Browsing articles in "Weekly Market Update"

Countdown to Christmas: T-25 Days

Nov 30, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

After some weeks of downward pressure, the markets rebounded in a big way this week.  The spark that ignited things was a simple sentence from the chairman of the Federal Reserve.  Sometimes it is the little things that make the most difference.  Some of you may remember an old commercial from the 1970s and 1980 in which the actor confidently states, “When E.F. Hutton talks, people listen.”  It seems Mr. Powell is the modern day E.F. Hutton and this week he seemed to suggest the course of the Federal Reserve may be changing.

Earlier in the week we learned from the Washington Post that President Trump is “not even a little bit happy” with his appointment of Jerome Powell as Fed chair and believes the central bank is “way off-base with what they’re doing.”  I’d like to believe the Federal Reserve is completely independent of politics, but the pressure put to bear on the Fed has been unrelenting in recent weeks.  So perhaps it doesn’t come as a surprise that the Fed is telegraphing its intent to slow the rate of interest rate hikes it had planned.  While there remains a very high probability of a rate hike next month, the three hikes planned for next year have evaporated.  Instead, many analysts believe there could be as few as just one rate hike next year.  While most investors applauded the move, it does imply that raising rates further could jeopardize or perhaps even stall economic growth.  Whether for political or economic reasons, the Fed appears ready to transition to a new policy come 2019.

In other news, Cyber Monday sales topped $7.9 billion according to Adobe analytics, making it the single largest shopping day in U.S. history.  To put it in perspective, this represents a 20% increase over sales in the same period last year.  Also, in comparison, Thanksgiving Day and Black Friday brought in $3.7B (28% growth y/y) and $6.2B (23.6% growth y/y) in revenue, respectively.  Sales coming from smartphones also hit an all-time high of $2B and the “buy online, pick up in-store” trend spiked 50%.  The flip side of the coin is that consumer debt has increased substantially and will top $4 trillion (excluding mortgage debt) by the end of this year.  With defaults rates remaining low, it appears consumers haven’t overextended themselves yet.

In company news, we learned that General Motors plans to downsize 15% of its workforce.  This came as a surprise to many, including President Trump, who was not at all happy with this announcement.  In its announcement, the company said it plans on cutting production of several well-known sedans including, the Buick LaCrosse, Chevy Volt, Chevy Cruz, Chevy Impala, Cadillac CT6, and Cadillac XTS. Its goal is to shave $6 billion per year in costs by 2020 while transforming the company toward “battery-electric” vehicles.  Unfortunately, among the plants being closed is one in Ohio and another in Michigan, which have already experienced drastic cuts to manufacturing over the past two decades.  Some believe the trade-war with China and steel tariffs are to blame.  The company reported its costs increased by $1.5 billion due to higher steel and aluminum prices.  Others are more inclined to believe it is a strategic decision to move production outside the United States.  Either way, the Midwest looks like it will take the brunt of it again.

In closing, this weekend could be a significant one as far as economic policy goes.  President Trump plans to meet with China’s Xi to discuss the status of trade negotiations between the countries.  At the moment the odds are 50/50 they’ll be able to reach an agreement.  Goldman Sachs sees an escalating China-U.S. trade war as the “most likely” outcome from the meeting this weekend.  If an agreement is not reached, it could go one of two ways.  The path of escalation would include tariffs rising to 25% on all Chinese imports currently under tariff and tariffs placed on remaining imports.  The next most likely outcome is a “pause”, in which existing tariffs stay in place while negotiations continue.  Next week could be volatile regardless of which way the talks progress.  We’re hoping for an amicable solution soon.  Now you know.

And finally, tomorrow is the Olde West Chester Christmas Walk.  As in past years, we will provide refreshments and cookies, as well as, a balloon artist for the kids.  For those in town, we encourage you to stop by and say hello.  The event begins at 2pm with crowds growing steadily throughout the day, culminating in a parade from 6:30-8:00pm.  We hope to see you there!

November 30, 2018

Making a Splash

Nov 16, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was another volatile week in the markets as investors and analysts digested corporate and economic news.  The technology sector led the slump once again as Apple and Nvidia disappointed.  In fact, corporate stories from General Electric to PG&E drove the markets lower this week.  We remain optimistic that a Christmas bump may be coming but unfortunately, it didn’t happen this week.

Let’s start with the good news.  The latest negotiations between the U.S. and China appear to be moving forward.  In a press conference today, President Trump announced that four of the five sticking points between the nations have been resolved.  The trade war has acted as a drag on the economy in terms of uncertainty.  A resolution on this front could provide the fuel for another push higher in the markets.  The second piece of news is that the Fed’s Vice Chair, Richard Clarida, said in an interview today that the Fed may stop raising rates at the “neutral rate,” which in layman’s terms means sooner rather than later.  The expectation for future interest rate hikes is slowly changing, with a high probability of another rate hike in December followed by a reassessment of the economic conditions and perhaps even a pause.  This too could go a long way to reassuring investors’ fears of the Fed going too far.

