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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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March 14, 2019

Ten Years On

March 6, 2009 was a “jobs Friday,” and that report was a disaster. The U.S. economy lost a staggering 651,000 jobs in February 2009. The details were even worse. The number for January was revised to a loss of 655,000 jobs, and the loss for December was revised to 681,000. That was the single-worst month for jobs in 60 years. There was bad news everywhere. The unemployment rate came in at 8.1 percent, which was a 25-year high.

During the day on March 6, the S&P 500 fell to a devilish low of 666.79. The Dow got down to 6,469.95. Adjusted for inflation, that’s unchanged from the Dow’s peak 43 years before: essentially forty-three years of no gains.

On Monday, March 9, 2009, ten years ago yesterday, the S&P 500 closed at 676.53. Since then, the market has more than quadrupled. Including dividends, it’s up fivefold: an amazing 17.37 percent annualized. Oh the power of compound interest!

The best time to invest in a generation was an incredibly hard time to invest. The news was horrible and stocks were on sale, but the “experts” were calling for things to get much, much worse.

For example, Nouriel Roubini, who had earned the nickname “Dr. Doom,” said the market had even further to fall. The Wall Street Journal ran an editorial entitled “Obama’s Radicalism is Killing the Dow,” by a former chairman of the President’s Council of Economic Advisors.

Every light was flashing red. The VIX was at 50! On that Friday, the S&P 500 was able to eek out a tiny gain, but the market sunk again in Monday, closing at 676.53, a 12-year low. As of today, that stands as the lowest close this century.

Even though everything looked about as bad as possible, within a month, the S&P 500 had soared 25 percent. The index gained 70 percent in less than a year. By the bull’s first birthday, Dr. Robert Shiller, a Nobel Prize-winning economist, said the market was due for a pullback. That idea has been repeated many, many times since.

On March 6, 2000, 19 years ago last week, then Fed Chairman Alan Greenspan, on his 74th birthday, seemed to endorse the stratospheric prices of tech stocks at a Boston College economic conference, following years of warning that stock prices were too high. Just four days later, 19 years ago today, the Nasdaq peaked and began tumbling in what then was the worst market crash since 1929.

If you think you (or anyone) can expect to call market tops and bottoms, think again.


Domestic stocks performed poorly last week, with the major indexes seeing declines on each of the five trading days and generally suffering their first down week of the year. The smaller-cap indexes, which are typically more volatile, fared worst. The S&P 500 slipped below its 200-day moving average, a threshold that many tactical managers watch closely.

Within the S&P 500, the typically defensive and interest rate-sensitive real estate and utilities sectors fared best as longer-term bond yields decreased to their lowest levels since the start of the year. Energy stocks were among the worst performers as oil prices fell, and industrials shares suffered from deepening concerns over a global slowdown. Health care shares also performed poorly, weighed down in part by a decline in pharmaceutical giant Pfizer. Transportation stocks, often considered a barometer of global economic activity, were also notably weak. The Dow Jones Transportation Average recorded its longest stretch of daily declines in nearly 50 years, according to Bloomberg.

Indeed, a variety of troublesome signs about the health of the global economy weighed on sentiment throughout last week. The most pronounced indicator may have been the decision by the European Central Bank on Thursday to inject further liquidity into the eurozone’s banking system to spur loan growth and economic activity. Traders also seemed unsettled by China’s announcement of new fiscal stimulus directed at its manufacturing sector.

Hopes that a U.S.-China trade deal would soon be announced seemed to fade as last week progressed, further weighing on stocks. Stock futures got a boost on Monday morning from a report in The Wall Street Journal that the two sides were nearing a deal that might be finalized at a summit between the country’s two leaders as early as March 27. The report also quoted insiders cautioning that “hurdles remain,” however, and no further reports of substantive progress emerged later in the week.

