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July 11, 2019

Quietly Higher

The major domestic equity indexes closed higher last week after a modest pullback on Friday followed a series of new closing highs set earlier in the week. Within the S&P 500, the real estate sector outperformed, while energy shares fell sharply as concern about global growth prospects seemed to grow.

Stocks got off to a good start Monday, as traders welcomed some apparent progress in U.S.-China trade negotiations at the G-20 summit last weekend. Semiconductor stocks were particularly strong after President Trump agreed to ease a ban on sales of chips to Chinese telecommunications giant Huawei Technologies. The large-cap indexes added modestly to their gains on Tuesday, when White House Trade Advisor Peter Navarro told CNBC that talks with China were heading in “a very good direction,” although he cautioned that a deal “will take time and we want to get it right.”

The week’s economic calendar was relatively light but seemed, initially, to confirm that growth was slowing globally, a pattern that traders had seemed to welcome in recent weeks because it could point toward a dovish turn in monetary policy and lower interest rates from the Fed. Manufacturing gauges released Monday indicated weak or even contracting activity in many regions, although most U.S. readings surprised modestly on the upside. Gauges of U.S. service sector activity, released Wednesday, were mixed, and ADP’s survey of private payroll gains in June came in somewhat below consensus expectations.

On the other hand, Friday’s June payrolls report from the Labor Department came in well above expectations, suggesting that the U.S. economy maintained considerable momentum. Traders who weren’t celebrating a long holiday weekend (probably junior ones) seemed uncertain about how to interpret the news. Stocks fell back in the first two hours of trading, as worries apparently grew that the Fed would not cut rates as much as investors hoped it would in the second half of the year. Stocks recovered a portion of their losses later in the day, however, as traders may have reconsidered some of the underlying data in the report. Average hourly earnings gains came in a bit below expectations, and weekly hours worked moved back to near a two-year low.

Longer-term U.S. Treasury yields moved higher (and prices lower) following the positive jobs news, with the yield on the benchmark 10-year U.S. Treasury note jumping roughly 10 basis points over the previous trading day’s close.

Overseas, the pan-European STOXX Europe 600, the UK’s FTSE 100, and the exporter-heavy German DAX all rose slightly last the week amid increased hopes that the ECB will supply fresh rounds of monetary stimulus to keep the region’s slowing economies afloat. Stocks got a further boost and bonds rallied after the IMF’s Christine Lagarde was nominated to be the next ECB president. She is expected to continue the loose monetary policy of current President Mario Draghi when Draghi leaves the bank at the end of October.

Chinese stocks posted a weekly gain, as traders reacted with relief to the temporary cease-fire on tariffs struck by President Trump and his Chinese counterpart Xi Jinping last weekend, but the absence of any news about the resumption of talks tempered optimism about a lasting solution. Japanese stocks also rose last week, with the Nikkei 225 gaining 2.21 percent.

From the headlines…

The U.S. Department of Labor reported that our economy added 224,000 jobs in June, far more than the 165,000 economists were expecting, while the unemployment rate edged slightly higher to 3.7 percent and wages grew at an annualized pace of 3.1 percent. Still, the news might not be as good as the top-line number suggests.

If the ability to learn from mistakes is an essential quality in a great leader, then Christine Lagarde has the potential to be an excellent president of the European Central Bank.

Despite the market boom, too many are still struggling to get by.

Yields on sovereign debt have dropped to multiyear or record lows in many places across the globe, but in China they are roughly where they were at the start of the year.

The U.S. has entered the longest economic expansion in its history. How much longer can it run?

The U.S. trade gap widened in May despite a new round of tariffs on Chinese goods.

The president has two new Fed nominees – one conventional and one not.


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July 2, 2019

The major domestic equity indexes closed mixed last week. The large-cap benchmarks fell back from the record highs they had established the previous week, while the S&P MidCap 400 and the small-cap Russell 2000 recorded small gains, but remained below their late-2018 peaks.

As traders begin to look ahead to second-quarter earnings reports, sentiment seemed focused on geopolitical concerns. Further tensions with Iran sent oil prices to their highest level in a month, benefiting energy shares. On Tuesday, stocks appeared to fall in response to warnings from White House officials that no broad trade deal with China was expected to emerge from this weekend’s G-20 summit in Tokyo. Administration officials also stated that the U.S. was not prepared to offer China new concessions. Stocks bounced back in early trading Wednesday following remarks from Treasury Secretary Steven Mnuchin, who estimated that negotiators were “90 percent of the way there” in reaching a deal. Stocks soon surrendered their gains, however.

Also weighing on sentiment at midweek were remarks from Federal Reserve officials, which proved less dovish than many had hoped. On Tuesday, James Bullard, the president of the Federal Reserve Bank of St. Louis and a notable advocate of easy monetary policy, voiced opposition to a 50bp cut in rates in July, as some are advocating. Fed Chair Jerome Powell also stated that the Fed should not overreact to changes in sentiment.

The political implications of Fed policy added another layer of uncertainty and appeared to be merging in potentially alarming ways with trade policy. President Trump stepped up his criticism of Powell and the Fed, tweeting that the central bank “blew it” by hiking rates and was acting like a “stubborn child.” The market consensus seems to be coming around to the idea that Mr. Trump will not sign a trade deal until he gets a rate cut to start a loosening cycle.

The week’s economic data generally missed expectations. Gauges of manufacturing activity in the Chicago, Kansas, and Dallas regions fell unexpectedly into contraction territory, and overall durable goods orders contracted much more than anticipated in May. Consumer personal spending and income recorded solid gains in May. Weekly jobless claims rose a bit more than expected, however, and the Conference Board’s measure of consumer confidence in June fell sharply, hitting its lowest level in nearly two years due to “a less favorable assessment of business and labor market conditions.”

The weak data and geopolitical tensions sent the yield on the benchmark 10-year U.S. Treasury note below 2 percent for the first time since President Trump’s election victory in November 2016.

Overseas, the pan-European STOXX Europe 600, the UK’s FTSE 100, and the exporter-heavy German DAX all rose slightly throughout the week amid hopes that the G-20 summit would ease trade tensions. Chinese stocks softened as traders stayed cautious ahead of a widely anticipated G-20 meeting on trade between President Trump and his Chinese counterpart Xi Jinping.

From the headlines…

“Think of what it could have been if the Fed had gotten it right,” President Trump tweeted last week, imagining huge gains in market indexes and GDP growth in the 4 to 5 percent range. He likened the Fed to “a stubborn child” and said the central bank “blew it.” And he won’t let the issue go. “Here’s a guy, nobody ever heard of him before, and now I made him and he wants to show how tough he is?” Mr. Trump said of Jerome Powell, the Fed chairman, yesterday. “He’s not doing a good job.”Powell has responded, albeit indirectly: “Congress chose to insulate the Fed this way because it had seen the damage that often arises when policy bends to short-term political interests. Central banks in major democracies around the world have similar independence.”

As reported by The New York Times,“The president’s criticism of the Fed comes at an odd moment: As of July 1, the United States will have experienced the longest economic expansion on record, ten years and running. The unemployment rate is at its lowest level in nearly 50 years, and inflation — though quiescent — has at least gotten close to the central bank’s 2 percent goal. By lifting rates from near zero and shrinking the massive volume of government-backed bonds on its balance sheet, the central bank has bought itself precious space to fight the next economic downturn when it comes.”

The Dallas Fed’s manufacturing index fell to the lowest level in three years in June. Trade tensions are clouding the outlook for factories, with 41 percent of Texas manufacturers saying U.S. and foreign tariffs have had a negative impact on business. The weak Dallas report follows soft New York and Philadelphia Fed surveys. U.S. manufacturing is falling fast and hard.

On Tuesday, President Trump announced a new set of sanctions targeting top officials in the Iranian government, including Supreme Leader Ayatollah Ali Khamenei. The measures were called “outrageous and stupid” by Iranian President Hassan Rouhani.Mr. Trump also tweeted that any “attack by Iran on anything American will be met with great and overwhelming force.” How we got here. Russia’s booming stock market and currency, China’s second quarter bounce and Nicolás Maduro’s ability to hold power in Venezuela have flown directly in the face of the perceived power of the U.S. to use sanctions to cajole bad actors on the international stage.

The trade war between the U.S. and China is becoming a major drag on the global economy. At the G-20 meeting yesterday, Presidents Trump and Xi agreed to restart trade talks. It’s still unclear if that is good news (maybe no tariffs) or bad news (rate cuts less likely). Moreover, if Mr. Trump is waiting for a rate cut to cut a China deal, the overall messiness and uncertainty will be difficult to navigate.

Economists are starting to worry about the U.S. jobs market.

Oil closed out its best month since January as crude got a boost from Iran tensions and falling U.S. stockpiles. That rally may get tested next week as OPEC and its allies meet on Monday to agree on an extension to production cuts. Also putting in a stellar performance in June was gold, which netted its biggest monthly gain since 2016.

