Interest Rates on the Rise

Apr 27, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Stocks fluctuated this week as the benchmark 10-year Treasury yield hit 3% for the first time in four years sparking concerns over higher borrowing costs for companies already facing rising commodity and labor costs.  Although the move in interest rates is important, earnings announcements remain center stage with many companies beating expectations on both revenue and earnings growth.  The impact of the recently passed tax reform is somewhat larger than expected, however a lot is already priced in to stocks at these levels which is why we aren’t seeing too many big price moves.

Today we learned that U.S. Gross Domestic Product (GDP) for the first quarter came in at 2.3% which exceeded the consensus expectation for 2.0%.  For many, this is viewed as good news because it suggests the U.S. economy is plugging along well and gives the Federal Reserve the needed data to keep pushing forward with its plan to raise interest rates two more times this year.

Additionally, the March Consumer Confidence number came in higher than expected at 128.7 vs the 126.1 consensus.  Both the present situation and expectations index were also higher.  Consumers appear to be pulling out their pocketbooks more frequently due to tax cuts, wage growth, and even tax refunds.  We anticipate this behavior to continue through at least the third quarter.  However, energy could be the wildcard given the recent rise in the price of crude oil and the impact that could have on gasoline prices and indirectly on discretionary spending.

Along those lines, the price of crude oil crept higher this week.  This stealthy move has seemingly flown under the radar of most media channels.  Oil has risen from $26 per barrel to almost $70 per barrel over the last two years, and as we move into the summer months it could mean increased transportation costs for summer travelers.  Also putting pressure on the price of oil is the current decision whether to renew the Iran nuclear deal.  President Trump has openly declared that he opposes the deal and is the most significant element behind crude’s recent rally.  The U.S. has until May 12 to decide whether to quit the deal and reimpose sanctions against Iran.

In company news, we learned Amazon is raising the price of its Prime membership from $99 to $119 per year beginning June.  They also announced a new partnership with GM and Volvo to provide “in-trunk” delivery of packages which is a first of its kind.  First, they wanted into our homes, now they want into our cars?  In other news, we learned that Google’s CEO, Sundar Pichai, has restricted stock that vested to the tune of $380 million.  This is one of the largest single payouts to a public company executive in years and makes me wonder when million-dollar bonuses stopped being enough.  To his credit, Google’s stock has surged 90% since the restricted stock was granted.  Apple’s Tim Cook met with the President in a closed-door meeting in the oval office this week to discuss… you’re guess is as good as mine.  Perhaps it was the repatriation of Apple’s huge cash position held oversees?

In closing, I grew up in an era of wood-paneled station wagons which should give you a decent indication of my age.  The station wagon was replaced by the minivan, and for those without the capacity needs, the four-door sedan.  In more recent times, sales of pickup trucks and SUVs have gone mainstream.  To that end, Ford announced this week that it will stop selling all sedans in the U.S. except the Mustang.  The company expects that by 2020 almost 90% of its portfolio will be trucks, utilities, and commercial vehicles.  We’re entering a new era and it sadly doesn’t include the sedan.  Now you know.

April 27, 2018

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