Stocks continued higher this week as investors focused on strong earnings reports and continued corporate announcements about increased investments in the United States post the recent tax reform law. FedEx was the latest, announcing an increase in wages for all its hourly employees as well as additional investment in the US. The major indices have been up four consecutive weeks and every week so far in 2018. For the week, the Dow increased 2.1% while the S&P 500 increased 2.0%. Both indices closed at record highs today.
The initial report on 4th quarter economic growth was a little disappointing at a 2.6% annualized rate. Compared to average growth from 2000-2016, 2.6% is reasonably attractive, but many have come to believe the US economy can get sustained growth at a rate greater than 3% per year. The economy had grown at a 3%+ rate in the 2nd and 3rd quarters. It’s been since 2005 that the economy grew in excess of 3% for three consecutive quarters. There are still two additional reports that will update 4Q growth, so it’s possible the growth will be revised higher. One thing that strikes me about 4Q growth is the role tax reform could have played. Starting in 2018, companies will get immediate expensing of many capital investments. This means that investments in 2018 can be taken as a full deduction on 2018 taxes. This sharp change could have motivated companies to delay investments and capital expenditures into 2018 to take advantage of the new law, artificially depressing growth in the 4th quarter. Read More
One of the most troubling aspects of the Trump economic agenda in my opinion came into focus this week as Trump announced new tariffs on foreign made washing machines and solar panels. Tariffs merely drive up the price of consumer goods. The US has frequently accepted less-than ideal trade deals just to keep trade flowing. It’s somewhat admirable that Trump is trying to fix that situation. However, pushing prices higher and risking a bigger trade war seem counterproductive to me. It’s also confusing how the Administration has spent the last few months talking up the benefits of lower corporate taxes, which I agree with, but now is increasing taxes on certain consumer goods. These tariffs seem likely to cause more troubles than benefits. Read More
Oil increased 4.0% this week to close at $66.11/barrel. The yield on the 10-yr Treasury moved higher, to 2.66% from 2.55% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 4.15% from 4.04% a week ago.
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Stocks continued higher this week even while the odds of a potential government shutdown increased. Discussions remain ongoing, but at a minimum it appears the government will be partially shutdown for a least a few days. One party is seeking a relatively clean continuing resolution and the other party is trying to link a controversial issue to the bill. If this sounds remarkably familiar, but in reverse, you’re right. In 2013, Republicans wanted to include some Obamacare rollbacks in a funding bill and today Democrats want to included a DACA extension. Thankfully the market is looking past the political games and not allowing this to derail the rally. On the week, the Dow gained 1.0% while the S&P 500 increased 0.9%.
Apple announced this week a massive repatriation of overseas cash. This is an issue I’ve written about numerous times over the past few years. The US is the only major country to tax global earnings. The caveat is that companies can defer that tax as long as the cash remains overseas. This policy saw US corporations accumulate over $2.5 trillion in cash held overseas. The recent tax reform bill allows companies to repatriate that cash at a much lower tax rate, 15% vs 35%. As part of this move, Apple will pay $38 billion in taxes to bring the cash and other assets back to the US. Apple will invest $30 billion in US-based capital investments over the next five years as a result of the tax reform bill. Some critics have argued that Apple was planning this repatriation and US investment regardless, but I would argue they allowed over $200 billion in overseas cash to build up over the last ten years. They also borrowed money to pay dividends instead of bringing back foreign cash. Those two facts suggest the tax reform bill did help influence them to make this decision. Read More
Oil decreased 1.2% this week to close at $63.57/barrel. The yield on the 10-yr Treasury moved higher, to 2.66% from 2.55% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 4.04% from 3.99% a week ago.
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Earnings season kicked off this week and stocks continued moving higher. We’ve also seen several more large companies announce increased investment, wages and/or bonuses as a result of corporate tax reform. The one-time bonuses are nice, but the real economic benefit will come from higher wages and higher investments. Even foreign companies are getting in on the act. Fiat-Chrysler announced this week an additional $1 billion investment in Michigan. With the US corporate tax rate now lower than most large European economies, investment by European firms into the US looks that much more attractive. All the positive news pushed both indices higher for the week with the Dow gaining 2.0% and the S&P 500 increasing 1.6%.
The big news this week was Walmart’s announcement that it is raising its minimum wage to $11/hour and paying one-time bonuses to employees between $200-$1,000. The company also increased its paid maternity leave to 10-weeks for full-time employees. The company announced this change was a direct result of corporate tax reform. The news was somewhat diminished by the concurrent announcement that the company would close 63 Sam’s Club warehouses. Some of the closed warehouses will be converted to eCommerce shipping centers.
