Browsing articles in "Weekly Market Update"

A Year of Surprises

Jan 5, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Is everyone as excited about what 2018 has in store as I am?  2017 had its fair share of surprises but turned out to be a pretty fantastic year.  A number of records were set with regard to stock market levels and while the Federal Reserve started slowly tightening, it had little impact on dampening the enthusiasm shared by investors.  Before we resume our normal weekly recap, let’s take a moment to reflect on the big market events of 2017.

Among the most significant events last year were the Brexit negotiations and civil unrest in Catalonia, the future of U.S. trade with regard to NAFTA, the unraveling of the Dodd-Frank Bill regarding “too-big-to-fail”, corporate and individual tax reform, the U.S. economic boom and continuous records for stock indexes, cryptocurrency mania, media company mergers, net neutrality repeal, OPEC output cuts, Paris and Iran deal pullout, General Electric’s restructuring, the rise of Tesla, tensions with North Korea, the EU’s war on tax avoidance, and new Federal Reserve leadership.  What a year.

The natural question on everyone’s mind is what is in store for 2018?  Will U.S. stocks keep rising?  Which sectors will be hot?  Tax bill benefits or debt ceiling worries?  U.S. mid-term elections?  Will the oil rally continue?  Cryptocurrency surprises?  Next steps for monetary policy?  Dollar downturn?  Brexit and NAFTA?  Other trade agreements?  Lastly, how will the second year of Trump’s presidency shape the markets?  While we have ideas on some of these questions, it remains to be seen how 2018 unfolds.

Among the first hurdles we face is hitting the debt ceiling in approximately two weeks.  Congress has passed three short-term “stopgap” spending bills, one in September, one in early December, and the latest just before Christmas.  However, if both parties can’t reach an agreement by January 19th, it is conceivable we could have another government shutdown like the one that occurred in 2013.  Among the biggest hurdles is the need for a debt limit increase (on the back of the recent tax cuts), and the expiration of DACA protections for Dreamers in March affecting nearly a million young unauthorized immigrants.

In economic news, 2017 had the lowest annual number of job cuts since 1990.  Employers announced only 418,770 for the entire year.  Retail tops the list of job cuts with 76,084 jobs, followed by healthcare which announced a reduction of 40,732.  On the flip side, employers hired 1,100,654 people during the year representing a 27% increase over 2016.  Perhaps most encouraging, due to the tight labor market and recent tax reform, several industries are raising their minimum wage and offering better benefits including the return of the 401k match.  Most prominently, the financial services industry (primarily banks) are raising the minimum wage to $15 across the board.  Over 100 large companies announced bonuses of $1,000 or more for all their employees, increased wages, or pledged large charitable contributions.  We haven’t seen this level of largesse in quite some time.

In company news, the story remains largely focused on a select few companies.  Amazon, Facebook, Google, and Tesla continue to garner the lion’s share of the media.  In particular, there are large swathes of the media devoted to figuring out which industry Amazon will disrupt next and those companies Amazon may next acquire.  Always an entertaining character, Elon Musk continues to make wild projections for Tesla with all manner of hype, while simultaneously burning through $2 billion in cash each year.  Cryptocurrencies, while derided by the mainstream media, quickly became headline news as the price of Bitcoin skyrocketed from $1,000 to $20,000.  If 2017 was the year for Bitcoin, I suspect 2018 will be the year for alternative cryptocurrencies.  Whether this is a bubble or the beginning of a shift toward digital currency, we’ll have to wait and see.

In closing, within the first few trading days of 2018, another major milestone was accomplished – Dow 25,000.  While we don’t know exactly what will happen this year, we have an idea of some of the issues and opportunities we face.  As always, we remain vigilant and hope to remain ahead of the stories as they unfold.  Happy New Year!

January 5, 2018

Hurtling Toward 2018

Dec 1, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

While the market has had an unusual lack of volatility this year, this week was a different story.  It appears Republicans are close to having enough votes to push the Senate’s tax reform bill through perhaps even as you read this.  While there may be strong opinions about the merits of cutting taxes, and increasing the national debt at a time when the economy is growing strongly, it goes without saying that the stock market always likes the idea of lower taxes.  The markets took this news and ran with it, pushing the Dow Jones Industrial Average (DJIA) past 24,000 for the first time ever.  However, on the heels of this news was also the announcement that Michael Flynn pleaded guilty of lying to the FBI and perhaps has incriminating evidence and testimony against President Trump.  With that simple turn of events, the mood soured almost instantly.  The market looks to retain most of the gains this week, but count on DC drama making the ride a little bumpier.