The collapse in bond yields since this spring has been stark, swift, and global. The drop says investors expect a recession may be looming, and that central banks will have to step in with lower rates to try to forestall it.

S&P 500 companies repurchased $205.8 billion worth of their own stock in the first quarter, according to S&P Dow Jones Indices, the second-highest amount on record based on data going back to 1998, but less than Q4 2018.

Vanguard, the indexing giant, is examining a push into private equity. Goldman Sachs is putting together a 4-unit division with around $140 billion in assets to invest in private companies and other alternative assets like real estate. However, the hedge fund moment is probably over.

Tariffs are a tax on imported goods paid by U.S. businesses that new research from the New York Fed suggests would increase taxpayers’ overall costs by $106 billion a year.

Nearly 70 percent of IRA rollovers are undertaken without an advisor’s assistance.

Americans lose trillions claiming Social Security at the wrong time.


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June 25, 2019

President Trump opened his campaign for reelection last week and the strength of the American economy was his lead argument.

“Our country is now thriving, prospering and booming. And frankly, it’s soaring to incredible new heights. Our economy is the envy of the world, perhaps the greatest economy we’ve had in the history of our country. And as long as you keep this team in place, we have a tremendous way to go. Our future has never ever looked brighter or sharper.”

The stock market seems to agree. Last week’s surge in stocks (the S&P 500 and the Dow both reached all-time highs last week) underscored confidence on Wall Street that the U.S. economy and global markets remain healthy. Stocks are on pace for their best June in more than half a century. Broadly speaking, the economy *is* strong, if not as strong as it was, as last week’s Federal Reserve policy statement emphasized.

On the other hand, Mr. Trump also characterizes the economy as so fragile that it requires significant interest rate cuts from the Fed. He has repeatedly urged the Fed to cut rates and take additional steps to stimulate economic growth. Responding to the Fed’s announcement last week that it was prepared to cut rates in the near future, Mr. Trump said, “They should have done it sooner, but what are you going to do?”

The bond market seems to agree. After the Fed meeting, demand for U.S. government debt drove the benchmark 10-year U.S. Treasury yield down to below 2 percent before settling at 2.07 percent at last week’s close. In the last seven months, 10-year yields have dropped 120 basis points. The Bank of America Merrill Lynch monthly fund manager survey named “long Treasuries” as the most overcrowded trade in the world. Lower yields suggest the economy isn’t humming along as strongly as previously believed.

Messages are highly mixed — from the president, the Fed, the stock market, and the bond market.

The Fed’s reinforcement of trader expectations for an interest rate cut later this year powered strong gains for domestic stocks last week. While the tech-heavy Nasdaq outperformed the broad market, large-cap defensive sectors that pay relatively high dividends, such as utilities, also posted healthy gains.

Geopolitical tensions in the Middle East continued to ratchet higher, driving large gains in crude oil prices as well as energy sector stocks. News that Iran shot down a U.S. drone helped push the price of West Texas Intermediate crude, the U.S. oil benchmark, up more than 5 percent on Thursday alone.

Sentiment about the trade dispute between the U.S. and China seemed to shift positively, providing another source of support for stocks. On Tuesday, President Trump said that he and Chinese President Xi Jinping would have “an extended meeting” at the G-20 conference next week in Japan. Traders hope that renewed negotiations will help avoid tariffs on additional Chinese goods imported by the U.S.

European stocks also rose last week, buoyed by anticipation of more central bank stimulus measures. The pan-European STOXX Europe 600, UK’s FTSE 100, the exporter-heavy German DAX, and Italy’s FTSE MIB all gained as ECB President Mario Draghi signaled that the bank could offer more stimulus measures as early as July if growth continued to stall.

In Asia, Chinese stocks advanced strongly for the week too, as traders bet that a meeting between President Trump and his Chinese counterpart Xi would lead both countries to resume trade talks that broke down last month. The benchmark Shanghai Composite gained 4.2 percent and the large-cap CSI 300, which tracks blue chips listed on the Shanghai and Shenzhen exchanges, added 4.9 percent.

From the headlines…

At last week’s policy meeting, Federal Reserve officials held interest rates steady but strongly suggested they would cut them in the months ahead if an economic outlook clouded by uncertainty over trade policy didn’t improve. St. Louis Fed President James Bullard dissented from the decision, preferring lower rates immediately. It was the first dissenting vote cast since Jerome Powell became Fed chairman in February 2018. Interest-rate projections released by the central bank showed eight of 17 officials — the reserve bank presidents and board governors who participate in the Fed meetings — expect they will cut the benchmark rate by year’s end from its current range between 2.25 and 2.5 percent.

European Central Bank President Mario Draghi signaled the bank could cut interest rates or expand its giant bond-buying program as soon as its next policy meeting in July.

In Europe, manufacturing is slumping and recession worries are on the rise.

President Trump and Chinese President Xi Jinping agreed to meet in Japan next week, buoying financial markets and spurring hopes for a trade truce.

It isn’t just China. The U.S. and India have hit a rough patch over tariffs too.

Bank of America’s monthly investor survey makes for grim reading. Still, with 496 S&P 500 companies having reported first quarter earnings, more than three quarters (75.6%) beat expectations, with Q1 earnings now expected to increase 1.6 percent, data from Lipper shows.

The U.S. was preparing to launch a retaliatory strike against Iran for shooting down an American reconnaissance drone last week, but the mission was called off at the last minute.

Gold futures climbed 3.6 percent on Thursday to $1,392.90 a troy ounce, their biggest one-day advance since June 2016 and highest settle since 2013.

An economics lesson from Taylor Swift.

Americans gave less money to charities last year, partly because tax law changes made many people ineligible for tax breaks that can inspire donations. Total estimated giving, by corporations, foundations, as well as individuals, fell about 1.7 percent, after inflation, to $427.7 billion.


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June 19, 2019

Wall Street v. Main Street

There is a major disconnect in economic perspective between Main Street and Wall Street. Using May’s NFIB small business optimism index as a proxy for Main Street opinion, the economy is strong. May’s reading was the highest since October, hiring plans rose to the greatest level since December, and problems finding qualified applicants for job openings is hovering near record highs. Indeed, U.S. job openings today outnumber the unemployed by the widest gap ever. The NFIB concluded, “optimism among small business owners has surged to historical highs thanks to strong hiring, investment and sales…taking advantage of lower taxes and fewer regulations….”

On the other hand, pessimism is rising on Wall Street, largely related to tariffs. The recent “temper tantrum” six-week market decline really got going after President Trump tweeted his way into a trade war in early May. In response, Wall Street has been demanding interest-rate cuts to support the stock market. The president is fully on board with that, if unwilling to support free markets.

The Federal Reserve gets together again next week to revise its economic forecasts and we’ll see if the Fed decides to play ball. The latest data from the futures markets suggests that traders think there’s roughly a one-in-three chance that the Fed will ease next week. For the July FOMC meeting, the futures markets think there’s roughly a 90 percent chance the Fed will cut rates. They also think the Fed will ease again in September and a third time in December.

To give you an idea of how much things have changed, one month ago traders saw a roughly one-in-ten chance of two rate cuts by September. Now the odds are about three-in-four. The yield on the two-year U.S. Treasury note, which is often a good proxy for Fed policy, has dropped to its lowest yield in 18 months.

However, consistent with Main Street opinion, the substantive case for easing isn’t all that great. The recent jobs report was a little light, but the unemployment rate is still just 3.6 percent, close to a 50-year low. This week’s CPI report showed that consumer inflation is basically right in the Fed’s target zone. A 75 basis point rate cute implies the something is terribly wrong. It isn’t.

Wall Street expects, but the Fed may not deliver. However, there’s a big G20 meeting at the end of this month. I think it’s likely that the president will try very hard to announce some sort of breakthrough with China there, which would take the pressure off the market.

Domestic stocks were strong early last week due to last weekend’s reported deal between the U.S. and Mexico to avert tariffs before losing momentum later in the week. The S&P 500 and the Dow finished the week with modest gains. The small-cap Russell 2000 outperformed larger-cap indexes, but only slightly.

Last week’s weak inflation data helped push Treasury yields lower, with the yield on the benchmark 10-year U.S. Treasury note falling to 2.09 to end the week. Treasuries also benefited from the building geopolitical tensions in the Middle East and the continuing uncertainty about the trade war between the U.S. and China, which encouraged traders to move into safe-haven assets.

European stock markets ended last week higher, buoyed by the rise in oil prices, but still under pressure from U.S.-China trade tensions and weak Chinese industrial data. The pan-European STOXX Europe 600, the UK’s FTSE 100, the exporter-heavy German DAX, and Italy’s FTSE MIB all moved higher.

