There was a lot of geopolitical news this week coupled with important jobs data. With all the news though, stocks were very calm this week. On the week, the Dow was essentially unchanged while the S&P 500 declined 0.3%.
The March jobs report came in well below estimates, but it didn’t seem to impact markets today. The economy added only 98k net new jobs in the month. This was well below consensus estimates of 180k. Additionally, figures for January and February were revised lower by a combined 38k jobs. Total job creation in the first quarter was 533k, or a reasonably attractive 178k per month, essentially the same as the 176k monthly average in 2016. Wage growth was a bright spot in the report though, increasing at a 2.7% annualized rate. The unemployment rate dropped to 4.5%. The market had a very muted reaction to this report for a couple reasons I think. First, these monthly reports are notoriously volatile. Second, last month was strong amidst a very warm month in many parts of the country. March, however, dealt with a large snowstorm through the entire Northeast that likely hurt construction employment in the month. Finally, we’ve had these weak months periodically in the last few years, but they have always been blips. In May 2016, the economy added only 24k jobs, but rebounded to a strong 271k in June. At this point, people are comfortable chalking this up as an anomaly not the start of a trend. Read More
Lots of geopolitical news this week. North Korea launched another ballistic missile into the Sea of Japan. The launch occurred before the meeting between Trump and Chinese leader Xi where North Korea was expected to be a major topic of discussion. Additionally, the US launched 59 cruise missiles into Syria destroying an air base and some Syrian air force planes over night. The strike was in response to a chemical weapons attack believed to be coordinated by the Assad regime. It’s unclear where this goes from here. Russia, who has backed Assad, has been pretty moderated in its response, even saying its support of Assad isn’t unconditional. Neither event seemed to concern investors. Markets were down early today, but quickly rebounded and some of the negativity could have come from the headline jobs figure. Defense stocks actually did well today, with Raytheon and Lockheed Martin both up over 1%. Read More
President Trump met with Chinese Leader Xi Jinping this afternoon. As of yet, they have not issued a joint statement. Trade and North Korea were expected to be important topics of discussion. Many have speculated the Syria strike was timed to make clear to Xi that the US would be willing to act alone against North Korea if China is unable, or unhelpful in reigning in Kim Jung Un. There’s been few little details about the substance of the meeting release yet, but markets will be looking for details on the trade portions of the discussion. While Trump has continued to talk tough on trade, his actions have been more measured. Hopefully that trend continues because we benefit greatly as a nation from trade with China.
Oil increased 3.0% this week, closing at $52.23/barrel. The yield on the 10-yr Treasury decreased slightly, closing at 2.38%, from 2.40% a week ago. The average rate on a 30-yr mortgage declined again, moving to 4.10% from 4.14% last week.
|10-yr Treasury (∆ in bps)||2.38||(1)||(6)|
Stocks finished the last week of March on a positive note. The Dow gained 0.3% while the S&P 500 added 0.8%. For the quarter the Dow and S&P 500 increased 4.6% and 5.5%, respectively. The first quarter was the sixth straight quarter where the indices increased.
Earlier this week, the UK officially started the process of leaving the European Union by invoking article 50 and formally filing its ‘intention to leave’ letter to the European Council. The two sides now have two years to negotiate the terms of the departure. The goal of the negotiation is to determine any departure tax the UK might have to pay as well as sign trade, work and travel agreements between the UK and the rest of the EU. Trade between the UK and the EU is important to both economies, so it seems to me the sides should be able to work out an agreement. Switzerland and Norway are notable examples of non-EU countries that have effectively negotiated trade and other deals with the EU. Those deals seems like a great starting point. While many EU officials are likely still upset about Brexit, economic self-interest should encourage a relatively seamless process. No one wins from an ugly process that hurts trade for everyone. Read More
The retail sector continues to struggle. As online shopping grows, regular brick & mortar businesses are closing stores and in some cases filing for bankruptcy. Macy’s, Sears and others have announced large numbers of store closings. Specialty retail stores like Gander Mountain, Wet Seal and BCBG have filed for bankruptcy protection this year. In the first quarter, nine retail companies filed for bankruptcy, equal to the total for all of 2016. What’s interesting to me about this is while many retailers are struggling, Amazon is actually looking to open more physical retail stores. I think this points to the fact that physical retail will always have a presence, especially in key locations that can be profitable. However, we are significantly over-retailed in this country. Amazon can start from a position of strength and add key locations and avoid less lucrative markets. It’s going to be a fascinating few years as the retail space equalizes with demand. It will also be interesting to watch what this means for commercial real estate. There are millions of square feet of retail space across the country that are simply not needed. Will other businesses step and use this space or will we be left with numerous empty stores? Read More
Oil increased 5.4% this week, closing at $50.73/barrel. This was the first weekly close above $50 in four weeks. The yield on the 10-yr Treasury decreased slightly, closing at 2.40%, from 2.41% a week ago. The average rate on a 30-yr mortgage declined again, moving to 4.14% from 4.23% last week.
