Browsing articles in "Weekly Market Update"

Form Over Function

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

After the past couple of weeks, this one felt pretty good.  Major stock indices are headed for the best week in six years as the rebound in global equities pushes into the sixth day.  We’re encouraged that the fear that encased the markets has melted somewhat with a recognition that this isn’t the same market it was in 2017.  For sure, these are different times with different challenges, but as long as investors aren’t taken by surprise with irregular economic indicators or unexpected Fed policy changes we might expect to regain some momentum in the markets.

Along those lines, the President unveiled an infrastructure plan, on whose face, should provide further stimulus to an already hot economy.  However, the plan falls far short of what many expected, including only $200 billion in federal funding with the bulk of the money coming from private investors.  This puts more emphasis on finding projects that are attractive to private investors for their potential returns, which might not be the public projects that are necessary but don’t include the prospects of a large return.  To come up with the $200 billion, President Trump has endorsed the idea of an additional gasoline tax of $0.25 per gallon which, in and of itself presents a rather large uphill battle.  Given the reaction of the market, investors don’t seem all that bothered by the prospects of this proposal perhaps because they don’t think it will pass in its current form.

In other news, we had a slew of economic data released this week, and despite inflation being front and center, it didn’t seem to bother the market like it did just two weeks back when wage and labor pressure took center stage.  The Consumer Price Index (CPI) came in higher than projected with headline inflation rising an eye-popping 0.50% for the month!  But like most other news this week, the markets seemed to shrug off what would otherwise be concerning developments.  Fortunately, February Consumer Sentiment came in well above expectations suggesting people may be experiencing some of the benefits of the recent tax reform, in terms of higher after-tax take-home pay and perhaps even employer bonuses.

In company news, we learned Facebook may be falling out of favor with the youth.  While we’ve known for some time that alternatives like Snapchat and Instagram have grown at the expense of Facebook, it revealed that it may be losing younger users more quickly than previously estimated.  The company expects the first-ever decline in the age 18-24 user base in the U.S. this year of 5.8%.  While Facebook is still growing in the U.S., it is mainly due to older users signing on.  McDonald’s has finally decided there’s more to fast food than hamburgers.  The company is making chicken a top priority with companies like Chick-fil-A clearly in its sights.  Also, a sign of the times, the New York Times reported this week that it expects print to be dead within the next ten years.  Call me “old-fashioned” but for those of us who grew up with traditional newspapers, there’s just something special about the feel, experience, and touch of a paper that doesn’t want to fold in quite the way you want.  And what about the black ink on our fingers?  While we must adapt, we don’t have to like it.

In closing, I’d like to report on a story I came across this week that, while funny, asks the age-old question regarding form over function.  You almost certainly have heard that Apple built a new headquarters in the shape of a large circle.  Some, including Steve Jobs himself, liken it to a giant spaceship.  It seems the interior of the building was designed to be open and airy with 45-foot panels of curved glass a testament to innovation.  There’s only one problem.  Apple employees keep smacking into the glass.  Apple employees are often glued to their iPhones which has resulted in repeated cases of distracted employees walking into the panes.  Some staff started to stick Post-It notes on the glass doors to mark their presence, but they were removed because they detracted from the building’s design.  It’s quite a conundrum.  Put the iPhones down or don’t have glass walls?  We may never know how this plays out, but I’d guess the eternal question of form over function will be a hotly debated topic at Apple headquarters for many years to come.  Now you know.

February 16, 2018

Roller Coasters Used to be for Amusement Parks

Feb 9, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Let’s talk about the elephant in the room.  The markets have, at least temporarily, entered a more volatile period.  After breaking the record for the longest streak without a five percent pullback, we returned to normal.  However, the truth is we have a long way to go before we return to “normal.”  Late last year, the markets went into overdrive, with the Dow hitting new 1,000 point milestones on what seemed a weekly basis.  It felt good on the way up but created a short-term dislocation running far ahead of itself.  The pullback we’ve experienced brings us back in line with the long-term trend which, for now, remains intact.  I can’t say we won’t see more days of unusual volatility, but I can tell you the underlying fundamentals haven’t changed.  The economy remains on solid footing with no signs of slowing down.