The week’s domestic economic data were generally upbeat, suggesting that the global slowdown had yet to cause significant damage to the U.S. economy. Gauges of both service and manufacturing activity in February indicated solid expansion, and December new home sales rose in defiance of expectations for a sharp drop.

The unemployment rate declined in February, but hiring growth slowed significantly, a sign employers could be struggling to find workers as the labor market tightens. U.S. nonfarm payrolls rose a seasonally adjusted 20,000 in February, the Labor Department reported Friday. The unemployment rate, a seasonally adjusted 3.8 percent, was down from 4.0 percent a month earlier. Economists surveyed by The Wall Street Journal had expected 180,000 new jobs and a 3.9 percent unemployment rate. Wages rose 3.4 percent from the prior year, the best pace in a decade. The consensus view seems to be that the economy is slowing from last year’s robust 3 percent pace, but the job market gives no reason to think it’s in trouble.

The yield on the benchmark 10-year Treasury note did not react decisively to the payrolls report but decreased substantially throughout the week in response to the ECB decision and continued dovish remarks from Fed officials. On Friday morning, the benchmark 10-year U.S. Treasury note yield touched its lowest point since January 4 and closed the week at 2.62 percent.

Across the pond, the pan-European STOXX Europe 600 fell after the ECB news. The move seemed to highlight the negative impact that trade tensions and geopolitical concerns have been having on growth in the eurozone and around the globe.

In Asia, mainland Chinese stocks ended a roller-coaster week lower, as poor February trade data and bearish broker calls on two high-flying financial stocks there led to profit-taking just days after the indexes there entered a bull market. For the week, the Shanghai Composite shed 0.8 percent, while the large-cap CSI 300, China’s blue-chip index, fell 2.5 percent. In Japan, the Nikkei 225 fell -2.7 percent for the week.

Other significant news and notes follow:


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March 7, 2019

Strong Start to the Year Continues

February was in the books as of Thursday, and it was another good (but not great: S&P 500 +3.21%) month for stocks. December was the worst December for the market since the 1930s (-9.03%), and that was followed by the best January since 1987 (+8.01%). While February was good, trading was very quiet. The S&P 500 has closed above its 10-day moving average for 38 straight sessions. That’s the longest such streak in years.

Since 1938, there have been 30 years where both January and February have been positive, and 29 of those years out of 30 have ended up positive, with an average of over 20 percent. This has been the best first two months of a year since 1987, but that year didn’t turn out so well. Each sector in the S&P 500 notched gains for the second consecutive month for the first time since 2013, led by industrials (+19%), energy (+14%) and technology (+14%).

Eight S&P 500 companies rose more than 40 percent in the first two months of the year: Coty, Xerox, Hanesbrands, Xilinx, Mattel, Hess, General Electric, and Chipotle. The index’s eight worst performers, Kraft Heinz, Macy’s, Take-Two, AbbVie, CenturyLink, Newell Brands, CVS Health, and ResMed, all fell at least 10 percent. With 90 percent of S&P 500 stocks above their 50-day moving average, many analysts expect this good run to continue, at least for a while.

The Dow, Nasdaq and Russell 2000 have each climbed in eight consecutive weeks to start 2019. Friday marked the first such occurrence for the Dow since 1964, first for the Nasdaq since 1976 and first ever for the Russell, according to Dow Jones Market Data.

The major domestic stock indexes were mixed but mostly positive last week. The tech-heavy Nasdaq performed best, while the smaller-cap benchmarks lagged. Within the S&P 500, utilities stocks outperformed, while materials shares lagged.

Signs of progress in U.S.-China trade negotiations seemed to lift sentiment for much of the week. Stocks jumped at the start of trading Monday following tweets from President Trump over the weekend announcing that he would delay the implementation of higher tariffs on certain Chinese goods scheduled for March 1. Mr. Trump cited “substantial progress” on a range of issues, including intellectual property protection, technology transfer, currency manipulation, and promised increases in Chinese purchases of U.S. agricultural products and services.

