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August 14, 2019

Hurry Up and Wait

When this missive hit your inbox early last Sunday, I reported on a lousy week in the markets – despite a Fed rate cut – because President Trump further intensified his trade war with China. I also noted that China’s response was still to come. By the time the sun rose over the Land of the Free on Monday morning, the land of the not-at-all free had responded, and the markets didn’t like that much either. But conviction was fickle – in both directions. Despite big swings in recent days, all three major domestic indexes (S&P 500; Nasdaq; Dow) closed last week just modestly lower.

What began as a rout on Monday – with U.S. stocks suffering their worst one-day drop of the year – quickly reversed course as Beijing didn’t take as aggressive a stance on weakening the yuan as some feared. The S&P 500 rebounded nearly 2 percent on Thursday, before resuming its drop Friday when President Trump suggested a meeting with China on trade might be canceled. “We’re not ready to make a deal, but we’ll see what happens,” Mr. Trump said Friday morning. “We will see whether or not China keeps our meeting in September.”

Energy shares were among the worst performers in the S&P 500 last week, dragged down by a midweek plunge in domestic oil prices following a surprise rise in U.S. inventories. Longer-term interest rates continued to fall, favoring real estate shares, and the larger consumer discretionary sector was helped by a rise in Booking Holdings (operator of Priceline and other travel sites) after an earnings and revenue beat.

The Labor Department announced on Friday its producer price index rose 0.2 percent in July after moving up 0.1 percent the previous month. In the 12 months through July the PPI increased 1.7 percent after advancing by the same margin in June. Excluding the volatile food, energy, and trade services components, producer prices edged down 0.1 percent last month, the first decline since October 2015. The print was in line with expectations. Along with the rising trade tensions, the report gives further room for the Federal Reserve to continue cutting interest rates, and futures markets ended last week pricing in a roughly 88 percent likelihood of at least two more quarter-point rate cuts by the end of the year, according to CME Group data.

The cocktail of trade tensions and rate-cut hopes has led to a stock market that has risen about 17 percent year-to-date, but which is also only up a little more than 2 percent from where it was a year ago. Many have piled into presumed safe-haven assets such as U.S. government bonds and gold amid the latest turmoil. The yield on the benchmark 10-year U.S. Treasury note hit its lowest level in three years last week and closed the week at 1.65 percent. Gold futures settled at six-year highs on Wednesday. The yield curve remains significantly inverted.

In Europe, the pan-European STOXX Europe 600, the UK’s FTSE 100, and the exporter-heavy German DAX all posted substantial losses. In Asia, Chinese stocks posted their steepest weekly drop in three months, as traders appeared to brace themselves for a lengthy U.S.-China economic battle. Japanese stocks were down too.

From the headlines…

On Monday, the (governmentally manipulated) renminbi crossed the psychologically important level of 7 to the U.S. dollar for the first time since the 2008 financial crisis and hit a record low. That indicates a growing desire by Beijing to find ways to retaliate against President Trump and his trade war.

In addition to the weakening yuan, China’s state-run agricultural firms have now stopped buying American farm goods, in a move that looks designed to inflame President Trump. The U.S. Treasury Department officially declared China a currency manipulator Monday night.

During the first half of the year, imports from China dropped by 12 percent, and U.S. exports to China fell 19 percent. China is no longer the top trading partner of the U.S. The new No. 1? Mexico. Overall, Chinese exports rebounded in July, though economists expect the turnaround to be short-lived as Beijing and Washington escalate their trade battle.

The president believes that “[t]rade wars are good and easy to win,” but he is pretty much alone in that view, as even his closest advisors nearly all oppose them. Bloomberg Economics puts the cost to the world economy of a full blown trade war at $1.2 trillion. Liberty Street Economics (from the New York Fed) looks at tariff costs at the household levelMorgan Stanley says another set of tariffs would cause a recession (tariffs are paid to the government, but their costs are passed along to the consumer in the form of higher prices). Still, the president says things are going great on the tariff front, even if Wall Street disagrees. And the trade war has now escalated beyond tariffs, obviously.

Oil prices are in the dumps, down one-third since October, but why?

Federal-funds futures, used by traders to wager on the direction of monetary policy, suggest a 100 percent chance of another rate cut in September.

Falling bond yields mean falling mortgage rates, and homeowners are rushing to refinance.

Economist Nouriel Roubini argues that the Fed doesn’t have nearly enough ammunition to protect against a full-fledged trade war.

