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

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