|10-yr Treasury (∆ in bps)||2.40||(2)||(5)|
Markets experienced their largest decline of 2017 this week. Most of the weakness occurred on Tuesday as financial stocks sold off sharply. For the week, the Dow declined 1.5% while the S&P 500 was down 1.4%.
On Tuesday, the Dow and S&P 500 broke an impressive streak. The indices had gone 110 straight trading days without a daily loss of greater than 1%. This was longest such streak since the early 90s. It’s really been a surprisingly calm few months in the market. By contrast, through March 24th last year, which is approximately 75 trading days, the market had 14 days where the indices declined by more than 1%. Read More
A major topic over the last few days has been the Republican’s healthcare bill and what that means for future legislation. The current bill doesn’t seem too popular with anyone and it was reported just before 4pm that Republicans were pulling the bill and no vote would take place. Many have argued this vote was important because it would demonstrate the Administration’s ability to pass legislation. The thought being, if Trump can’t get the healthcare bill passed, will he be able to get tax reform passed? I have a hard time understanding that thought process given the nature of both issues. Healthcare is terribly complex and there were numerous factions with differing views on the future of healthcare, especially within the Republican party. On tax reform, especially corporate tax reform, it appears to me there is much more support for doing something, even bipartisan support. Of course, every politician will have different goals, but it seems many are directionally aligned, so it seems far less likely there will be a number of Republicans voting ‘No’ on a potential tax reform bill. Read More
Oil declined this week, decreasing 1.3% to close at $48.14/barrel. The yield on the 10-yr Treasury decreased, closing at 2.41%, from 2.55% a week ago. The average rate on a 30-yr mortgage retreated, moving to 4.23% from 4.30% last week.
|10-yr Treasury (∆ in bps)||2.41||(9)||(3)|
After suffering their worst week of the year last week, both indices rebounded and increased slightly this week. The Dow gained 0.1% while the S&P 500 increased 0.2%.
The Federal Open Market Committee met this week and agreed to raise interest rates 0.25%. This was widely expected, but stocks managed to rally immediately following the announcement. The rally was broad-based with even utilities increasing. Utility stocks, given their high dividend yields, often sell-off when interest rates rise as the relative attraction of the dividend decreases. This suggests to me the market fully expected an increase and took the increase as a signal of a strengthening economy. Additionally, the comments from Janet Yellen suggested that two additional increases were likely this year. Some had speculated three more could happen this year and I think that reassured dividend investors that rates wouldn’t more too much higher in the near term. Read More
The US announced what appears to be a fairly significant change in policy to dealing with North Korea, although the news didn’t seem to impact markets today. North Korea has nuclear weapons, but doesn’t yet have the missile capability to reach the west coast of the United States. They have expressed a desire to do that and they repeatedly test missile launches in the Pacific Ocean. Last week, North Korea launched four ballistic missiles towards Japan, saying it was a test for attacking US forces in Japan. Secretary of State Rex Tillerson said this week that all options would be on the table if North Korea increases its threat, including a preemptive military strike. I don’t know what the long-range plan/solution is to North Korea, but I always assume these dictators want to talk tough, but also want to remain in power, which hopefully keeps the status quo going forward. There’s been very little geopolitical news impacting markets lately, but this is a situation to monitor. Read More
Oil bounced back this week, increasing 0.7% to close at $48.79/barrel. The yield on the 10-yr Treasury decreased, closing at 2.50%, from 2.58% a week ago. The average rate on a 30-yr mortgage extended a 2017 high, moving to 4.30% from 4.21% last week.
|10-yr Treasury (∆ in bps)||2.50||(7)||5|
Both indices endured their worst week of 2017. The Dow broke a 5-week winning streak, while the S&P 500 was down for the first time in seven weeks. On the week, the Dow and S&P 500 declined 0.5% and 0.4%, respectively.
