10/6/17 – Stocks Higher, Amazon to Enter Pharmacy Business?

Stocks Continue Higher in First Week of October

  • Dow and S&P 500 each increase over 1% this week
  • September jobs report disappoints, likely impacted by Harvey & Irma
  • Amazon to enter pharmacy business?

The September jobs report released this morning showed a reduction of 33k jobs, although that likely understates the strength in the labor market. It also highlights the difficulty and discrepancy between the various ways the Bureau of Labor Statistics tracks the labor market. The headline number is from surveying almost 150k companies about employment levels. This is the jobs report most followed by Wall Street. However, the BLS also surveys households and those results show the US economy reaching a record number of workers with a total of 154.3 million people working. Wages also looked strong, growing at 2.9%, the largest monthly increase in just over 10 years. Wage growth could provide a nice boost to the economy. For much of the last 10 years, there was so much excess labor supply, that wages barely moved. Now that we’ve seen the unemployment rate under 5% for sometime, it appears wages are starting to increase as companies need to attract and retain employees. Beyond the discrepancies of the two studies, the impacts of Hurricanes Harvey & Irma will likely require the September estimates to be revised in future months. Read More

Pharmacy benefit companies like CVS and Express Scripts sold off today on rumors that Amazon is close to entering the pharmacy business. People have long speculated that Amazon would eventually start selling prescription drugs through the mail. Amazon has the potential to significantly impact the industry. Under Amazon’s current model, it seems patients on regular medication would be the most likely to switch, but as the company continues to work on drone delivery, it could eventually serve sick patients who needs drugs the same day. The fascinating thing about Amazon is how it can disrupt numerous industries. Investors don’t seem to care that Amazon doesn’t make much money. It can compete on price because investors are happy with top line sales growth assuming at some point the company will start making money. Much is discussed about the rivalry between Amazon and Walmart, but the relative profits between the two are shocking. In the last nine months, Walmart made $9.7 billion in net income. In the last 10 *years*, Amazon has only made $6.8 billion. A few weeks back an NYU professor put out a study showing that Walmart paid 46 times more in federal taxes since 2008 than Amazon, $64 billion vs $1.4 billion. The fact that Amazon shareholders don’t seem to care about profits gives it a huge advantage in pricing versus its competitors. Read More

Oil declined this week, decreasing 4.4% to close at $49.31/barrel. The yield on the 10-yr Treasury moved higher, up to 2.36% from 2.33% last week. The average rate on a 30-yr also moved higher, to 3.85% from 3.83% last week.

Close Weekly YTD
Dow Jones 22,773.67 1.6% 15.2%
S&P 500 2,549.33 1.2% 13.9%
Oil 49.31 (4.4%) (8.5%)
10-yr Treasury (∆ in bps) 2.36 4 (8)

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9/29/17 – Stocks Higher on GDP Growth and Tax Reform

Stocks Higher, Framework of Tax Reform Released

Stocks finished the third quarter on a positive note as both major indices finished higher. The Dow gained 0.2% while the S&P 500 added 0.7%. The big financial news out this week was strong second quarter GDP growth and a rough framework for potential tax reform.

The US economy grew at an annualized rate of 3.1% rate in the 2nd quarter. This was revised up from 3.0% estimate last month and is the best quarterly growth since the 1st quarter of 2015. This report looks good, but sustainability is the key. Over the last 10 years we’ve had multiple quarters that grew at a 3%+ annualized rate, but have never put up a whole year with that level of growth near 3%. Read More

Increasing GDP growth is a central aspect to Trump’s tax reform proposal. The key provision of his plan is a reduction in corporate tax rates to 20% from 35% currently. The US corporate tax rate is the highest in the developed world. We’re also the only country to tax global earnings. The Trump plan includes a 10% tax on repatriated foreign earnings, which could lead to over $2 trillion of US corporate cash to be returned to the US. Current tax law allows company to defer taxes on global income until the cash comes back to the US. Bringing $2 trillion back to the US strikes me a very positive thing. Even if the money is simply paid out in one-time dividends or used for share repurchases, that’s a big win versus it sitting in overseas bank accounts. If some of the money is reinvested back into the economy, that’s even better. While the corporate reform framework seems very positive to me, the likelihood of it happening seems pretty low. I don’t believe the market expects it will happen either, so if Republicans are able to pass tax reform, it could provide a nice boost to stocks. Read More

