Big Picture Market Perspectives 2/6/17



February 6, 2017, 4:00pm EST               Invest Alongside Billionaires For $297/Qtr

We ended last week with a very strong jobs report, yet the measure of wage pressure was soft.  That, for the near term, reduces expectations on how aggressive the Fed might be (but not a lot).

Still, the 10-year yield has drifted lower to start the week. It was 2.50% Friday afternoon.  Today it’s closer to 2.40%.  When the 10-year yield drifts lower, mortgage rates drift a little lower, back very close to 4% today.  This all helps two of the most important tools the Fed has been focused on for the past eight years to drive economic recovery:  stocks and housing.

The Trump administration, like the Fed, will need both stocks and housing to continue higher to maintain confidence in the economy, and in the agenda.

Now, on Friday I said Trump was hosting Japan’s Prime Minister Abe in Florida over the weekend for a round of golf at Mar-a-Lago.  It looks like it’s this coming weekend, instead.

Interestingly, this comes as the Trump administration made a conscious effort on Friday to refocus the messaging from a protectionist narrative to an economic growth narrative.

Abe will be entering this meeting with President Trump under some peripheral scrutiny about trade imbalances.  Japan runs about a $60 billion surplus with the United States.  That’s about on par with Mexico, which has become a target for Trump in recent weeks.  Still, as I said last week, it’s peanuts compared to China, and that’s where the Trump administration’s real attention lies.

Nonetheless, Abe is expected to come in with a plan to balance trade with the U.S., which includes working together on a big U.S. infrastructure program.  And there is still considerable sensitivity surrounding the value of the yen (the Japanese currency).

As we know, under Abenomics, the yen has devalued by about 40% against the dollar. But as China has done often over the past decade, as they have headed into big meetings with global leaders, Japan seems to be walking its currency up in the days heading into the Abe/Trump meeting.

usdjpy feb6

You can see in the chart above, the dollar has been in decline against the yen this year (the orange line falling represents a weaker dollar, stronger yen).  The top in the USD/JPY exchange rate this year came when Trump’s chief trade negotiator was named on January 3rd.  Robert Lighthizer worked in the Reagan administration and happened to be behind stiff tariffs imposed on Japan during that era on electronics.

Trump’s tough talk on trade, and the market’s continued focus on upcoming elections in Europe (that threaten to continue the trend of nationalism and protectionism) have stocks in Japan and Europe diverging from the strength we’re seeing in U.S. stocks.  The Dow is above 20k.  Meanwhile, Japanese stocks are still 10% off of the 2015 highs.  German stocks are 7% off of 2015 highs.

But as I’ve said, growth solves a lot of problems.  In addition to the underlying current of a better performing U.S. economy (with the pro-growth agenda in the pipeline), the data is already improving in both Germany and Japan.  I suspect that Europe and Japan will soon be cleared from the fray of the trade protectionist rhetoric, and we’ll start seeing major European stock markets and the Japanese stock market climbing, and ultimately putting up a big number in 2017.

For help building a high potential portfolio for 2017, follow me in our Billionaire’s Portfolio, where you look over my shoulder as I follow the world’s best investors into their best stocks.  Our portfolio more than doubled the return of the S&P 500 in 2016.  You can join me here and get positioned for a big 2017.