The Bureau of Labor Statistics released a very strong February jobs report this morning. The economy added 235k net new jobs last month, well above the consensus estimate of 190k. This follows a strong ADP jobs report on Wednesday and suggests businesses are optimistic about the direction of the economy. Over 160 million Americans are working, the most in history. The unemployment rate declined to 4.7%. As I’ve mentioned many times over the last few years though, the unemployment overstates the strength of the labor market in my opinion. People who haven’t actively looked for a job in the prior four weeks are not included in the labor force. This excludes millions of Americans who are long-term unemployed and have given up looking for work. There are still over 94 million working age American not working. I think what we’re seeing is a nice sign of optimism from corporate America, but also a continuation of many of the same trends we’ve seen for years. Jobs are growing at a nice rate, but many people are still on the sidelines in need of a stronger labor market. Read More
The Federal Reserve Open Market Committee meets next week and it is widely expected they will decide to increase the Fed Funds rate by 0.25%, or 25 basis points. The strong jobs report today essentially finalized the decision and the market seems to be happy with it. In the 2012-2015 period, every time investors thought the Fed would raise rates, stocks would sell-off and vice versa. Today, most investors seem ready to welcome higher rates. I think this is because people recognize the economy is in a much better position today that it was a few years ago. My expectation for the year is we’ll see three, and potentially four rate increases. This could be a nice boost to savers as interest rates on savings accounts and fixed income investments increase. It could cause some volatility and unpredictability in the bond market in the short-term, but overall I believe this is a positive for investors. I know I would like to see higher returns in the fixed income portion of portfolios.
Eighteen months ago, Congress voted to suspend the debt ceiling. This happened a few times during the Obama years, where the ceiling was suspended instead of being raised. It’s sort of a semantic issue, since both options allow the government to continue borrowing money. The current suspension expires on March 16th so something needs to happen soon. I’ve argued over the years that the debt ceiling is pointless because we’ve raised it ~80 times over the years. Politically, it will entertaining to watch the situation evolve with one-party in control of Congress and the White House. Practically, we have to either suspend the debt ceiling again or raise it to some amount that will get us through another couple years. In spite of all the talk about fiscal discipline, the US has shown very little over the years, regardless of which party was in control. Read More
Oil was down sharply this week, decreasing 9.0% to close at $48.43/barrel. This is the first time since November that oil has finished a week below $50/barrel. The yield on the 10-yr Treasury increased, closing at 2.58%, from 2.49% a week ago. The average rate on a 30-yr mortgage reached a 2017 high of 4.21% from 4.10% last week.
|10-yr Treasury (∆ in bps)||2.58||9||13|
Stocks rallied sharply on Wednesday following President Trump’s speech Tuesday night. Wednesday made up over 100% of this week’s gains as investors responded positively to continued plans to cut corporate taxes and reduce business regulations. For the week, the Dow increased 0.9% while the S&P 500 increased 0.6%.
While taxes and regulations were focal points during the speech, there was very little mention of the budget, debt and our deficit in spite of a lot of spending discussion. The national debt is the country’s total amount of debt outstanding. Our debt currently stands around $20 trillion. Roughly 3/4th of the total debt is held by public investors and the rest is debt owed to other parts of the government. This intra-government debt includes the Social Security trust fund. There is no cash in the trust fund, rather the general budget has promised to payback the trust fund in the future. The US Gross Domestic Product is ~$18.5 trillion, so we currently have slightly more than a years’ worth of economic output in debt outstanding. For comparison, in 2007, US debt to GDP was 65%. Germany is currently around 75% while Japan is close to 230%.
The deficit is the annual shortfall between what the government spends and what it collects in taxes. The deficit for fiscal 2017 is projected to be ~$550 billion. This means that the government will need to borrow an additional $550 billion, increasing our total debt outstanding, to fund the shortfall this year. While we had a couple balanced budgets in the last years of the Clinton administration, total debt outstanding has increased every year since 1957. That means even in those years with a balanced budget on paper, the government still needed to borrow small amounts to fund the spending. No one really knows how long we can keep borrowing hundreds of billions of dollars a year to cover government spending. We’ve never had a problem borrowing money, interest rates are at historical lows, but it would have been nice to hear a plan or commitment to fiscal responsibility on Tuesday night.