On Wednesday, stocks fell back after the administration’s chief trade negotiator, Robert Lighthizer, told a congressional committee that “much still needs to be done” before an agreement could be reached. Bloomberg reported on Thursday afternoon, however, that U.S. officials were drafting a deal that President Trump and Chinese President Xi Jinping could sign as early as mid-March.

The week brought some important economic releases, several of which had been delayed because of the partial government shutdown that ended in late January, but they did not appear to drive the market decisively in either direction. December data were generally disappointing while more current data were generally more promising. The manufacturing sector remained a weak spot, however, with two separate gauges of manufacturing activity in February falling more than expected.

A measure of consumer confidence in the U.S. rebounded in February. Data released Tuesday showed U.S. home building starts in December were the lowest since September 2016, and the 11.2 percent fall from November was the biggest one-month decline since January 2007. But U.S. building permits rose during the month, by 0.3 percent, meaning a sharp divergence between the number of actual building constructions started and the number of permits filed to build.

The U.S. economy grew at a strong 2.9 percent rate in 2018, just missing President Trump’s 3 percent goal, but at only a 2.6 percent clip in 4Q. Still, by one measure, the U.S. just enjoyed the best full year of economic growth since 2005. So, growth is slowing, but not as much as feared. But business investment dwindled as 2018 progressed and ended the year more with a whimper than a bang, the report showed (the Fed said as much back in November). The U.S. homeownership rate climbed in the fourth quarter to the highest level in nearly five years. Federal Reserve Chairman Jerome Powell said, “The economy is in a good place.”

Longer-term U.S. Treasury yields moved higher for the week, with the yield on the benchmark 10-year note touching its highest level in a month. The 10-year yield moved from 2.67 percent at the start of last week to 2.76 percent at Friday’s close.

In overseas trading, the pan-European STOXX Europe 600 rose despite escalating geopolitical tensions between nuclear powers Pakistan and India and the abrupt end to the U.S.-North Korea summit. As in the U.S., renewed hopes for a U.S.-China trade agreement buoyed stocks. Japanese stocks were up modestly as well.

Mainland Chinese stocks entered bull market territory, with the major indexes up over 20 percent from their recent lows, after MSCI announced that it would quadruple the weighting of China shares in its widely used global benchmarks this year. For the week, the Shanghai Composite Index surged 6.77 percent, marking the benchmark’s biggest weekly gain since June 2015. The large-cap CSI 300, considered China’s blue chip benchmark, added 6.52 percent. Buying from foreign investors ahead of MSCI’s decision helped drive both indexes higher on Friday, which capped a stellar month for Chinese stocks. U.S. dollar- and yuan-denominated Chinese A shares rose 14.89 percent and 25.34 percent, respectively, through the end of February, making them among the best year-to-date performers in emerging markets, according to MSCI data.

Other significant news and notes follow.

The latest annual edition of the Global Investment Returns Yearbook is out and it’s impressive, as always.

As noted above, Chinese domestic stocks are in a bull market. Still, the CSI 300 remains well below the 2007 record high and below two other recent peaks since 2015. However, China’s latest purchasing managers index, the first official gauge for February, showed activity slumped further while new export orders also slid. Meanwhile, U.S. companies are planning their lowest rate of expansion in China since 2016. Imports to and exports from China plummeted, a sign that higher tariffs are cooling global economic growth.

The global economy is slowing.

The CBO says the U.S. will run out of money by September without a debt limit increase. Keith Hall, director of the CBO, forecasts that U.S. debt will grow to 93 percent of GDP by 2029, and 150 percent by 2049, the largest in U.S. history. That’s up from 78 percent of GDP at the end of last year and 34 percent before the Financial Crisis.

Even though U.S. unemployment is near half-century lows and companies are routinely complaining of labor shortages, labor’s share of domestic income has been declining since 1970.

