I hope you had a happier Thanksgiving than the market did. The holiday-shortened week proved ugly for global markets. Both the Dow and S&P 500 were down sharply. The Dow declined over 1,100 points, its worst Thanksgiving week since 2011. On the week, the Dow declined 4.4% while the S&P 500 declined 3.8%. Oil declined for its 7th consecutive week, closing at its lowest level since October 2017.
There seems to be a consensus forming that the US economy is slowing and could even enter a recession next year. Japan and Germany saw economic contraction in the 3rd quarter, although some are attributing that to one-off components in the calculations rather than a true negative growth rate. China continues to struggle, existing home sales are at their lowest level in four years and home builder sentiment fell to the lowest level in over two years. Rising mortgage rates are playing a key role in declining demand for housing. What’s less clear is whether this is a temporary blip or a sign of deeper problems in the housing market. It makes sense for activity to slow and skepticism to mount as rates rise and consumers adjust to the new rates. The key will be whether buyers adjust to higher rates and sellers adjust to a market with potentially lower sales prices. Higher rates increase monthly payments, limiting what a home buyer can pay for a house. A prolonged slowdown in the housing market would negatively impact consumer confidence, lower peoples’ ability to use home equity to pay for upgrades while higher rates make tapping equity more expensive. Six months ago, a December Fed rate increase seemed like a sure thing. Now, all eyes will be on the Fed next month to see if they continue on their path to normalize interest rates or recognize things aren’t as rosy as people have been believing. I don’t like that Trump has been publicly pressuring Fed Chairman Powell to cut rates, but I think the prudent decision for the Fed would be to hold off on any future increases until the economy stabilizes, even if it appears it is caving to political pressure.
As mentioned above, oil decreased again this week, plummeting 11.3% to close at $50.3+/barrel. Oil is now ~35% off the high is reached in early October. The yield on the 10-yr Treasury moved lower, closing at 3.04% from 3.07% last week. The average rate on a 30-yr fixed rate mortgage sharply declined, moving to 4.81% from 4.94% last week.
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Concerns over a slowing economy and trade wars drove stocks sharply lower in the first half of the week. Even with up days yesterday and today, both major indices closed down on the week, with the Dow declining 2.2% while the S&P 500 declined 1.6%. As you might guess, the rallies yesterday and today came on the heels of positive Chinese trade talk from the Trump administration.
Economic growth has been strong over the last four quarters, but some are starting to question the longevity of this stretch. Increased federal spending has added to the growth and investors are starting to worry that other areas of the economy are slowing. Roughly speaking, the consumer spending makes up two-thirds of the US economy while business investment and government spending each add 15-20%. When the government runs large deficits, it serves as a stimulus to the economy and can mask some weakness in other areas. While the past data has been good, some companies are tempering expectations heading into 2019. Given weakness in some other parts of the world, this will be an important development to follow.
Oil decreased again this week, declining 5.7% to close at $56.83/barrel. The sharp drop in oil prices supports the view that overall economic growth is slowing. While oil is volatile and often swings too high and too low, it’s eye-opening to see it decline over 25% in the last six weeks. The yield on the 10-yr Treasury moved lower, closing at 3.07% from 3.19% last week. The average rate on a 30-yr fixed rate mortgage held steady at 4.94%.
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Stocks finished their best week since June following the midterm elections this week which saw the Democrats regain control of the House while Republicans retained control of the Senate. This result was largely expected by pre-election polling and election betting markets. Stocks responded very positively to the news. This change likely means any future tax cuts will not happen, although that seemed very unlikely either way. The areas where some bipartisanship could happen is infrastructure and drug pricing, although given a Republican Senate, I wouldn’t expect anything significant on either front in the next two years. We could be looking at two years of gridlock. Markets are generally supportive of gridlock as businesses can invest knowing it’s unlikely any major policy changes will be coming in the near future. For the week, the Dow gained 2.8% while the S&P 500 increased 2.1%.
McDonald’s (in)famous McRib sandwich is back in stores for a limited time. What does that have to do with investing and the stock market? One analyst went back to 2010 and found the S&P 500 performs significantly better, on average, on days when the McRib is available. Over that time period, the McRib has been available on almost 20% of trading days and the average daily gain on those days was 0.11%, almost four times the 0.003% average daily gain on days when the McRib was not available. Of course correlation doesn’t equal causation, but its amusing to see these anomalies. Let’s hope the correlation continues this year. See the chart here.