In other news, we learned Germany’s economy shrank in Q3 for the first time since 2015.  Some believe it could be chalked up to new emissions tests that temporarily disrupted auto production.  However, the contraction will feed fears that the euro area’s expansion is running into trouble.  We also learned that Japan’s economy contracted in the third quarter, mostly attributed to strong typhoons and a powerful earthquake that halted factories and stifled consumption.  A decline in exports was also concerning, suggesting trade protections are starting to take a toll on overseas demand.  Both countries will be watched closely in the months ahead.

As for company news, there was more than a bit and it could best be described as mixed.  Amazon finally announced the location of its second headquarters.  Apparently, it had such a difficult time deciding it chose both New York City and Washington D.C.  The move does not come without controversy, especially from taxpayers in New York who will be paying a whopping $48,000 per job in incentives to lure the company to its environs.  New York is on the hook for over $1.5 billion in tax cuts and incentives over the next ten years.  For other company news we turn to PG&E which is quite possibly responsible for the fires in Northern California.  Talk had turned to bankruptcy for California’s largest utility provider as liabilities could far exceed its insurance coverage.  The stock fell as much as 63% before slightly rebounding after representatives in California said it wouldn’t let the company go bankrupt.  And finally, it seems General Electric is once more in the spotlight for all the wrong reasons.  The company fell on hard times after the financial crisis in 2008 and has struggled to find its footing ever since.  Despite billions in asset sales, it’s debt level continues to weigh on the stock as investors fear credit rating agencies will drop its rating to junk status.  The company has a herculean task ahead both in righting the ship and in calming investors nerves.

In closing I turn to the art market which seems to come up occasionally on my radar.  In the past, I’ve mentioned pieces of art that have sold for astronomical amounts.  This time is no different.  Talk about making a splash, on Thursday a painting by David Hockney, titled Pool with Two Figures, sold for a mind numbing $90.3 million.  What makes this special is that it is the highest ever paid for a piece of art by a living artist.  In less than nine minutes of heated bidding at Christie’s, this piece smashed the previous record held by Jeff Koon’s sculpture, Balloon Dog (Orange), which fetched $58.4 million in 2013.  I’m sorry if you were in the market for a Hockney and missed this sale, but at least now you can start saving for the next record breaking auction.  Happy Thanksgiving!

November 16, 2018

Tundra Pie Pro

Nov 2, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

In case you didn’t notice, it was another very volatile week in the markets.  Fortunately, there were more bulls than bears and we look to finish the week higher.  More importantly, the Dow Jones Industrial Average has reclaimed 25,000, which is both a psychological and technical floor.  Earnings announcements continue to flood in with many companies reporting solid earnings and revenue growth with forward guidance to match.   There were a few notable exceptions but not as many as one might think.  Earnings announcements will begin to slow next week after which we should see the news focus on the outcome of the mid-term election and once again return to economic data.

Speaking of economic data, perhaps the best news we learned this week is that the economy added 250,000 jobs in the month just ended, versus an expectation of only 193,000.  Some might argue the quality of these jobs is poor, representing low-wage or entry level positions.  While it is hard to deny many of these jobs are entry level, it does speak to the general health of the economy that vast numbers of jobs are being created.  It also speaks to the deep pockets of consumers who continue to spend with reckless abandon.  While we don’t encourage our clients to spend recklessly, it should be noted that consumer spending makes up 71% of gross domestic product (GDP) or put another way, it is the gasoline for our economic engine.

In other news, last week I mentioned that the methodology for generating FICO scores will be changing next year.  The new UltraFICO score would be more favorable to those with blemished records.  This loosening of standards is not ideal, lest we forget the financial crisis.  So, I was pleasantly surprised to learn this week that both Capital One Financial and Discover Financial Services are becoming more cautious in their handling of credit limits.  They both reported they will be tightening lending standards as a precaution against a future economic downturn, both citing the length of the current recovery as justification.

Another story that caught my attention had a headline, “Tech Giants May Face Billions in New Taxes.”  How could one not be a little intrigued with a headline like that?  It seems the European Union (EU) is tired of tech companies finding tax avoidance loopholes.  As one example, Reuters documented in 2014, Google had moved $12 billion from its Dutch arm to a Bermuda-based, Irish-registered affiliate called Google Ireland Holdings.  The money was received as royalty payments from its Irish affiliate Google Irish Limited, where most non-U.S. revenues are apparently channeled.  If you didn’t follow that, you’re not alone.  Well, the EU decided enough is enough.  Its proposal is to impose a tax based on the revenue of tech companies rather than their profit.  If implemented, this tax could mean billions in taxes on the largest technology companies, including Google, Microsoft, and Apple.