Chinese stocks rebounded last week as traders grew more confident that Beijing would step up stimulus measures to cushion the economy from the impact of U.S. tariffs. The benchmark Shanghai Composite ended up 1.9 percent, its best showing in eight weeks, and the large-cap CSI 300, which tracks blue-chips listed on the Shanghai and Shenzhen exchanges, added 2.5 percent. The latest gains came a week after both indexes closed at their lowest levels in almost four months. Japanese stocks were also up about 1 percent.

From the headlines…

U.S. inflation slowed in May, restrained by weakening price pressures almost across the board. The consumer-price index, which measures what Americans pay for household goods and services, rose just 1.8 percent from a year earlier despite a strong labor market and moderate wage gains. Of course, muted inflation could give the Fed cover to cut interest rates.

The U.S. budget deficit has increased to $738.6 billion in the first 8 months of the fiscal year — up $206 billion (almost 40 percent) from the same time last year. Of course, nobody in Washington, in either party, cares.

China says it is preparing to ride out a trade war. In fact, China has lowered its tariffs substantially, just on everybody but the U.S. The White House’s top economic adviser said President Trump could take further action against China if President Xi Jinping doesn’t agree to a meeting at the Group of 20 summit in Japan later this month.

Morgan Stanley (via Business Insider) has made its bear case for the trade war if the U.S. and China don’t end the tariffs:

·     S&P 500 falls 16 percent to 2,400 over the next 6-12 months

·     Earnings growth bottoms out in 2021 at -14 percent

·     A full-blown economic recession hits in 2020

The negative attitude toward Chinese assets continues, too. Notice (below) how MSCI’s index of the 100 companies in its World index with the greatest exposure to China has compared to the MSCI World index itself since President Trump was elected. The biggest decline came with the first threats of tariffs last year. That was followed by a rebound after the Buenos Aires “truce” between Mr. Trump and China’s Xi Jinping last November, while the recent sharp fall dates from the presidential tweets promising extra tariffs on Chinese goods.

A slew of Chinese economic data came out last week. Chinese economic data on industrial output and investment published Friday added to evidence of a slowdown that some economists said risks breaching the government’s 6 percent bottom line for growth (which would still be the slowest in a quarter-century), unless there is more stimulus. The factory output number, the weakest since 1992, follows disappointing trade data published last week showing exports nearly flat and imports falling 8.5 percent in May. Loan expansion in the period lagged every other month this year.

Oil prices surged Thursday after two tankers were damaged in a suspected attack in the Gulf of Oman, near the Strait of Hormuz.

Trade volumes are flat or down across major economies the world over, possibly auguring recession.

At last weekend’s Group of 20 meeting, officials criticized trade tensions for slowing economic growth worldwide. Bowing to pressure from the U.S., however, their public joint statement didn’t mention “tariffs.”

In Born to Win, Schooled to Lose, researchers found that being born “affluent” but dim carries a 7 in 10 chance of reaching a high socioeconomic status as an adult, while being born intelligent but “disadvantaged” means just a 3-in-10 shot. Talent is universal, but opportunity is not.

There are a lot of touchy subjects to bring up when you want to preserve wealth over generations.

Social Security faces a big test next year. It will have to start drawing down assets to pay out promised benefits for the first time since 1982.

The good, bad, and ugly of SEC’s Reg BI. States are likely to be the next battleground over the fiduciary debate. A fiduciary rule is proposed for Massachusetts.


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May 9, 2019

Much Ado About (Mostly) Nothing

The major domestic stock indexes closed roughly flat last week after a Friday rally erased earlier losses. Healthcare shares outperformed within the S&P 500, while energy stocks and communication services struggled. Slower-growing value stocks handily outperforming more highly valued growth shares while small caps generally outperformed their larger cap counterparts. According to Thomson Reuters, 163 of the S&P 500 companies were to report earnings last week, making for the busiest week of the earnings season. Thomson Reuters and FactSet expect overall earnings growth for the S&P 500 to be roughly flat versus the last year, compared with an increase of about 20 percent in 2018.

Trade talks resumed in Beijing on Tuesday, but hopes for an imminent deal seem to have dampened. In any event, most are expecting a watered-down agreement if and when one is reached. The Fed’s policy-setting committee met last week and decided to make no change to official short-term interest rates, as was widely expected. The market reacted poorly to Fed Chairman Jerome Powell’s post-meeting press conference, however (see below).

Evidence that the Fed might have no need to lower rates and spur growth arrived Friday, when the Labor Department reported that employers had added 263,000 jobs in April, well above expectations. Wage growth also picked up, and the unemployment rate fell to 3.6 percent.

Friday’s jobs report fostered a sharp rise in the yield on the benchmark 10-year U.S. Treasury note, which had declined for the much of the week, to close at 2.54 percent. Government bonds generally were largely unchanged. After all the recent fuss and fear related to a (briefly) inverted yield curve, the curve has steepened dramatically of late.

In overseas trading, the pan-European STOXX 600 fell as regional economic data continued to point to eurozone slowing and Fed Chair Powell seemed to signal a rate cut is not imminent. Political uncertainty also weighed on sentiment. In Asia, mainland Chinese stocks edged higher in a shortened trading week, as traders digested the mixed signals surrounding U.S.-China trade negotiations and a few buyers stepped in after the previous week’s steep declines. Mainland markets were closed from Wednesday to Friday for the Chinese Labor Day holiday. In Japan, stock exchanges were closed for the week as part of an unprecedented 10-day market holiday to celebrate the abdication of Emperor Akihito and the ascension of Crown Prince Naruhito.

From the headlines…

Before the Fed policy meeting last week, President Trump tweeted his desire that the Fed cut interest rates by a full percentage point and resume its huge crisis-era bond-buying program. However, Fed officials agreed to hold their benchmark interest rate steady on Wednesday (text here) while noting that some key economic activity had slowed during the first quarter. The Fed’s actions made the market happy, but Fed Chairman Jerome Powell’s soon-to-come words did anything but, even though he was optimistic. There was a significant failure to communicate. Although the central bank doesn’t see a strong case today for moving rates down or up, the current low rates of inflation are seen as likely “transitory” in nature, which was a downer to those traders (an apparent majority) who were looking for a rate cut this year. In other words, a ho-hum nothing to see here Fed was not what they were after.

Overall, the economic news was decent last week. The ISM Manufacturing report for April fell to 52.8. While that’s down, it still indicates that the factory sector is growing. U.S. worker productivity improved during the past year at the best pace in nearly a decade, although that’s pretty close to the average historical rate. U.S. consumers picked up their spending in February and March. Home-price growth slowed to its lowest level in nearly seven years in February. The U.S. economy added 263,000 jobs in April, blowing past the 180,000 economists were expecting, the Labor Department announced on Friday. The unemployment rate dropped to 3.6 percent from 3.8 percent, marking a 49-year low. The U.S. is also enjoying its longest streak of private-sector job creation on record as we have now seen 103 straight months of job growth. Average hourly wages for private-sector workers grew 3.2 percent from a year earlier, matching the prior month’s increase. As the current period of growth nears the longest on record, history suggests it may have much further to run. Indeed, signs are emerging that the supply side of the economy — the workers and the tools and machines they use to produce goods and services — is becoming energized, improving the chances that faster growth can be sustained.

This earnings season, at roughly the halfway point, isn’t as bad as some had expected. About 75 percent of companies are beating expectations so far. We don’t have the full numbers in yet, but Credit Suisse had been expecting a Q1 earnings decline of 2.5 percent; they now expect to see an earnings gain of 2.5 to 3 percent.

Hedge funds have delivered subpar returns for more than a decade (see here), but a new survey finds many institutional investors are planning to stick with them because they fear another sharp market downturn is coming. In related news, just 49 percent of money managers in Barron’s spring 2019 poll say they’re bullish on stocks over the next 12 months.

The federal debt will grow to 92 percent of gross domestic product in 2029 from 78 percent in 2019, the largest projected share since 1947, according to the Congressional Budget Office, Congress’s nonpartisan scorekeeper. On the campaign trail, President Trump vowed to eliminate the national debt over a period of eight years. Two years in, the White House admits it won’t happen.

In its ongoing trade negotiations, the Trump administration is dropping its demand that China cease hacking U.S. companies to steal intellectual property, which had been central to the stated reason for a new set of deals, having called it “Chinese government-conducted, sponsored, and tolerated cyber intrusions into U.S. commercial networks.” The Pentagon says China is using espionage to steal secrets to help bulk up its military, too.

President Trump and Democratic leaders agreed on a potential infrastructure plan with a price tag of $2 trillion (with a “T”). They did not agree on how to pay for it.

Liberal Democrats’ goal of transforming the U.S. health-care system into a single, government-financed (single-payer) model would be “complicated, challenging and potentially disruptive,” the CBO warned in an analysis released last week. Even estimating a price tag is extremely difficult.