Snapchat issued shares to the public (IPO) for the first time this week. Snapchat is the latest social media company to go public and is a very popular video/picture app with people under 25 years old. The company currently has a market valuation of ~$35 billion. To put that in context, that is the same size as well-known companies such as Deere, Adidas, General Mills and Southwest Airlines. While the market is valuing these companies similarly, Snapchat generated only $500 million in sales last year and lost over $500 million. It’s crazy that a company with $500 million in sales could be worth $35 billion. Southwest had sales over $20 billion and net profits over $2 billion last year. There was one unlikely winner in the IPO. A private high school in California invested $15k a few years ago into Snapchat. That stake is now worth $24 million. Not a bad investment for a group of high school students. Read More
Oil was down this week, decreasing 1.5% to close at $53.21/barrel. The yield on the 10-yr Treasury increased sharply, closing at 2.49%, from 2.32% a week ago. The average rate on a 30-yr mortgage moved lower to 4.10% from 4.16% last week.
|10-yr Treasury (∆ in bps)||2.49||17||4|
Stocks continued moving higher this week, the 5th consecutive week the S&P 500 increased and the 4th in the last five for the Dow. For the week, the Dow increased 1.0% while the S&P 500 increased 0.7%.
Incoming Treasury Secretary Steven Mnuchin talked about the administration’s economic growth plan in an interview with CNBC earlier this week. While specifics weren’t released, the framework included significant tax cuts for individuals and businesses and a reduction in business regulations. Mnuchin said the tax cuts were targeted for middle class earners and that any reduction in marginal rates for higher income people would be neutralized with declining deductions. I think lower rates with fewer deductions is a more efficient way to raise revenue. I also think it reduces economic distortions as people focus on business and investing instead of maximizing tax deductions. There was less information on corporate taxes in the interview, although the Border Adjustment Tax is still being discussed. The discussion lacked specifics on regulations as well, but he said the goal was reduce the regulatory burden on small and medium-sized businesses. Regulations often hit those firms the hardest because they lack the money or scale to effectively comply with myriad regulations. Mnuchin said they plann to have specific proposals and details released over the summer. As with all legislation, the details will be critical. Read More
French Presidential elections will become a bigger news/market topic over the next two months. The key reason markets are watching is what is means for the future of the EU and Euro currency. Marine Le Pen is leading in many polls and she has suggested France should abandon the common currency. Even though she appears to be leading in some polls, it would still take a pretty big upset for her to actually win the Presidency. French elections are structured very differently from ours. It’s a two stage process where the first round contains every candidate running and the top two vote recipients advance to the final round two weeks later. A candidate can win outright in the first election by receiving over 50% of the vote, but that has never happened and doesn’t appear likely to happen this year. While Le Pen polls well as peoples’ first choice candidate, she doesn’t appear as many peoples’ second choice. This suggest she is likely to advance to the final election, but most likely lose to the other runner-up as that candidate consolidates more of the votes from the eliminated candidates. That said, people are watching closely after the upset votes for Brexit and Trump as populist philosophy continues to take a greater hold in the West. Read More
I’m still thinking through what a potential Frexit would mean. This would be very different from Britain leaving because Britain has its own currency. Britain leaving the EU would/will cause some renegotiation of trade deals and work/travels rules, etc, but the country’s debt remains in the same currency and its central bank remains intact. Debt throughout the economy also remains in the same currency. If France leaves and returns to the Franc, billions in government and private debt could be at risk. It’s unclear how France would attempt to handle Euro-denominated debt in a transition and whether it would lead to a default. The biggest issue could be France losing access to funding from the European Central Bank and having to re-establish its own central bank. There’s numerous variables at play and if Le Pen’s popularity keeps rising, expect to read/hear a lot more about the potential ramifications.
Oil was up this week, increasing 1.2% to close at $54.02/barrel. The yield on the 10-yr Treasury decreased sharply, closing at 2.32%, from 2.42% a week ago. The average rate on a 30-yr mortgage ticked slightly higher to 4.16% from 4.15% last week.
|10-yr Treasury (∆ in bps)||2.32||(11)||(13)|
Stocks continued moving higher this week, the 4th consecutive week the S&P 500 increased and the 3rd in the last four for the Dow. For the week, the Dow increased 1.7% while the S&P 500 increased 1.5%. Both indices closed at record highs again. Markets are closed Monday in observance of President’s Day.
