Browsing articles in "Weekly Market Update"

Steeling the Spotlight

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

The week started off on the right foot with strong economic numbers buoying optimism and anticipation of Jerome Powell’s first public statements as head of the Federal Reserve.  However, not a week goes by these days without a fear event shaking investors’ confidence and this week it presented in the form of a tariff.  Sparse on details, this topic quickly overtook the airwaves with experts from every walk of life opining on the consequences such a policy.  Who you believe will partly be a function of who you listen to, watch, and read.  Hopefully, you’ll weigh what I say below and reconcile some of these ideas with your own beliefs.

Let’s talk about the big news.  President Trump announced his administration will impose a 25 percent tariff on imported steel and a 10 percent tariff on imported aluminum, on the grounds that other countries’ trade practices endanger our national security by undermining domestic production.  While this goes against the bedrock Republican principle and conservative ideology of free trade, President Trump appears to be rebuffing those in his party who are imploring him to change his mind.  American steel and aluminum companies have long complained of unfair practices by overseas competitors, especially Chinese subsidies, which flood the global marketplace and depress prices making American production less economical.  The big winners are the U.S. steel and aluminum industries.  The most immediate losers are the industries that rely on steel and aluminum which account for such a large part of the U.S. economy.  Some examples include the nation’s biggest industries: the automobile industry; aerospace; heavy equipment; and construction.

Does this matter for the economy?  In a nutshell, this action may create some jobs in domestic metals-producing companies, cost some jobs in a field where steel and aluminum are inputs, and push consumer prices a bit higher.  The U.S. economy can handle it.  The risk comes from the unintended consequences.  Affected countries may well retaliate by ordering tariffs on American goods, and they could carefully target goods to cause economic or political pain.  There are few winners in an all-out trade war.  The irony is that the aim of this administration is to punish China; however, Canada and Brazil are the top exporters of steel and aluminum to the United States.  China doesn’t even crack the top ten.  This surprise announcement seems clumsy, rushed, and extraordinarily broad in nature.  I suspect lobbyists and advisors will craft a more narrowly defined tariff before it takes effect next week.

Unrelated to the tariff news, most major automobile manufacturers reported sales were down in February.  Among those suffering the largest declines are Ford, General Motors, Honda, and Hyundai.  It appears higher interest rates and fewer discounts are dissuading customers from trading up.  Along the same lines, pending home sales declined sharply in January.  While it is too soon to say, it could be interest rates are beginning to change consumer behavior.  On the flip side, consumer confidence hit its highest level since 2000.  Jobless claims hit a multi-year low, the ISM manufacturing index expanded in February, and manufacturing PMI was the strongest in almost fourteen years.  Gains were seen in employment, inventories, backlogs, and supplier deliveries.  It appears the corporate tax break is making a difference.  Companies are in fact spending more on capital equipment.

Companies are also spending more on buying back stock.  Per Goldman Sachs, companies are poised to unleash $2.5 trillion in cash spending in 2018, of which share buybacks will total $650 billion.  The rate at which companies are buying their own stock is now more than double last year according to the Wall Street Journal.  While this doesn’t exactly help the economy, it does impact the stock market favorably.  There is vigorous debate whether companies should repurchase shares but I’ll leave that for another weekly column.  I’m afraid I’ve used my allotted space to cover just a fraction of the many news stories shaping the markets this week.  Have a great weekend and enjoy the sunny weather.  Spring is right around the corner!

March 2, 2018

Stately Living

Feb 23, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

After a turbulent few weeks, the markets seemingly took a deep breath and said, “I’m tired, let’s rest a bit.”  For a couple weeks, the good news was viewed as “bad” since it signaled the potential for inflation.  Computer trading took over and the roller coaster ride ensued.  Fortunately, someone unplugged the computers and good news once more turn into good news.  The markets recovered much of the sell-off and here we stand today at DOW 25,000 once more.  As predicted, volatility has picked up this year.  While it may feel strange after such a long period of movement in only one direction, it is more normal for these markets to go both up and down.  We should get used to the volatility since it is, in all likelihood, here to stay.

The most influential news of the week was found in the minutes of the January Federal Reserve meeting.  The minutes revealed increasing confidence in the economic outlook.  My take is the economic indicators have wiped away lingering concerns about the inflation outlook and now allow policymakers to coalesce around the existing three-hike projection.  Even the most dovish among them now think that rate hikes are prudent given the pace of economic growth and fiscal stimulus in the form of tax reform.  As would be expected, we’ve seen interest rates continue to rise with the 10-yr Treasury now approaching 3%.

As interest rates have risen, so too have mortgage rates.  While still low by historical standards, the 30-year fixed mortgage rate reached its highest level since April 2014.  It is worth noting a depository bank is no longer the leading mortgage originator in the United States. After the financial crisis, tens of billions in penalties were levied on deposit-taking banks in addition to stiff regulations and lending standards.  The result is that mortgage origination and servicing is no longer worth the trouble for many banks.  Unaffiliated mortgage companies now account for more than 40% of new conventional mortgages – almost twice the level just eight years ago.  It may come as a surprise, but Quicken Loans surpassed Wells Fargo in the fourth quarter last year to become the largest mortgage originator with $86 billion in loans in the quarter.  Some believe the hardship of regulation should be lifted to level the playing field, or conversely equally applied to nonbank entities.

In other news, the gas tax we spoke about last week may be dead in the water.  President Trump’s Council of Economic Advisers has warned that taxing gasoline to pay for infrastructure improvements is not desirable.  While it’s not clear if this is a reversal of policy or simply a lack of coordination between the left and right hand, it is clear that the times have changed.  The council’s chairman perhaps states it best when he says, “The gas tax’s current design isn’t really a 21st-century design – that the gas tax was set at levels that were needed to fund highways back in the days when fuel economy was really low and we didn’t have electric cars.”

In closing, I was reminded once again that taxes vary widely depending on where one chooses to call home.  The Tax Foundation puts together an annual report highlighting the disparity of state income taxes and its results are worth considering especially if you happen to live in one of the high-tax states.  The states that are among those with the lowest tax burden include Alaska, Wyoming, South Dakota, Tennessee, Louisiana, and Texas.  I won’t provide commentary on whether one would want to live in one of these states other than to say, they may not be for everyone.  On the flip side of the equation are the highest-taxing states which include (not surprisingly) New York, Connecticut, New Jersey, California, and Illinois.  While those states certainly have their charms, they certainly have their costs.  Now you know.

February 23, 2018

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


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