Former chairs of the board of governors of the Federal Reserve are “united in the conviction that the Fed and its chair must be permitted to act independently and in the best interests of the economy, free of short-term political pressures and, in particular, without the threat of removal or demotion of Fed leaders for political reasons.”

With earnings season about 80 percent complete, we know that earnings are almost totally flat overall, and that companies have been talking down their prospects at the greatest rate since early 2015 when energy companies were writing down their own estimates in the face of falling oil prices.

Small endowments can’t successfully mimic what the big endowments do (and neither can you).

Dividends don’t fall nearly as much as stocks when the market gets crushed.

The world’s 20 biggest asset managers. Some of them are facing an existential crisis.

Individual investors are worried.

Investors in high-tax states like New York and California are piling into municipal bonds, fueled in part by the 2017 tax overhaul that raised tax burdens for many high-income households.

Mark Tibergien explains how the financial advice business will change over the next decade.

Carl Richards asks whether large chunks of unstructured time are a reward for doing great work or a prerequisite for it (video).

John Maynard Keynes thought future generations would work less and less. By 2030, he predicted in 1930, most people would work only 15 hours a week. As if. Today, many people feel they work more than previous generations. But a new study suggests that how we use our time hasn’t changed that much in 50 years.


August 7, 2019

This week’s market action is far less important than the context in which it occurred, so let’s start with what was important.

On Wednesday, after a year of almost constant wheedling, the Federal Reserve finally gave President Trump what he wanted: an interest-rate cut. Depending upon your outlook, the Fed either (a) moved to get ahead of the curve with respect to a softening economy; or (b) gave in to the president, even though many fear doing so could fuel asset bubbles and leave the Fed with fewer tools to handle a real downturn.

The rate cut came even though economy is mostly fine, unemployment is low, inflation is nominal, and the stock market has done remarkably well. The new range for the Fed funds rate is 2.00 to 2.25 percent. The Fed last raised rates just seven months ago. Fed Chairman Jerome Powell listed three reasons for the first such rate cut since 2008: “to insure against downside risks from weak global growth and trade policy uncertainty; to help offset the effects these factors are currently having on the economy; and to promote a faster return of inflation to our symmetric two percent objective.”

Among the “downside risks” the Fed sees are President Trump’s policies, as his ongoing trade war has caused companies to pull back on spending (e.g., the Institute for Supply Management manufacturing index slipped to its lowest reading in nearly three years in July, marking the fourth straight month of slowing expansion), increased the prices of consumer goods, and threatened the supply chains of American business. Indeed, S&P Global revised down its outlook for U.S. GDP growth through 2022, because “the risk of trade protectionism between the U.S. and China will persist for some time.”

Mr. Powell also said that “we’re thinking of it as essentially in the nature of a midcycle adjustment to policy.” In other words, the Fed doesn’t see this move as the first in a long series of rate cuts going into a recession. Instead, they see a few cuts to help the economy during an expansion. It’s a new approach for the Fed. Instead of looking primarily at the labor market, the main reason it cut interest rates was “the implications of global developments for the economic outlook.” Further questioning made it clear that he was talking about the trade situation and the risk of a worsening conflict.

Chairman Powell did see some good news on Wednesday: “After simmering early in the year, trade-policy tensions nearly boiled over in May and June, but now appear to have returned to a simmer.” Well, that simmer didn’t last long. The president (like Wall Street traders) was not satisfied with the quarter-point cut or the suggestion by Mr. Powell that there might not be more in the offing. No president can do much of anything about employment and inflation, but “global developments” are right in his wheelhouse. And, right on cue, Mr. Trump responded with … more tariffs (traders got squeezed; the S&P 500 experienced its biggest intraday reversal since May 10).

Bond markets saw an immediate flight to safety. The benchmark 10-year U.S. Treasury note yield fell to its lowest level since Mr. Trump’s election (1.86 percent) and the trend towards a flatter or even inverted yield curve returned. Part of the impetus is economic concerns, which are real and enhanced by more tariffs. But, even more, it seems to be driven by Fed expectations and the limited tools available to it. The market’s estimate of the odds of another rate cut at next month’s FOMC meeting rose from 64 to 92 percent, according to futures data compiled by Bloomberg. By December’s meeting, the odds of at least two more rate cuts from here rose from 42 to 75 percent.

