Browsing articles in "Weekly Market Update"

Hurtling Toward 2018

Dec 1, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

While the market has had an unusual lack of volatility this year, this week was a different story.  It appears Republicans are close to having enough votes to push the Senate’s tax reform bill through perhaps even as you read this.  While there may be strong opinions about the merits of cutting taxes, and increasing the national debt at a time when the economy is growing strongly, it goes without saying that the stock market always likes the idea of lower taxes.  The markets took this news and ran with it, pushing the Dow Jones Industrial Average (DJIA) past 24,000 for the first time ever.  However, on the heels of this news was also the announcement that Michael Flynn pleaded guilty of lying to the FBI and perhaps has incriminating evidence and testimony against President Trump.  With that simple turn of events, the mood soured almost instantly.  The market looks to retain most of the gains this week, but count on DC drama making the ride a little bumpier.

So why do I say the economy is growing strongly?  For starters, Gross Domestic Product (GDP) is growing by over 3% annually for the first time in almost a decade.  This metric is a measure of economic activity and is the yardstick by which most economists determine the health of the economy.  In conjunction with GDP, economists also look at inflation which remains very low and indicates the Federal Reserve has room to hike rates again at its next meeting in less than two weeks.  And lastly, unemployment is 4.1% which by most economists’ definition suggests the economy is at full employment.  Namely, anyone who wants to work can get a job.  Additionally, this week we learned that new home sales are soaring, growing to a decade-high 685,000 in October.  This is up 6.2% month-over-month and a whopping 18.7% above October one year ago.  Consumer confidence rises well above expectations and the Richmond Manufacturing Survey doubles expectations in November.  With numbers like these, the only concern might be that the economy is growing too fast.  While it is unlikely that it overheats in the next quarter or two, it is worth watching for in the second half of 2018.

In retail news, Black Friday and Cyber Monday sales beat expectations and suggest this will indeed be a Merry Christmas.  According to Adobe, Cyber Monday hit record revenues of $6.59B, making it the largest U.S. online sales day ever.  In comparison, Black Friday and Thanksgiving Day brought in $5.03B and $2.87B in revenue respectively.  The internet holiday shopping season has so far driven a total $50B, a 16.8% increase, and Adobe predicts it will be the first-ever season to break $100B in online sales.  You may be thinking, what about brick and mortar stores?  And you would have a point.  The migration of shopping to online retailers has disrupted traditional big box and mall stores.  Interestingly, Wal-Mart may be closing in on Amazon.  Seeking to regain its low-price leader title, Wal-Mart is now within striking distance of matching Amazon for the first time.  Supporting this thesis, Costco posted an eye-popping double-digit gain in comp store sales and 39% growth in its e-commerce channel in November.  The winners will be those retailers that can merge a robust online ability with a strong local presence.

Since I haven’t talked about Tesla in a while, I thought I’d share some recent news.  Tesla is about to turn on the world’s largest battery which some call a lithium-ion revolution.  It recently installed the world’s largest battery in South Australia and is expected to supply power to 30,000 homes.  However, it is worth noting that although Elon Musk gets a lot of attention, Tesla is not alone in this industry.  In fact, there are several companies that are on par or larger than Tesla in the field of batteries, including Panasonic and Hyundai.  In fact, Hyundai Electric & Energy Systems is building a 150-megawatt unit, 50% larger than Musk’s, that will go live in about three months in Ulsan, South Korea.  With all the publicity Tesla gets, it is easy to forget that this upstart company has competition from much larger rivals.  It is truly a story of David versus Goliath.

In closing, I want to point out that the Dow closed above 24,000 for the first time Thursday, marking a record fifth time in 2017 the index hit a 1,000-point milestone.  After closing at 20,000 on January 25, 2017, the Dow roared to 24,000 in 10 months.  By comparison, the run-up from 16,000 to 20,000 took more than three years.  The jump from 23,000 to 24,000 took just 30 days of trading.  This has been an unusual year in more than one respect.  While we are confident that economic conditions continue to do well the next couple of quarters, we remain vigilant for any warning signs in the coming year.

December 1, 2017

Olde West Chester Christmas Walk

Nov 17, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

There are a lot of macroeconomic events which we could talk about.  For example, Venezuela falling into default, the end of Mugabe’s thirty-seven-year reign over Zimbabwe, and President Trump’s recent trip to Asia.  Other topics might include the faltering NAFTA negotiations or perhaps the tax bill that passed in the House of Representatives this week.  Some might find interest in General Electric’s long and slow downfall, or perhaps the surprise announcement that the P&G proxy battle did, in fact, go to Nelson Peltz.  However, with the temperatures falling and Thanksgiving less than one week away, my thoughts have turned to the approaching holidays and the realization that another year is quickly coming to an end.

