4/6/18 – Stocks Lower in Volatile Week

Sharp sell-offs on Monday and today wiped away gains from the middle of the week. Trade talk, disappointing jobs reports and Fed comments all led to today’s poor performance. For the week, the Dow declined 0.7% while the S&P 500 declined 1.4%.

Trade talk continued to dominate financial headlines this week. Trade fears fueled the sharp downturn on Monday, but by mid-day Tuesday rumors of behind-the-scene trade negotiations between the US and China eased concerns. But then Trump announced this morning he wanted to study the effects of another $100 billion in Chinese products subject to tariffs. It’s hard to understand the goal here. Trade is critically important to the US and global economy. This back and forth retaliation would be a large net loss for both the US and China, and yet here we are. Read More

The jobs report disappointed this morning, with the economy adding only 103k net new jobs in March. This was well below the 175k consensus estimate. Wage growth was reasonably strong though, growing at a 2.7% annualized rate. The jobs figures for January and February were also revised lower by a total of 50k jobs. The unemployment rate remained at 4.1%. While the jobs report was weaker than expected, Fed Chairman Powell stated this afternoon that the economy remains strong and ready for additional interest rate increases this year. Read More

I posted this on my business Facebook page yesterday. We’re over two months into the current market correction. Every correction is different and the issues driving them change, but it can be beneficial to study how past corrections behaved. I looked at the last four corrections to see how the current one compares in length and severity. This data suggests we’ve got several more months to go before working through this volatile period. It also shows that this correction (so far) has been pretty mild relative to others in the past decade. No one knows what the future holds, but if we have hit the bottom, we reached it significantly faster than the prior four corrections. We hit the low point 13 days after the late January high while the average correction has taken 138 days to set a bottom. We’re only 70 days from the all-time highs reached in late January. Over the past four corrections, it has taken an average of 268 days to exceed the prior high. You can see the chart here and follow me on Facebook if you’re interested.

Oil decreased 4.7% this week to close at $61.88/barrel. The yield on the 10-yr Treasury moved higher to 2.78% from 2.74% last week. The average rate on a 30-yr fixed rate mortgage moved lower to 4.40% from 4.44% a week ago.

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3/30/18 – Stocks Higher in Final Week of Quarter

Strong rallies on Monday and Thursday pushed stocks higher for the week. Concerns over a trade war dissipated and markets reacted to better than expected 4th quarter growth. The final estimate shows the US economy grew at an annualized rate of 2.9%. This is below the 3%+ rate of the last two quarters, but still significantly higher than the average of the first 16 years of this century. For the week, the Dow gained 2.4% while the S&P 500 increased 2.0%. While we ended the first quarter on a strong week, both the Dow and S&P 500 declined during the quarter. This broke a streak of straight positive quarters for the market. Markets are closed today in observance of Good Friday. Read More

Walmart is in early talks to buy health insurer Humana according to multiple reports. This follows CVS agreeing to acquire another health insurer, Aetna, in December. This could start a trend where we see insurers being consolidated into large businesses as the pressure to keep reducing healthcare cost intensifies. Stripping out layers of administrative costs seems like a positive, but consolidating purchasing power contains several risks. Drug research is very expensive and has a very low success rate. We currently have a lot of investment capital directed to drug research because the returns remain attractive. That means we do pay more for drugs, but we have a steady pipeline of new and better drugs. The risk of too much pricing pressure on drugs is less new drug research. On the flip side, we have an aging population and a growing need for doctors. While specialists are still well-paid, many family doctors’ earning potential has declined to the point where it’s hard to justify the time and financial investment of medical school. Additional pressure on that front could turn more of the best and brightest away from becoming doctors.Read More
     
Oil decreased 1.6% this week to close at $64.91/barrel. The yield on the 10-yr Treasury moved lower to 2.74% from 2.81% last week. The average rate on a 30-yr fixed rate mortgage moved lower to 4.44% from 4.45% a week ago. After a steady climb this year, mortgage rates have been essentially flat for five weeks.  


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3/16/18 – Stocks Decline on Increased Tariff Talk

Stocks declined on the week on news of some additional targeted tariffs towards China. China responded that it is preparing for a potential trade war. I don’t think we’re going to see a trade war, both sides have too much lose, but the concern is keeping pressure on stocks. For the week, the Dow declined 1.5% while the S&P 500 declined 1.2%.