So why do I say the economy is growing strongly?  For starters, Gross Domestic Product (GDP) is growing by over 3% annually for the first time in almost a decade.  This metric is a measure of economic activity and is the yardstick by which most economists determine the health of the economy.  In conjunction with GDP, economists also look at inflation which remains very low and indicates the Federal Reserve has room to hike rates again at its next meeting in less than two weeks.  And lastly, unemployment is 4.1% which by most economists’ definition suggests the economy is at full employment.  Namely, anyone who wants to work can get a job.  Additionally, this week we learned that new home sales are soaring, growing to a decade-high 685,000 in October.  This is up 6.2% month-over-month and a whopping 18.7% above October one year ago.  Consumer confidence rises well above expectations and the Richmond Manufacturing Survey doubles expectations in November.  With numbers like these, the only concern might be that the economy is growing too fast.  While it is unlikely that it overheats in the next quarter or two, it is worth watching for in the second half of 2018.

In retail news, Black Friday and Cyber Monday sales beat expectations and suggest this will indeed be a Merry Christmas.  According to Adobe, Cyber Monday hit record revenues of $6.59B, making it the largest U.S. online sales day ever.  In comparison, Black Friday and Thanksgiving Day brought in $5.03B and $2.87B in revenue respectively.  The internet holiday shopping season has so far driven a total $50B, a 16.8% increase, and Adobe predicts it will be the first-ever season to break $100B in online sales.  You may be thinking, what about brick and mortar stores?  And you would have a point.  The migration of shopping to online retailers has disrupted traditional big box and mall stores.  Interestingly, Wal-Mart may be closing in on Amazon.  Seeking to regain its low-price leader title, Wal-Mart is now within striking distance of matching Amazon for the first time.  Supporting this thesis, Costco posted an eye-popping double-digit gain in comp store sales and 39% growth in its e-commerce channel in November.  The winners will be those retailers that can merge a robust online ability with a strong local presence.

Since I haven’t talked about Tesla in a while, I thought I’d share some recent news.  Tesla is about to turn on the world’s largest battery which some call a lithium-ion revolution.  It recently installed the world’s largest battery in South Australia and is expected to supply power to 30,000 homes.  However, it is worth noting that although Elon Musk gets a lot of attention, Tesla is not alone in this industry.  In fact, there are several companies that are on par or larger than Tesla in the field of batteries, including Panasonic and Hyundai.  In fact, Hyundai Electric & Energy Systems is building a 150-megawatt unit, 50% larger than Musk’s, that will go live in about three months in Ulsan, South Korea.  With all the publicity Tesla gets, it is easy to forget that this upstart company has competition from much larger rivals.  It is truly a story of David versus Goliath.

In closing, I want to point out that the Dow closed above 24,000 for the first time Thursday, marking a record fifth time in 2017 the index hit a 1,000-point milestone.  After closing at 20,000 on January 25, 2017, the Dow roared to 24,000 in 10 months.  By comparison, the run-up from 16,000 to 20,000 took more than three years.  The jump from 23,000 to 24,000 took just 30 days of trading.  This has been an unusual year in more than one respect.  While we are confident that economic conditions continue to do well the next couple of quarters, we remain vigilant for any warning signs in the coming year.

December 1, 2017

Olde West Chester Christmas Walk

Nov 17, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

There are a lot of macroeconomic events which we could talk about.  For example, Venezuela falling into default, the end of Mugabe’s thirty-seven-year reign over Zimbabwe, and President Trump’s recent trip to Asia.  Other topics might include the faltering NAFTA negotiations or perhaps the tax bill that passed in the House of Representatives this week.  Some might find interest in General Electric’s long and slow downfall, or perhaps the surprise announcement that the P&G proxy battle did, in fact, go to Nelson Peltz.  However, with the temperatures falling and Thanksgiving less than one week away, my thoughts have turned to the approaching holidays and the realization that another year is quickly coming to an end.

With this in mind, I am going to forgo the usual political, economic, and financial commentary and instead give you a poem on the theme of thanksgiving.  This poem is written by Ella Wheeler Wilcox who was born in 1850 in Johnstown, Wisconsin.  It is said she was published by the time she graduated high school.

Ella Wheeler Wilcox

We walk on starry fields of white
And do not see the daisies;
For blessings common in our sight
We rarely offer praises.
We sigh for some supreme delight
To crown our lives with splendor,
And quite ignore our daily store
Of pleasures sweet and tender.

Our cares are bold and push their way
Upon our thought and feeling.
They hand about us all the day,
Our time from pleasure stealing.
So unobtrusive many a joy
We pass by and forget it,
But worry strives to own our lives,
And conquers if we let it.

There’s not a day in all the year
But holds some hidden pleasure,
And looking back, joys oft appear
To brim the past’s wide measure.
But blessings are like friends, I hold,
Who love and labor near us.
We ought to raise our notes of praise
While living hearts can hear us.

