Earnings season kicked off this week and stocks continued moving higher. We’ve also seen several more large companies announce increased investment, wages and/or bonuses as a result of corporate tax reform. The one-time bonuses are nice, but the real economic benefit will come from higher wages and higher investments. Even foreign companies are getting in on the act. Fiat-Chrysler announced this week an additional $1 billion investment in Michigan. With the US corporate tax rate now lower than most large European economies, investment by European firms into the US looks that much more attractive. All the positive news pushed both indices higher for the week with the Dow gaining 2.0% and the S&P 500 increasing 1.6%.
The big news this week was Walmart’s announcement that it is raising its minimum wage to $11/hour and paying one-time bonuses to employees between $200-$1,000. The company also increased its paid maternity leave to 10-weeks for full-time employees. The company announced this change was a direct result of corporate tax reform. The news was somewhat diminished by the concurrent announcement that the company would close 63 Sam’s Club warehouses. Some of the closed warehouses will be converted to eCommerce shipping centers.
Some people have suggested the Sam’s Club closures are being used to pay for the wage increases and bonuses. I view that is an incorrect analysis. The physical retail sector is shrinking. We all order too much stuff online and don’t go shopping as much. Additionally, Sam’s Club keeps losing to Costco in the warehouse sector. Walmart is closing the stores because they are under-perfoming stores. Without tax reform, those stores would still be closing. I view the two announcements as two distinct issues. One, stores closing given the competitive climate. Two, employee raises and bonuses to share a portion of the expected tax savings. Read More
Oil increased 4.5% this week to close at $64.36/barrel. This was the highest weekly close since December 2014. The yield on the 10-yr Treasury moved higher, to 2.55% from 2.47% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 3.99% from 3.95% a week ago.