With this in mind, I am going to forgo the usual political, economic, and financial commentary and instead give you a poem on the theme of thanksgiving.  This poem is written by Ella Wheeler Wilcox who was born in 1850 in Johnstown, Wisconsin.  It is said she was published by the time she graduated high school.

Thanksgiving
Ella Wheeler Wilcox

We walk on starry fields of white
And do not see the daisies;
For blessings common in our sight
We rarely offer praises.
We sigh for some supreme delight
To crown our lives with splendor,
And quite ignore our daily store
Of pleasures sweet and tender.

Our cares are bold and push their way
Upon our thought and feeling.
They hand about us all the day,
Our time from pleasure stealing.
So unobtrusive many a joy
We pass by and forget it,
But worry strives to own our lives,
And conquers if we let it.

There’s not a day in all the year
But holds some hidden pleasure,
And looking back, joys oft appear
To brim the past’s wide measure.
But blessings are like friends, I hold,
Who love and labor near us.
We ought to raise our notes of praise
While living hearts can hear us.

Full many a blessing wears the guise
Of worry or of trouble;
Far-seeing is the soul, and wise,
Who knows the mask is double.
But he who has the faith and strength
To thank his God for sorrow
Has found a joy without alloy
To gladden every morrow.

We ought to make the moments notes
Of happy, glad Thanksgiving;
The hours and days a silent phrase
Of music we are living.
And so the theme should swell and grow
As weeks and months pass o’er us,
And rise sublime at this good time,
A grand Thanksgiving chorus.

In closing, I want to invite everyone to come tomorrow to the Olde West Chester Christmas Walk.  This will be our ninth year participating and enjoy seeing everyone partake in this festive event.  It is open to the public and runs from 2 pm to 8 pm.  The parade is the highlight of the day and should not be missed.  It starts at 7 pm and makes its way down Cincinnati-Dayton Rd. Our office is the perfect place to view the parade as it marks the mid-point of the route.  As always, we will have a nice offering of cookies and warm cider and a balloon artist for the kids.  We hope to see you tomorrow!

November 17, 2017

The Cut, Cut, Cut Act

Nov 3, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

What a week!  If hundreds of earnings announcements weren’t enough, we also had the nomination of a new Federal Reserve chair, and the GOP tax reform plan.  Trying to digest all the information was like trying to drink from a firehose.  I’ll do my best to summarize what could turn out to be the busiest week of the year.

You may have noticed the stock market continues to head higher each week.  In fact, this is the eighth-consecutive week of higher closes.  We also learned that despite this week marking the thirtieth anniversary of the Black Monday stock market crash, this October the CBOE Volatility Index recorded the lowest monthly average in its history (dating back to 1990).  You couple that bit of news with the release of the Consumer Confidence Index which increased to its highest level in almost seventeen years, and it’s no wonder the stock market keeps heading higher.  I’m not saying that we’ve hit euphoria yet, but the numbers indicate people, in general, feel good about the economy and investors are confident current economic conditions will persist.

Part of what is fueling this rally is the cash that had been sitting on the sidelines all these years.  A recent report found that mutual funds are holding only 3.3% of assets in cash.  Meanwhile, money market funds as a percent of long-term assets have fallen to 17% – also an all-time low.  A separate Citigroup study from a couple months back finds institutional cash at just 2.25% of assets.  The bottom line is that there are a lot of fully-invested bears out there.

Additionally, the Federal Reserve Open Market Committee (FOMC) met this week and in its policy statement takes note of solid economic activity despite the hurricanes, soft core inflation, and continued strength in the labor market.  There is nothing in the statement suggesting the Fed won’t hike rates again at its next meeting in December.  But while we’re on the subject of the Federal Reserve, it should be noted that President Trump nominated Jerome Powell to be the new chairman of the Federal Reserve, replacing Janet Yellen whose term expires in February.  Mr. Powell has been a Fed governor since 2012 and has consistently voted with Yellen, thus earning the moniker, “The Republican Yellen.”  One thing that could prove different is his desire to further deregulate banks.  He’s on record saying he wants to, “deregulate community banks, relax liquidity constraints on larger firms, and relax lending standards in the housing markets.”  Those measures are more in line with the Trump administration and were likely contributing factors to his nomination.

In the middle of all this news, the GOP released details of its tax reform plan.  It did not go unnoticed.  No doubt you heard some of the details in the news.  The biggest change is the effort to drop the corporate tax rate from 35% to 20%.  However, anyone with a grade school education knows this means less revenue and potentially big budget deficits, perhaps as large as $1.5 trillion over 10 years.  To offset this loss of income, Republicans came up with a number of ideas including capping the mortgage interest deduction on new home purchases, limiting the amount of property taxes that can be deducted, eliminating the deductibility of state and local taxes, medical expenses, the tax credit for adoption of a child, and student loan interest.  It also keeps the top marginal tax bracket at 39.6% for those with earned income greater than $1 million.  Just remember, to “simplify” the tax code it was necessary to write a 400-page bill.