Some people have suggested the Sam’s Club closures are being used to pay for the wage increases and bonuses. I view that is an incorrect analysis. The physical retail sector is shrinking. We all order too much stuff online and don’t go shopping as much. Additionally, Sam’s Club keeps losing to Costco in the warehouse sector. Walmart is closing the stores because they are under-perfoming stores. Without tax reform, those stores would still be closing. I view the two announcements as two distinct issues. One, stores closing given the competitive climate. Two, employee raises and bonuses to share a portion of the expected tax savings. Read More
Oil increased 4.5% this week to close at $64.36/barrel. This was the highest weekly close since December 2014. The yield on the 10-yr Treasury moved higher, to 2.55% from 2.47% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 3.99% from 3.95% a week ago.
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Stocks kicked of the year in great fashion, with both major indices increasing more than 2%. It was a big week for milestones as well. The Dow Jones index topped 25,000 for the first time, the S&P 500 exceeded 2,700 and the NASDAQ went above 7,000. For the week the Dow gained 2.3% while the S&P 500 added 2.6%.
The Bureau of Labor Statistics released the December jobs report this morning and the headline number was lower than expected. The economy added 148k net new jobs in the month, well below the 190k estimate. The unemployment rate remained at 4.1%. Interestingly, retail employment fell 20k jobs last month. Retail losing jobs during the Christmas shopping season really shows how much traditional brick and mortar retail is struggling. Wages increased at a 2.5% annualized rate, the same as November. While not a great number, 148k jobs in a month is still above the level needed to meet population growth. This was the 87th consecutive month of positive job growth. The US labor market continues to do quite well, regardless of the occasional less impressive month. The last month to see employment decrease was September 2010. Read More
Oil increased 2.4% this week to close at $61.56/barrel. The yield on the 10-yr Treasury moved higher, to 2.47% from 2.41% last week. The average rate on a 30-yr fixed rate mortgage moved lower to 3.95% from 3.99% a week ago.
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I hope you all had a Merry Christmas and have a Happy New Year!
Stocks finished the holiday shortened week down slightly. This was a fascinating year for the market. Negative sentiment was high following the election, but the market steadily climbed throughout the year. While there are some legitimate concerns the investing world has welcomed a decrease in regulation, an increase in economic growth and a reduction in corporate taxes. The S&P 500 represents 500 of the largest US public companies and is a great gauge for the overall market performance. The index gained just over 19% this year.
One of the interesting aspects of tax reform is how this will impact an asset that most companies have called deferred tax assets. Deferred tax assets are an accounting situation that will generate a tax deduction or tax credit in the future. Since the corporate tax rate was reduced from 35% to 21%, the value of many of these assets has decreased. As such, we’ll likely see numerous large write downs when companies report 4th quarter and 2017 earnings. Goldman Sachs reported this week it would take a $5 billion charge and some analysts estimate S&P 500 companies could take over $200 billion in aggregate charges to earnings. The key point is tax reform is a big positive for corporate earnings, but we will see a lot of one-time hits to earnings in early 2018 as companies write down the value of deferred tax assets.
Oil increased 4.8% this week to close at $60.10/barrel. The yield on the 10-yr Treasury moved lower, up to 2.41% from 2.49% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 3.99% from 3.94% a week ago.
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Stock declined slightly today after President Trump signed the tax reform bill. This is a little of the ‘buy the rumor, sell the news’ theory. Stocks have increased five straight weeks on optimism of a large reduction in the corporate income tax rate. From my perspective, the corporate tax cut is the most significant portion of this bill. The federal rate was decreased from 35% to 21%, in line with the EU average (21%) and 6 percentage points below Germany (28%). This will make the US economy even more attractive for US and foreign investment.
On the heels of the bill passing, numerous large companies announced wage and investment increases and one time bonuses for employees. AT&T announced it would invest an additional $1 billion in 2018 because of the new tax law and would pay all ~200k employees a $1,000 bonus before year end. Other companies such as Wells Fargo and Fifth Third Bank announced they would raise their minimum wage to $15/hour for all employees. I’m sure some portion of this is a nice PR effort by these companies, but I also believe lower corporate taxes are a net benefit to the economy. The tax savings are available for increased investment, wages, dividends or simply higher profits. All of those options provide positive benefits to the economy. Read More & More
Apple admitted this week that its iPhone systems are designed to slow down as the phones age. The company claims the process is in place to help keep older phones, with older batteries, working at peak performance. Many consumers are concerned it was done to encourage people to upgrade to a newer phone. Apple’s view makes some sense as batteries age and usage demands increase over time, but some consumers feel this should have been disclosed or set up as a option that a user could pick instead of having no control over the slowing. There is now a lawsuit against the company in California over this issue. Read More
Oil increased 1.7% this week to close at $58.32/barrel. The yield on the 10-yr Treasury moved sharply higher, up to 2.49% from 2.35% last week. The average rate on a 30-yr fixed rate mortgage ticked higher to 3.94% from 3.93% a week ago.