Stephen Moore, the pundit the president wanted to nominate to the Fed, could not generate support, and withdrew from consideration on Thursday, despite having stated that he wouldn’t and even though the White House had expressed its full support to Moore earlier that morning – another Trump loyalist dumped via Twitter and unhappy about it.

The Fed published a guide to monetary policy — in comic-book form.

The Alliance for Lifetime Income hired Milliman, an actuarial consulting firm, to develop the new Retirement Income Security Evaluation Score, or RISE Score (story here; RISE Score tool here).

The DOL will issue new rules on the fiduciary duties of financial advisors.

Warren Buffett’s vast conglomerate ranges over candy and carpets, railroads and running shoes. This weekend, they were all under one roof for Berkshire Hathaway’s annual meeting (“Woodstock for Capitalists”). Lots of folks played along with Berkshire Bingo. As usual, the main event was Buffett and his partner Charlie Munger answering questions. Earlier in the week, Occidental announced that Berkshire had committed to investing $10 billion to help it buy Anadarko. Berkshire is buying up Amazon stock, too. Oh, and Charlie has a side gig.


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May 1, 2019

Round Trip

The market round trip back to new highs after the Q4 swoon is complete. Some think that means clear sailing ahead. The basic argument is here:

“A lot has changed since autumn. A once-aggressive Federal Reserve says it’s on pause, Treasury yields have fallen half a percentage point, valuations are sturdier, and trade talks between the U.S. and China have progressed. Investors are limping back, more chastened than euphoric. Memories of the bull market’s near-death experience have kept inflows to stocks far below the explosive levels of last year.”

In other words, and to quote The Clash, this has been a pause that refreshes. But is it? Although the S&P 500 sits at a never before reached level, there are only 13 stocks within the S&P 500 at new highs. John Authers, at least, is skeptical of the market’s strength:

“This looks to me like a needed correction which has been undone unhealthily quickly, in large part because the Fed is perceived to have panicked and because investors are highly geared to each new piece of information that comes out of China. My greatest reason for concern comes from the economy. We are presumably later in the cycle now than we were in 2015. The economy is stronger now, but what really matters to markets is the direction of travel, and on this score the completion of this round-trip looks to have been premature.”

He isn’t alone: “Bridgewater Associates recently warned clients that the immense widening of margins over the last 20 years, which it says accounted for half of the developed world’s stock returns, could be at a turning point. Strategists at Goldman Sachs have warned about profitability coming under pressure, too. At Morgan Stanley, researchers are pointing to decelerating global survey data as a precursor to lower margins.”

Moreover, the dirty little secret of this year’s rally is that it has been fueled more by share buybacks than by real-money investors buying. Therefore, don’t be so sure the stock market will only go up from here. The arguments of bears are summarized here. Still, some say there’s no reason to think the market can’t keep going up indefinitely.

Whatever happens going forward, here’s what happened in the markets last week.

Domestic stocks posted modest gains last week, with the tech-heavy Nasdaq and smaller-cap benchmarks outperforming large-cap indexes. The S&P 500 hit record highs on Tuesday and, after losing some of its upward momentum, again on Friday. The S&P has now climbed roughly 25 percent from its recent low on Christmas Eve. Trading volumes continued to be lackluster despite many major companies reporting quarterly earnings numbers. Technology bellwether Microsoft posted strong quarterly earnings, pushing its market capitalization briefly above $1 trillion and boosting the Nasdaq, while industrial conglomerate 3M’s shares plunged after it posted disappointing sales figures, weighing on the Dow.

Crude oil prices were volatile last week. Oil jumped on Monday and Tuesday after the Trump administration confirmed that it will end waivers allowing certain countries to continue to buy Iranian crude. However, oil fell on Thursday and Friday after data showed that U.S. crude oil inventories reached the highest levels since October 2017, erasing the commodity’s early-week gains and pushing prices lower for the week. Energy sector stocks suffered along with crude, and disappointing earnings from some major energy companies compounded the sector’s woes.

On Friday, the Commerce Department said that U.S. GDP grew at a 3.2 percent annual pace in the first quarter, surprising many observers who had expected slower growth in a quarter that featured a government shutdown and severe winter weather. However, the report showed that consumer spending increased at a disappointing 1.2 percent rate, slowing significantly from the fourth quarter of 2018. The positive and negative aspects of the GDP data seemed to offset each other, resulting in little effect on stocks.

The yield on the benchmark 10-year U.S. Treasury note fell to 2.51 percent last week.

In Europe, the STOXX Europe 600 moved slightly higher last week as first-quarter earnings season got into full swing there too. In Asia, while Japanese stocks traded slightly higher last week, mainland Chinese stocks posted their biggest weekly decline since last October amid fears that Beijing would dial back policy support after China’s economy grew more than expected in the first quarter. For the week, the Shanghai Composite and the large-cap CSI 300, China’s blue chip benchmark, each lost more than 5 percent.

From the headlines…

Fortune magazine’s sixth annual list of the World’s Greatest Leaders is the home of the brave — thinkers, speakers, and doers make bold choices and take big risks. Explore the list.

Upwards of 40 world leaders joined Chinese President Xi Jinping in Beijing for the second international gathering on his Belt and Road Initiative, a plan to build a massive network of ports, roads and railways across some 65 countries. Belt and Road is just one element of China’s plan to supplant the U.S. as the dominant global superpower.

The IMF lowered its global growth forecast; the third cut in six months and its lowest forecast since the financial crisis.

A new report by the European Central Bank finds the U.S. economy could be hit much harder than either China’s or the eurozone’s in a fresh escalation of international trade tensions.

Nobel laureate Joseph Stiglitz makes the case for progressive capitalism. Lots of billionaires are worried too: “In places such as Silicon Valley, the slopes of Davos, Switzerland, and the halls of Harvard Business School, there is a sense that the kind of capitalism that once made America an economic envy is responsible for the growing inequality and anger that is tearing the country apart.”

Pimco makes a case for emerging markets. Bridgewater makes a case for global equities. GMO’s Jeremy Grantham argues that investors should be jumping at the chance to allocate to climate-change strategies.

Federal Reserve officials are starting to talk about the conditions under which they would cut interest rates.

A strong dollar makes U.S. exports less competitive and eats away at profits for U.S.-based multinational firms. Currency traders generally buy the dollar when they are worried about global growth and when U.S. economic data is strong. After weak manufacturing readings in Germany and Japan, strong U.S. retail sales, and 50-year-low initial jobless claims data, both of those themes seem to apply. That provides a good explanation for why, on earnings calls so far in the first quarter, FX and currency worries – dollar strength – have been the most cited negative by S&P 500 companies.

Finance marketing pros give their opinions about recent ads from Wells Fargo, Schwab, Fisher and others.

The U.S. is ending waivers for countries to import Iranian oil, part of the Trump administration’s effort to drive Iran’s exports to zero, the White House announced Monday. The goal is to block all Iranian oil exports. Secretary of State Mike Pompeo claimed the U.S. “maximum pressure” campaign has already begun to reduce Iran’s power, though that’s far from clear.

Senior citizens lose about 25 times more to scammers than official statistics indicate, a new study found, with total losses as high as $27.4 billion a year.

The 2019 annual report of the Social Security trust fund is out. According to the latest data, Social Security’s costs are projected to begin exceeding its income in 2020 and the program’s reserves will be depleted in 2035. That is a slight improvement over a year ago. The Medicare program’s finances also look about the same as they did a year ago. Medicare’s Part A trust fund will become depleted in 2026.

U.S. workers who are using financial advisors are saving more for retirement than their peers, but they still aren’t saving enough. Millennials (who believe – really – that they will be rich and have faced more financial hardships than previous generations) with advisors have saved an average of $89,724, or 28 percent more than those without advisors, the survey said. Baby boomers have saved more than $333,085, compared with $286,671 for those without an advisor.

You’re a widow. Now what?

President Trump announced in a Monday tweet that Herman Cain was withdrawing his name from consideration as a member of the Federal Reserve’s Board of Governors, just a week after Cain said he wouldn’t withdraw.

We worry too much about super-rare events such as selfie deaths and market crashes.

The U.S. economy grew at a 3.2 percent annualized rate in the first quarter of the year — a faster pace than the previous quarter’s 2.2 percent and significantly more than the 2.1 percent economists were expecting, the Commerce Department announced on Friday, thanks to strong exports and consumer spending. Sales of previously owned U.S. homes sputtered in March despite lower mortgage rates and a strong job market, marking 13 straight months of annual declines. However, the pace of new-home sales in March rose to the highest level in more than a year. Orders for long-lasting factory goods rose in March at the fastest clip in seven months.

With the U.S. economy generally strong and stocks at record levels, retirees’ and workers’ confidence in having enough money for retirement has risen over the past year to all-time highs, according to the 2019 iteration of a long-running survey released Tuesday. A new Fidelity survey explored why Americans are uncertain about their financial futures. Here is a case against early retirement.

How rich are you by world standards? If you live in the United States, the answer is almost surely “pretty rich.”