While the markets were down this week, there was some positive economic news. The Labor Department reported there were 6.3 million job openings at the end of January. That’s the highest number on record. This follows last month’s strong jobs report which saw the economy add 313k net new jobs. The strong jobs figures could push the Federal Reserve to speed up interest rate increases this year. In the recent past, the fear of interest rate increases has caused stocks to sell-off, but that didn’t happen today. I think the market has come to terms with 2-3 interest rate increases this year and recognizes that it is an overall positive to the market and economy for the Fed to be in a position to raise rates. The Fed meets next week to discuss interest rate policy and it is largely expected that the Federal Funds rate will be increased 0.25%. Read More

The University of Michigan Consumer Sentiment survey reached a 14 year high this week. Tax cuts are increasing disposable income and should support continued consumer spending. Consumer spending makes up two-thirds of the US economy. Interestingly, people in the bottom third of incomes showed a sharp increase in sentiment, while those in the top third saw a decline. The reaction to the tariff announcement could explain part of this divergence. Lower income people, many of whom have experienced manufacturing jobs moving overseas view the tariffs as a way to improve their job situation and prospects. Whereas higher income Americans might be more concerned about higher consumer prices and the broader impact on the economy from higher taxes on goods. Read More

Oil increased 0.3% this week to close at $62.26/barrel. The yield on the 10-yr Treasury moved lower to 2.85% from 2.90% last week. The average rate on a 30-yr fixed rate mortgage moved lower to 4.44% from 4.46% a week ago. This was the first decline in mortgage rates in 2018.

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3/9/18 – Strong Jobs & Weakened Tariffs Push Market Higher

Stocks rode a strong jobs report and a partial rollback of the steel and aluminum tariffs to a great week. The Dow gained 3.3% while the S&P 500 increased 3.5%. While these strong weeks are nice, the volatility continues. This was the 4th week out of the last five that saw the Dow increase/decrease by more than 3%. For comparison, prior to this stretch the Dow went 59 straight weeks without a move greater than 3%. The Dow remains almost 5% below its all-time high while the S&P 500 is 3% below its all-time high.

The February jobs report showed the US economy added 313k net new jobs last month, significantly above the consensus expectation of 200k new jobs. Skilled labor positions, including construction and manufacturing, saw its best three-month period since 1984. The labor force participation rate increased to 63% while the unemployment rate declined to 4.0%. Wage growth was relatively modest at a 2.6% annualized rate. Interestingly, this was taken as a positive by many investors as a sign that inflation pressures remain contained. One of the issues that sparked the sell-off in late January was concerns about rising inflation and interest rates. This report, while only one data point, provided comfort that we aren’t looking at raising inflation for the moment. Along those lines, we also saw a large increase in the labor force from people returning to work who were no longer counted as unemployed. I’ve talked about the shadow labor supply in the past and it is this supply that has held wages in check even as the economy continues to add jobs. Read More

Tariffs on steel and aluminum sparked fears of a trade war last week. Like most market participants, I was hopeful that the blanket tariffs discussed wouldn’t actually come to pass. One of things we’ve seen with Trump is him making large, absolute statements to generate headlines, then dialing back into a more modest approach when final announcements are made. Importantly in this tariff debate, Canada and Mexico have been excluded from the tariffs. Canada and Mexico are the 1st and 3rd largest exporters of steel to the US. Coupled with US production this means the amount of steel actually subject to the tariff is a small portion of the total US consumption of steel. Treasury Secretary Steven Mnuchin has hinted that even more countries might be excepted in the future as well. That’s a big plus in my opinion. Read More

Oil increased 1.2% this week to close at $62.09/barrel. The yield on the 10-yr Treasury moved higher to 2.90%. The average rate on a 30-yr fixed rate mortgage moved higher again to 4.46% from 4.43% a week ago. Mortgage rates have now increased every week in 2018.