Full many a blessing wears the guise
Of worry or of trouble;
Far-seeing is the soul, and wise,
Who knows the mask is double.
But he who has the faith and strength
To thank his God for sorrow
Has found a joy without alloy
To gladden every morrow.

We ought to make the moments notes
Of happy, glad Thanksgiving;
The hours and days a silent phrase
Of music we are living.
And so the theme should swell and grow
As weeks and months pass o’er us,
And rise sublime at this good time,
A grand Thanksgiving chorus.

In closing, I want to invite everyone to come tomorrow to the Olde West Chester Christmas Walk.  This will be our ninth year participating and enjoy seeing everyone partake in this festive event.  It is open to the public and runs from 2 pm to 8 pm.  The parade is the highlight of the day and should not be missed.  It starts at 7 pm and makes its way down Cincinnati-Dayton Rd. Our office is the perfect place to view the parade as it marks the mid-point of the route.  As always, we will have a nice offering of cookies and warm cider and a balloon artist for the kids.  We hope to see you tomorrow!

November 17, 2017

The Cut, Cut, Cut Act

Nov 3, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

What a week!  If hundreds of earnings announcements weren’t enough, we also had the nomination of a new Federal Reserve chair, and the GOP tax reform plan.  Trying to digest all the information was like trying to drink from a firehose.  I’ll do my best to summarize what could turn out to be the busiest week of the year.

You may have noticed the stock market continues to head higher each week.  In fact, this is the eighth-consecutive week of higher closes.  We also learned that despite this week marking the thirtieth anniversary of the Black Monday stock market crash, this October the CBOE Volatility Index recorded the lowest monthly average in its history (dating back to 1990).  You couple that bit of news with the release of the Consumer Confidence Index which increased to its highest level in almost seventeen years, and it’s no wonder the stock market keeps heading higher.  I’m not saying that we’ve hit euphoria yet, but the numbers indicate people, in general, feel good about the economy and investors are confident current economic conditions will persist.

Part of what is fueling this rally is the cash that had been sitting on the sidelines all these years.  A recent report found that mutual funds are holding only 3.3% of assets in cash.  Meanwhile, money market funds as a percent of long-term assets have fallen to 17% – also an all-time low.  A separate Citigroup study from a couple months back finds institutional cash at just 2.25% of assets.  The bottom line is that there are a lot of fully-invested bears out there.

Additionally, the Federal Reserve Open Market Committee (FOMC) met this week and in its policy statement takes note of solid economic activity despite the hurricanes, soft core inflation, and continued strength in the labor market.  There is nothing in the statement suggesting the Fed won’t hike rates again at its next meeting in December.  But while we’re on the subject of the Federal Reserve, it should be noted that President Trump nominated Jerome Powell to be the new chairman of the Federal Reserve, replacing Janet Yellen whose term expires in February.  Mr. Powell has been a Fed governor since 2012 and has consistently voted with Yellen, thus earning the moniker, “The Republican Yellen.”  One thing that could prove different is his desire to further deregulate banks.  He’s on record saying he wants to, “deregulate community banks, relax liquidity constraints on larger firms, and relax lending standards in the housing markets.”  Those measures are more in line with the Trump administration and were likely contributing factors to his nomination.

In the middle of all this news, the GOP released details of its tax reform plan.  It did not go unnoticed.  No doubt you heard some of the details in the news.  The biggest change is the effort to drop the corporate tax rate from 35% to 20%.  However, anyone with a grade school education knows this means less revenue and potentially big budget deficits, perhaps as large as $1.5 trillion over 10 years.  To offset this loss of income, Republicans came up with a number of ideas including capping the mortgage interest deduction on new home purchases, limiting the amount of property taxes that can be deducted, eliminating the deductibility of state and local taxes, medical expenses, the tax credit for adoption of a child, and student loan interest.  It also keeps the top marginal tax bracket at 39.6% for those with earned income greater than $1 million.  Just remember, to “simplify” the tax code it was necessary to write a 400-page bill.

I usually close out this weekly piece with a funny or unusual story.  This week is a more sobering reminder that money is not free and does not, in fact, grow on trees.  It was announced the Social Security Administration paid out more than $1 trillion in fiscal 2017 for the first time ever.  This amounts to 37 times the Department of State budget, 32 times that of the Department of Justice, 20 times that of the Department of Homeland Security, and 76% more than the federal government spent on the Department of Defense.  The Social Security Administration and the Department of Health and Human Services now account for 53% of all federal spending.  If nothing is done to fix the funding, the financial reckoning will be huge – some estimate as much as $11.4 trillion down the road.  Now you know.

November 3, 2017


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