Stocks continued higher this week as investors focused on strong earnings reports and continued corporate announcements about increased investments in the United States post the recent tax reform law. FedEx was the latest, announcing an increase in wages for all its hourly employees as well as additional investment in the US. The major indices have been up four consecutive weeks and every week so far in 2018. For the week, the Dow increased 2.1% while the S&P 500 increased 2.0%. Both indices closed at record highs today.
The initial report on 4th quarter economic growth was a little disappointing at a 2.6% annualized rate. Compared to average growth from 2000-2016, 2.6% is reasonably attractive, but many have come to believe the US economy can get sustained growth at a rate greater than 3% per year. The economy had grown at a 3%+ rate in the 2nd and 3rd quarters. It’s been since 2005 that the economy grew in excess of 3% for three consecutive quarters. There are still two additional reports that will update 4Q growth, so it’s possible the growth will be revised higher. One thing that strikes me about 4Q growth is the role tax reform could have played. Starting in 2018, companies will get immediate expensing of many capital investments. This means that investments in 2018 can be taken as a full deduction on 2018 taxes. This sharp change could have motivated companies to delay investments and capital expenditures into 2018 to take advantage of the new law, artificially depressing growth in the 4th quarter. Read More
One of the most troubling aspects of the Trump economic agenda in my opinion came into focus this week as Trump announced new tariffs on foreign made washing machines and solar panels. Tariffs merely drive up the price of consumer goods. The US has frequently accepted less-than ideal trade deals just to keep trade flowing. It’s somewhat admirable that Trump is trying to fix that situation. However, pushing prices higher and risking a bigger trade war seem counterproductive to me. It’s also confusing how the Administration has spent the last few months talking up the benefits of lower corporate taxes, which I agree with, but now is increasing taxes on certain consumer goods. These tariffs seem likely to cause more troubles than benefits. Read More
Oil increased 4.0% this week to close at $66.11/barrel. The yield on the 10-yr Treasury moved higher, to 2.66% from 2.55% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 4.15% from 4.04% a week ago.