In fact, the issue isn’t that market participants worry about the economy slowing down, they worry it may speed up.  The problem is inflation and its something we haven’t had to talk about for many years.  The Federal Reserve (Fed) has two mandates: keeping inflation at 2% and achieving “full employment.”  Most economists believe we’re at full employment with the unemployment rate around 4%.  The second mandate is more tricky and will be the focus of Fed policy for the foreseeable future.  With unemployment possibly breaking below 4% this year, we’re beginning to see wage pressure.  As wages rise, so too will the price of the goods and services companies charge.  The way the Fed combats this is by raising interest rates, which they started last year and are expected to raise three times this year.  What the market collectively said this week is, “we think rates will have to rise faster than had been expected.”

But let’s talk about another factor that drives volatility.  For decades the stock market was the hallmark of people, namely market makers, who provided liquidity that allowed the markets to function properly.  Over the last fifteen years, market makers have slowly been replaced by computers.  It started with algorithmic trading but has evolved into high-frequency trading (HFT).  HFT strategies utilize computers that make elaborate decisions to initiate orders based on information that is received electronically before human traders are capable of processing the information they observe. Algorithmic trading and HFT have resulted in a dramatic change of the market microstructure, and to a large degree account for the volatility we’re experiencing.  Intra-day thousand-point swings aren’t caused by retail or institutional investors.  This is the realm of autonomous computers.  It’s a future that can’t be stopped but will hopefully be more aggressively regulated in time with limits on how far the market can be distorted before breakers are triggered.

We remain optimistic about the economy and view current market swings as part of the usual cycle, albeit faster and more exaggerated than is typical.  We cannot know what Monday holds, but we are confident that by focusing on long-term strategies and goals we won’t be victim to these short-term swings.  Warren Buffet put it best when he said, “I will tell you how to become rich.  Close the doors.  Be fearful when others are greedy.  Be greedy when others are fearful.”  We have entered a period where people are now fearful.  In time this will fade, but for now at least, the ride is going to be bumpier than it has been.

February 9, 2018

The Last Straw

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

Upon looking at this week’s stories, it struck me that outside of earnings announcements, there isn’t much to talk about.  Earnings announcements are in full swing with a substantial number of companies reporting.  The common theme has been companies reporting better than expected revenue and earnings growth driven largely by a combination of benefits from recent tax reform, a somewhat weaker dollar, and synchronized global growth.  In the weeks ahead, we’ll be able to determine if this early assessment holds true.  At the moment, there appears to be more momentum to the upside than downside.

Fortunately, Congress reached an agreement on Monday to reopen the government after being closed last weekend.  While one could look at it as another failure in that it just keeps things open until February 8th, it appears both sides are serious about reaching a compromise regarding the border wall, a DACA solution, and immigration reform.  In the meantime, the stock market continues to move higher seemingly looking past this issue.

In other news, the Senate confirmed Jerome Powell this week to replace Janet Yellen as the chairman of the Federal Reserve.  He comes to the position at a critical time for the Fed, which is normalizing monetary policy after years of extraordinary accommodation triggered by the financial crisis.  While many who come to the position are economists who work in academia, Powell comes with a more market-based background, having worked in venture capital.  His policy positions are mostly expected to run close to Yellen, though some of his comments indicate he may be a bit more inclined to raise interest rates faster and be somewhat looser on bank regulation, especially regarding community and regional banks.

While we’re on the subject of monetary policy, our Treasury Secretary, Steve Mnuchin, let it slip he thinks a weak U.S. dollar would be great for the United States.  This is a departure from decades of traditional U.S. policy.  As if on command, the U.S. dollar dropped to a new three-year low.  Echoing Mr. Mnuchin’s comments, the chief strategist at JPMorgan made the comment, “the U.S. has been a ‘pacifist’ in the currency war for too many years.  Other countries – Japan and Europe – have been trying to push their currencies down.  We just took it.  I think we shouldn’t.”  For simplicity sake, a weaker U.S. dollar means it is cheaper for consumers in other countries to buy our goods.  On the flip side, it would mean our buying power would decrease making imported items we might buy more expensive.  Recognizing the mistake, Mr. Mnuchin tried to walk back his comments, but it was too late.  President Trump even felt obliged to say, “the dollar is going to get stronger and stronger.”

