The Last Straw

Jan 26, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Upon looking at this week’s stories, it struck me that outside of earnings announcements, there isn’t much to talk about.  Earnings announcements are in full swing with a substantial number of companies reporting.  The common theme has been companies reporting better than expected revenue and earnings growth driven largely by a combination of benefits from recent tax reform, a somewhat weaker dollar, and synchronized global growth.  In the weeks ahead, we’ll be able to determine if this early assessment holds true.  At the moment, there appears to be more momentum to the upside than downside.

Fortunately, Congress reached an agreement on Monday to reopen the government after being closed last weekend.  While one could look at it as another failure in that it just keeps things open until February 8th, it appears both sides are serious about reaching a compromise regarding the border wall, a DACA solution, and immigration reform.  In the meantime, the stock market continues to move higher seemingly looking past this issue.

In other news, the Senate confirmed Jerome Powell this week to replace Janet Yellen as the chairman of the Federal Reserve.  He comes to the position at a critical time for the Fed, which is normalizing monetary policy after years of extraordinary accommodation triggered by the financial crisis.  While many who come to the position are economists who work in academia, Powell comes with a more market-based background, having worked in venture capital.  His policy positions are mostly expected to run close to Yellen, though some of his comments indicate he may be a bit more inclined to raise interest rates faster and be somewhat looser on bank regulation, especially regarding community and regional banks.

While we’re on the subject of monetary policy, our Treasury Secretary, Steve Mnuchin, let it slip he thinks a weak U.S. dollar would be great for the United States.  This is a departure from decades of traditional U.S. policy.  As if on command, the U.S. dollar dropped to a new three-year low.  Echoing Mr. Mnuchin’s comments, the chief strategist at JPMorgan made the comment, “the U.S. has been a ‘pacifist’ in the currency war for too many years.  Other countries – Japan and Europe – have been trying to push their currencies down.  We just took it.  I think we shouldn’t.”  For simplicity sake, a weaker U.S. dollar means it is cheaper for consumers in other countries to buy our goods.  On the flip side, it would mean our buying power would decrease making imported items we might buy more expensive.  Recognizing the mistake, Mr. Mnuchin tried to walk back his comments, but it was too late.  President Trump even felt obliged to say, “the dollar is going to get stronger and stronger.”

Oil has been a topic of discussion for this weekly email going back years now.  First, the price was too high, then it was too low, and now maybe it will no longer matter.  Bank of America put out a report this week suggesting oil demand will peak by 2030 amid a boom in electric vehicles.  Analysts predict 40% of all new car sales will be electric vehicles by then, reducing the need for oil as a fuel for transportation.  Even as strong global oil consumption helps to push crude prices higher, the rise of electric vehicles is seen as one of the biggest long-term threats to demand.  You heard it here first.

For this week’s story, I turn to government regulation.  I think we can all agree some regulation is a good thing.  For example, we all want clean water and uncontaminated food.  But where does one draw the line?  I came across two stories that had me thinking about the role government plays in our lives.  The first is a soda tax enacted in Seattle that adds 1.75 cents an ounce to sugary beverages.  For example, a case of Gatorade that used to cost $15.99 now costs $26.33.  A case of Dr. Pepper now costs $17.55 instead of $9.99.  The health benefit is clear, but who gets to make these decisions?  This week, the majority leader in California’s lower house has introduced a bill to stop sit-down restaurants from offering customers straws with their beverages.  A waiter who serves a drink with an unrequested straw would face up to six months in jail and a fine of up to $1,000.  In years past, I remember restaurants not offering water by default but instead leaving it to the patron to request it.  I’m not passing judgment one way or another, I just thought it was worth mentioning as a starting point for discussion.  Where do you stand?

January 26, 2018

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