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3/2/18 – Roller Coaster Continues for Stocks on Tariff News

Roller Coaster Continues in Rough Week for Stocks 

The Trump administration outlined planned tariffs on foreign steel and aluminum this week. The move sent stocks into a sell-off mode, but seems to have somewhat stabilized as the week came to a close. For the week, the Dow declined 3.0% while the S&P 500 declined 2.0%. We wrapped up February with the S&P 500 declining 3.9% during the month. It was the worst month since January 2016 and broke a stretch of 15 straight positive months. That was the longest streak in over 30 years.

Tariffs create friction and added costs in an economy. I’m a believer that free markets create the greatest good for the greatest number of people. Billions of people globally have been pulled out of abject poverty because markets were allowed to flourish. Trade allows people, companies and countries to create what they do best and then sell that on a global scale. This has allowed developing countries with low labor costs to build manufacturing economies while allowing developed economies to enjoy lower prices on a variety of products. Trade does come with trade-offs though. Almost no clothing in manufactured in the US anymore because it can be done significantly cheaper in other countries. Many Americans who used to work in the textile industry lost jobs as a result. We’ve seen this in numerous industries, but the net benefit to the US economy has been a positive in my view. That doesn’t help people who’ve lost jobs; however, and that can spark a movement to implement protective trade policies.

Global trade is imperfect though. There is no question that the US faces tariffs in other markets that we don’t apply to products coming from those markets. While this isn’t ideal, the US has historically been a leader in promoting free trade regardless. We often accept and tolerate sub-optimal trade deals to keep markets open and trade occurring. There are also examples of countries violating the rules of trade agreements that frequently go without significant penalty. Potentially Trump is trying to force other countries’ hands, but this feels like a dangerous economic game to play. The tariffs announced this week aren’t the final versions and it’s possible changes will be made before finalized. While the effects of these particular tariffs likely won’t be broadly felt by US consumers, the risk is what other countries do in retaliation. Especially since these weren’t targeted tariffs against China and others who are often accused of cheating in global trade. The proposed tariffs apply to all countries including some of our best trading partners. The last thing the global economy needs is a trade war that sees overall economic activity decline as a result.

Oil decreased 3.4% this week to close at $61.38/barrel. The yield on the 10-yr Treasury ticked lower to 2.86%. The average rate on a 30-yr fixed rate mortgage moved higher again to 4.43% from 4.40% a week ago.

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Friday Rally Pushes Stocks Higher This Week – 2/23/18

A strong Friday rally lifted the Dow and S&P 500 into the green for the week. The Dow gained 0.4% while the S&P 500 increased 0.6%. The indices have recovered roughly 2/3rd of the value lost in the early February correction. Interest rates held steady this week ahead of incoming Fed Chairman Jerome Powell’s first report to Congress, scheduled for Tuesday. The market will be listening closely to his comments to get a sense of where interest rate policy is going. While many believe Powell holds similar views to outgoing Chairman Janet Yellen, this will be an important time for his to outline his plan on managing monetary policy, interest rates and reducing the Fed’s $4.5 trillion balance sheet. Most market participants are expecting the Fed to increase rates 0.75% over the course of the year through three separate 0.25% increases.

It was an eventful week in the retail sector. Walmart reported disappointing earnings Tuesday morning and its stock declined almost 13% by Wednesday afternoon. Most concerning to investors is the slowing growth in the online business, a focal point for Walmart in its competition with Amazon. Online sales grew almost 25%, but that was down from 50% growth last quarter. It was the largest one-day percentage drop since 1988. It’s not common to see a company as large as Walmart move that much in one day. Walmart’s market value declined $35 billion this week. Read More

Upscale retailer Nordstrom is reportedly trying to be taken private by the Nordstrom family. Nordstrom became a publicly-traded company in 1978, but the family has remained central to the business. The family currently owns approximately 30% of the company and apparently believes they will be in a better position to run the business in a challenging retail environment without the pressures and costs of being a public company. The family is attempting to get a deal announced before Nordstrom is scheduled to release 4th quarter earnings next week. Read More

Oil increased 3.1% this week to close at $63.55/barrel. The yield on the 10-yr Treasury held steady at 2.87%. The average rate on a 30-yr fixed rate mortgage moved higher again to 4.40% from 4.38% a week ago.