Oil has been a topic of discussion for this weekly email going back years now.  First, the price was too high, then it was too low, and now maybe it will no longer matter.  Bank of America put out a report this week suggesting oil demand will peak by 2030 amid a boom in electric vehicles.  Analysts predict 40% of all new car sales will be electric vehicles by then, reducing the need for oil as a fuel for transportation.  Even as strong global oil consumption helps to push crude prices higher, the rise of electric vehicles is seen as one of the biggest long-term threats to demand.  You heard it here first.

For this week’s story, I turn to government regulation.  I think we can all agree some regulation is a good thing.  For example, we all want clean water and uncontaminated food.  But where does one draw the line?  I came across two stories that had me thinking about the role government plays in our lives.  The first is a soda tax enacted in Seattle that adds 1.75 cents an ounce to sugary beverages.  For example, a case of Gatorade that used to cost $15.99 now costs $26.33.  A case of Dr. Pepper now costs $17.55 instead of $9.99.  The health benefit is clear, but who gets to make these decisions?  This week, the majority leader in California’s lower house has introduced a bill to stop sit-down restaurants from offering customers straws with their beverages.  A waiter who serves a drink with an unrequested straw would face up to six months in jail and a fine of up to $1,000.  In years past, I remember restaurants not offering water by default but instead leaving it to the patron to request it.  I’m not passing judgment one way or another, I just thought it was worth mentioning as a starting point for discussion.  Where do you stand?

January 26, 2018

Countdown to Shutdown: T-8hrs

Jan 19, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

With earnings announcements starting to trickle out, the news so far is good.  Most analysts had predicted the fourth quarter of last year would be a good one due to improving economic data, rising wages, and the positive effects of tax reform.  To a large extent, a lot of the good news is already priced into the stock market.  To that end, we’ve seen some companies report higher than expected revenue and earnings growth only to have investors take some money off the table in those stocks.  While the good news is generally speaking good, you’ve likely heard the saying, ‘buy the rumor, sell the news.’  We may see some of this in the weeks ahead.

The more pressing issue is the looming government shutdown which is just hours away.  I won’t go into the politics of it since that is outside the scope of this weekly email.  However, regardless of what happens, investors may not need to worry too much, as past shutdowns haven’t corresponded with significant stock-market movement.  Data shows that markets have an only modest weakness during shutdowns, with the S&P 500 falling an average of 0.6% over the period of the closure.  In fact, 44% of the time, the markets went higher during the period of the closure. Since 1976, there have been 18 closures ranging from one day to three weeks but never before has there been a shutdown when one party has controlled both the Congress and the White House.

Fortunately, the economy looks good according to the latest release of the Federal Reserve’s Beige Book.  The economy continued to expand at a “modest to moderate” rate across all eleven districts.  Employment was up at a modest pace with most districts noting ongoing market tightness and challenges finding qualified workers.  Inflation also sees “modest to moderate” growth and retailers noted holiday sales higher than expected.  Lastly, housing sales were constrained by limited inventory.  Overall, this is a picture of an economy that is growing at a sustainable pace without risk of overheating in the near-term.

In company news, Apple announced an ambitious plan to boost the U.S. economy by $350 billion over the next five years and hire an additional 20,000 workers due to the recently passed tax reform.  Also, in a reversal, the company announced that it will allow you to control whether or not your iPhone slows down as it ages in an upcoming software update.  In other news, while Cincinnati didn’t make the final cut for Amazon’s second headquarters, the company is getting closer to finding a second home Indianapolis and Columbus still in the running.  General Electric (GE) continues to feel the pain as investors slowly give up hope on this company emerging from the ashes.  There are strong rumors that the company is looking at breaking itself up, however, in this case, the sum of the parts may, in fact, be less than the whole.  To say that GE is struggling to find itself is an understatement.

In closing, I came across a piece about a month ago which highlights the most annoying words people use in everyday conversation.  For the ninth consecutive year, Americans say “whatever” is the most annoying word or phrase used in casual conversation.  Coming in second place is “fake news” which annoys 23% followed closely by “no offense, but” with 20%.  11% think “literally” is the most grating word while 10% assert “you know what I mean” is the most agitating.  Interestingly, those under the age of 40, compared to their older counterparts, do not find the word “whatever” all that bothersome.  Those millennials.  Now you know.

January 19, 2018

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