Oil decreased again this week, declining 4.0% to close at $60.28/barrel. The yield on the 10-yr Treasury moved lower, closing at 3.19% from 3.22% last week. The average rate on a 30-yr fixed rate mortgage moved sharply higher to 4.94%, from 4.83% last week, the highest level in seven years.
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The stock market rallied for much of the week, recouping over half of last week’s losses. Both major indices increased 2.4% this week. Strong earnings and increased optimism on a Chinese trade deal helped push markets higher.
The October jobs report showed the US economy added 250k net new jobs last month. This was significantly better than expectations and a nice reversal from a rather weak September. The unemployment rate remained at 3.7%. Wage growth was a bright spot as well. Wages grew at a 3.1% annual rate, the best level in nine years. While the report was generally very strong, stocks sold off today, partially on fears that this report will lead the Fed to additional interest rate increases. Fed policy is always a balancing act between raising rates too fast and potentially causing a recession and raising rates too slowly allowing inflation to take hold. Everyone expects an interest rate increase in December, but 2019 is less certain. The US economy is strong right now, but weakness in other countries could hurt our prospects. The market‘s perception of how the Fed will navigate this will help drive stocks in the coming months. Read More
With oil prices in a free fall, gas prices are expected to follow suit as we approach the holiday shopping season. Oil is down almost 20% over the last month and that decline is starting to reach consumers. The next two months are critical for the retail industry and this price decline could put more money into consumers pockets. The consumer represents roughly two-thirds of the US gross domestic product and lower gas prices could push holiday spending even higher. Read More
Oil decreased this week, declining 7.2% to close at $62.82/barrel. The yield on the 10-yr Treasury moved higher, closing at 3.22% from 3.08% last week. The average rate on a 30-yr fixed rate mortgage moved lower to 4.83%, from 4.86% last week.
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Stocks suffered another rough week with the Dow declining 3.0% while the S&P 500 decreased 3.9%. This continues a trend we’ve seen for most of October. Approximately 50% of companies in the S&P 500 are down 20%+ from their recent highs. Three-quarters of companies are down more than 10%. While the broader indices aren’t technically in a ‘correction’ yet by being down 10%, we touched correction level during intra-day trading today. So, what is going on here? The US economy continues to grow at an impressive clip – today’s report on 3rd quarter growth showed the economy grew at a 3.5% annualized rate in the quarter. The labor market is strong, wages are starting to grow, consumer confidence remains very high and corporate earnings have been strong. Those are all backward looking statistics though and investors are starting to worry about growth in 2019.
People are concerned about the Fed continuing to raise rates in the face of a slowing economy. I think the Fed will increase interest rates again in December, but that might be the end of the increases for a while. Trade war concerns remain elevated as well. There’s been minimal news on the trade front, but what markets would like to see are announcements of trade deals. Trump has been using the stick of tariffs to extract trade concessions, primarily from China, but no one really wants to see this turn into a protracted battle where tariffs damper global growth. I believe we’d see a sharp rebound in stocks if a China trade deal was announced. There’s also growing concern about the US debt and budget deficit. The deficit captures how much more the government spends annually than it collects in taxes. The debt is the cumulative total of years of deficits that have been paid for by borrowing money. With interest rates raising, we’re approaching a point where interest costs will consume a growing portion of our budget each year. There’s nothing wrong with running a deficit as long as the deficit as a percentage of Gross Domestic Product is less than the GDP growth rate. Sadly, that hasn’t happened in over 10 years and is sharply moving in the wrong direction currently. All of these issues have been around for a few months, but markets woke up to them over the last few weeks.
What should we do? Corrections are a normal part of markets. We’ve had five corrections over the last 10 years where markets declined more than 10%. It normally takes several months to work through the correction and reach new highs, but can sometimes be a year or more. While these are never fun to experience, they are a part of investing. Markets go up and down and economies ebb and flow. I think we’re at, or approaching, a level where this sell-off feels over done. Even if the economy slows, a recession seems unlikely at this point. I’ve lightened some stock exposure over the last week to lock in some gains and reduce equity exposure, but overall, I think maintaining current asset allocation is the most prudent response, especially for long-term investors.
Oil decreased this week, declining 2.3% to close at $67.68/barrel. The yield on the 10-yr Treasury moved lower, closing at 3.08% from 3.19% last week. The average rate on a 30-yr fixed rate mortgage ticked higher to 4.86%, from 4.85% last week.
