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

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