We’ve never seen a President use social media to the extent Trump uses Twitter. Twitter, as a company, has never made money. It’s lost over $2 billion over the last two years. Since it’s Initial Public Offering, the stock is down 60%. That said, the President is helping to support Twitter’s value. One analyst estimated that Trump being so active on Twitter is worth $2 billion. The company currently has a market valuation of $12.5 billion, so the President is responsible for over 15% of Twitter’s value, according to this analyst. Anecdotally, this makes sense to me. Twitter seemed to be slowly dying until Trump became President. Now, numerous media outlets and people check Twitter first thing every morning to see what the President tweeted out overnight. Read More

Oil increased again this week, gaining 1.9% to close at $51.58/barrel. The yield on the 10-yr Treasury moved higher, up to 2.33% from 2.26% last week. The average rate on a 30-yr fixed held steady at 3.83%.

Close Weekly YTD
Dow Jones 22,405.09 0.2% 13.4%
S&P 500 2,519.36 0.7% 12.5%
Oil 51.58 1.9% (4.3%)
10-yr Treasury (∆ in bps) 2.33 7 (12)

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9/22/17 – Stocks Higher, Walmart Testing Unique Home Delivery

Stocks Slightly Higher in Week That Sees Toys ‘R’ Us Bankruptcy Filing

Markets were up slightly this week as the Federal Reserve held the Fed Funds rate constant and hinted at a slower rate of future increases. I would be surprised if we see a rate increase at the December meeting even though the Fed still signaled one is likely. For the week, the Dow increased 0.4% while the S&P 500 was up 0.1%.

One interesting outcome of the Fed’s meeting is the announcement it will start reducing the assets it holds. Prior to the financial crisis, the Fed’s balance sheet was less than a $1 trillion. It’s currently more than $4.5 trillion (roughly 25% of total GDP). Much of what the Fed owns are mortgage securities and Treasury bonds. The Fed started buying assets for a few reasons: to create markets in securities that had become illiquid, to give banks the ability to sell the risky assets to someone and to help hold down longer-term interest rates by a being prominent buyer in those markets. The Fed hasn’t bought much over the last three to four years, but hasn’t started selling for concerns about what adding this much debt back into the market would do to prices and interest rates. The Fed plans for reduce its balance sheet over the next 3-4 fours, so hopefully it can slowly sell assets without causing large moves in interest rates.

Walmart announced this week it is testing a grocery delivery service where the delivery person will come in your house and put your groceries in your refrigerator/freezer, even if you aren’t home. The testing will occur in Silicon Valley with customers who use the August home security system. The system will grant a one-time access code and also has video cameras installed inside the house. This sounds very convenient, but I’m sure how I would feel about a stranger putting away groceries in my house without me there. This is another move by Walmart to compete with Amazon. A few weeks ago, the company started heavily advertising its free 2-day shipping on online orders, a direct shot at Amazon’s popular Prime membership. Amazon has been very disruptive in the retail space and it will be interesting to see how it will compete with Walmart, arguably the best run supply-chain company in the world, now that Walmart has firmly turned its sights on Amazon.  Read More

Toys ‘R’ Us filed for Chapter 11 bankruptcy protection this week, meaning it will continue operating as it attempts to restructure its debt. While the retail sector has struggled amid Amazon competition and changing consumer preferences, Toys ‘R’ Us is a story of excessive debt. The company was purchased by a trio of private equity firms in 2005. The buyers used significant debt to pay for the purchase and the company was never able to reduce its debt load. Toys ‘R’ Us was actually doing okay from an operational and financial standpoint, but it had no money to invest in the stores and build out it e-commerce business because its debt service was so large. Bankruptcy was probably the right decision as the company can move forward with a friendlier capital structure. For the three private equity firms though, they are officially losing their $1.3 billion combined investment. Debt is always appealing because it’s someone else’s money, but debt can significantly increase the financial risk of a company. Read More

Oil increased again this week, gaining 1.5% to close at $50.63/barrel. The yield on the 10-yr Treasury moved higher, up to 2.26% from 2.20% last week. The average rate on a 30-yr fixed increased to 3.83% from 3.78% last week.