New Jersey’s newly proposed uniform fiduciary plan “far exceeds” the SEC’s Regulation Best Interest as well as the Labor Department’s now defunct fiduciary standard rule.

Facebook’s reputation is tanking, but it’s still ahead of the federal government. How do other big companies stack up?

Warren Buffett sat down for an interview with The Financial Times, in which he reflected on his investment record and the challenges he faces.

Since the beginning of 2015, Americans’ total financial assets have grown by nearly $11 trillion, Federal Reserve data shows, but less than one percent of that gain has been from hedge fund investments. Aside from a select few managers who continue to generate inflows and decent returns, hedge funds as a whole have been losing investors — an average $5.4 billion of outflows per year since 2015, data from research firm eVestment shows – and underperforming generally.

The share of teens aged 16–19 who work summer jobs has fallen significantly. Just 35 percent had a summer job in 2017, compared to more than half of teens who had one in 2000 and 58 percent in 1978.

A study by EY recommends that financial firms adopt a subscription model or risk being outrun by tech firms entering the market.

The number of endowments and foundations that believe the economy has worsened, and see a slowdown as their biggest long-term threat, has tripled over the past year.

Opportunity Zone funds haven’t even got off the ground yet and they are already enduring calls for further scrutiny.

Church attendance continues to plummet in the United States.


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April 25, 2019

Decidedly Mixed

The major domestic indexes closed mixed last week, with the smaller-caps lagging the large-caps and the tech-heavy Nasdaq. Despite the release of a new round of major quarterly earnings reports, trading was relatively quiet in a holiday-shortened week. The number of shares exchanging hands reached a new year-to-date low on Monday, and the VIX hit an eight-month low on Wednesday. Within the S&P 500, industrials outperformed, aided by better-than-expected earnings reports from Union Pacific and Honeywell. Health care stocks lagged substantially and recorded steep losses as investors worried about possible policy headwinds.

Most of last week’s major economic reports came later in the week and surprised to the upside. March retail sales, reported Thursday, bounced back more than expected from a small February decline and indicated strength across almost all categories. In another sign of consumer strength, jobless claims defied expectations and fell to a new five-decade low for the second consecutive week. On the negative side, IHS Markit’s gauge of U.S. service sector activity fell more than expected, although it still suggests moderate expansion.

Last week also saw President Trump resume his criticism of Federal Reserve policy. On Monday, the president tweeted that “if the Fed had done its job properly…the [Dow] would have been up 5[,]000 to 10,000 additional points, and GDP would have been well over 4% instead of 3%…with almost no inflation.” Those comments raised the expected concerns about Fed independence, but seemed to have little impact on the bond market. However, the positive economic signals fostered a moderate rise in longer-term bond yields, with the benchmark 10-year U.S. Treasury note yield touching a one-month high on Wednesday, before bouncing back to close the week at 2.46 percent.

Overseas, Asian stocks were also mixed. China’s GDP grew more than expected in the first quarter, mitigating concerns that trade strife with the U.S. was hurting its economy and weighing on global growth. Industrial production surged, while other gauges of fixed asset investment and retail sales showed solid growth, according to China’s state statistics bureau. In Europe, the STOXX Europe 600 rose, buoyed by positive economic Chinese data and the U.K.’s six-month Brexit extension. Germany’s DAX rose 1.8 percent despite reports indicating that the German economy is poised for further slowing. The French CAC 40 rose 1.4 percent, and the UK’s FTSE 100 gained 0.44 percent.

From the headlines…

The president says he was vindicated while the “resistance” ponders impeachment. You can read the Mueller report for yourself. Here is the funniest line.

President Trump is mad at the Fed and wants to politicize it. One White House source explained his thinking. What that might look like. ECB President Mario Draghi said he is concerned about political independence at central banks around the world, especially in the U.S.

Stocks have rallied this year despite a global slowdown, leaving some investors wary. They are rising at the fastest pace in decades, regaining most of the ground lost during their fourth-quarter tanking, bolstered by signs that central banks are willing to keep interest rates low.

“The market has completely ignored predictions of declining earnings growth in the first quarter,” Axios reports. “There’s been an acceptance that earnings growth was bound to decelerate this year after getting a boost from the tax cut in 2018. Profits aren’t falling because of declining sales, but margins are shrinking thanks to higher labor and material costs.”

Behind the rally in global debt markets lurks a disaster just waiting to happen, at least according to some. The world does have a lot of debt.

Thanks to the 2017 tax reform, the number of Fortune 500 companies that paid no federal taxes roughly doubled last year, to 60, according to an analysis by the Institute on Taxation and Economic Policy. Companies paying no taxes included Amazon, Delta Air Lines, Chevron, IBM, General Motors, Molson Coors, and Eli Lilly.

As the U.S. and China inch toward a deal on trade, it appears President Trump is in retreat, as tariffs have cost U.S. producers and consumers dearly. China has been hurt too, of course, but authoritarian leaders don’t generally care much about that. Accordingly, it looks like the president will settle for a small-scale deal, which would be a victory for Chinese President Xi Jinping, as it means China will likely avoid big, structural concessions on how it does business. The Chinese economy steadied itself in the first three months of the year, after Beijing flooded the financial system with money to avoid a slowdown. However, China’s economy has a host of problems beneath the surface. Chinese exports tumbled 20.7 percent from a year earlier in February, according to that country’s General Administration of Customs. The disappointing trade data reflect weaker global demand and distortions from the Lunar New Year holiday, said economists. The OECD warned in a new report that China’s policy stimulus could cause big risks to the country in the long run.

A recent study from Fidelity Investments purports to show that active funds outperform passive generally. But there’s a big problem with the “research.” Where active management does outperform.

In his annual letter to shareholders, JPMorgan Chase Chairman and CEO Jamie Dimon outlined 11 ways to address challenges that are restricting opportunity for many people.

Goldman Sachs’s first-quarter profit fell 21 percent from a year ago. Citigroup’s first-quarter profit rose 2 percent from a year ago, boosted by growth in U.S. consumer banking and solid trading performance compared with rivals. Bank of America said its first-quarter profit rose to $7.31 billion from $6.92 billion a year earlier. BlackRock’s first-quarter profit declined, but a market rebound helped the firm’s assets under management bounce back to top $6.5 trillion. Morgan Stanley said first-quarter profit fell 9 percent to $2.4 billion. Bank of New York Mellon delivered a grim reminder that converging directions in bond yields can take their toll on the financial-services industry.

Harry Markowitz won a Nobel Prize as the father of modern portfolio theory. Where is he invested now?

The Trump campaign is spending nearly half (44%) of its Facebook ad budget to target users who are over 65 and using over half of those ads to talk immigration. Democratic candidates are only spending 27 percent of their budgets on that demographic, according to data from Bully Pulpit Interactive. On the other hand, the Trump campaign is only targeting voters age 18-35 with 4.3 percent of its total ad budget. Democrats and President Trump are targeting middle-aged people, roughly ages 34-65, at the same percentage of total spend. Just four percent of the president’s Facebook ad spend is targeting the age 18-35 demographic, compared to 19 percent among Democrats. But there’s also a lot of variation among the Democratic candidates. Sen. Bernie Sanders is spending 49 percent of his Facebook ad budget on young people, compared to just eight percent for Sen. Amy Klobuchar.

Is Pax Americana in decline? Daniel Drezner, Fletcher School professor of international politics, argues in the forthcoming issue of Foreign Affairs that American hegemony is not coming back.

In critical facilities across the country, experts predict that it is only a matter of time before the electrical infrastructure holding society together undergoes catastrophic failure. According to the most recent report of the United States Congressional Commission appointed to assess the risk, we face the threat of “long-lasting disruption and damage” to everything from power and clean water to electronic banking, first-responder services and functioning hospitals.

U.S. companies have now disclosed the pay ratio between bosses and median workers in proxy filings for a full year since the SEC demanded the metric. The Financial Times and Equilar, a compensation consultancy, dug into the numbers, looking at the 100 largest companies by revenue that had published 2018 data by April 1, the midpoint of the annual reporting calendar. Three notable findings:

·     “Of the 100 CEOs, 11 made more than 1,000 times as much as their median employee.”

·     “Elon Musk was paid 40,668 times more than the median Tesla worker.”

·     “Warren Buffett earned less than seven times as much as the median Berkshire Hathaway employee.”

A memo from the OMB states that major rules, like the SEC’s proposed best-interest standard, must be reviewed by Congress, threatening its implementation.

New Jersey unveiled its proposed fiduciary rule.

Good financial advisors are hard to find.

According to a recent study, millennials (52%) were more worried about a coming recession or an impending market crash than Gen Xers (46%) and baby boomers (44%).

Qualcomm and Apple have settled their bitter legal dispute over patent royalties, with a deal that includes a six-year agreement on royalty rates and a multiyear deal for Apple to supply chips to Qualcomm.

