Published Aug 13th, 2018

As U.S. equity markets powered onward, the Federal Reserve called the economy fundamentally strong and hinted at two more rate hikes this year and perhaps three hikes next year.

Earnings have been strong, with almost all of the S&P 500 results released. So far, reported earnings increased nearly 25 percent year on year. Eighty of the companies have beaten estimates. The proportion with rising earnings is a record 62 percent. No doubt, if we did not have trade conflicts, we would be doing even better.

Trade talks between the Trump administration and China have stalled. The president is threatening further tariffs; China is responding by weakening the yuan. The spread between dollar value and yuan value is widening, so the dollar is rising against other currencies as well. While a strong dollar has benefits for importers, it makes it harder for exporters to sell goods. For those wishing to narrow the trade deficit, it is a self-defeating strategy. Import more, sell less abroad and complain about the widening gap. The logic is hard to understand. Most economists do not agree with the strategy.

Domestic unemployment continues in the low range. According to the latest measurements, 219,000 jobs were created last month. There are now more employment positions available than there are people to fill them.

Some industries, such as construction, are feeling a severe shortage of available workers. Overall, there are jobs for everyone who wants one. Companies are lowering their educational requirements. People with disabilities can get jobs. People with criminal records are getting jobs. Immigration policies are shrinking the workforce.

Wage pressure, and therefore inflation, will surely follow, but for now the Fed is happy with […]

Published July 9th, 2018

U.S. equity markets show uncertainty and less growth. The economy stumbles over trade conflicts and rising interest rates, amid evidence of inflation and a strong dollar.

Year to date, the S&P index is up a meager 2.65 percent, about the annual rate of inflation. June saw only a 0.62 percent increase in the S&P. The Gross Domestic Product annualized growth for the quarter was 2.0 percent versus the forecast 2.2 percent and White House boasts of 4 percent. The Atlanta Fed forecasts a slowing GDP growth rate. Personal consumption fell slightly on the quarter. Why are the market and the GDP pausing now?

A host of negatives provide headwinds for the market.

Interest rates are on the rise. The Fed has already raised them this year, and three to four more increases are being discussed. The White House, through Larry Kudlow, President Trump’s top economic advisor, took the very unusual step of admonishing the Fed about interest rate increases. No White House in memory has told the Fed what to do. Since it was first established, the Fed was to be independent of politics.

Kudlow also took time to assure the markets that the massive deficits incurred by the tax cut were disappearing. No signs that the deficits are disappearing have been noted. The Congressional Budget Office says the deficits are persistently large and show no signs of decrease.

Rising interest rates have the effect of strengthening the dollar. A strong dollar coupled with proposed tariffs make U.S. products more expensive to foreign buyers, which means a slowing economy and fewer jobs in the U.S. Many companies have warned that their production will be curtailed and their employment […]

Published March 9, 2018

President Trump began his term by abandoning the Transpacific Trade Agreement, angering many of our allies. By threatening to impose steel and aluminum tariffs, he has further distanced himself from our allies when he needs them. Now he finds himself isolated in the trade talks with China, when he needs the support of other countries to come to favorable terms with them. Having determined that the U.S. is unreliable at present, our trading partners are making separate deals with China, further isolating the U.S.

Recently, Trump had to back down from his penalties on ZTE, a Chinese company that he had sought out for punishment, until President Xi Jinping retaliated with tariffs on U.S. agricultural products. Trump’s interest in controlling technology transfer to China was left on the cutting room floor in order to salvage U.S. soybean exports.

In Trumpian style, he has sought to double down on his losing position. He wants more tariffs, this time on automobiles and auto parts. He is apparently unaware that auto products can and do cross borders, sometimes several times, in the manufacturing process. His strategy will disrupt global supply chains and damage the global economy. China will lose, but so will the US.

Congressmen and women are proposing legislation to limit Trump’s trade authority, fearful that he has gone too far. Jamie Dimon, CEO of JPMorgan, has warned about potential negative consequences of the trade conflict. The Business Roundtable CEOs are concerned about the Trump administration’s approach to trade, with a recent survey showing 95 percent see a risk that foreign retaliation could hurt U.S. exports, while 91 percent see risks that consumers will be impacted by higher costs of imports.

In […]

Published May 11, 2018

Expectations for the market heading into 2018 were very high – that company earnings would be up 18 percent year on year. The market was stretched to meet these high expectations. Aided by the tax cut bill, actual earnings far exceeded forecasts. By early May, with most companies reporting, actual earnings were up an astounding 27 percent. Normally, one would expect the market to show a similar increase, but it did not. The market has barely moved since the start of 2018, compared with a 7 percent increase as of this time last year.