In closing, I often like to talk about innovation in the economy.  After all, it is disruptive innovation that frequently leads to new markets and investment opportunities.  However, this week I bring an innovation that while disruptive, seems downright strange.   Pizza Hut and Toyota have teamed up to make a zero-emission robotic pizza-making truck.  The vehicle, dubbed the Tundra PEI pro, is programmed to have the pies freshly baked as you drive to your delivery destination.  You heard that right, Pizza Hut wants to bake pies in a Tundra.  It does seem to hit on all the key trends, i.e. robotic and zero-emission.  The only thing missing is self-driving.  I don’t know about you, I’m not sure I want a future where pizza is baked in the back of pickup trucks.  That’s one innovation I plan to skip.  Now you know.

November 2, 2018

October Blues

Oct 26, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

There is no denying it was a rough week in the markets.  In fact, it has been a difficult month.  Since the early 20th century, the month of October has been associated with a lower stock market, prolonged bear markets, and economic recessions.  This October is no different.  The Dow Jones Industrial Average (DJIA) is down 6.5% for the month, while the S&P 500 and Nasdaq are down 8.6% and 10.0% respectively.  For the year, all but the tech heavy Nasdaq are now negative.  The month isn’t over yet, but we’re looking forward to moving into November.  I’m sure you are too.

So why is October such a bad month?  A lot of research has been done on this subject and you might be surprised to learn that it is only the fourth worst month of the year in terms of returns.  However, history is a major factor in people’s perception of the month.  It was in October 1929 that the stock market crashed, ushering in the Great Depression.  Another factor is momentum.  September is the worst month of the year for stock market returns, and selling momentum often follows into October.  Perhaps most intriguing is newer research that suggests the changing of the seasons may play a role.  Researchers speculate that emotions can turn negative when the calendar year changes from summer to fall.  With summer vacations over and the sun setting earlier, investors’ moods may lean toward the gloomy.  As a result, negative economic or market developments can cause overreactions.  The good news is that the months of November and December often experience a turnaround called the “Santa Claus rally” due to a flipping of moods during the holidays.  There is also the “January Effect” which occurs when investors sell stocks before the end of the year only to buy them back in January for tax purposes.  In a nutshell, there is reason to believe things will get better.

Let’s move on.  The mid-term elections are only eleven days away and it is an understatement to say that a lot rests on the outcome.  Not missing a beat, President Trump has proposed a sweeping middle-class tax cut that is long on hope and short on details.  It is expected the proposal will be released just prior to the midterm election, although the House is out of session from October 15-31 and could not vote on it until November at the earliest.  In another controversial move, the President announced he is mulling the idea of tying U.S. drug prices to Europe’s.  Specifically, he’s exploring benchmarking Medicare reimbursement to the average price in Europe for drugs administered by doctors.  European countries currently pay about half the U.S. rates.  I fully expect the U.S. pharmaceutical industry to push back hard on this plan.

This next story impacts us all and is one I’m sure you’ll feel sympathy towards.  The Wall Street Journal wrote a piece this week highlighting the plights of banks.  It seems customers have pulled billions from accounts at these institutions that don’t pay interest.  While the Federal Reserve has raised interest rates for almost three years, banks have been notoriously slow to raise interest rates on deposits.  Over the past year ended June 30, customers withdrew more than $30 billion from non-interest-bearing U.S. bank accounts.  You can’t blame them, can you?  Who doesn’t want free money to make loans in an environment where interest rates are rising?  Eventually, the free market will force banks to increase interest rates on deposits as online alternatives gain traction.

In closing, I want to turn to a subject that isn’t as amusing as I’d like.  To a large extent, the financial crisis in 2008 was predicated on easy money.  Yes, the banks created terrible and in some cases fraudulent products.  But it was the easy money that allowed borrowers to buy homes well beyond their means.  It was also the collapse of the housing market that led to the ensuing collapse of several large financial institutions necessitating the $800 billion bailout.  This week FICO, the primary company that provides credit scoring services, announced it is overhauling its credit scoring methodology.  It plans to unveil a new system next year called the UltraFICO Score, which is designed to give people with blemished credit histories a more favorable rating.  It is expected this overhaul will increase approvals for credit cards and personal loans.  Call me crazy, but this loosening of the standards is what got us into trouble in the first place.  There is an adage that goes, “Those who do not learn history are doomed to repeat it.”  Despite only ten years having passed, it seems we’ve forgotten.  Now you know.

October 26, 2018

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