Close Weekly YTD
Dow Jones 22,349.59 0.4% 13.1%
S&P 500 2,502.22 0.1% 11.8%
Oil 50.63 1.5% (6.0%)
10-yr Treasury (∆ in bps) 2.26 6 (19)

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9/15/17 – Teflon Market Closes at New Highs

Stocks Power Through Geopolitical Risk

In spite of North Korea launching another missile over Japan, stock markets rallied this week to close at all-time highs. The market seems to resemble teflon in that nothing negative sticks to it. Investors seems comfortable that new sanctions and diplomacy will diffuse the situation. This is almost the inverse of what we saw five years ago when markets sold-off on every bit of bad news out of Greece. Today, markets shake-off most negative news. On the week the Dow gained 2.2% while the S&P 500 gained 1.6%. Both indices closed the week at all-time highs.

Historically, September is the worst month for the stock market. It’s the only month with a negative average return. So far this month though, markets have been very strong, including this week, which posted the best weekly gain all year. Why is the market shrugging off potential concerns? The North Korea situation seems like a legitimate risk to me. North Korean leader Kim Jong Un seems borderline crazy and continues to provoke the international community. It’s hard to figure what Kim’s ultimate objective is, but given the proximity to South Korea and Japan, the potential for a major economic event exists. Since the financial crisis, markets have grown to believe that central bank liquidity can solve any problem. I agree with that idea on a sovereign debt crises, but North Korea seems like a risk that isn’t being priced into stocks at the moment.

Oil increased sharply this week, gaining 4.9% to close at $49.87/barrel. Oil hasn’t closed a week above $50 since May. The yield on the 10-yr Treasury moved sharply higher, up to 2.20% from 2.05% last week. The average rate on a 30-yr fixed remained constant at 3.78%. Given the sharp increase in Treasury rates, mortgage rates will likely follow next week.

Close Weekly YTD
Dow Jones 22,268.34 2.2% 12.7%
S&P 500 2,500.23 1.6% 11.7%
Oil 49.87 4.9% (7.5%)
10-yr Treasury (∆ in bps) 2.20 15 (24)

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9/8/17 – Stocks Retreat as Irma Dominates Headlines

Stocks declined this week while much of Florida prepares for one of the strongest storms on record to hit the mainland. The Dow declined 0.9% while the S&P 500 declined 0.6%.

While Irma headlines justifiably dominated the news cycle, there were some important financial developments this week as well. First, sources reported that President Trump is unlikely to nominate Senior Economic Advisor Gary Cohn to the Chair of the Federal Reserve. It was widely believed Cohn was well-positioned for the role and markets were eagerly anticipating his ascension into the role. Mr. Cohn is a former trader and #2 at Goldman Sachs. He lacks the academic pedigree of previous Fed Chairs, but many investors were excited to have an individual with significant market experience. In addition to the Fed Chair position, this report could signal the end of the Cohn’s role in the Administration. Cohn has been an important driver for tax reform, so his leaving the Administration could threaten that push. Read More

The 10-year Treasury bond approaching 2% was another important development this week. I’ve written about this a couple times in the last few months, but the yield on the 10-yr continuing to decline suggests the bond market doesn’t believe growth is improving in the US economy. Some of the rise we’ve seen in the stock market is predicated on the idea that overall economic growth will break out from our slump of the last 8-16 years. The 10-yr traded below 2% for eight months leading up the election in November, but rose sharply following Trump’s victory. Much of the enthusiasm in the bond market about Trump’s victory and what it meant for economic growth is gone. It is important to note that the bond market is notoriously pessimistic. There’s an old joke that the bond market has correctly predicted nine of the last five recessions, meaning it often signals recessions that never happen. I don’t believe we are nearing a recession, but the prospects for 3% annualized growth seem dim. Read More