U.S. retail store closures in 2019 already surpass last year’s total. Companies have announced 5,994 store closures this year against just 2,641 store openings.

The past two years have brought wildfires, storms, and floods, killing scores of people, destroying thousands of homes, and costing some $500 billion in global damage. Some politicians may be unconvinced about climate change, but major investors – with real skin in the game – are convinced of the vulnerability of their assets as well as a vast profit opportunity in the decades ahead. BlackRock, together with Rhodium, a consulting firm, has released a sophisticated program classifying the climate threat to investments in U.S. municipal bonds, electric utilities, and commercial real estate. Wellington Management, CalPERS, and Woods Hole Research Center have produced a similar system for the U.S. with the goal of expanding it to a global analysis. Since 2017, Michael Bloomberg and Mark Carney, governor of the Bank of England, have also pushed the world’s leading banks and blue-chip companies to quantify and disclose their climate risk. These areas will be hardest hit.

Walmart has a robot army.

Manufacturing output was flat in March after falling in the first two months of 2019.

The IRS has released new regulations for Opportunity Zone funds.

The International Crisis Group has updated its list of conflicts to watch.

The Democratic Part is increasingly hostile to market economics.

Is inflation dead?

“Investors often describe the world of business in terms of animals, such as bears, bulls, hawks, doves and dogs,” The Economist writes in its lead story (and don’t forget black swans and minotaurs.) “There is, however, a problem with the unicorns: their business models.”

Money magazine doesn’t think much of Dave Ramsey.


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April 17, 2019

Still More Strength

Most of the major domestic indexes recorded small gains last week. The large-cap S&P 500 rose 0.5 percent and moved within roughly 1.1 percent of its all-time high, established in September 2018, while the narrowly focused Dow recorded a slight loss. Trading was quiet throughout most of the week, with daily volumes hitting new year-to-date lows on Monday, Wednesday, and again on Thursday, awaiting the start of earnings season on Friday.

Within the S&P 500, financials outperformed, supported by a better-than-expected quarterly earnings report from banking giant JP Morgan on Friday. Communication services shares were also strong, boosted by a rise in Walt Disney shares after traders responded positively to the unveiling of the new Disney+ streaming service. Health care shares lagged, held down by drops in Anthem and UnitedHealth Group.

Analysts surveyed by both Thomson Reuters and FactSet expect overall earnings for the S&P 500 to have declined slightly in the first quarter versus a year earlier — a sharp contrast with the roughly 20 percent increase in profits in 2018. The roll-off of the December 2017 tax cuts on year-over-year comparisons is one factor in the decline, along with the recent slowdown in the global economy and the end of a rebound in the energy sector. Margin compression also appears to be at work. Analysts expect revenues to have grown around 5 percent versus the prior year, suggesting that firms are absorbing rising wages and other cost increases rather than passing them on to consumers.

Last week also brought news that inflation remained well contained, appearing to validate the Federal Reserve’s recent decision to hold off on further increases in official short-term interest rates. Headline inflation increased by a healthy 0.4 percent in March, but core inflation (ex-food and energy) rose only 0.1 percent in March and 2.0 percent on a year-over-year basis, its slowest pace in 13 months. The minutes from the Fed’s March policy meeting, released Wednesday, acknowledged that it was “noteworthy” that the exceptionally tight labor market had not funneled through into higher inflation.

Last week’s other economic data offered mixed signals. The market’s weakness on Tuesday seemed to be driven by some poor global growth signals, including a larger-than-expected drop in the International Monetary Fund’s global growth forecast. Weakness in Chinese auto sales also weighed on sentiment, and investors worried about threats from the Trump administration to slap tariffs on $11 billion of imports from Europe in retaliation for subsidies to Airbus. The U.S. labor market remained a standout, however. On Thursday, the Labor Department reported that weekly jobless claims had fallen to the lowest level since 1969, when the labor market was only about 60 percent of its current size.

Perhaps signaling increasing conviction in the strength of the economy, longer-term U.S. Treasury yields moved modestly higher for the week. The yield on the benchmark 10-year U.S. Treasury note closed last week at 2.56 percent.

Overseas, the STOXX Europe 600 Index lost ground during a week in which the European Union granted the UK a second Brexit extension and the European Central Bank held its benchmark refinancing rate at zero. Japanese stocks were narrowly mixed. Mainland Chinese stock markets fell last week after four straight weeks of gains and waited for a U.S.-China trade deal amid reports that both sides are closing in on a final agreement.

From the headlines…

There are also signs of green shoots from China. The government there has done just about everything to get the economy back on its feet, and the IMF recently bumped up its forecast for Chinese economic growth. Plus, the Chinese stock market has rallied impressively off its low. I never thought I’d see a Communist government cut taxes to spur growth, but here we are.

It seems that the yield curve has already backed off some. The 10-year U.S. Treasury note yield is back above the three-month-bill yield. Also, the odds of a Fed rate cut later this year have diminished. Within the next five months, the futures market thinks there’s only a 30 percent chance of a rate cut. Even that seems high to me because, this week, we got the minutes from the last Fed meeting, and members are still open to raising rates. Most think it’s a long shot, but not unthinkable. I suspect that the Fed realizes the December hike was a mistake, and for now, they’re not going to move much in either direction.

First quarter earnings season has commenced. Over the next few weeks, Corporate America will tell us how things went during the first three months of the year. This will be a key earnings season because most are expecting a modest earnings decline. Q1 will be the first time in ten years when revenues are higher but earnings are lower. In other words, margins are falling. JPMorgan Chase reported and said its profit rose 5 percent on the strength of its consumer bank, helping send U.S. stock futures higher.

The Russell 2000 index of small-cap stocks fell back below its 200-day moving average on Tuesday after briefly creeping above the long-term trend line for the third time this year. An index sustaining a rally above that line is seen as a bullish signal to market technicians. The index climbed back above the line with a 1.4% advance Wednesday.

Robust gains from the longest bull market in U.S. history have failed to solve the deep-seated problems of the nation’s public pensions. But there is a simple reason why pensions are in such rough shape: The amount owed to retirees is accelerating faster than assets on hand to pay those future obligations.

The ratio of U.S. companies that S&P Global has downgraded to the number it has upgraded this quarter is the highest on an annualized basis since 2016, the ratings agency reported this week.

Uber published the prospectus last week for its long-awaited I.P.O., revealing the full scale of its ride-hailing empire and how much money it is losing.

Chevron announced plans to acquire Anadarko, the oil and gas producer, in what would be one of the biggest deals in the industry in years.

In Amazon’s annual letter to its shareholders, Jeff Bezos shared insights about the financial performance of his e-commerce behemoth. Spoiler alert: Growth is slowing.

The dust has settled on the agreement to delay Britain’s withdrawal from the E.U. for at least six months. But reactions to the situation have been mixed. Businesses are generally unhappy. For many larger companies, Brexit has already happened. But “businesses of all sizes are still pleading for Parliament to give them clarity before the economy slows.” Economists are generally pleased. The I.M.F.’s managing director, Christine Lagarde, said that the new Brexit date meant that Britain would avoid — for now — the “terrible outcome” of a no-deal departure. The Bank of England governor, Mark Carney, said the delay would make a no-deal exit less disruptive. And Prime Minister Theresa May has “renewed her effort to push through her Brexit deal with the aid of the opposition Labour Party, in a desperate bid to avoid holding European parliamentary elections in a month’s time.”

Economists said that they see the Fed holding rates steady at least through 2021.

The new World Bank president, David Malpass, says there is too much debt in the world.

The key takeaways from Prime Minister Benjamin Netanyahu’s election victory on Tuesday.

The number of Americans filing applications for new unemployment benefits fell last week to the lowest level in nearly half a century.

Disney is preparing to launch Disney+, ending its lucrative relationship with Netflix to become a rival with a fee-based service that will stream new and old shows built around franchises from “Star Wars” to “High School Musical.”

The middle class is shrinking and its economic power diminishing in the U.S. and other rich countries.

The U.S. budget gap widened in the first half of the fiscal year as spending rose faster than revenue. The $691 billion deficit from October through March is 15 percent higher than during the same period a year earlier despite relatively strong economic growth. The Treasury estimated the full-year deficit will top $1 trillion in fiscal 2019, the first time breaching that level since 2012.

The case for international stocks.

There are black holes in space and in the derivatives market.

America’s richest states just keep getting richer.

A lackluster start of the year for the global economy has prompted the International Monetary Fund to downgrade its predictions for growth in the coming months.

Grandparents are spending approximately $179 billion on their grandkids every year.

College students are selling themselves to Wall Street.

Nearly all advisors use social media.

The Trump administration has moved toward imposing tariffs on about $11 billion in imports from the European Union. The trigger this time isn’t steel or cars. It’s airplanes.

China’s blueprint for global dominance.