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Stocks Rebound, Best Week Since 2013 – 2/16/18

After experiencing the two worst weeks in the last two years, stocks rebounded sharply this week, with the Dow posting its best week since late 2016 and the S&P 500 having its best week since 2013. There was no specific news that drove the rebound, but the fear over higher interest rates and inflation appears to have subsided for the time being. Interestingly, interest rates continued to move higher and the 10-year Treasury is now at a 4-year high. To me, this suggests market participants have realized interest rates are still very low historically and unlikely to reach levels in the intermediate term that will put downward pressure on stock valuations. While this was a good week, it’s reasonable to expect that we will continue to see increased volatility going forward. Volatility was historically low for the prior two years and some return to a more normal level seems likely. For the week, the Dow and the S&P 500 increased 4.3%. Both indices have been up for six straight days and have now recovered around 60% of the losses from the prior two weeks. Markets will be closed Monday in observance of President’s Day.

The Commerce Department today announced recommendations for tariffs and/or quotas on imported steel and aluminum. The US steel companies surged today, with US Steel gaining ~15% on the news. Companies such as Whirlpool and others that are large users of steel and aluminum sold off on the news. A final decision is expected from the Trump administration in April. Tariffs and quotas are a de facto tax on consumers and businesses as they increase the cost of the underlying product. This follows recently announced tariffs on washing machines and solar panels. One of my biggest concerns about the Trump economic plan is tariffs and whether or not they could lead to a trade war. There are many examples of the US being on the wrong side of tariffs and unfair trade, but we have always stood for freer markets and no tariffs. This allows companies to compete on price and quality without significant government friction. It also keeps prices as low as possible for American consumers. Global trade is critical to everyone’s economic success and I’m hoping this will be the last of the tariffs announced. I believe we should be promoting open, free and fair trade, not putting up barriers in our own market. Read More

Oil increased 4.0% this week to close at $61.62/barrel. The yield on the 10-yr Treasury moved slightly higher, to 2.87% from 2.85% last week. The average rate on a 30-yr fixed rate mortgage moved higher again to 4.38% from 4.32% a week ago. This is the highest level for mortgage rates in almost four years.

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2/9/18 – Global Sell-off Continues, Markets Officially entered ‘Correction’

Global Sell-off Continues, Markets Officially entered ‘Correction’

Last Friday’s weakness carried into this week and all the major indices officially entered ‘correction’ territory, which means they traded more than 10% below recent highs. The sharp rally late Friday technically pulled markets out of the correction as now the Dow and S&P 500 are roughly 9% below recent highs, but they traded as much as 11-12% below the highs earlier today. For the week, the Dow and S&P 500 both declined 5.2%. Even with the sharp down move, stocks are still at levels seen just two months ago in late November and early December. It’s possible we will continue to see volatility and downward pressure on prices in the coming weeks, but it was positive to see stocks rally late on a Friday heading into the weekend.

This is the first correction we’ve had since February 2016. Two years ago, the market declined just over 13%, peak to trough. Since then, the market has gone almost two years since experiencing even a 5% decline. That officially ended this week. Since the financial crisis, there have now been five corrections. In addition to this year and 2016, we experienced corrections in 2015 (-12.4%), 2011 (-19.4%) and 2010 (-16.0%). Historically, the market experienced one market correction per year on average. Since the financial crisis, we’ve had a lot more stability in the stock market, with a correction only every two years. This is likely driven from global central banks keeping monetary stimulus flowing over most of this time period.

Why do these things happen? There are always numerous drivers of these types of corrections. Over time, earnings drive the market. Earnings are the single most important aspect of the financial markets and earnings have been strong. However, what is always very subjective is how much investors are willing to pay for those earnings. Over the last 20-years, the average price paid for 12-month forward earnings has been 17.2x. That means that if a company expected to earn $1/share in the next 12-months, investors would value the company at $17.20/share, $1 of earnings times a 17.2 multiple. That multiple peaked a week ago at 18.5x and currently sits around 17.0x. For various reasons, investors decided they were no longer willing to pay the same multiple for future earnings.