One of the under-reported aspects surrounding hurricane Irma is the Florida insurance market. After hurricane Wilma in 2005, Florida implemented a lot of new restrictions and regulations on property insurance sold to state residents. As a result, many large insurance companies significantly reduced their exposure to the state. Smaller competitors popped up and many Florida residents have insurance through these smaller companies. A long stretch with minimal hurricane damage pushed premiums lower, creating a situation where insurance companies might be under-capitalized heading into this storm. Florida requires many of these small insurance companies to reinsure their exposure, some of which was done through catastrophe bonds. Catastrophe bonds are sold to large institutional investors. The bonds pay higher interest rates than government or corporate bonds, but also carry more risk. If there are no major claims situations, the investors make a good amount of money. However, a massive storm like Irma could see large losses on many of these bonds. Pension funds and other large investors are about to see whether they’ve been appropriately compensated for the risk they assumed. Similar to the mortgage crisis, I’m guessing many institutional investors are about to realize they have not been. Fortunately the catastrophe bond market is significantly smaller than the mortgage market. In addition to potential investor losses, this could set up a situation where numerous policy holders find their insurance company isn’t able to pay a claim. Read More

Oil increased this week, gaining 0.5% to close at $47.55/barrel. The yield on the 10-yr Treasury moved sharply lower, down 2.05% from 2.17% last week. The average rate on a 30-yr fixed continued lower to 3.78% from 3.82% last week. This is the lowest mortgage level of the year.

Close Weekly YTD
Dow Jones 21,797.79 (0.9%) 10.3%
S&P 500 2,461.43 (0.6%) 9.9%
Oil 47.55 0.5% (11.8%)
10-yr Treasury (∆ in bps) 2.05 (11) (39)

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9/1/17 – Economic Growth and Jobs Headline Week

Strong Growth and Decent Jobs Headline the Week

Stocks continued moving higher this week, with the Dow gaining 0.8% while the S&P 500 added 1.4%. On Wednesday, stronger than expected economic growth numbers were released. Growth in the second quarter was estimated at an annualized rate of 3.0%, exceeding the 2.7% consensus estimate. This is a good number, but it is only one quarter. Multiple quarters over the last eight years have seen annualized growth over 3%, and yet the economy grew at a less-than 2.5% rate every year. It’s always good to see positive growth and hopefully this is a start of a higher growth trend, but I’d like to see it for a few more quarters before I’m a believer. Read More

The August jobs report released this morning showed the economy added 156k net new jobs while the unemployment rate ticked higher to 4.4% from 4.3%. The consensus estimate had been for 179k new jobs this month. Additionally, the last two months of data were revised lower. All this supports my above thought that 2Q growth might be more of a blip than the start of a trend. We’ve basically been in the same job and economic growth trend since the financial crisis ended in 2009. Job growth averaging under 200k a month with annualized economic growth under 2%. Both figures are okay, but underwhelming. Growth is more difficult on a bigger base, but from the end of World War II through 2000, the US economy averaged 3.1% annualized growth. Read More

The Houston area suffered a massive hurricane over the last week. Some parts of Houston received almost 50 inches of rain in 4-5 days. The average annual rainfall in the US is 39″ a year, so this storm dropped 125% of the national average in less than a week. That’s hard for me to comprehend. In total, over 15 trillion gallons of water hit the Houston area, that’s double what Katrina dropped on New Orleans. There’s been a lot of talk about whether Houston was prepared and how the response has been, but so far only 30 people have died. During Katrina, over 1,800 people died. That seems like a pretty good result, all things considered.

Oil declined again this week, dropping 1.1% to close at $47.29/barrel. The yield on the 10-yr Treasury moved slightly lower, rounding up 2.17% versus rounding down to 2.17% last week. The average rate on a 30-yr fixed continued lower to 3.82% from 3.86% last week.

Markets are closed on Monday for the Labor Day holiday. Have a happy long weekend.

Close Weekly YTD
Dow Jones 21,987.56 0.8% 11.3%
S&P 500 2,476.55 1.4% 10.6%
Oil 47.29 (1.1%) (12.2%)
10-yr Treasury (∆ in bps) 2.17 (1) (28)

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8/25/17 – Stocks Rebound, but Risks Remain

Stocks reversed a two week losing streak, but risks remain. For the 10th consecutive week, investors have pulled money out of stock mutual funds. Over that period, $30 billion has left the equity markets through mutual fund redemptions. With so much passive money in the market these days, equity flows can be a good predictor for future price performance. Mutual fund flows can indicate how retail investors are feeling about the market. Additionally, as funds are forced to carry out large sell orders these fund flows can move the market. Given that we are close to all-time highs with continued concerns around tax reform and North Korea, I’m comfortable holding higher-than-average cash balances in portfolios. For the week, the Dow increased 0.6% while the S&P 500 increased 0.7%.