Is this a work of a “stable genius”? The “yes” argument (“three-dimensional chess”) sees that the president gets interest rate relief to stimulate the economy through the 2020 election and more runway to take his trade fight to China. The “no” argument sees that if he really pushes ahead with more and higher tariffs, the result will be lower equilibrium rates needed to keep the economy stable; they will not stimulate economic activity. The president announced new tariffs the day after the Fed Chair he chose warned repeatedly that tariffs represent the single biggest threat to the U.S. and global economies. Still, higher trade barriers (and thus higher prices for American businesses and consumers) may become “the new status quo.”

It is also noteworthy that stock markets did not respond to the good news of likely lower rates in future, but to the bad news that the risk of an all-out trade war had greatly increased. Mr. Trump takes the stock market very seriously, and it seems to be telling him he is making a mistake.

We also need to consider how China responds. China has promised a response, without elaborating what measures it would take if the new tariffs are introduced on September 1. The Chinese economy remains by far the greatest risk to global markets and the world economy. Only time will tell if the president’s gambit (if that’s what it is) works, but it’s hard not to see it as dangerous – reckless even – especially because the domestic markets had just about decided that trade concerns weren’t really that big of a deal.

As Mark Zandi, chief economist at Moody’s Analytics, told CNBC, if President Trump follows through on the tariffs, “that is the fodder for recessions,” and would more than likely force Chairman Powell’s hand, out of fear of the impact on business confidence and spending. New tariffs would also impact consumer spending, as products like Nike sneakers and iPhones will be much more expensive.

Usually, the monthly employment data is a big deal. This time, not so much. Employers added jobs at a steady pace in July and unemployment held at a historically low level, signs of an assured labor market despite a broader cooling of economic momentum. Nonfarm payrolls rose by 164,000 in July, the Labor Department announced, right in line with expectations. The jobless rate held steady at 3.7 percent, near a 50-year low. Wages advanced 3.2 percent from a year earlier, an improvement from the prior month’s pace. The week’s manufacturing data were mixed, while June construction spending fell unexpectedly.

Now to market performance…

Domestic stocks suffered their worst week thus far in 2019. Every day was negative, but most of the damage was late in the week. The tech-heavy Nasdaq fell the most and the small-cap Russell 2000 stood fell back into correction territory, or more than 10 percent below its August 2018 closing high.

Within the S&P 500, technology shares performed worst as new trade and global growth worries, along with some earnings disappointments, caused many semiconductor stocks to give back a portion of their strong July gains. Consumer discretionary shares were also weak as retailers selling goods imported from China faced the prospect of significantly higher costs and reduced demand. The small real estate sector fared best as longer-term bond yields plunged to levels not seen in almost three years, promising lower mortgage rates.

European stock markets closed sharply lower for the week, consistent with U.S. markets. The pan-European STOXX Europe 600, the UK’s FTSE 100, the exporter-heavy German DAX, and Italy’s FTSE MIB all recorded steep losses.In Asia, weakness was the rule too. Chinese and Japanese markets generally traded off 2.5-3 percent for the week.

From the headlines…

More than 90 percent of developed-market government bonds have yields that are lower than the Federal Reserve’s benchmark overnight interest rate, according to Bianco Research, up from about 40 percent in 2015. Even the yield on 10-year debt from Greece, buffeted in recent years by economic and political toil, trades below the federal-funds rate. The Fed has raised interest-rates nine times in recent years, while the Bank of Japan adopted a negative interest-rate policy and the European Central Bank pulled rates further below zero. The divergence has contributed to a widening gap between the yields on U.S. government bonds and other sovereign debt. About 25 percent of all bonds in the world now have negative yields and about 40 percent of global bonds yield less than 1 percent. Today, 43 percent of the global ex-U.S. IG index (excluding U.S. Treasuries, U.S. corporate bonds, MBS, CMBS, and ABS) is trading at negative yields, up from 20 percent late last year.

U.S. crude-oil prices closed down 7.9 percent Thursday, their biggest one-day drop since February 4, 2015, as analysts worried that slowing demand will lead to a glut. Prices are now down 19 percent from their April highs and 29 percent below their 52-week high hit in October. The cause: trade hostilities.

Borrowing by the federal government is set to top $1 trillion for the second year in a row. The Treasury Department said it expects to issue $1.23 trillion in debt in 2019, more than twice as much as the $546 billion it issued just two years earlier.