I usually close out this weekly piece with a funny or unusual story.  This week is a more sobering reminder that money is not free and does not, in fact, grow on trees.  It was announced the Social Security Administration paid out more than $1 trillion in fiscal 2017 for the first time ever.  This amounts to 37 times the Department of State budget, 32 times that of the Department of Justice, 20 times that of the Department of Homeland Security, and 76% more than the federal government spent on the Department of Defense.  The Social Security Administration and the Department of Health and Human Services now account for 53% of all federal spending.  If nothing is done to fix the funding, the financial reckoning will be huge – some estimate as much as $11.4 trillion down the road.  Now you know.

November 3, 2017

Historical Revelations

Oct 27, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was quite a week and one full of records.  The S&P 500 has closed at record highs sixty-six times this year, the most since the mid-1990s.  But also as impressive is the unusually low volatility which has resulted in the S&P 500 having its longest streak ever without a 3% intraday drawdown.  Some other mind-boggling stats include a record thirty-three straight days without a 0.5% drop, the longest streak since 1995.  And lastly, the S&P 500 has fallen by 1% or more only four times this year, the fewest for a full year since 1964.  While some may see these stats as unsustainable, the good news is that volatility is low because economies around the world are growing, there are few signs of recession in the U.S., and companies are reporting earnings growth.

This week was all about earnings announcements and boy were there a lot.  Despite the run-up in stock prices this year, some companies are executing their strategies better than others.  The following are some of the winners and losers this week:

  • General Electric -13%
  • Whirlpool -11.5%
  • Chipotle -15%
  • Expedia -19.5%
  • Baidu -10%
  • Mattel -13.5%
  • Google +4%
  • Microsoft +7.5%
  • Caterpiller +5%
  • Amazon +12%
  • Intel +11%
  • 3M +6%

In the midst of this earnings season, there is more than the normal amount of disorder happening in the healthcare sector.  For starters, it was revealed this week that Amazon has received wholesale pharmacy licenses in multiple states.  Amazon was mum on whether it is planning a move into the prescription drug delivery business, but the three major pharmacy distributors all took notice.  McKesson, AmerisourceBergen, and Cardinal Health all had a bad week down -11%, 8%, and 6% respectively.  Additionally, the old adage of kicking a man while he’s down could likewise apply here.  President Trump went on record calling the opioid epidemic an emergency with many looking at the drug distributors as ground zero.  However, the final bombshell this week was the announcement that CVS Health is considering the acquisition of Aetna perhaps blurring the line between insurance, pharmacy benefit, and retail pharmacy all in one fell swoop.  Healthcare is perhaps the most difficult and surely most uncertain sector these days.

In other news, the House of Representatives narrowly approved the Senate’s recently-passed 2018 budget, opening the door for the Senate to pass the GOP’s tax reform plan.  The reconciliation process will start soon, meaning the Senate can pass the tax cuts with just fifty votes (the VP breaking any tie).  However, a core dilemma is how to pay for the expansive tax cuts that are estimated to add up to $1.5 trillion to the existing federal deficit over ten years.  One proposal is to eliminate state and local tax deductions which could bring in up to $1 trillion over the same time period.  Another option is to reduce the annual cap on tax-deferred contributions that can be made to 401k plans from $18,000 to as little as $2,400.  Much like healthcare reform, the details could make a grand bargain insurmountable.

In closing, I turn to the much-anticipated release of 2,800 records related to the assassination of President John F. Kennedy.  While not all the records were released due to a last-minute stay by the President, enough was released to add color to what has been a hotly contested event in history.  One document has J. Edgar Hoover, in his own words, saying the public must believe Lee Harvey Oswald acted alone.  Another document indicates the Soviet Union theorized that President Lyndon B. Johnson could have been behind the assassination – and also feared that Moscow could be blamed and attacked.  They noted that sources said the KGB “was in possession of data purporting to indicate President Johnson was responsible for the assassination of the late President.”  And finally, a memo to the director of the FBI revealed that a call was made to the senior reporter at the Cambridge News (a British newspaper) at 6:05 pm on the day Kennedy was killed.  It should be noted the time is important because the call was made before JFK was assassinated.  “The anonymous caller told the reporter he should call the American Embassy in London for some big news and then hung up.”  If you are a history buff and want to know more, the documents are all online and can be reached here.  Now you know.

October 27, 2017

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