Heading into fall means football. A staple for bars and restaurants during football season is chicken wings. Consumer demand for wings continues to grow and prices are starting to follow. The wholesale price of chicken wings has increased 20% this year and frozen storage stocks are a third lower than at the same time last year. The driver seems to be increased consumer demand. If you’re in restaurants and bars in the coming weeks, expect to see higher prices on wings and specials on boneless wings. Boneless wings are made from breast meat and are less expensive for restaurants to buy. Wings were once an afterthought and restaurants started pushing them as appetizer specials. Well, a market was successfully created and prices are responding accordingly. Read More

Oil declined again this week, dropping 1.6% to close at $47.83/barrel. Hurricane Harvey put some pressure on oil later in the week as any damage to refineries could increase global supply as ships lose the ability to unload oil to some gulf coast refineries. The yield on the 10-yr Treasury moved lower, closing at 2.17% from 2.19% last week. The average rate on a 30-yr fixed rate moved to the lowest level of 2017, 3.86% from 3.89% last week.

Close Weekly YTD
Dow Jones 21,813.67 0.6% 10.4%
S&P 500 2,443.05 0.7% 9.1%
Oil 47.83 (1.6%) (11.2%)
10-yr Treasury (∆ in bps) 2.17 (2) (27)

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8/18/17 – Trump Tax Reform Still Possible?

Is Trump Tax Agenda Still Possible?

Stocks declined for the second straight week. This is the first time we’ve had consecutive down weeks since May. For the week, the Dow declined 0.8% while the S&P 500 was down 0.6%. All the week’s losses occurred on Thursday as the Dow was down more than 1% for the first time in 63 trading days. It was a tumultuous week for the President and rumors yesterday suggested that Gary Cohn, Director of the National Economic Council, might leave the administration. Many market participants think highly of Mr. Cohn and fears rose that if he left, other pro-business members of the administration could leave as well. Today, Steve Bannon, the controversial Trump advisor stepped down. This calmed markets because it increases the likelihood that Cohn and others will remain.

All of this gets to corporate tax reform. One of the larger questions about the market rally this year is the extent that future tax reform is already priced in. Are current stock valuations based on current earnings and fundamentals or are investors already pricing in higher earnings going forward based on lower corporate taxes? If it’s the latter, any change in expectation about tax reform should cause a market sell-off. Corporate tax reform should be a relatively easy issue. We have, by far, the highest corporate tax rate in the industrialized world. We are also the only country that taxes global earnings instead of simply US earnings. Most politicians on both sides agree we need to make changes, but Republicans can’t seem to put a plan together and Democrats seem to think ‘doing nothing’ is their best political move. I think the market is expecting, at best, a 50% chance of meaningful tax reform. Nothing about the way DC has functioned in the last nine years suggests a big, bipartisan compromise will happen. Corporate earnings have been good, the economy is reasonably strong and stock prices continue to look attractive relative to bonds. Those factors give me confidence that there is support for the market’s gains this year even if no tax reform occurs.

Oil declined again this week, dropping 0.3% to close at $48.63/barrel. The yield on the 10-yr Treasury remained steady, closing at 2.19% again this week. The average rate on a 30-yr fixed rate moved slightly lower this week, to 3.89% from 3.90% last week.

Close Weekly YTD
Dow Jones 21,674.51 (0.8%) 9.7%
S&P 500 2,425.55 (0.6%) 8.3%
Oil 48.63 (0.3%) (9.8%)
10-yr Treasury (∆ in bps) 2.19 0 (26)

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8/11/17 – Geopolitics Drives Markets Lower

Volatility is Back on Geopolitical News

Stocks declined this week, largely driven by concerns around the North Korea situation. President Trump appeared to draw a firm line in the sand about preemptively attacking North Korea only to have Kim Jong Un almost immediately cross that line by threatening to attack Guam. The situation seems to have diffused somewhat over the last two days, but this will be an important issue to follow. While North Korea has no impact on the global economy, any war could quickly cause massive damage in South Korea, Japan or even China, all of which would have a big impact on the global economy. Over the last week, I’ve been selling stocks to raise cash and provide some protection from this potential sell-off. The markets are near all-time highs and it seemed prudent to me to completely sell some positions and reduce some others. While I hope Kim Jong Un will recognize any military action is a losing proposition for him personally and will back down, I’m comfortable reducing risk in your portfolios given the uncertainty. For the week the Dow declined 1.1% while the S&P 500 dropped 1.4%.