With earnings strong, the price-earnings ratio of the market dropped from over 18 times earnings to about 16 times earnings – closer to the historical average. Fixed income became a better investment than equities; even cash earned more than equities because equities remained flat since the start of earnings season. Yields on the 10-year Treasury bond rose to 3 percent, making fixed income competitive with equities. In addition, volatility rose dramatically. Was the market getting tired? Was the market tipping over?

The May jobs report came in with the number of jobs created at 164,000, down from the expected 192,000. But the rate of unemployment fell to 3.9 percent – the lowest since December 2000. The rate of unemployment for black workers fell to 6.6 percent – the lowest ever. Wage growth was tepid at 2.6 percent.

Meanwhile, the labor pool is shrinking: 410,000 more people dropped out of the workforce, out of a total of almost 96 million employed. This shrinking labor pool is the largest reason for the drop in the unemployment rate. A shrinking labor pool is not good […]

Published April 6, 2018

On March 9, 2009, the U.S. equity market touched a low, having weathered the Great Recession brought on by a financial crisis. Since that time equities have climbed a wall of worry to reach new records. Frequent corrections occurred, but the market managed to overcome many hurdles and somehow reached new highs every quarter.

A slow but steady growth in the economy carried the market quarter after quarter. It was a much-hated rally, with investors always suspicious of its reliability. Economic growth was uneven, leaving out many people, but the overall economy grew. During this time earnings and gross domestic product increased, but slowly.  The tepid nature of the growth may have been one reason that the rally was so unloved.

Since the election of President Trump, headline news has dominated the airwaves. In this column, we frequently said to disregard the headline news and focus on the economic fundamentals, because the fundamentals were strong. We said our growth could continue so long as we did not have policy mistakes. Policy mistakes are frequently the reason for the end of a bull market.

The Federal Reserve is a potential source of mistakes and is frequently blamed for the demise of a bull market. “Bull markets don’t die of old age, they are murdered by the Fed” is a frequent adage. Lately, the Fed has been inching interest rates up. This is risky business, which can only be done with great care. Our rate of inflation is low, but approaching the Fed’s target rate of 2 percent.  While the rate of increase is not alarming, the Fed wants to stay ahead of it. The newly constituted Fed […]

Published March 9, 2018

After experiencing one of the longest bull markets in history, equity markets slipped.

Following a robust start to the new year, the markets descended into correction territory. What ensued was a period of confusion, because of the aftershock of the correction and because a new Federal Reserve chairman added to uncertainty. The market then seemed to regain its footing, recovering most of its loss. But after testimony of the new Fed chairman before Congress, the markets swooned again.

Then President Trump announced stiff tariffs on aluminum and steel imports, sending the markets down. The Dow Jones lost a total of about 1,000 points in two days and remains off of its highs.

Earnings still appear to be strong, with profits from S&P 500 stocks forecast to be up more than 16 percent in the first quarter of 2018. The rest of the year should be as strong or stronger, with the third quarter expected to see profits up almost 23 percent year over year.

Inflation remains rather tame – still under 2 percent. Indeed inflation has been moving into lower territory since 1980 due to improvements in the global supply chain and technological advances. Despite increased automation in all sectors, the unemployment rate has declined. Wages, which had remained stagnant, have just begun to move upward. The global economy remains strong, so we can expect the U.S. economy to also remain strong.

The Fed’s favorite inflation gauge, the core personal consumption expenditure index, has not exceeded 2.5 percent in years and was 1.5 percent at the end of 2017. You might think that the new Apple iPhone X could change the inflation outlook with its starting price of […]

Published February 9, 2018

After a 19-month melt-up, the equity market had a stunning start to the New Year. The market experienced a trifecta, beginning with the ”Santa Claus rally” during the seven-day stretch that ended Jan. 3, continuing with a rally in the first five days of 2018 and on through January, when the S&P index gained 5.62 percent.

A market axiom is that past performance is no indicator of future success. However, 29 times since 1949 all three of those events have occurred in January, and 90 percent of the time the market rose in the final 11 months of the year. The average gain was 12.9 percent.

Support for the market gains have come from a worldwide surge in growth, a weak dollar and strong earnings reports in the U.S. The U.S. manufacturing index is above 50, which signals an expanding economy. Employment numbers are growing, and wages are expected to follow. Unemployment is at historic lows, suggesting that consumer confidence will remain strong. Gross domestic product growth is expected to be around 5.6 percent – well in excess of the 2 percentish growth that we have had for years.