Last week included the first Friday of the month, but it wasn’t a “Jobs Friday.” The February jobs report comes out March 8. And no, it wasn’t delayed by the government shutdown. The report is not tied to the first Friday of the month, as is often assumed. Rather, it’s tied to two separate surveys. One covers households during the week that includes the 12th of the month, and the other asks employers about pay periods that include the 12th. Answers are collected the next week, in this case the week closing February 23, which didn’t leave enough time for the Department of Labor’s numbers crunchers to produce a report by Friday. Because February is the shortest month, its report often gets delivered on the second Friday of March.

Federal Reserve officials are considering whether to allow inflation to rise above their 2 percent target more often. When the inflation target topic came up a decade ago, former Fed chairman Paul Volcker wasn’t thrilled. “I don’t get it,” he said. By setting 2 percent as an inflation objective, the Fed is “telling people in a generation they’re going to be losing half their purchasing power.”

Study finds that clients prefer fee-based relationships to commissions.

You may not be hearing the name Merrill Lynch much anymore, now that Bank of America is phasing out the 105-year-old brand.

The SEC is reviewing a series of bond trades by three insurance companies tied to Guggenheim Partners. The regulator also asked a court to hold Tesla CEO Elon Musk in contempt for a February 19 tweet that said Tesla would make about half a million cars in 2019.

New research suggests that the retirement crisis is real and a new survey shows that even workers in countries with strong social safety nets fret over their financial futures.

Ten stocks that were the leading hedge fund holdings in 4Q 2018. Note, though, the crowded hedge fund trades are risky.

Life insurers want to creep on your Instagram.

The government may be the key player in the U.S. economy in the decade ahead.

U.S. crude oil has rebounded 22 percent in the first two months of the year, its best such start in figures going back to 1984, according to Dow Jones Market Data. Oil is heading for its best two-month stretch generally since 2016, when prices recovered after dipping below $27 a barrel early that year.

President Trump’s talks with North Korea ended with his abrupt exit after the two sides couldn’t agree on a deal to relieve Pyongyang of U.S. sanctions in exchange for giving up much of its nuclear-weapons program. “Sometimes you have to walk.”

Financial advisors are 23 percent more stressed than the national average.

How the Financial Crisis did not change the world.

U.S. officials are preparing a final trade deal that President Trump and his Chinese counterpart Xi Jinping could sign in weeks, sources say. But administration officials on the record are sending conflicting signals over the prospects for one. Larry Kudlow said the U.S. was on the verge of an “historic” deal, including a cut in subsidies for state-owned companies, and that “progress has been terrific.” But Steven Mnuchin echoed Robert Lighthizer’s more cautious tone and said there was “more work to do.” A summit with Xi may come in mid-March, one source said.Many outside experts fear the disagreements between the two countries might be too big to resolve, and that we should prepare for a future in which talks fail and the trade war becomes permanent.

The algorithms behind so-called trend-following quants suffer from many of the same weaknesses a mortal brain might.

Theresa May is facing an apparently impossible task as she tries to get her Brexit deal approved by Parliament in the month that remains. The Prime Minister’s spokesman said there was still “significant” work to do. But Ms. May promised to have another vote in Parliament by March 12, so the question is whether she’s gotten any closer to winning the support she needs. This is the new Brexit math.

Central banks around the world are embracing the virtue of patience. Federal Reserve policymakers have said the U.S. economy is in decent shape but with risks to the downside, therefore any more interest rate hikes will be dependent on incoming data quelling concerns about the outlook. The European Central Bank, meanwhile, is seen taking its time deciding on whether the slowdown in the region’s economy is sufficient to warrant taking policy action or reviving some form of long-term loans for the banking sector. Weak underlying inflation isn’t making that decision any easier.

Ten big global challenges technology could solve.

Pakistan and India came closer to the precipice of war this week than they have in decades, and they may have further yet to go.

The annual business and politics study from Global Strategy Group shows that Americans tend to have pre-existing notions about the political leanings of certain brands.