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Stocks ended the week in the green, but the volatility from last week continued. Tuesday saw the Dow gain over 2%, while yesterday declined almost 1.5%. Everyday featured large swings up and down throughout the day. While last week’s sharp sell-off is still on investor minds, a strong start to earnings season has provided positive push back. Johnson & Johnson, Netflix, Proctor & Gamble and Paypal all impressed investors this week. Over the next two weeks we’ll get earnings reports from most of the large companies in the US and that will likely set the tone heading into the end of the year. For the week, the Dow increased 0.4% while the S&P 500 was essentially flat.
Famous retailer Sears filed for bankruptcy protection earlier this week. This was a long time coming as Sears has struggled for years with excessive debt and falling sales. Sears hasn’t made a profit since 2010. At its peak, Sears operated over 3,500 stores in the United States under the Sears and Kmart brands. Today, it operates around 700 and plans to close almost 150 more in the coming months. The company’s business has been under pressure for years, but it owned a lot of valuable real estate. Real estate sales over the past few years propped the chain up as long as it could though. It’s unclear at this point if the stores will continue operating with a new ownership structure or shutdown altogether. This bankruptcy highlights the concept of ‘creative destruction’ that is central to any free-market, capitalist society. Businesses ebb and flow. When a business is no longer able to meet the needs of its customers, it will cease to exist. This happens in every industry and I view it as a healthy part of a vibrant economy. It’s always sad to see well-known companies fail, but Sears wasn’t able to adapt to the changing retail market in the age of Amazon and internet shopping. Read More
Oil decreased this week, declining 3.2% to close at $69.28/barrel, breaking a four-week streak of oil closing above $70/barrel. The yield on the 10-yr Treasury moved higher, closing at 3.19% from 3.15% last week. The average rate on a 30-yr fixed rate mortgage retreated to 4.85%, from 4.90% last week.
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Stocks declined sharply on Wednesday and Thursday this week. Financial headlines largely pinned the declines on raising interest rates and Fed policy. That is hard for me to believe. The Fed has been raising rates over the last two years and telegraphing to markets that it intends to continue raising rates. There was nothing new this week that should have spooked markets based on interest rates. Continued trade concerns was another factor mentioned. Again, there was nothing new that would spark a sharp sell-off in my opinion on the trade front. What seems most likely to me is computer algorithm trading firms started selling to lock in some gains and the selling snowballed, triggering additional selling. This is a reality in the current market environment. Longer-term, quality companies and quality economies will do well, but in the short-term there can be frustrating volatility from high-frequency computer trading. For the week the Dow was down 4.2% while the S&P 500 declined 4.1%. This was the worst week for the market since early February.
Ten years removed from the start of the financial crisis, no-down payment, subprime mortgages are making a comeback. Events are being held across the country introducing potential home buyers with poor credit to the product. The current iteration does require borrowers to submit income and employment documentation as well as attend counseling which explains the costs, reviews their budgets and attempts to determine if they can afford the payments. The loans are being offered by a Boston based non-profit called Neighborhood Assistance Corporation of America (NACA). The objectives seems admirable. The company sees low home ownership rates among lower income Americans and feels they are being left behind by overly caution lending standards. This pendulum tends to swing back and forth. When times are good, as they are now, jobs are plentiful and wages are increasing, foreclosures decline, prompting the decision to loosen lending standards. It remains to be seen how this will play out when the economy slows at some point in the future. Read More
Oil decreased this week, declining 3.7% to close at $71.57/barrel. The yield on the 10-yr Treasury moved lower, closing at 3.15% from 3.24% last week. The average rate on a 30-yr fixed rate mortgage moved sharply higher to 4.90%, from 4.71% last week.
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Stocks sold off in the first week of October as we saw US Treasury rates move sharply higher and the labor market slowdown in September. The 10-yr US Treasury, a key interest rate in the financial world increased sharply, reaching a 7-year high. Raising interest rates can be good for savers, but could also suggest we could be on the verge on higher inflation. For the government budget, higher interest rates increase borrowing costs. The government has used a lot of short-term bonds to finance spending over the last 10 years. This will cost the government more money as bonds mature and have to be reissued at higher rates. For the week, the Dow was down slightly while the S&P 500 was down 1.0%.