Geopolitical risks, from Tripoli to Tehran, will soon push oil prices higher.

Government spending is a big unknown with respect to U.S. economic growth. The latest two-year deal to raise spending caps expires in October. If Congress doesn’t reach another, the limits enacted in 2011 would kick back in, reducing discretionary spending by $125 billion, or 10 percent, from 2019 levels.

Last week’s Barron’s cover story highlighted three investment strategists talking their books, each with his own reasons for continued optimism.

If officially nominated and confirmed, pundit Stephen Moore and former CEO and presidential candidate Herman Cain would mean that President Trump will have placed six out of 12 voting members on the Federal Open Market Committee. However, his previous nominees haven’t been like these latest two and Cain, at least, now looks unconfirmable. Most analysts don’t want a politicized Fed.

Wall Street forecasts for U.S. government bond yields are lower.


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March 27, 2019

Fed Fun

Spring has sprung, at least officially, but domestic stocks declined last week after a sell-off on Friday, the worst day in the market since January 3, took the S&P 500 down from five-month highs reached the day before. A plunge in longer-term interest rates – a rally in bond prices – seemed to be the primary catalyst. This action took a heavy toll on financial shares by threatening lower bank lending margins. Conversely, the prospect of lower rates helped the real estate sector, which was the best performing sector within the S&P. Technology and other growth-oriented shares also continued to outperform value stocks, which are typically more sensitive to economic conditions.

U.S. monetary policy and deepening concerns about the global economy appeared to dominate market sentiment before Friday. Traders focused much of their attention on the Federal Reserve’s policy meeting on Wednesday. As was widely expected, the Fed kept interest rates unchanged. Markets are now pricing in a roughly one-in-three chance of a rate cut in 2019.

At his post-meeting press conference, Fed Chair Jerome Powell acknowledged that growth in U.S. consumer and business spending had slowed in recent months and pointed to a more pronounced slowdown in European economies. In advance of the Fed’s statement on Wednesday, sentiment seemed to be dampened by profit warnings from several companies closely tied to swings in global demand, including BMW, FedEx, and UBS.

Bad news on Friday morning about the German manufacturing sector deepened these concerns and seemed to spark the day’s sell-off. Traders also seemed concerned by drops in IHS Markit’s gauges of both service and manufacturing activity in the U.S. Earlier in the week, the Commerce Department reported that factory orders had risen only slightly in January, while shipments had declined for the fourth consecutive month. A gauge of manufacturing activity in the mid-Atlantic region indicated healthy expansion and surprised on the upside, however.

As noted above, the generally downbeat tone of global economic data and the dovish signals from Fed officials sent longer-term U.S. Treasury yields down sharply. The yield on the benchmark 10-year U.S. Treasury note approached 2.4 percent in trading Friday, its lowest level since December 2017, and closed the week at 2.44 percent. November saw a seven-year high in 10-year yield of 3.232.

The rally in longer-term rates caused the yield on the 10-year note to fall below the yield on the three-month U.S. Treasury bill, resulting in an inversion of the yield curve. Such inversions have reliably signaled an oncoming recession in past decades, although some think that protective measures by central banks in recent years to hold down longer-term interest rates may be making the signal less reliable.

Despite the looming Brexit deadline, the STOXX Europe 600 was little changed through the first four days of the week before Friday’s manufacturing data sent stocks lower. IHS Markit’s gauge of purchasing manager’s index (preliminary) for the eurozone showed a below forecast reading. Germany’s manufacturing purchasing manager’s index seemed to be of particular concern, falling to a six-year low.

In Asia, mainland Chinese stock markets rose for the second straight week as domestic investors there stayed confident that the government would continue to step up easing measures to counter China’s slowing economy. For the week, the Shanghai Composite rose 2.72 percent and the large-cap CSI 300, China’s blue-chip benchmark, added 2.37 percent. Japanese stocks were also higher last week, although more modestly. The Nikkei 225 gained 0.8 percent for the week.

From the headlines:

  • Federal Reserve Chairman Jerome Powell said Wednesday that it “may be some time” before the central bank needs to adjust its monetary policy, signaling that the central bank will not raise interest rates any time this year, giving the market what it wanted, for better or worse. The comments came as he unveiled another startlingly dovish outlook that saw projections for future interest-rate increases slashed from two to zero along with an announcement that quantitative tightening — the act of shrinking the Fed’s huge pile of balance sheet assets — would end even earlier than thought, in September. Mr. Powell was careful not to speak ill of the U.S. economy, but one has to wonder if the Fed is concerned about the data more and market reaction less, especially given that stocks closed down Wednesday after the announcement. For example, note this week’s first Chart of the Week.
  • On Friday evening, after the market’s close, Special Counsel Robert Mueller delivered a report to attorney general William Barr detailing his nearly two-year investigation into Russian interference in the 2016 election. The comprehensive report, still confidential as of press time, marks the end of Mueller’s probe but sets the stage for big public controversies to come. The next steps are up to Trump’s attorney general, to Congress and, most likely, the federal courts.
  • Also on Friday, President Trump tweeted that he would be blocking “additional large scale Sanctions” on North Korea, which he said had been announced earlier in the day by the Treasury Department.
  • A newly inverted yield curve – on Friday, the bond priced the interest rate on three-month U.S. Treasury bills higher than the interest rate on 10-year U.S. Treasury notes – suggests that the Fed was right to pause its rate-rising regimen. Such an inversion has been a sure-fire harbinger of the past seven recessions.
  • U.S. trade representative Robert Lighthizer and Treasury Secretary Steven Mnuchin plan to fly to Beijing this week to meet with Chinese Vice Premier Liu He, who is expected to lead a Chinese delegation to Washington to continue talks next week. The deal they are working toward would include substantial increases in U.S. exports to China, and Chinese pledges to better protect intellectual property, end pressure on U.S. companies to transfer technology to their Chinese partners and reduce subsidies for Chinese companies. But other issues big remain. President Trump said last week that he plans to keep tariffs in place on Chinese goods for a “substantial period of time,” possibly even after a trade deal is forged to ensure Beijing’s compliance. China’s spending spree during the global financial crisis helped pull the world economy out of recession. However, Beijing’s latest stimulus might not pack the same punch.
  • Of the 11,021 ratings on stocks in the S&P 500 ahead of the upcoming first-quarter earnings season, 54 percent are buy ratings, 40 percent are hold ratings and 6 percent are sell ratings, according to FactSet. Of course, analyst’s firm don’t generally want their clients to sell stocks. The energy (67%), health-care (60%) and communication-services (59%) sectors have the highest percentage of buy ratings, the data showed. Meanwhile, the consumer-staples sector has the highest percentage of hold ratings (50%) and sell ratings (11%).
  • The Trump administration pushed a $1.5 trillion tax cut through Congress in 2017 on the promise that it would spark sustained economic growth. While the tax cuts did goose the economy in the short term, administration officials now concede they will not deliver the three percent annual growth the president promised over the long term.
  • When GDP became the dominant measure of economies in the 1940s, wide adoption of the internet was still a half-century away. Today, the internet is responsible for a major chunk of economic activity, but GDP misses much of it. This has widened the gap between the closely watched metric and actual economic health.
  • U.S. manufacturing output declined for the second consecutive month in February, a fresh sign that a long-predicted slowdown is hitting the U.S. economy. The question now is how sharp and long-lasting the slowdown will be. Americans’ spending on services slowed sharply in the fourth quarter, a development that will likely force downward revisions to official estimates of fourth-quarter gross domestic product.
  • Bloomberg’s PMI tracker, which follows every region in the world, shows data have slowly moved two levels down from “improving” for much of 2018 to “neutral” at the start of 2019. U.S. PMI fell to its lowest in 18 months. Manufacturing output fell for the second consecutive month in February, the first back-to-back decline since 2017.
  • Baby boomers may be more prepared for dying than living.
  • 46 percent of Americans say they don’t expect to be financially comfortable in retirement.
  • Median compensation for 132 top CEOs exceeded $1 million a month in 2018: $12.4 million a year, up from $11.7 million in 2017.
  • Bridgewater, Ray Dalio’s mammoth hedge fund, is betting that debt-stricken Brazil’s growth will be the “strongest in the world” in 2020.
  • Is the SEC using Regulation Best Interest as “a marketing slogan”?
  • With insurers likely to add social media to the data they review before issuing policies, it might be wise to post pictures from the gym, but not happy hour.
  • BlackRock is cutting the price big clients pay to invest in its largest equity index fund, a bid by the giant money manager to close the gap with cheaper rivals.
  • Flows into multi-factor U.S. equity ETFs have gone gangbusters so far in 2019.
  • Japan’s government downgraded its view of the economy for the first time in three years, blaming the U.S. trade war for weak exports and industrial output.
  • UK Prime Minister Theresa May got her requested Brexit delay, sort of. If the British Parliament approves a withdrawal agreement this week, the EU will extend the deadline to May 22, giving both sides time to approve legislation to implement the deal. But if Parliament again votes no, the UK will have only until April 12 to indicate how it wants to take the Brexit process forward, meaning a disorderly crash-out is still possible.
  • The Economic Report of the President, prepared by the Council of Economic Advisers, and which runs 705 pages and features chapters on “expanding labor force opportunities” and “ensuring a balanced financial regulatory landscape,” claims to be written by Batman.
  • A Morningstar survey explored what attributes investors value in an advisor. Of course, investors often want the wrong things.
  • Cyclone Idai swept through southeast Africa last week, killing thousands and leaving entire towns and farmlands underwater. The aftermath is only just starting to become clear, assisted by drones and satellite imagery.
  • As polarized as the country is, Americans agree on a variety of things. Most fundamentally, there is agreement that the future is grim. Across the board, there is further agreement that the standard of living will fall by 2050, health care will be less affordable, a terrorist attack as bad or worse than 9.11 will happen, public education will deteriorate, robots and computers will take many U.S. jobs, people will be forced to work into their 70s, and politicians won’t be able to handle it.