The Senate passed that massive budget deal, previously passed by the House, that lifts the debt ceiling and prevents automatic spending cuts. Some GOP senators grumbled that the bill does nothing about the national debt, which will grow to further record levels due to this deal, but nobody is willing to do anything about it. President Trump has said he’ll sign it.

A decade or more of lagging doesn’t mean the value investing landscape has changed permanently.

Average earnings among S&P 500 companies that have reported are up 0.7 percent from a year earlier, according to FactSet. That has helped improve analysts’ forecasts for earnings to a 2.6 percent contraction for the quarter, better than the more than 3 percent pullback they had been predicting last week. Check out this S&P 500 earnings scorecard.

The invention of money.

The Wall Street Journal reported that the Certified Financial Planner Board of Standards, which runs LetsMakeAPlan.org, hasn’t been informing users about customer complaints, regulatory skirmishes and other problems. The CFP Board responded by saying it will upgrade its scrutiny of financial planners and appoint a task force to review its enforcement and disclosure procedures.


July 31, 2019

Domestic stocks rebounded from the previous week’s losses last week, lifting the large-cap S&P 500 and the tech-heavy Nasdaq to record highs. The Nasdaq outperformed, helped by a 10 percent surge in Alphabet (parent of Google) shares on Friday, following the media and tech giant’s report of better-than-expected second-quarter earnings, as well as plans to repurchase $25 billion of its shares.

Within the S&P 500, Alphabet’s gains, along with an earnings and revenue beat from Twitter, helped the communication services sector handily outperform other segments of the index. The sector got a further boost Friday following the Justice Department’s announcement of its approval of a $25 billion merger of wireless carriers T-Mobile and Sprint. Energy shares were laggards as oil prices surrendered gains from an unexpectedly sharp drop in domestic crude inventories, with traders seeming to focus instead on the clouded global economic outlook.

The second-quarter earnings season continued apace, with 145 of the S&P 500 companies reporting results last week. Aside from Alphabet, prominent movers on earnings releases included Boeing, which fell back on confirmation of a large quarterly loss resulting from suspended deliveries of its troubled 737 MAX airliner. Fellow industrial giant Caterpillar also sold off after reporting disappointing earnings and guidance. So far, more companies than usual have been beating estimates.

Nevertheless, many traders continued to look beyond earnings and focus on the broader economic and political environment. Hopes for progress in U.S.-China trade talks seemed to give a lift to markets early in the week, with Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer scheduled to fly tomorrow to Shanghai to renew talks. On CNBC Friday, however, White House economic adviser Larry Kudlow cautioned that he “wouldn’t expect any grand deal” to result from the visit.

The week’s economic data offered mixed signals. Tuesday brought news that existing home sales fell more than expected in June, while a gauge of factory activity in the mid-Atlantic region tumbled unexpectedly, reversing a recent pattern of upside surprises in regional manufacturing reports. Indeed, IHS Markit’s survey of overall manufacturing activity, which was released Wednesday, moved down to 50, the border between expansion and contraction.

On the other hand, June durable goods orders excluding transportation (and, thus, most of the impact of Boeing’s 737 MAX problems) rose much more than expected. Weekly jobless claims also fell back sharply and hit a three-month low. On Friday, the Commerce Department reported that gross domestic product had grown at an annualized pace of 2.1 percent in the second quarter, a touch more than consensus expectations.

The week’s data did little to change consensus expectations for a quarter-point rate cut following the Federal Reserve’s July 30–31 meeting. The yield on the benchmark 10-year U.S. Treasury note rose modestly and closed last week at 2.08 percent.

Stock markets in Europe were generally higher, buoyed by positive earnings reports and hints from the European Central Bank that more monetary stimulus is on the way. In Asia, stocks also mostly advanced as traders looked forward to the trade talks between China and the U.S.

From the headlines…

The change we have seen since December is incredible. As Christmas trees were being decorated, the overarching market narrative quickly shifted from “global synchronized recovery” to “global synchronized slowdown.” Friday’s GDP report showed the growth of the U.S. economy slowing to 2.1 percent in Q2, a significant slowdown from the first quarter’s 3.1 percent growth rate, but still better than the 1.9 percent economists had expected. That number is spot on the 2.1 percent average growth rate since June 2009 and is consistent with average GDP growth during President Obama’s two terms.