But wait! Didn’t the market hit a stumbling block and start February on a down note? What’s that all about? It is about the already jittery market getting jitterier.

First there was the Trump State of the Union address. As the address approached, investors began to worry about what would be in the speech. Fortunately, the speech was largely benign, and the market rallied.

But then there was the Federal Reserve meeting. The Federal Reserve was transitioning leadership from slow and steady Janet Yellen to a new person who […]

Published January 8, 2018

Chalk up a remarkable year for investors.

At this point in time a year ago, the new U.S. president, Donald Trump, had been elected in what was considered a surprising result. A shock went through the market, as many investors considered their options amid changes in the investment climate.

The options frequently included exiting the market. Sworn into office in mid-January, President Trump offered cold comfort to the market. In a dystopian inaugural address he offered a bleak view of the U.S. While most presidents, particularly in their first term, offer promise and hope in an effort to unite the nation, Trump poured cold water on the American dream. The markets were confused and discouraged.

Still, out of this cloud of doubt, the equity markets began to show strength. While the headline news continued to be frightening, the economy was expanding. Led by technology, profits began to climb. Health care and discretionary consumer stocks added support. At the start of the year, Fact Sheet predicted 9 percent earnings growth for the first quarter of the year. Instead, earnings growth for the period increased 14 percent. The expansion continued throughout the year, but at a slower pace.

At this time last year, the Dow was about 20,000; today it is near 25,000. The S&P has gone from roughly 2,260 to 2,680, year over year. The Nasdaq was 5,500 last Christmas and near 7,000 now. A synchronized pickup in growth around the world led stock markets to multiyear highs.

2017 was remarkable, even astonishing, for investors, as few would have predicted this outcome. Those investors who ignored the headlines and focused on the fundamentals were rewarded. The year was a […]

Published December 11, 2017

President Trump has been in office nearly a year. During that time, he has had scant legislative victories. He has attempted to roll back the signature accomplishments of former President Obama. He has generally only had success where Congress cannot intervene, even though the Republicans control both houses.

After a year of struggle, Republicans are poised to finally produce a win on a tax bill. Called a tax reduction and reform bill, it creates massive new debt for the U.S. Proponents argue that economic growth will make up the needed revenue to overcome the reductions in tax rates. History shows otherwise. Bill Dudley, president of the New York Fed, opines that the result will be even higher interest rates as the government borrows more to fund increasing deficits. Higher rates will dampen economic growth, making it unlikely that the bill will be positive for the economy.

Additionally, it is hard to see how the economy, which is operating at full throttle, can ratchet up the pace. With the unemployment rate at less than 5 percent, achieving improvement is challenging. And so, the tax bill may simply generate more debt for the country. President Trump, with his own multiple bankruptcies, has called himself the “king of debt,” and that may be the role he is playing now.  Republicans are typically averse to debt and fond of criticizing Democrats for deficit spending, but not this time.

So, why does the market find good news in what historically has been not so good news? It is in part because of the strong belief that the tax bill will create economic growth and more jobs, even though history has shown […]

Published November 10, 2017

With the global economy further recovering from the financial crisis of 2007-2009, equity indices around the globe pushed higher. In October, usually a bad month for markets, the S&P rose 2.2 percent as a result of strong earnings, and anticipation of tax reform. Consumer confidence, as measured by the Conference Board, hit a very high 129.9.

Personal spending rose 1 percent in September – the largest monthly gain since August 2009. Retail sales soared, rising 1.6 percent in September. The spending was partially a result of the need to replace cars and trucks damaged by hurricanes and floods. Manufacturing and service industries expanded at a robust pace. The purchasing manager index reached a 15-year peak and the service sector index reached a 12-year high. Orders for durable goods, such as defense spending, rose 2.2 percent, and it appears that growth is on track at a 3 percent clip.

Globally, the economy continued its expansion.

The Federal Reserve left U.S. interest rates unchanged, but a quarter-point increase is surely on deck for December. Meanwhile, the European Central Bank left its short-term interest rate at zero, but indicated it will wind down its bond purchases. In Japan, with inflation at 1.4 percent, the Bank of Japan left interest rates unchanged. China’s economy slowed somewhat for the month. President Xi had no comment.

U.S. corporate earnings were strong. With 81 percent of the companies in the S&P 500 reporting actual results for the third quarter, 74 percent reported positive earnings surprises and 66 percent reported positive sales surprises. For the third quarter of 2017, the blended earnings growth rate for the S&P 500 was 5.9 percent. Six sectors reported earnings […]