Today marked the 89th consecutive day that the stock market hasn’t had a decline of greater than 1%. A streak this long has only happened 17 times in the last 70 years. The streak dates back to October 11th, a month before the election. I always recommend people focus on the longer-term instead of worrying about the ups/down on individual days, weeks and months. However, it’s pretty interesting to look at the daily trading over that period. It’s been a generally upward moving market, but there have been very few days that were up over 1%, only four. Most days have been up/down less than 0.5%. There’s been a lot of hyperbole and chaos politically over the last three months, so it’s interesting that the market has been behaving exactly the opposite. Steady strength rather than sharp swings up and down. I think that bodes well for the market over the coming months.
Merger news dominated headlines today with the proposed $143 billion acquisition of Unilever by Kraft-Heinz. The shares of both companies increased, as did others in the sector such as Colgate. Unilever rejected the initial offer, but stock reaction suggests a higher offer might be forthcoming. It’s always interesting to see merger activity increase when stocks rise. On some levels, you would think lower share prices would encourage buyers to make acquisitions, but it always seem that exuberance from higher stock prices gets both buyers and sellers willing to do deals. Regardless of the stock moves today, this deal seems unlikely to happen to me. Britain is navigating whether it will leave the EU or not and this type of transaction is largely driven by potential cost synergies. Cost synergies is a fancy way of saying ‘layoffs’ so it seems unlikely that the UK would approve a merger where it would see significant jobs cuts while it faces uncertainty from a potential Brexit. Read More
Many of you likely remember the Snuggie from the late night TV commercials of the blanket with sleeves. I didn’t even realize Snuggies were still a thing, but apparently they’ve been in a long legal battle about whether Snuggies are blankets or robes. You might be wondering, ‘who cares?’ It’s an important distinction because of how blankets are taxed relative to clothing. If the Snuggie had been ruled as a robe, the import tax would have been 14.9%. As a blanket, however, the Snuggie only faces an 8.5% tax. Who would have thought the difference between a blanket and a robe would add up to real money. Read More
Oil was down this week, declining 0.8% to close at $53.37/barrel. The yield on the 10-yr Treasury increased slightly, closing at 2.42%, from 2.41% a week ago. The average rate on a 30-yr mortgage ticked slightly lower to 4.15% from 4.17% last week. Average mortgage rates are now down 0.17% from the beginning of the year.
My 2017 Form ADV is now filed and available for review. The ADV is a regulatory document filed every year with state financial regulators describing me and my business model. You can find the latest version here.
|10-yr Treasury (∆ in bps)||2.42||1||(3)|
A strong Thursday and Friday pushed stocks higher on the week. The Dow increased 1.0% while the S&P 500 added 0.8%. The Dow, S&P 500 and NASDAQ all finished the week at record highs.
A lot of the strength the last two days was driven by an upcoming announcement on corporate taxes. In a meeting with airlines executives yesterday, Trump said that a ‘phenomenal’ announcement was coming in the next 2-3 weeks on corporate tax reform. There’s really been no info on what this potential proposal will include. House Republicans continue to discuss the Border Adjustability Tax, but it’s unclear if the administration will go in this direction. Stocks rallying on potential news has been a common theme in the last few months. We still haven’t seen many, if any, concrete proposals on financial regulation, corporate regulation, corporate taxes, etc and yet stocks are pricing in a lot of good news. Maybe the reality will live up to expectations. There’s an old saying on Wall Street, ‘buy the rumor, sell the news’ and that might be shaping up as true as we sit at all-time highs. I don’t make investment decisions based on potential short-term movements, instead preferring to buy quality companies that are attractive longer-term holdings, but we could see some market volatility as actual proposals come out and differ from the optimism people are currently projecting. Read More
Daniel Tarullo, a Fed Governor, unexpectedly announced his resignation effective April 15th. Mr. Tarullo was appointed by President Obama in 2009 and his term was scheduled to run until 2022. He didn’t give a reason for his departure, but it does leave three vacancies for President Trump to fill on the important seven-member committee. Fed Chairman Janet Yellen’s current term ends next February and it’s unclear whether or not she is interested in returning or whether Trump will ask her to return. The Fed Governors play an important role in financial regulation and this opening gives the Trump administration the potential to make significant changes. Read More
Oil was essentially flat this week, closing down one penny to $53.82/barrel. The yield on the 10-yr Treasury declined, closing at 2.41%, from 2.48% a week ago. The average rate on a 30-yr mortgage ticked slightly lower to 4.17% from 4.19% last week.
|10-yr Treasury (∆ in bps)||2.41||(7)||(4)|