The IMF reduced its global growth expectations for the third time this year, pointing squarely to the U.S.-China trade war that has thrown a wet blanket on cross-border trade and investment, sending manufacturing into a recession in the U.S. and in an increasing number of countries around the globe. Dimmer expectations for global growth have led S&P 500 companies to cut their profit forecasts, pushing the estimated earnings-growth rate for the year to 1.7 percent, down from expectations of 3 percent in late March, according to FactSet. Emerging markets, responsible for most of the world’s growth, also are beginning to slow notably, data from the Institute of International Finance shows. Meanwhile, China’s industrial sector has lost 5 million jobs in the last year, 1.8 million–1.9 million jobs because of the trade war with the U.S., according to a leading Chinese investment bank estimate, and the Chinese government announced that growth there fell to its slowest pace in almost three decades.

The economy had two glaring weak spots in an otherwise solid second quarter. Exports and business investment both declined from the first quarter, and their annual growth rates have been decelerating since the second quarter of 2018. That’s roughly when the U.S. got its maximum boost from President Trump’s tax cut and accelerating global economy – and when year-over-year GDP growth peaked at 3.2 percent, a three-year high. The tax cut is now in the past and exports are sinking as trade tensions rise and the world slows. Global monetary easing could arrest the slump, but 2 percent growth may be the best the U.S. can hope for.

Check out this S&P 500 earnings scorecard.

White House and congressional officials struck an agreement to raise the debt ceiling, averting a fiscal crisis but adding billions more in debt to an already gaping federal deficit. The agreement — for more than $2.7 trillion in spending over two years, with a nearly $50 billion rise next fiscal year — must still pass Congress (the House passed it; the Senate takes it up this week) and be signed by the president. It would suspend the debt ceiling until July 31, 2021 and will add another $1.7 trillion to the federal deficit over ten years, a deficit that was already the largest ever. Much higher governmental debt and deficits – spending without restraint – seems to be a state of affairs both parties can agree on.

The Fed’s new predisposition toward easing seems to be weakening the dollar and un-inverting the yield curve. Federal-funds futures now show traders pricing in a roughly 89 percent chance of at least one more rate cut this year after next week and nearly 55 percent odds of at least two more. Pretty much everybody expects a rate cut next week.

The logic of negative yielding bonds.

The European Central Bank signaled it is preparing to cut short-term interest rates for the first time since early 2016 and possibly restart its giant bond-buying program. However, recent Princeton University research suggests there comes a point at which lowering interest rates actually makes things worse, and “depresses rather than stimulates the economy.”

Will central banks begin buying stocks to stimulate their economies?

Boris Johnson, Great Britain’s new prime minister, will try anew to get a Brexit deal done. Johnson says the UK will leave the EU on or before October 31 with or without a deal.

Private equity replication.

The poor performance of university endowments continues and has now persisted for a decade.

Economic “givens” that may be wrong.

Static retirement withdrawal assumptions are a dangerous game.

Americans often don’t plan for long-term-care services and underestimate their cost.

If demographics are destiny, the stock market is cheap.

new survey of 9,100 retail investors in 25 countries from investment bank Natixis finds that many need a “reality check.” The survey showed retail investors are especially (insanely) confident in their return expectations, with long-term return expectations of 10.9 percent (above inflation).

Trading while driving– what could go wrong?


July 25, 2019

Earnings Season Commences

The major domestic stock indexes fell last week as the second-quarter corporate earnings reporting season began in earnest amidst the summer doldrums. The narrowly focused Dow Jones Industrial Average fared best, while consumer staples and materials shares outperformed within the S&P 500. Energy stocks declined as domestic crude supplies fell less than expected and reports surfaced that Iran had approached the U.S. with an offer to allow greater monitoring of its nuclear program in exchange for allowing a resumption of Iranian oil exports. The large communication services sector was also weak, dragged lower by a plunge in Netflix shares following news that subscriptions declined in the U.S. and rose much less than expected internationally.

A report from Citigroup on Monday heralded the unofficial start of second-quarter earnings reporting season, with 56 companies in the S&P 500 delivering results. Both Thomson Reuters and FactSet currently expect overall earnings for the S&P 500 to be roughly flat for the quarter versus the year-earlier period, which isn’t all that bad considering the high bar set by 2018’s earnings surge.