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The final tax reform bill is scheduled to be released at 5:30pm eastern and it appears that Republicans in the Senate have enough votes for passage. The final details aren’t known, but it appears the corporate rate will be reduced to 21%. The individual tax code is seeing less significant reductions, but is being simplified through the doubling of the standard deduction. From an investing standpoint, the reduction in the corporate rate is the key aspect of the bill. While many companies don’t pay the full statutory rate, a tax cut will free up capital for investment, dividends or share repurchases. Every capital investment decision has to include a provision for taxes. If the tax rate is lower, additional investments will start to make economic sense. Read More
One thing that remains interesting to me is the bond market reaction to tax reform. I’ve written about this over the last year, but it still surprises me how different the bond market seems to think about the economy and future economic growth versus the stock market. The 10-yr Treasury is at 2.35%. At the beginning of the year it was 2.45%, essentially the same level. The stock market seems to believe economic growth is going to start exceeding 3% annually, but the bond market isn’t believing that, otherwise the 10-yr Treasury would be trading significantly higher than it is. The gold market seems to agree with the bond market. Gold is up 9% this year, but it has largely traded in the $1,200-1,300/oz range for the past two years. That means the market isn’t expecting a sharp increase in inflation in the near term. If growth is able to get above 3% consistently, we would likely see higher inflation.
The latest Star Wars movie officially opened today, but many theaters showed the movie last night. Remarkably, the movie made $45 million last night and expects to be around $100 million by the end of the day today. This could end up being the most lucrative opening weekend in history. In addition to Disney winning from the latest Star Wars release, it announced this week it was buying a number of asset from Fox, one of which is the remaining Star Wars assets it doesn’t own. If this deal goes through, Disney will now own all of the Star Wars franchise and Star Wars appears poised to be a business success for years to come. Read More
Oil declined slightly this week, decreasing 0.1% to close at $57.32/barrel. The yield on the 10-yr Treasury moved lower, down to 2.35% from 2.38% last week. The average rate on a 30-yr fixed rate mortgage ticked lower to 3.93% from 3.94% a week ago.
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Friday Rally Following Jobs Reports Lifts Stocks Higher for Week
- November Jobs Reports Better Than Expected
- Still No Tax Bill
- Both the S&P 500 and Dow Were Up 0.4% This Week
The November jobs report came in stronger than expected. The Bureau of Labor Statistics announced this morning the US economy added 228k net new jobs in the month. The unemployment remained at 4.1%. The last two months have been a nice divergence from the rest of 2017, with an average of 236k jobs created during October and November. For the year, we are averaging 174k new jobs per month. Monthly job creation in the current expansion peaked in 2014 at 249k, but has dropped each year since then. Wages grew at a 2.5% annualized rate in the month. This is slightly higher than we saw for much of last 5-6 years, but still below what one would expect given the low unemployment rate. I believe wages remained constrained because there is a lot of slack in the labor market. People sitting on the sidelines, not counted in the formula for unemployed people, that keep coming back into the labor force as new jobs are added. This is a lot of ‘shadow’ supply of labor that is balancing out continued higher demand, thus wage growth remains relatively stagnant. Read More
Negotiations for the tax bill continued this week, but no resolution has been found. Major differences continue to exist on state and local income tax deductions, the Alternative Minimum Tax and various other issues. Additionally, the need to avoid a partial government shutdown is taking center stage with Trump negotiating with Congress on a stop-gap continuing resolution. For some reason, Trump signed a continuing resolution to fund the government through Dec 22nd. Yes, that’s just two weeks from today. It makes no sense to me why they couldn’t fund this at least through mid-January. It remains to be seen what comes of the tax reform bill, but negotiations will continue next week.
Oil declined this week, decreasing 1.6% to close at $57.36/barrel. The yield on the 10-yr Treasury ticked higher, up to 2.38% from 2.37% last week. The average rate on a 30-yr fixed rate mortgage increased to 3.94% from 3.90% a week ago.
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Tax Reform Optimism Sends Stocks Higher
- Reports Thursday that Republicans had Votes for Tax Reform Propelled Markets Higher
- Real Earth Elements Discovered in US Coal Basins
- S&P 500 was up 1.5% this week, Dow up 2.9%.
