Why a Bull and a Bear?

Aug 3, 2018   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Despite all the earnings announcements reported this week, the markets look to finish mostly flat.  This week was perhaps the busiest in terms of the number of companies reporting earnings and for the most part things continue to look good.  Having said that, investors remains focused on future growth not past growth, and in that light there were some disappointments as a handful of companies lowered guidance this week citing rising materials costs, labor costs, and the potential for tariffs impacting their bottom line.  For others, the rising value of the dollar has made it more difficult to sell overseas which creates a headwind that is being accounted for in forward guidance.  All said, the quarter that just ended was good and we expect continued growth albeit with the potential for more uncertainty on the horizon.

It is hard not to notice the significant rise in the technology sector this year.  What may come as a surprise to you is that roughly two-thirds of the S&P 500’s market return this year is attributable to five companies, otherwise known as the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google).  Put another way, this year’s returns do not have a broad base but are laser focused on one sector and more specifically, five companies.  In that light, it should be noted that Apple made history this week by becoming the first publicly traded company to break a market capitalization of more than $1 trillion.  To put this in perspective, Apple’s market cap is greater than the GDP of Sweden, Argentina, Switzerland, Saudi Arabia, The Netherlands, and Turkey.  It is also greater than the cost of World War I, the Vietnam War, and the Iraq War.  We remain optimistic regarding the economy, but would rather see the distribution of gains more widely dispersed among sectors and industries.

While we’re on the subject of the economy, it was announced this week that the U.S. Treasury Department plans to borrow more this quarter than it had previously estimated as tax reform and increased spending widens the nation’s budget deficit.  New projections put total net borrowing at $769 billion for the second half of 2018 and $1.33 trillion for the year.  What happened to the days when we were concerned about the spiraling national debt?  I guess the pendulum has swung to the opposite extreme with the belief the United States can borrow indefinitely.  It was also reported this week that healthcare spending in the U.S. will soon reach 20% of GDP, a significantly higher proportion than any other major economy.  The Wall Street Journal reports the key cost driver is price hikes, not increased demand.  Since 1960, the CPI has risen 700% while medical costs have exceeded 2000%.  Since 2000, prescription drug costs have grown 69%, hospital care 60%, and physician and clinal services 23%.

Now for the good news.  The Treasury Department is considering bypassing Congress to grant a $100 billion tax cut in a legally tenuous maneuver that would cut capital gains taxation and fulfill a long-held ambition of many investors.  By changing the definition of “cost” for calculating capital gains, taxpayers would be allowed to adjust the initial value of an asset (cost basis), such as a home or share of stock, for inflation when it sells.

Tariffs are still a growing concern with President Trump threatening an additional 25% on $200 billion of Chinese goods and China counter-threatening tariffs on an additional $60 billion in U.S. agricultural products.  Perhaps more positive is the olive leaf that new Mexican President AMLO has offered to wrap up NAFTA negotiations.  I’m sure Canada is wondering what just happened since it was not included in the latest round of discussions.  And speaking of tariffs, it seems BMW is looking to move some of its production out of the United States.  The company is planning on increasing production in Europe and has ruled out South Carolina for the site of a new manufacturing facility instead choosing Thailand.  Perhaps President Trump was right when he called trade a zero-sum game.  At least for now, it seems we’re on the losing end of that gambit.

In closing I came across an interesting picture this week that addressed something I had never considered.  Have you ever wondered why a bull represents a rising market and a bear a falling market?  I’m ashamed to admit that it had never really crossed my mind in all the decades I’ve been in this industry.  In a nutshell, the stock market got the names “Bear and Bull” because of the way in which these animals attack.  Bulls typically swipe up with their horns when attacking, while bears swipe down with their paws when attacking.  Seems obvious now but how did this never occur to me?  Now you know.

August 3, 2018

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