Retail Earnings – Traditional brick and mortar retailers continue to feel the pain from Amazon’s increasingly large share of retail sales. Most of the major department stores reported earnings yesterday. Since then, Macy’s is down 10%, Kohl’s is down 8%, Dillard’s is down 21% and JC Penney’s is down a shocking 24%, in two days. JC Penney’s is now at an all-time low valuation, going back to the 1970s. Customer traffic keeps declining and while some earnings and sales weren’t that bad, the future expectations aren’t inspiring. Read More 

Stock Settlement – When you buy or sell a stock, the transaction doesn’t officially close, or settle, for three days. This is important when it comes to how quickly you can access money in an investment account. Cash is always available same day, but if stocks need to be sold, it takes three days to get access to the funds. Meaning, if a stock is sold on Monday, that money could not be transferred out until Thursday. This has been the market convention for years, but that’s changing this week. Stock settlement is being reduced to two days. I don’t understand why it can’t be one day, but it is still an improvement.

Oil declined again this week, dropping 1.4% to close at $48.76/barrel. The yield on the 10-yr Treasury moved lower, closing at 2.19% from 2.27% a week ago. The average rate on a 30-yr fixed rate moved lower this week, to 3.90% from 3.93% last week.

Close Weekly YTD
Dow Jones 21,858.32 (1.1%) 10.6%
S&P 500 2,441.32 (1.4%) 9.0%
Oil 48.76 (1.4%) (9.5%)
10-yr Treasury (∆ in bps) 2.19 (7) (26)

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Dow Tops 22k, 401k Changes on the Horizon?

Stocks continued climbing higher this week with the Dow index exceeding 22k for the first time ever. Boeing was the largest driver of the index, adding ~35% of the 1,000 points between 21k and 22k. The Dow index is a strange index in that it is weighted by the share price of the member companies instead of the total value of the company. This means that Boeing, which is the most expensive stock on a dollar price basis, has the most impact on the Dow’s performance, even though it is only the 20th largest company of the Dow’s 30 companies. For the week, the Dow gained 1.2% while the S&P 500 gained 0.2%.

Strong Jobs Report for July – The economy added a net 209k jobs in July, exceeding the consensus estimate of 180k. The unemployment rate dropped to 4.3%, matching a 16-year low. This is the 82nd straight month that combined public and private employment has increased. That’s almost three years longer than the second-best streak from 1986-1990.

Potential 401k Changes – A huge potential source of government revenue involves eliminating the tax-destructibility of 401k contributions. This change has been mentioned again recently during the tax reform discussions. CNBC estimated the other day it could be worth almost $600 billion in additional taxes through 2020. 401k plans are a major source of retirement savings for most Americans. In theory the tax deduction encourages people to save. 401k plans work similar to a traditional IRA, where you get a tax deduction in the current year, but when you withdraw money in retirement you pay taxes on withdrawals as if it was regular income. If you have a 401k/IRA with $1 million, you really have approximately $750k because the government has a tax claim on the rest. The potential change would generate significant revenue for the government currently, but has met sharp resistance. Personally, I think this could be a big benefit to investors over the long-term. This would convert 401k plans going forward into Roth 401ks. In a Roth, there is no current tax deduction, but future withdrawals are not taxed. Even if people save slightly less in a Roth 401k, they will likely finish out ahead in retirement. It’s the same reason I recommend a Roth IRA over a traditional IRA for people who qualify. The ability to have tax-free withdrawals in retirement is more valuable than the current benefit for most people. Read More

Oil pulled back slightly this week, dropping 0.6% to close at $49.45/barrel. The yield on the 10-yr Treasury moved lower, closing at 2.27% from 2.29% a week ago. The average rate on a 30-yr fixed rate ticked higher this week, to 3.93% from 3.92% last week.

Close Weekly YTD
Dow Jones 22,092.81 1.2% 11.7%
S&P 500 2,476.83 0.2% 10.5%
Oil 49.45 (0.6%) (8.2%)
10-yr Treasury (∆ in bps) 2.27 (2) (18)

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