"Political risk is hard to manage because so much comes down to the personal choices of policymakers, whether prime ministers or heads of central banks." -- James Surowiecki

Political Risk

These markets have thrived in an environment driven by expectations and confidence. The expectation has been that the new pro-business administration would move policy forward on tax reform, deregulation and public spending on infrastructure. The confidence is born of single party control of both the executive and legislative branches of government. A recipe, one could surmise, for economic growth, and even inflation.

What the marketplace is experiencing this morning is "political risk." Anything that slows down or distracts from the agenda would clearly be a risk, especially if it divides House and Senate Republicans who otherwise would be focused on said areas of tax reform and fiscal policy. Wall building and travel banning are such distractions.

This is not political commentary. I only care about making money (at least here and now). I am saying that equity markets have come a long way on something that appears to be fragile. Am I giving up on the "Trump Rally"? No, not even a chance, but I am not blind to the fact that my portfolio is now at increased risk and the responsibility to protect my hard-fought gains is mine. This would be a poor time to close your eyes and hope for the best.

Weaker Than We Thought

A secondary risk to this rally would be quantifiable economic performance, especially now that we know that U.S. economic growth did in fact weaken going into year's end. Friday's advance report from the Bureau of Economic Analysis was "a kick in the pants," to put it mildly. These numbers could be revised in coming months, and let's hope they indeed are. What stands out in the data is the obvious, which would be less government spending, and also a collapse in exports. Dollar strength throughout the quarter, and the cyclical nature of the soybean crop hurt the fourth quarter, as much as they helped the third quarter.

The DXY, if you'll recall, spent most of the third quarter rattling back and forth around the 95 level. That very same level was the low of the fourth quarter that saw the DXY basket peak above 103. Full-year GDP growth for 2016 now stands at 1.6%, which if left unrevised would make 2016 the weakest year of growth for the U.S. economy since 2011. Fed funds rate futures markets have not reacted much to the weak data, still suggesting the next increase would happen in June. This is also risk. Without higher rates, the banks falter, and the rally falters with them. That's why keeping the administration's primary agenda in place is so important.

Wild Week Ahead

The week ahead is fraught with peril. Not only will the Fed's FOMC announce a policy decision on Wednesday, but we will hear from the Bank of Japan tonight, and the Bank of England on Thursday morning. On the macroeconomic front, this is January "jobs week". Today will bring us Core PCE. Later in the week, data on manufacturing and productivity will hit the tape as well. Friday will obviously be dominated by nonfarm payrolls and data on wage growth.

Last but not least, this is still "earnings season". The season has gotten off to a good start. However, the drug makers will come into focus this week. Action Alerts PLUS charity portfolio holding Facebook (FB) - Get Report and Growth Seeker portfolio name Amazon (AMZN) - Get Report will be headline makers for the mainstream media, but traders will be focused just as much on Eli Lilly (LLY) - Get Report , Pfizer (PFE) - Get Report and Merck (MRK) - Get Report as this week plays out. Good luck, gang.

Macro

08:30 - Personal Income (December):Expecting 0.4%, November 0.0% m/m.

08:30 - Consumer Spending (December): Expecting 0.5%, November 0.2% m/m. Personal income and consumer spending are both expected to have shown significant growth in December. This is obviously a positive, but I think we need to see a run where income exceeds spending regularly for a stretch of months before the U.S. consumer truly feels comfortable.

We've seen a little back and forth over the last four months or so, but growth in spending far exceeded growth for income over the summer months, and regular folks are obviously still playing catch up. Spending on services slowed in the fourth quarter, and the service sector as we know is the bulk of our economy. That said, simultaneous growth will be taken well by the markets.

08:30 - PCE Price Index (December):Expecting 0.2%, November 0.0% m/m {1.4% y/y}.

08:30 - Core PCE Price Index (December):Expecting 0.1%, November 0.0% m/m {1.6% y/y}. From a market perspective, this measure of consumer level inflation is one of the most impactful macro-economic data-points that we'll see over the course of any single month. What market participants watch for is the year-over-year core print. Why? Because that's the one that Janet Yellen and her gang over at the FOMC are watching, and they happen to be making a policy announcement this week. Core CPI, which also measures inflation at this level, printed at year-over-year growth of 2.2% for December. That was up from 2.1% in November. FYI, the CPI has run hotter than the PCE for quite some time. A core print today of 1.8% or higher will catch some attention, and probably be supportive of Financial shares.

10:00 - Pending Home Sales (December): Expecting 1.1%, November -2.5% m/m. This item, which is not a game-changer for the markets, printed at what looks like catastrophic levels in November. One step back allows one to see that this is indeed a volatile series. November was but the third weakest month of 2016 when measured in month-over-month terms. The expectation is for a decidedly positive print going into year's end.

10:30 - Dallas Fed Manufacturing Survey (January):December 15.5. This district has printed in headline expansion for two straight months, after a very long stretch of contraction. With U.S. oil production ramping up dramatically over the last two weeks, it would be surprising if January did not come in positive and extend the streak. The other four major regional manufacturing surveys have all come in positive this month, and such a print here would make it a Fed sweep for the third straight month.

Sarge's Trading Levels

These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.

SPX: 2317, 2306, 2300, 2292, 2282, 2272

RUT: 1383, 1375, 1370, 1365, 1357, 1352

Monday's Earning's Highlights (Consensus EPS Expectations)

Before the Open: EPD ($0.32)

After the Close: CR ($0.98), LEG ($0.58), PKG ($1.16)

At the time of publication, Stephen Guilfoyle was long AMZN, although positions may change at any time.