rise (red highlights).

Survey parameters are below.

1. Cash: The typical range is 3.5-5.0%. BAML has a 4.5% contrarian buy level but we consider over 5% to be a better signal. More on this indicator here. 
2. Equities: Over +50% overweight is bearish. A washout low (bullish) is under +15% overweight. More on this indicator here. 
3. Bonds: Global bonds started to underperform in mid-2010, 2011 and 2012 when they reached -20% underweight. -60% underweight is often a bearish extreme.
4. Commodities:  Higher commodity exposure goes in hand with improved sentiment towards global macro.

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September Macro Update: Employment Growth Slows Further

Summary: The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least a year and in several instances as long as 2-3 years. On this basis, the current expansion will last well into 2018 at a minimum. Enlarge any image by clicking on it.

Unemployment claims are also in a declining trend; historically, claims have started to rise at least 6 months ahead of the next recession.

That said, there is one main watch out that bears monitoring closely:

Employment growth has been decelerating from over 2% last year to 1.4% now. It's not alarming but it is worth noting that expansions weaken before they end and slowing employment growth is a sign of late-stage maturation in the current expansion. 

A second watch out had recently been demand growth, with retail sales growth falling under 1.5%. But this changed for the better in July: real retail sales growth (excluding gas) was a healthy 2.6% yoy. Personal consumption accounts for about 70% of GDP so retail sales has a notable impact on the economy. 

Here are the main macro data headlines from the past month:

Employment: Monthly employment gains have averaged 175,000 during the past year, with annual growth of 1.4% yoy.  Full-time employment is leading. 

Compensation: Compensation growth is on an improving trend and near the highest in the past 8 years - 2.5% yoy in August.  

Demand: Real demand growth has been 2-3%. In July, real personal consumption growth was 2.7%.  Real retail sales (including gas) grew 2.5% yoy in July, making a new ATH. 

Housing: Housing sales fell 9% yoy in July after making a 9-1/2 year high in March. Starts and permits are flat over the past two years due to weakness in multi-family units. 

Manufacturing: Core durable goods growth rose 3.4% yoy in July. The manufacturing component of industrial production grew 1.3% yoy in July. 

Inflation: The core inflation rate remains near (but under) the Fed's 2% target. 

Our key message over the past 5 years has been that (a) growth is positive but slow, in the range of ~2-3% (real), and; (b) current growth is lower than in prior periods of economic expansion and a return to 1980s or 1990s style growth does not appear likely.

This is germane to equity markets in that macro growth drives corporate revenue, profit expansion and valuation levels. The simple fact is that equity bear markets almost always take place within the context of an economic decline. Since the end of World War II, there have been 10 bear markets, only 2 of which have occurred outside of an economic recession (read further here).

The highly misleading saying that "the stock market is not the economy" is true on a day to day or even month to month basis, but over time these two move together. When they diverge, it is normally a function of emotion, whether measured in valuation premiums/discounts or sentiment extremes.

Macro data should be better than expected in 2H17. Why? Macro data was ahead of expectations to start the current year. During the current expansion, that has led to underperformance of macro data relative to expectations into mid-year and then outperformance in the second half of the year (green shading). 2009 and 2016 had the opposite pattern: these years began with macro data outperforming expectations into mid-and then underperforming in the second half (yellow shading).

A valuable post on using macro data to improve trend following investment strategies can be found here.

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Let's review the most recent data, focusing on four macro categories: labor market, end-demand, housing, and inflation.


Employment and Wages

The August non-farm payroll was 156,000 new employees minus 41,000 in revisions for the prior two months.  This was fine but disappointing: in the past 12 months, the average monthly gain in employment fell to 175,000. Employment growth is decelerating.

Monthly NFP prints are normally volatile. Since the 1990s, NFP prints near 300,000 have been followed by ones near or under 100,000. That has been a pattern during every bull market; NFP was negative in 1993, 1995, 1996 and 1997. The low print of 50,000 this past March and 43,000 in May 2016 fit the historical pattern. This is normal, not unusual or unexpected.

Why is there so much volatility? Leave aside the data collection, seasonal adjustment and weather issues; appreciate that a "beat" or a "miss" of 80,000 workers in a monthly NFP report is equal to just 0.05% of the US workforce.

For this reason, it's better to look at the trend; in August, trend employment growth was 1.4% yoy. Until spring 2016, annual growth had been over 2%, the highest since the 1990s.  Ahead of a recession, employment growth normally falls (arrows). Continued deceleration in employment growth in the coming months continues to be an important watch out.

Employment has been been driven by full-time jobs, which are at a new all-time high (blue line), not part-time jobs (red line).

The labor force participation rate (the percentage of the population over 16 that is either working or looking for work) had been falling but has more recently stabilized. The overall trend down has little to do with the current recovery; the participation rate has been falling for more than 17 years. Participation is falling as baby boomers retire, exactly as participation started to rise in the mid-1960s as this group entered the workforce. Another driver is women, whose participation rate increased from about 30% in the 1950s to a peak of 60% in 1999.