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March 21, 2019

Bounce Back

Two Fridays ago, Wall Street got spooked by a poor jobs report. The economy created just 20,000 net new jobs in February while the consensus expected nine times that number. Some are dismissing that as a one-off and not indicative of a souring economy, while others think it is the beginning of more bad news.

A more middling view seems prudent: the economy is still doing well, but not as well. Earnings growth is slowing down. Moreover, we’re currently in the “lull” period between earnings seasons when there’s not a lot of financial or economic news. As such, every news item probably draws undue attention.

Every day, it seems, the market gets jostled by whatever the current headline is on China, North Korea, or Brexit. These issues simply are not likely to be central to the market’s long-term bearing. For investors (as opposed to traders), everything comes down to earnings and interest rates. Beyond that, the rest is mostly noise.

Domestic stocks posted solid gains last week. The tech sector, the largest segment of the S&P 500, performed best, aided by strength in Apple due to enthusiasm over the expected announcement of a new video streaming service. Industrials lagged, weighed down by a sharp decline in Boeing shares following a second fatal accident involving its new 737 Max 8 airliner. The strong performance of tech shares led to the outperformance of the tech-heavy Nasdaq, which became the strongest major index YTD.

Stocks were strong out of the gate last week, helped by expectations that the U.S. and China would soon reach a trade agreement. Traders seemed particularly encouraged by remarks from the head of China’s central bank at a news conference on Sunday, in which he pledged that China would not devalue its currency to boost exports or to use it as a weapon in trade disputes.

Hopes that a deal was imminent faded as the week progressed, however, after Bloomberg reported that the two countries’ leaders were unlikely to meet until at least early April. Growing concerns over the health of China’s economy may have also caused the midweek stall, but news that Chinese officials were responding with new stimulus seemed to be behind a rally on Friday to close the week.

The week’s domestic economic data continued a recent pattern, with the housing and manufacturing sectors flashing warning signals. New home sales dropped nearly 7 percent in January, well in excess of consensus estimates. Overall industrial production failed to rebound in February as much as hoped, manufacturing output declined for a second straight month, and a gauge of regional factory activity fell more than expected. Core durable goods orders (ex-aircraft and defense) jumped in January by the most in six months, however, raising hopes for a rebound in business investment.

Traders also received some hopeful news about the consumer. January retail sales rose a bit, suggesting that December’s plunge, the worst monthly drop since the financial crisis a decade ago, may have been an aberration. The University of Michigan’s preliminary gauge of March consumer sentiment also rebounded more than expected.

China worries, the mixed U.S. economic signals, and a softer-than-expected inflation reading on Tuesday sent the yield on the benchmark 10-year U.S. Treasury note under 2.60 percent, its lowest level since a brief plunge at the start of January, and closed the week at 2.59 percent.

In Europe, the STOXX Europe 600 moved higher last week, boosted by the declining probability that the UK would leave the EU by the March 29 deadline. The week there was dominated by Brexit politics as UK lawmakers voted on a multiple pieces of legislation ahead of the looming deadline. The FTSE 100 rose after UK Prime Minister Theresa May won parliamentary approval to seek a Brexit delay, while the British pound and the euro also gained against the U.S. dollar.

Chinese stocks also rose last week, buoyed by assurances of economic support from a top official after several indicators underscored the country’s continued slowdown. For the week, the Shanghai Composite rose 1.74 percent and the large-cap CSI 300, considered China’s blue-chip index, added 2.39 percent. Most of the gains came on Friday, when Chinese Premier Li Keqiang said that Beijing was considering cutting some interest rates and banks’ reserve requirements to bolster economic growth. Li also stated that Beijing was keen to help the real economy, particularly small and private businesses, to bolster employment and prevent large layoffs. Elsewhere in Asia, Japan’s Nikkei 225 was up 2 percent.

Other significant news and notes follow:

  • British lawmakers voted to postpone the country’s departure from the EU, but narrowly failed to wrest control of the Brexit process from Prime Minister Theresa May’s government. The Brexit endgame (a visual guide). And with time running out until the UK is slated to trigger Article 50 and leave the EU, SEC Chairman Jay Clayton told a group of international bankers last week to brace for price volatility.
  • Germany seems headed toward a significant slowdown in growth and perhaps into a recession. Which route the country takes has major implications for Europe and the rest of the world. After recording zero growth in the fourth quarter of 2018, narrowly avoiding back-to-back quarters of economic contraction (the common marker for recessions), one of Germany’s most prestigious research institutes Thursday cut its expectations for German growth this year by almost half.
  • “We’ll have news on China. Probably one way or the other, we’re going to know over the next three to four weeks,” President Trump told reporters. He added that China had been “very responsible and very reasonable.” But a final agreement is still far from a sure thing. Treasury Secretary Steven Mnuchin said that a proposed meeting between Mr. Trump and President Xi Jinping of China won’t happen this month because there is still more work to do. Some think it could happen in April.
  • Extrapolating if/when the world’s second-biggest economy will overtake the first is a tricky business riddled with caveats.
  • The Senate joined the House and voted to overturn the President’s national emergency declaration about the border. As expected, the president vetoed it.
  • Despite a campaign promise to end federal debt, President Trump’s budget projects trillion-dollar deficits for the next four years, and no balanced budget for at least 15, despite assuming consistently strong economic growth and no recession going forward.
  • President Trump said the Federal Aviation Administration would ground Boeing’s fleet of 737 MAX airliners in a major safety setback for the plane maker after two deadly crashes in less than five months. It was inconvenient for air travelers too.
  • President Trump’s former economic adviser, Gary Cohn, speaking on the Freakonomics podcast, said that Mr. Trump’s trade adviser, Peter Navarro, is in his view the only Ph.D.-holding economist in the world who thinks that tariffs do not hurt the economy.
  • Friday marked a quarterly collision that traders call “quad witching,” when equity and index futures and options expire. Adding to the fun, dozens of S&P indexes were scheduled to rebalance their holdings at the end of the day. That means ETFs and other index traders will realign their portfolios to match their updated benchmarks, buying shares that have been added and selling stocks that have been dropped. By some estimates, ETFs will need to complete $100 billion in combined buying and selling.
  • Economists have lowered their forecasts for U.S. employment and economic growth in the first quarter.
  • Howard Marks and Oaktree just waved a big warning flag to credit markets.
  • Yale’s asset allocation bears no resemblance to the typical university endowment.
  • Envestnet to buy MoneyGuide for $500 million.
  • Shake Shack tests four-day work week amid tight U.S. labor market.
  • At least 49 people were killed in Christchurch, New Zealand after gunmen opened fire on two mosques. Dozens more are injured, many of them seriously, and the death toll is expected to rise. Three men and one woman have been arrested, with one man, 28, charged with murder. Witnesses say the man strolled in and opened fire on innocent worshipers. Prime Minister Jacinda Ardern said it was a well-coordinated attack and called this “one of New Zealand’s darkest days.” An 87-page manifesto believed to belong to one attacker also has emerged, filled with anti-immigrant and anti-Muslim rhetoric.
  • Some states want to require that financial advisors act in clients’ best interests, perhaps clumsily.
  • Federal prosecutors are pursuing a criminal investigation into deals Facebook made with “at least two” large smartphone makers to access user data like friend lists and contact information, without explicit consent from its users.
  • The bomb cyclone hit hard.
  • Peak California.
  • Banks and money-laundering.
  • Almost 80 investment advisory firms agreed to pay back more than $125 million to clients who were steered into higher-cost mutual funds without being clearly told about cheaper versions.
  • Before the 2008 stock market crash, 52 percent of Americans aged 35 or younger were invested in the stock market. As of last year, the number had dropped to 37 percent.
  • Consider high-school teacher Donelan Andrews, perhaps the first person ever to read his insurance policy.

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