Hello Fourth Quarter

Sep 28, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Investors held their breath this week as we headed into the end of the third quarter.  This period typically involves mutual funds and institutional money managers making last minute trades.  With large amounts of money shifting into and out of sectors, it is not uncommon to see large swings, however, that did not happen this quarter.  To a large degree politics took center stage with additional tariffs on China and soon Iran, the Federal Reserve’s vote to hike interest rates, and the Senate Judiciary Committee hearings on Supreme Court nominee Brett Kavanaugh.  There was enough to keep everyone occupied this past week.

It didn’t get much attention, but on Monday an additional $200 billion in tariffs were placed on China.  In retaliation, China imposed an additional $60 billion in tariffs on U.S. goods including liquified natural gas and certain aircraft.  Unfortunately, talks have broken down between our countries and each side believes it has the upper hand.  While tariffs can create opportunities and/or leverage in trade negotiations, they unfortunately also create higher prices for U.S. consumers.  We haven’t seen inflation rise sharply yet, but it is reasonable to think that if these tariffs persist, we could begin to see inflation rise next year.

Sanctions were also in the news this week as President Trump, speaking at the United National General Assembly, says the U.S. will reimpose nuclear sanctions against Iran to resume November 5th.  He spoke very directly to not only Iran, but also our European allies.  However, the EU isn’t thrilled with the new direction and is proposing a special payment channel allowing companies to legally continue financial transactions with Iran without exposure to U.S. sanctions.  The schism between the U.S. and the EU will almost certainly widen if this plan is implemented, allowing European companies to circumvent the sanctions.

An unintended consequence of these sanctions is that gas prices are creeping higher.  Prices as the pump have risen lately with a gallon of gas closing in on $2.90 locally and well over $3.00 in parts of the West.  To some extent this is due to fears regarding the Iran sanctions which mean 1.5M barrels per day of oil will be taken off the market.  Compounding the sanctions, OPEC leaders signaled they would not raise production and the Trump administration announced it has no plans to release strategic reserves to make up for the decrease in supply.  Needless to say, these events are putting pressure on oil prices which have climbed to $80/bbl and could climb as high as $90/bbl in coming months according to J.P. Morgan.

One industry whose fate rides on oil is the airlines which are beginning to feel the pinch.  Airlines had a difficult week but there was a silver lining of sorts.  The lobbying arm for the industry scored a victory in Congress as bipartisan congressional legislation dropped plans to mandate “reasonable and proportional” baggage and change fees.  Not wasting any time, many airlines raised baggage fees including Delta which now charges $30 for the first checked bag and $40 for the second.  United Airlines, Jet Blue, and American Airlines also raised fees which virtually guarantees that higher checked bag fees are here to stay.

Perhaps the biggest non-news this week is that the Federal Reserve decided to raise interest rates for the third time this year.  This was almost completely expected and therefore did not move the markets.  Based on the minutes from the meeting, the Fed anticipates hiking rates again in December, with as many as three more hikes next year.  Its goal is to bring the federal funds rate to 3% by the end of next year, but could possibly overshoot the mark a bit if the economy looks like it can handle it.

In closing, I want to talk a little bit about the blockchain.  Over the past two years you may have heard a lot about blockchain technology and not realized it.  The mathematics behind the blockchain was initially proposed by Satoshi Nakamoto (whose real identity remains a mystery to this day) and is the foundation for cryptocurrencies like Bitcoin.  However, there are real world applications for this technology that go beyond the original premise of an alternative currency.  For example, Walmart announced this week that all suppliers of leafy green vegetables to its stores will be required to begin uploading their data to IBM’s food safety blockchain by this time next year.  Doing this will make the food supply chain more transparent and traceable in the event of an illness outbreak.  What used to take over a week to trace will now take 2.2 seconds according to IBM.  While Bitcoin may be a nonstarter for most, blockchain technology will likely be widely adopted by companies in the years ahead.  Now you know.

September 28, 2018

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