Stocks were mixed on Friday as the Dow Jones Industrial Average managed a 0.2% rise, but the Nasdaq Composite and S&P 500 both fell fractionally by 0.1%. Everyday can’t be one of growth and, frankly, we don’t think that is healthy for a sustainable market. Looking past daily market movement, second-quarter GDP was in line with the consensus at 2.6%, more than double first-quarter results. This data presents a solid rebound but remains short of President Trump’s target of 3 to 4%. Year-to-date, things are still looking good and stocks remain stronger relative to bonds.

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The S&P CoreLogic Case-Shiller Indices, the leading measure of U.S. home prices, was recently released for April 2017; nationwide home prices continue their rise over the trailing 12 months. The Case-Shiller Index covers all nine U.S. census divisions which reported a 5.5% annual gain in April, down from 5.6% in March. The 10-City Composite showed a slight decrease of 4.9%, down from 5.2% the previous month and the 20-City Composite posted a 5.7% year-over-year gain, down from 5.9% in March.

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Political headlines are coming at an alarming pace. In spite of this, markets were relatively quiet last week which left U.S. equity prices little changed. Treasury yields moved slightly lower as the dollar weakened; our dynamic yield curve is beginning to flatten. Oil prices also declined for a fourth straight week. Nevertheless, the Federal Reserve remained on track to slowly normalize monetary policy. As expected, the Fed funds rate rose by 25 basis points to 1.0%. Additionally, the Fed hinted at the likelihood of one more increases before year-end. Normalizing the country’s balance sheet should be viewed as a positive. However, it wasn’t long ago that our Fed vowed to raise rates only when inflation reach higher levels. To date, that has not happened.

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Last week, stocks started the abbreviated trading week on a down note, but things turned around heading into Thursday and Friday, pushing the major benchmarks to record highs. Equity prices closed higher on Friday, June 2, following a non-farm payrolls report that showed a weaker-than-expected 138,000 jobs were created in May (versus consensus of 185,000). Logic holds that stock prices would move lower on such news. However, the (negative) new jobs portion of the report was counterbalanced by lower unemployment and (almost undetectable) wage inflation. In essence, news is mixed and markets are maintaining their resilience.

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Last Friday, stocks reached record highs (again) on a better-than-expected nonfarm payrolls report. The 10-year Treasury yield also rose for most of the week following reassurance by the Federal Reserve that it remains on pace with planned interest rate hikes. Friday’s employment report was expected to show 185,000 new jobs added in the month of April but, surprisingly, the numbers came in at 211,000 jobs for the period. This favorable outcome was enough to offset economic concerns prompted by a weaker than expected GDP report. Washington was in on the action with an agreement to fund the Federal Government through September, and a victory in the House to repeal-and-replace the Affordable Care Act. Other items on President Trump’s agenda seem to be gaining traction; market-friendly tax reform and infrastructure spending could bolster the economy and begin adding to the GDP.

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No matter where you turn, everyone is predicting the next market top. So-called ‘experts’, CNBC, cab drivers and the list goes on.  Particularly, when watching pundits who report on market conditions, you hear the banal repetition of “we’ve run too far, too fast” and “valuations are too high” or the ever popular, “rising interest rates will end the equity party”.  When it comes to gaining listeners and selling advertising, the media knows that fear sells. As an investor, you must have a healthy skepticism, because occasionally, some good information can be gleaned from the media.  Nevertheless, their job is making money for the networks at your expense.  Suppose we remove the noise (media) and consider what the market is saying; interest rates relative to stock prices and what indications (if any) alert us to a market top.

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When economic data is good and consumer confidence reaches its highest level since 2001, U.S. equities have momentum on their side.  Last week the S&P 500 Index climbed 0.7% as the ISM non-manufacturing index showed that business activity and employment trends are improving.  As the economy improves, the Federal Reserve will likely move interest rates higher later this month. Investors are cheering this environment but we believe equity markets have gotten ahead of themselves.

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Heading into the election, headlines pontificated a huge sell-off (following a Trump win). Stocks closed at record highs last Friday, with gains of 0.5% for the Dow Jones Industrial Average, 0.4% for the S&P 500, and 0.3% for the Nasdaq Composite.  Year-to-date gains are now 6.5% for the Nasdaq, 3.5% for the S&P 500 and 2.6% for the Dow Jones Industrial Average. Equity markets have rallied since the election, leaving some question whether markets have come too far, too fast.  Even worse, are stocks in a bubble?

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America was highly attuned to the U.S. political backdrop last week as Donald J. Trump was sworn in as the nation’s 45th president. Investors are betting that President Trump will deliver on some of his pro-growth policies.  He is focused on several things, taxes being at the top of that list.  Still, financial markets were rattled (only slightly) by his comments that some parts of the tax plan are “too complicated” and the U.S. dollar is “too strong.”  Nevertheless, 8 of the 11 sectors in the S&P 500 Index traded higher last week.

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Heading into the holiday weekend, stocks rose slightly on Friday amid low volume, the Dow managed its seventh consecutive weekly gain. Only three days of trading remain in 2016 and investors are optimistic for a solid finish without sizeable deterioration.  In recent weeks, however, the market has moved into what we call a bullish pennant formation. This setup usually resolves in prices moving higher but our medium-term indicators are overbought and seem to be flashing a sign of caution.  A pause or pullback should not be ruled out at this point.  Perhaps the most asked question is what is driving this market?

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