Index provider MSCI said it would more than quadruple the weighting of mainland Chinese companies in an influential global benchmark. “Passive” investing, indeed. Insiders own most of the stocks there now, and they are selling.

Gap will split into two public companies, the profitable Old Navy brand and everything else.

The best performing asset over the past 20 years.

The Wall Street Journal’s 2019 Tax Guide will help you sort through the confusion of doing your taxes for the first time under the new law.


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February 27, 2019

The Streak Continues

On Christmas Eve, most people involved in the markets seemed to think stocks had further to fall, perhaps a lot further. Accordingly, right at the low people were worried that the low was still a significant ways away. I saw the same thing in March of 2009. Now we are two months later, and the S&P 500 is up roughly 18 percent since Christmas Eve. That’s a huge gain for such a short amount of time. We have seen nine straight weeks of gains.

Domestic equities moved modestly higher again last week, helping the Dow record its longest streak of weekly gains in nearly a quarter of a century. Materials and utilities stocks led the gains within the S&P 500, while healthcare shares trailed, held down in part by a disappointing 2019 earnings projection from CVS. Communication services stocks were also weak following disappointing results from video gaming companies. Nearly 90 percent of S&P 500 companies had reported fourth-quarter results by the end of the week, according to Thomson Reuters.

One driver of the week’s gains appeared to be the release of the minutes from the Federal Reserve’s last policy meeting, which highlighted that Fed officials aren’t sure they need to raise rates this year. Policymakers also indicated that they would stop shrinking the central bank’s balance sheet by the end of the year, a drawdown that has slowly been removing liquidity from the financial system since late 2017.

The trade picture brightened somewhat, supporting stock prices, on reports that trade negotiations with the U.S. were picking up, increasing the likelihood of a bilateral trade deal before a temporary truce ends March 1. On Friday, U.S. President Donald Trump met Chinese Vice Premier Liu He, the country’s top trade negotiator, following the week’s lower level trade talks, after which Mr. Trump said that he will “probably” host Chinese President Xi Jinping next month at his Mar-a-Lago estate in Florida and expects to finalize a sweeping trade agreement that would end a nearly year-long tariff war. However, multiple reports suggest that the two sides remain far apart.

The week’s economic data were mixed, but some concerning reports released Thursday may have weighed on sentiment a bit. Core (ex-aircraft and defense) durable goods orders fell back in December, continuing a pattern of slowing business investment. A more current gauge of factory activity in the mid-Atlantic also surprised on the downside, and existing home sales in January fell back to their lowest level in over three years. On the positive side, weekly jobless claims fell more than expected, and IHS Markit’s gauge of service sector activity surprised on the upside.

Longer-term bond yields remained roughly steady for the week. The benchmark 10-year U.S. Treasury note started and ended last week yielding 2.65 percent.

Overseas, the pan-European STOXX Europe 600 rose throughout the back half of the week amid investor optimism on trade. The UK FTSE 100 lost ground, however, as the possibility of a no-deal Brexit grew. In Japan, the Nikkei 225 shrugged off disappointing economic data and rallied 2.5 percent for the week. The large-cap and small-cap TOPIX indexes also generated strong gains of about 2 percent for the week.Chinese stocks also posted a weekly gain, also on trade optimism.

Other news and notes follow:

