These Times They Are A-Changin’

Jun 30, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Today marks the close of the second quarter.  It was a busy week which included the second go at a healthcare bill from the GOP, a ransomware attack on several multinational corporations, and the approval by the Federal Reserve allowing thirty-four of the largest banks to commence capital return plans.  The second quarter had its ups and downs but managed to finish on a positive note despite the dysfunction in our nation’s capital.

Let’s start with some company news.  This week was the tenth anniversary of Apple’s iPhone and while it has both fans and detractors, no one can say it hasn’t been a success.  So I take this moment to remind us that even the best and brightest minds are sometimes wrong.  Steve Ballmer, then CEO of Microsoft, famously said, “$500, fully subsidized, with a plan!  That is the most expensive phone in the world and it doesn’t appeal to business customers because it doesn’t have a keyboard, which makes it not a very good email machine.”  Mr. Ballmer spent another six years stubbornly fighting the tide before stepping down in 2013.

In other company news, self-driving cars remain in the headlines.  The latest round of news is that companies are creating joint ventures and partnerships with the aim of building strong alliances before the market is fully developed.  Among those announcing partnerships are Volvo, Autoliv, and Nvidia.  This goal is to develop software systems for autonomous vehicles.  One day earlier, Apple reported it is working with Hertz on autonomous testing, while Alphabet (Google) inked a deal with Avis to manage its self-driving car fleet.

Self-driving cars aren’t the only changes on the horizon.  Unilever is undergoing a radical hiring experiment.  To diversify its candidate pool for early-career roles that are a fast track to management, Unilever is ditching resumes and traditional campus recruiting.  Its new process relies on algorithms to sort applicants and targets young potential hires through their smartphones.  To quote Bob Dylan’s 1964 album, “These Times They Are A-Changin.”

What isn’t changing is the improvement in the financial sector.  This week Janet Yellen announced the results of the latest stress tests and found that the banking system is very much stronger than in the past.  She even went so far as to say a financial crisis like the one seen in 2008/09 isn’t likely “in our lifetime.”  Your guess is as good as ours as to who’s lifetime.  All thirty-four banks won clearance by the Federal Reserve which is the first time since the global financial crisis.  As a result, financial stocks had a good week with most issuing capital return plans in the form of dividend hikes and increased stock repurchase authorizations.

ETF ownership of stocks rose to a record in the quarter.  ETF inflows in the first quarter were $98 billion, prompting Goldman Sachs to raise its full-year inflow forecast by $100 billion to $300 billion.  ETFs, per Goldman, now own a record 6% of the U.S. stock market.  Mutual funds, on the other hand, were net sellers of $31 billion of stock but still own 24% of the stock market, although representing the lowest level since 2004.  Still, ETFs weren’t the biggest buyers of stock.  That award goes to corporations, which hoovered up $136 billion through buybacks.  Goldman expects that number to reach $640 billion for the full year.

In closing, I turn to Illinois.  As of this writing, the state is in dire straits and without a budget for the third straight year.  Its comptroller is on record saying that if a budget isn’t passed by midnight tonight, the state will begin defaulting on large parts of its economy.  But this is the part of the story you might not have heard.  The Illinois Lottery announced on Tuesday that, without a budget or any special legislation, it won’t be able to pay anyone winning $25,000 or more come July 1.  In response, the popular Powerball and Mega Millions have asked the state of Illinois to stop selling tickets effective immediately.  As for those winning more than $25,000, they’ll have to press their luck for lawmakers and the governor to authorize payments.  Now you know.

June 30, 2017

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