Several factors over the last week helped convince investors a lower earnings multiple was reasonable. Interest rates increased rather sharply in a short amount of time. This led many investors to either decide they preferred fixed income investments or that enough other investors would make those allocation changes. Wage growth in the January jobs report was also at a multi-year high of 2.9%. That could be an early indication that higher inflation is coming. With the unemployment at 4.1%, the thought is higher wages will be necessary to attract and retain workers. On the whole, higher interest rates, higher wages and slightly higher inflation are a positive. They come out of a strong economy, but they can cause short-term disruption in financial markets as investors adjust to the new environment.

Overall, I made a few minor changes to portfolios this week and continue to believe the underlying economy is strong and that this correction will be relatively short-term in nature.

Oil decreased 9.2% this week to close at $59.23/barrel. The yield on the 10-yr Treasury moved slightly higher, to 2.85% from 2.84% last week. The average rate on a 30-yr fixed rate mortgage moved sharply higher to 4.32% from 4.22% a week ago.

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2/6/18 – Thoughts on Market Sell-Off

The Dow Jones Industrial Average declined almost 1,200 points yesterday, the largest one-day point decline in history. While the point move was very large, on a percentage basis, yesterday 4.6% decline wasn’t in the 30 worst trading days in history. Yesterday’s move followed Friday’s down day and pre-market trading implies stocks will open down sharply again today. Here’s how I’m thinking about the sell-off.

The stock market just experienced the strongest January performance since 1997 and a strong 2017. Even with the sharp decline in the last few days, the Dow and S&P 500 are at prices we saw in early December, just two months ago. The market hasn’t had a 10% ‘correction’ since late January and early February of 2016. Market corrections like this are very common and we’ve been in an extended period without this type of correction.

Investing is based on achieving long-term goals. Markets go up and down, but over the long-term stocks have trended upward. The goal is to buy quality companies at attractive prices. This sell-off is making a lot of quality companies less expensive than they were just a week ago. Warren Buffett likes to say that investors should be greedy when others are fearful and fearful when others are greedy.

Your portfolios are constructed with a mixture of stocks, bonds and cash. Bonds and cash provide stability, steady income and buying power should prices decline. Stocks allow for capital appreciation, but come with greater risk. Given the sharp increase we’ve seen in stocks over the last year, a couple of large down days doesn’t make me think we need significant changes to our strategy. The economy continues to grow, economic growth appears to be accelerating, corporate earnings remain strong and while interest rates are going higher, they remain at a very low level on a historical basis. Inflation is a risk, but overall, I think believe stocks remain an attractive and important part of a well-balanced portfolio.

If you have questions or want to discuss your portfolio more specifically, please let me know.

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2/2/18 – Ugly Week for Stocks

We’ve had a great run in the stock market and it’s easy to forget that sometimes stocks go down. That reality came back in full force this week with the Dow down over 600 points today and 4.0% for the week. This was the worst week for the Dow since the first week of 2016, when it was down 6.2%. The S&P 500 was down 3.8%. While this was a rough week, it’s important to put this into perspective: January was the best performing January since 1997, the major indices are still positive for the year and it’s been over 400 tradings days since the S&P 500 experienced a 5% decline, the longest such streak in history. A strong argument can be made that the market was long overdue for a pullback like we’re experiencing. It’s possible this sell-off could continue into next week, but fundamentally, corporate earnings continue to look good, the economy continues to grow and the labor market remains strong. While markets will always fluctuate up and down, the fundamentals suggest to me this pullback is merely that and not a sign of a weakening market or a slowing economy.

One issue that could be driving this weakness is the sharp rise in interest rates we’ve seen recently. The 10-year Treasury is yielding over 2.8% currently, the highest level in over four years. The 10-yr was yielding just over 2.4% at the beginning of the year. Interest rates can tell us many things, including higher expectations for growth and inflation, but it can have some negative impacts on stocks as well. Every investor evaluates various markets and investments and allocates capital accordingly. Rates have been at/near historic lows for many years. Those low yields make bonds much less attractive to many investors. As a result, many portfolios have been skewed to higher equity allocations and lower bond allocations. As rates rise, some investors could decide they prefer the higher interest rates and lower relative risk of investing in bonds. That leads to selling stocks and puts downward pressure on prices.

Oil decreased 1.3% this week to close at $65.26/barrel. The yield on the 10-yr Treasury moved sharply higher, to 2.84% from 2.66% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 4.22% from 4.15% a week ago.

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