  • Datatrek Research points out that the year’s first month typically sets a trend for the first quarter. January’s S&P 500 return of 7.9 percent was more than one standard deviation above the mean monthly return (+1.1 percent). In the eight complete years over the past 60 years when January has posted similarly strong results, February tacked on an average 1.3 percent further gain. In those same eight years, March returns averaged another 1.5 percent advance and in no case did any of these eight years show a negative Q1 return.
  • BMO Capital Markets interest-rate strategist Jon Hill argues the current rally in stocks is not based on positive growth expectations for the economy, but on the Fed’s reversal of its plan to raise interest rates.
  • Economists at ratings agency S&P Global raised the probability of a U.S. recession in 2019 to 20–25 percent Wednesday, in large part because of the flattening U.S. Treasury yield curve. That’s higher than its previous assessment of 15–20 percent three months ago. “Although economic indicators continue to point to a sustained economic expansion, heightened investor concerns over global economic developments led to market volatility and disruptions late last year, leaving a mixed picture for the second oldest expansion in U.S. history,” said Beth Ann Bovino, U.S. chief economist at S&P Global.
  • As trade negotiations with China resumed last week, the Trump administration was racing to strike a deal that will result in long-term reforms – and prove that tariffs are an effective battering ram to open markets. The parties have begun to sketch the outline of a potential deal to end their trade dispute, including work on drawing up six memoranda of understanding on structural issues. The stock market keeps getting juiced by news of progress in the trade talks, but the two countries may forever be stuck on their biggest differences because neither recognizes its own weaknesses.China’s economy is in hot water, and Beijing seems to be relying on its go-to recession-fighting strategy of encouraging lending for massive construction projects. The true leading cause of the slowdown is China’s fading growth. However, avoiding recession today could make for a disappointing tomorrow for China. China also must be fudging its unemployment numbers, which have been almost comically stable over the years. Meanwhile, the Trump administration wants China to keep its currency stable, but the yuan is tied to the dollar. Instability in this case is being imported from the U.S. And the Chinese government continues to build an enormous system of surveillance and control.
  • All major Asian economies, but for the Philippines, now see inflation rates at or below the lower end of their central banks’ target.
  • Trade tensions, slower economic growth, and Brexit are denting the outlook for companies in Europe. Positive economic news has long been absent. On account of negative yields, investors around the globe are effectively paying governments to hold more than $11 trillion of their bonds, a fresh sign of ebbing economic confidence in Europe and Japan.
  • The Trump administration is smart to commit to AI research.
  • Neither political party seems interested in talking about, much less dealing with the national debt. President Trump didn’t talk about it during his State of the Union. Neither did Stacey Abrams in her Democratic response. All told, Washington’s red-ink alarms have gone dead, even though the annual deficit will pass the trillion-dollar mark starting in 2022.
  • Does indexing threaten the market?
  • The reversal of quantitative tightening has now gone global.
  • The tech-heavy Nasdaq ended its fourth-shortest bear market ever February 15, climbing more than 20 percent above its Christmas Eve lows to start a new bull market. The Nasdaq was the last of the major indexes to leave bear market territory and is still 7.9 percent below last August’s record high.
  • The Wall Street Journal’s 2019 Tax Guide will help you sort through the confusion of doing your taxes for the first time under the new law.
  • Apple is shaking up its executive team, preparing for life after the iPhone. It is also reordering priorities across its services, artificial intelligence, hardware and retail divisions. The changes have included high-profile hires, noteworthy departures, meaningful promotions, and consequential restructurings.
  • Nike had a badly timed shoe malfunction. The stock dropped 1.27 percent, shedding $1.6 billion in market cap.
  • Kraft Heinz wrote down the value of its Kraft and Oscar Mayer brands by $15.4 billion, slashed its dividend, and disclosed an investigation by the SEC. Not surprisingly, the company’s stock was down big in response.
  • Walmart’s fourth quarter profits and revenues came in above expectations, while U.S. same-store sales rose 4.2 percent — more than the 3.2 percent analysts expected.
  • President Donald Trump wants to save coal. Glencore Plc, the world’s biggest coal supplier, is telling us that cause is already lost.
  • After tracking closely in the three decades following World War II, from 1979 to 2017 productivity grew 70.3 percent, while hourly compensation of production and nonsupervisory workers grew just 11.1 percent.
  • Even when they’re served with financial advice, Americans are stressing over going broke in retirement.
  • The three leading insurance and agent associations are working together to support a state “standard of care” proposal for agents that rejects fiduciary responsibility for agents and financial advisors.
  • Millions of Americans have been jobless for a year or more. Many can’t — or won’t — go where the jobs are.
  • The U.S. Treasury’s auction of $8 billion in 30-year inflation-protected bonds Thursday met with strong demand, a sign that some investors see potential for consumer prices to rise.
  • A senior EU economist suggests anew that the political upheaval on both sides of the Atlantic could erupt into World War III.
  • Financial Windfalls: 15 stories of the money that changed everything.
  • “Subprime” corporate debt is now a problem.
  • In January, active asset flows beat passive.
  • The greatest investor you’ve never heard of.