The September jobs report came in well below estimates with the US economy adding 134k net new jobs versus a 185k consensus estimate. This is the weakest jobs report since last September. The jobs figures for July and August were revised higher by a total of 87k jobs, lessening the weakness in the September report. The unemployment rate declined to a 50-year low 3.7%. Wages increased at a 2.8% annualized rate. Read More
Amazon announced this week it was raising its company-wide minimum wage to $15/hour. The headline sounds good, but the full story is less clear. While $15/hour has been a hot button issue in politics, and Amazon has faced plenty of negative political backlash from all sides, this move seems more designed to look good than actually reward workers. As part of the increase, Amazon is eliminating incentive bonuses and stock option awards for hourly employees. The company claims total wages will increase, but some top hourly employees will likely see a reduction in pay as the bonuses go away. Workers already making over $15/hr has also voiced their displeasure. Those workers are receiving a simple $1/hr increase in pay, while new workers, making $10-11/hr, are receiving 40-50% increases. In addition to a good headline, I’m guessing that Amazon believes a higher minimum wage will help them attract warehouse workers better than the potential for incentive bonuses and stock grants. With the unemployment rate currently at 3.7% and the important holiday shopping/shipping season approaching, competition for labor is intense and Amazon felt this was necessary to attract the workers it needs. Read More
Oil increased this week, gaining 1.0% to close at $74.32/barrel. The yield on the 10-yr Treasury moved sharply higher, closing at 3.24% from 3.06% last week. The average rate on a 30-yr fixed rate mortgage moved lower to 4.71%, from 4.72% last week.
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Stocks sold off this week in the last week of the third quarter. The Dow declined 1.1% while the S&P 500 was down 0.5%. Even with the down week, the S&P 500 had its best quarter since 2013. The market sold off sharply in February and March, but has steadily recovered throughout the rest of the year. The market remains near all-time highs.
I wrote a couple weeks ago about the seeming collapse of Elon Musk, co-founder and CEO of electric car company Tesla. This week, the SEC announced it was suing Elon Musk over a controversial tweet he sent on August 7th. In the tweet, Musk claimed he had funding secured for a deal to take Tesla private at $420/share. While he had preliminary discussions with the Saudi Arabia wealth fund over the summer, the SEC has determined Tesla/Musk had no future discussions in the week leading up to the tweet and the company didn’t hire any advisors to help with a potential deal. This suggests there is no way he truly had ‘funding secured’ as he stated in his tweet. The stock increased after the tweet as investors reacted to believing there was a $420/share offer on the table. The stock has sold off sharply since them, including a 14% decline today. The stock is down over 30% from its highs in August. The SEC is seeking to permanently ban Musk from being involved with the management and running of Tesla. Many securities lawyers seem to believe the SEC has a very strong case. Read More
Oil increased this week, gaining 3.3% to close at $73.55/barrel. The yield on the 10-yr Treasury moved sideways, closing at 3.06% again this week. The average rate on a 30-yr fixed rate mortgage moved higher to 4.72%, from 4.65% last week. This is the highest average mortgage rate in over seven years.
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Stocks continued higher this week without significant news. Trade talks continued with the Trump administration announcing 10% tariffs on $200 billion of China trade. That was less than the 25% that was discussed most of the summer, but markets largely seemed to shrug off the news. On the week the Dow gained 2.2% while the S&P 500 increased 0.9%.
The most fascinating part of this week was watching the Canadian marijuana stocks trade. Canada is legalizing marijuana for recreational use in mid-October. Several of these pot companies have seen crazy moves in the last few weeks. The market in Canada is pretty small, but valuations in these companies are astronomical at this point. Tilray, the largest and most traded showed what a roller coaster these speculative stocks can be. On Monday, Tilray closed at $120/share. By Wednesday, the stock briefly traded at $300/share, making the company worth more than half the companies in the S&P 500. Soon after touching $300, the stock cratered, closing the day at $214. Today, the stock closed at $123, almost right in line with Monday’s close. So, depending on when one bought this week, one could have made 250% or lost 60%. That’s a near unbelievable swing in one week and shows what can happen when small, speculative stocks catch significant retail investor interest. The valuations of these companies are still really stretched. Tilray is expected to generate total sales of $100 million in 2019 and had a peak market valuation of $28 billion. Companies simply don’t trade at 280x projected sales. For comparison, Walmart trades a less than 1x sales.
Oil increased this week, gaining 2.7% to close at $70.83/barrel. The yield on the 10-yr Treasury moved higher, closing at 3.06% from 3.00% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 4.65%, from 4.60% last week.
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