Average hourly earnings growth was 2.5% yoy in August. This is a positive trend, showing demand for more workers. Sustained acceleration in wages would be a big positive for consumption and investment that would further fuel employment.

Similarly, 2Q17 employment cost index shows compensation growth was 2.4% yoy.

For those who doubt the accuracy of the BLS employment data, federal tax receipts have also been rising to new highs (red line), a sign of better employment and wages (from Yardeni).

Demand

Regardless of which data is used, real demand has been growing at about 2-3%, equal to about 4-5% nominal.

Real (inflation adjusted) GDP growth through 2Q17 was 2.2% yoy. 2.5-5% was common during prior expansionary periods prior to 2006.

Stripping out the changes in GDP due to inventory produces "real final sales". This is a better measure of consumption growth than total GDP.  In 2Q17, this grew 2.3% yoy. A sustained break above 2.5% would be noteworthy.

The "real personal consumption expenditures" component of GDP (defined), which accounts for about 70% of GDP, grew at 2.7% yoy in 2Q17. This is approaching the 3-5% that was common in prior expansionary periods after 1980.

On a monthly basis, the growth in real personal consumption expenditures was 2.7% yoy in July.

GDP measures the total expenditures in the economy. An alternative measure is GDI (gross domestic income), which measures the total income in the economy. Since every expenditure produces income, these are equivalent measurements of the economy. A growing body of research suggests that GDI might be more accurate than GDP (here).

Real GDI growth in 2Q17 was 2.0% yoy.

Real retail sales reached a new all-time high in July, with annual growth of 2.5% yoy. The range has generally been centered around 2.5% yoy for most of the past 20 years.

Retail sales in the past two years have been strongly affected by the large fall and rebound in the price of gasoline. In July, real retail sales at gasoline stations grew by 0.4% yoy after having fallen more than 20% yoy during 2016. Real retail sales excluding gas stations grew 2.6% in July. This is a weakening trend.

The next several slides look at manufacturing. It's important to note that manufacturing accounts for less than 10% of US employment, so these measures are of lesser importance. Within manufacturing, most sectors are not contracting (more on this here).

Core durable goods orders (excluding military, so that it measures consumption, and transportation, which is highly volatile) rose 3.4% yoy (nominal) in July. March had the best annual growth rate since mid-2014. Weakness in durable goods has not been a useful predictor of broader economic weakness in the past (arrows).

Industrial production (real manufacturing, mining and utility output) growth was 2.2% yoy in July. The more important manufacturing component (excluding mining and oil/gas extraction; red line) rose 1.3% yoy. This is a volatile series: manufacturing growth was lower at points in 2014 than it was in 2016 before rebounding strongly.

Weakness in total industrial production has been concentrated in the mining sector; the past two years had the worst annual fall in more than 40 years. It is not unusual for this part of industrial production to plummet outside of recessions. With the recovery in oil/gas extraction, mining rose 10% yoy in July. 

Housing

New housing sales fell 9% yoy in July.  Housing starts and permits are flat over the past two years due to weakness in multi-family units.  Overall levels of construction and sales are small relative to prior bull markets, but the trend is higher.

First, new single family houses sold was 571,000 in July; March sales were at the highest level in the past 10 years and June was not much lower. Growth in July fell 9% over the past year after growing 26% yoy in July 2016.

Second, housing starts are flat over the past two years. Starts fell 6% yoy in July.

Building permits are also flat over the past two years (red line). Permits grew 4% yoy in July.

The weakness in starts (and permits) is in the multi-unit category. Single family housing starts (blue line) reached a new post-recession high in February and was only marginally lower in July. Meanwhile. multi-unit housing starts (red line) was flat over the past four years; this has been a drag on overall starts.

Inflation

Despite steady employment, demand and housing growth, inflation remains stuck near (but under) the Fed's target of 2%.

CPI (blue line) was 1.7% last month, a steep fall after being over 2% to start 2017. The more important core CPI (excluding volatile food and energy; red line) grew 1.7%, the lowest rate in 2 years (since February 2015).

The Fed prefers to use personal consumption expenditures (PCE) to measure inflation; total and core PCE were 1.4% and 1.4% yoy, respectively, last month. February was the first (and only) month since 2Q 2012 that total PCE was above 2%.

Some mistrust CPI and PCE. MIT publishes an independent price index (called the billion prices index; yellow line). It has tracked both CPI (blue line) and PCE closely.

Summary

In summary, the major macro data so far suggest positive, but slow, growth. This is consistent with corporate sales growth.  SPX sales growth in 2017 is expected to only be about 5% (nominal).

With valuations now well above average, the current pace of growth is likely to be the limiting factor for equity appreciation. This is important, as the consensus expects earnings to grow about 10% in 2017 (chart from Yardeni).

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