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February 20, 2019

200-DMA Breakthrough

The major domestic equity indexes posted their eighth consecutive weekly climb last week, as optimism that the U.S. and China would forge a trade deal before the U.S. raises tariffs offset weak December retail sales data. The latest round of U.S.-China trade talks wrapped up in Beijing last week. Treasury Secretary Steven Mnuchin tweeted that the meetings were “productive.” Negotiations will continue next week in Washington, China’s Xi Jinping said.

President Trump said he is open to extending the March 1 deadline to raise tariffs on Chinese imports if both sides are close to agreement by then. Interestingly, on trade, the president has much more in common with progressives like Rep. Alexandria Ocasio-Cortez, who argues for stronger trade rules to protect American jobs, than with traditional Republican views.

Last week closed the best eight-week stretch for the Dow since September 2009, according to Dow Jones Market Data. Stocks in the energy and industrials sectors within the S&P 500 generated the strongest returns, while utilities and financials were the laggards, and small caps outperformed large caps. The S&P 500 closed above its 200-day moving average for the first time since early December Monday, and held there for the week, ending a 46-day streak without eclipsing the closely watched technical level.

Crude oil prices increased nearly 5 percent last week, supporting energy-related stocks. West Texas Intermediate crude, the U.S. benchmark, climbed above the $55 per barrel mark on Friday. OPEC and Russia have voluntarily cut their oil production, reducing supply and supporting prices. U.S. sanctions on Venezuelan crude exports, designed to pressure the government of Nicolas Maduro, are further pressuring global supply.

Weak economic data released on Thursday briefly derailed the gains in U.S. stocks. The Commerce Department reported that retail sales declined 1.2 percent in December, much weaker than expected, marking the largest monthly drop since September 2009. Note that the December retail sales release was delayed because of the partial government shutdown in January. The Labor Department’s weekly jobless claims figures also unexpectedly increased, further dampening sentiment about the U.S. economy.

The yield on benchmark 10-year U.S. Treasury notes increased modestly over the week, to 2.66 percent, despite a sharp decrease on Thursday following the release of the unexpected drop in December retail sales. Inflation data continued to show limited upward pressure on prices, with the January consumer price index increasing 1.6 percent YOY. The January producer price index declined 0.1 percent from December.

Overseas, the pan-European STOXX Europe 600 rose about 3 percent, also on trade optimism. France’s CAC 40, Germany’s DAX, and the UK’s FTSE advanced too. Gains came despite more signs of slowing in the eurozone economy and the ongoing impasse over Brexit. Europe looks likes the weak link in the global economy.

In Asia, Japanese stock indexes all rose more than 2 percent. Chinese stocks also rose as mainland investors returned from a week-long Lunar New Year holiday in a buying mood, despite some skepticism there about the likelihood of a trade deal. For the week, the Shanghai Composite added 2.5 percent and the CSI 300 rose 2.8 percent, marking the biggest weekly gain in three months for each index, according to Reuters.

Other news and notes follow.

Stock prices and the economy have diverged, and that makes it even harder than usual to judge whether there is a true global slowdown under way. There are three primary possibilities.

