How Low Can Unemployment Go?

May 4, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

While the market had a few big days this week, it finished right around where it started.  That’s the thing with volatility.  One big up day does not indicate the market is heading higher, nor does one big down day suggest the market is on the verge of collapse.  Volatility has a way of intensifying one’s feelings in sometimes irrational directions.  The reality is that the market has gone sideways for much of this year despite some big movements both up and down.  The next phase of this market will be determined by economic data and perhaps a political catalyst, i.e. resolution to issues with China, N. Korea, Iran, or even NAFTA.

Along those lines, a trade delegation led by Treasury Secretary Steven Mnuchin has arrived in China to talk about tariffs.  While most pundits don’t expect a breakthrough, many believe China may make a conciliatory effort which could stall the implementation of tariffs on approximately $50B in Chinese exports.  However, it is becoming clear that this administration often makes threats as a form of leverage or negotiating tactic.  We learned this week that the administration is delaying a decision about whether to impose steel and aluminum tariffs on the European Union, Canada, and Mexico until June.  This is the second (or perhaps third) delay and allows negotiations to continue unabated.  It seems concessions are likely coming but may not rise to the level the rhetoric would have us believe.

As has been the case so far this year, the economic data remains strong.  The unemployment number for April was released today and it came in at 3.9% which is its lowest level in almost two decades.  Additionally, the economy added 204,000 jobs in April and initial jobless claims are down 18% year-over-year.  Perhaps a contrarian indicator, personal savings is down 20% as well, but that indicates people are spending which is good for the economy if not problematic in the long-run.

In company news, it seems the bookmakers don’t give very good odds on T-Mobile merging with Sprint.  While the merger could improve the health of the telecom industry given that there are really only two very large competitors, Verizon and AT&T, it doesn’t appear likely that regulators will bless this merger.  However, another rumored merger that seems peculiar but possible continues to gain steam.  A significant partnership or outright purchase of Humana could be good for Walmart shareholders and consumers.  Humana has a large Medicare Advantage business that skews to lower income seniors and looks like a natural fit for Walmart with its large aging customer base.  While this would be an odd combination, it could help diversify Walmart outside of just retail.  Lastly, there was word today that Starbucks may be selling its packaged food business to Nestle.  While the deal has not been finalized, it appears that both sides are close to reaching an agreement.  Perhaps we’ll learn more next week.

In closing I’d like to relate a story I heard this week.  While car sales fell in general during the month of April, it seems one car company can’t make them fast enough.  You may be mistaken in thinking I’m talking about Tesla.  However, it seems times are good for Ferrari who has sold out most of its models for 2018 and a part of next year.  What’s even more impressive is that the manufacturer is running at full capacity.  However, just in case you must have a Ferrari this year, it seems they still have a few GTC4 models.  It will set you back $300,000 but then you’ll have it in your garage this year.  One other tidbit I learned about Ferrari is that it has a self-imposed 10,000-car annual limit.  Apparently, this allows it to operate under less stringent fuel-economy rules.  Now you know.

May 4. 2018

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