Stocks took off Thursday when John McCain committed to voting for the Republican tax plan, signalling the Republicans should be able to get the 50 votes needed to pass tax reform. Markets are mostly responding to the corporate tax cut portion of tax reform, which would reduce the rate from 35% down to 20%. A reduction to 20% would bring the US corporate tax rate in line with other developed nations. The bill would also reduce taxes on foreign earnings, although the exact rate isn’t clear yet. Earlier versions of the Senate bill included a 10% tax on repatriated earnings. The US is the only developed country to tax foreign earnings.
Both of these policies seem very positive for US companies and the US economy. Lower corporate taxes will lead to some combination of lower prices, higher earnings and wages, and increased dividends/share repurchases and/or investment. All of those things benefit consumers and investors. Even if all the tax cuts goes straight to higher profits, I still think that’s a win for the overall economy. Pension funds, 401k plans, etc. benefit from higher corporate earnings and millions of Americans depend on pensions and 401ks for retirement income.
Lowering taxes on foreign earnings should encourage companies to bring back to the US some of the $2.8 trillion US corporate cash being held overseas. Personally I would preferred a 0% rate on repatriated cash. Some critics of this argue that the money will likely be used for share repurchases or dividends instead of additional investment. That might be true. There is ample capital available for investment right now, so that doesn’t seem to be limiting investment. However, I think having the cash in US banks, whether still in corporate accounts, or in investor accounts, is still a positive versus leaving it trapped overseas. As I’m writing this, there still hasn’t been a vote on the Senate bill, but it appears it will occur later this evening. After it passes it will head to committee to reconcile with the House bill. Read More
The Department of Energy reported this week that high concentrations of rare earth elements have been discovered in coal basins in Appalachia and Colorado. This could be a very important discovery. Rare earth elements (REE) are critical in the manufacturing of numerous high tech devices including cell phones, computers and even national security devices. The US currently has no REE mines. The only one we did have filed for bankruptcy in 2015 leaving us dependent on foreign supplies. China is a leading REE miner and provides essentially all US supply. Discovering a large domestic supply of rare earth elements could significantly reduce our need for China to provide these critical materials. Read More
Oil declined this week, decreasing 1.1% to close at $58.31/barrel. The yield on the 10-yr Treasury ticked higher, up to 2.37% from 2.34% last week. The average rate on a 30-yr fixed rate mortgage declined to 3.90% from 3.92% a week ago.
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Stocks Higher in Holiday Week
- NAFTA Back in the News
- America Creating Lots of Millionaires
I wish you all a Happy Thanksgiving filled with good food, family and friends.
The weekly recap is arriving early due to the Thanksgiving holiday. Markets will be closed tomorrow and only open half day on Friday. Stocks moved sharply higher this week, with most of the gains coming on Tuesday. So far this week, the Dow and S&P 500 are up 0.7%.
The North American Free Trade Agreement (NAFTA) was again in the press this week as the 5th Round of negotiations concluded yesterday with no real solutions. NAFTA was signed into law by the Clinton administration and has opened up markets between the US, Canada and Mexico for 23 years. The Trump administration has repeatedly threatened to leave NAFTA if we don’t get better terms in the deal. I’m a believer in free trade and global trade. I think consumers worldwide do better when products and services can be produced in the most effective and cost-efficient manner. That reality does have downsides though. Low-skilled labor in this country is much more expensive than in other countries. This can cause a lot of low-skilled employment to be outsourced to lower cost countries. That hurts parts of the US economy. However, it also benefits parts of the US economy because cheaper consumer goods means people can 1) consume more and 2) free up money to invest in other productive ventures. There is no perfect answer, but overall, I hope we stay in NAFTA and continue to be a global example of what free trade should be. Read More
A new study shows that 1 in 20 Americans are now millionaires. It’s remarkable to think that 5% of our population has a net worth in excess of $1 million. So far in 2017, 1.1 million households have become millionaires. There are now over 15 million US households with a $1 million net worth. The US accounts for roughly 5% of the global population, but has 43% of the world’s millionaires. Much of the recent gain has been from the stock market, which has continued its long bounce-back from the financial recession. Total wealth in the US now stands 30% higher than in 2006, the last full year before the financial crisis started. While some in the US have done very well, the US ranks a somewhat disappointing 21st in median net worth, with a median net worth of almost $56k. Median means half the US population has a net worth over than amount while the other half is below that amount. Switzerland leads the world in median wealth, with an impressive $230k figure. Read More
Oil declined rose this week, increasing 2.5% to close at $58.02/barrel. The yield on the 10-yr Treasury ticked lower, down to 2.32% from 2.34% last week. Freddie Mac hasn’t yet released the weekly change in mortgage rates.
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