Fourth-quarter results from U.S. companies highlight the many and varied ways that China’s cooling economy affects American business and, in turn, offer a glimpse of what’s happening inside China. The indications are that slowing growth there is broad, if still modest. After predicting eye-popping 11 percent first quarter profit growth for S&P 500 companies last year, analysts have massively scaled back expectations to the tune of roughly $16 billion in profits. They are now predicting the first year-over-year decline in 3 years. So far, 53 S&P 500 companies have issued negative guidance for Q1, while only 12 have revised guidance upward, according to FactSet.

The number of job openings in the U.S. rose in December to the highest level on record. U.S. household debt rose by $32 billion to $13.54 trillion in the fourth quarter, the 18th consecutive increase. A record 7 million Americans are 90 days or more behind on their auto loan payments, even more than during the wake of the financial crisis. 2018 marked the highest level in the 19-year history of the loan origination data, with $584 billion in new auto loans and leases.

Vanguard defends active bond funds.

The proportion of fund managers surveyed by Bank of America Merrill Lynch that are overweight global equities is at its lowest level since September 2016, according to the monthly BAML fund manager survey. Being long emerging markets is the market’s most crowded trade for the first time in the survey’s history.

President Trump’s NAFTA replacement deal may be in trouble.

Former Federal Reserve Chairman Paul Volcker slammed the Trump administration’s handling of U.S.-China relations in a rare interview with Ray Dalio.

America’s economic data divergence isn’t going away.

Fear goes missing in the biggest U.S. junk rally in a decade.

Traders hedge stock doomsday with record fixed income inflows.

The yield curve has been stuck just above flat for a long time now.

“Nationalism’s largely unpredicted resurgence is sobering,” Foreign Affairs argues.

It is unlikely that a 70 percent marginal tax rate, proposed by many progressives, would generate more revenue or help lower-income Americans without major effects on the economy.

The Green New Deal calls for a universal basic income paid to everyone. A UBI would direct much larger shares of transfers to childless, non-elderly, non-disabled households than existing programs, and much more to middle-income rather than poor households. A UBI large enough to increase transfers to low-income families would be enormously expensive. How expensive? Perhaps $3 trillion per year, or about 75 percent of all current federal expenditures.

Roughly 40 percent of Americans don’t have the financial flexibility to handle a $400 emergency expense, according to the Federal Reserve. Indeed, the Fed estimates that among those who do have investments, half have less than $40,000 invested.

Recession risk is real, according to Nobel laureate Robert Shiller, and one might come as soon as this year.

Income inequality is likely worse than before the Great Depression.

Estimates from nonpartisan government scorekeepers and other independent analysts did not project that President Trump’s tax cut would pay for itself. However, Treasury Secretary Steven Mnuchin said it would. What happened? So far, the independents have been right. Federal tax revenue declined in 2018, the first full calendar year under the new tax law, despite robust economic growth and the lowest unemployment rate in nearly five decades. Meanwhile, federal spending increased 4.4 percent, pushing the U.S. budget gap up by 28 percent, its highest level for a full calendar year since 2012.

Mistaken identity sends shares soaring 30 percent.

The Apple attorney in charge of communicating the company’s insider trading policy charged with insider trading.

Amazon felt the techlash in New York and will no longer build a headquarters and move 25,000 jobs there.

Economists and markets still aren’t on the same page about what the Fed should do next.

As noted above, December retail-sales numbers were super-ugly, but they don’t gibe with what we know about the broader economy. Those figures were so awful in fact that some think it is a one-time glitch. But year-end data are down generally.

Amazon abandoned its $2.5 billion plan to build a New York City headquarters, undoing one of the country’s biggest economic-development deals.

On Friday, President Trump signed a spending bill to keep the government open and then declared a national emergency to try to get more border-wall funding without Congressional approval or oversight. Expect Congressional attempts to thwart it and litigation to try to stop it.

Federal Reserve officials are zeroing in on a strategy to end the wind-down of their $4 trillion asset portfolio as soon as this year, which would conclude an effort to drain stimulus from the financial system earlier than they had once anticipated.


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