Nevertheless, many appeared to continue to focus primarily on macro concerns and, in particular, whether the Federal Reserve would cut interest rates by 25 or 50 basis points (0.25% or 0.50%) at its July 30–31 policy-setting meeting. Early in the week, Fed officials offered mixed signals over how aggressive they would be in cutting rates, with Fed Chairman Jerome Powell pledging that policymakers would “act as appropriate amid increased uncertainties,” while Dallas Fed President Robert Kaplan told The Washington Post that he only favored a “modest tactical adjustment,” which was generally interpreted as only one quarter-point cut this year.

The balance of “Fed-speak” seemed to tip in a dovish direction on Thursday, however, when New York Fed President John Williams said in a speech that “it pays to act quickly to lower rates at the first sign of economic distress.” Fed Vice Chairman Richard Clarida then told Fox Business that “you don’t have to wait until things get so bad to have a dramatic series of rate cuts.”

By Thursday afternoon, futures markets were pricing in a 71 percent chance of a 50-basis-point cut at the end of July, according to CME data. Stocks rallied in response, helping erase a downturn earlier in the day. Late Thursday, however, a New York Fed spokesperson clarified Williams’s remarks were “not about potential policy actions at the upcoming FOMC meeting,” leading markets to, again, price in a 25-basis-point move.

The week’s economic data were mostly positive. Retail sales recorded a second month of solid gains in June, and two gauges of regional manufacturing activity rose much more than expected. Overall housing starts fell from the month before and came in below expectations, but single-family starts, which are generally considered to have a bigger impact on the economy, increased.

The dovish signals from the Fed pushed the yield on the benchmark 10-year U.S. Treasury note sharply lower.

Stock markets in Europe came under pressure throughout the week from fresh U.S.-China trade tensions, as talks between the two countries stopped after President Trump threatened to impose tariffs on a further $325 billion of Chinese imports and talks ground to a halt over Chinese telecom company Huawei Technologies. While the pan-European STOXX Europe 600 and the UK’s FTSE 100 managed to eke out gains, the exporter-heavy German DAX dropped about 0.5 percent, while Italy’s FTSE MIB lost about 2.4 percent. In Japan, the Nikkei 225 dropped 1 percent.Chinese equities closed last week roughly unchanged, despite Friday gains after expectations grew for aggressive rate cutting by the Fed.

From the headlines…

An S&P 500 earnings scorecard.

The U.S. government will be out of money in early September. So far, talks to avoid a crisis are going nowhere.

Coal is struggling because wind and solar are cheaper.

Bonds today are a “Giffen good” and defy the rules you learned in Econ 101.

If you are interested in the markets and/or investing (and you should be), The Wall Street Journal has some suggestions about who you should follow on Twitter and who you should be reading. I’m honored to be on both lists.


July 18, 2019

The S&P 500 and the Dow Jones Industrial Average reached new record highs and crossed the respective symbolic thresholds of 3,000 and 27,000 for the first time last week. The tech-heavy Nasdaq also performed well and ended last week as the best year-to-date performer, up nearly 24 percent, while the smaller-cap indexes recorded modest losses.

Expectations for a Federal Reserve rate cut seemed to dominate traders’ attention last week. The previous Friday’s strong June jobs report weighed on sentiment as the week’s trading opened. While most analysts still expected a rate cut at the Fed’s July 30–31 meeting, a 50bp rate cut seemed increasingly unlikely given the strong payrolls data. By the end of the week, federal funds futures were pricing in only a 21% chance of a half-point cut.

Stock futures shot higher Wednesday morning, however, following the release of testimony that Fed Chairman Jerome Powell would provide to Congress. Traders seemed especially pleased that Mr. Powell stated that “uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook.” That less-than-great news was taken as a sign that rate cuts were coming.

Last week’s economic data provided little evidence that the Fed needed to come to the expansion’s rescue and may have even highlighted the peril of cutting rates in an economy with full employment. On Thursday, the Labor Department reported that the core (ex-food and energy) inflation rate rose 0.3 percent in June versus consensus expectations for a 0.2 percent gain. Data on June producer price inflation and consumer inflation expectations also increased more than expected. Meanwhile, weekly jobless claims fell back to near five-decade lows. A dark spot in the week’s data was a decline in a measure of small business optimism, which put an end to a five-month stretch of gains.

The solid economic signals sent prices lower on the benchmark 10-year U.S. Treasury note and its yield to its highest level in a month. In a potentially concerning sign for bond investors, the week’s Treasury auctions continued to be met with tepid demand. The so-called bid-to-cover ratio on Tuesday’s auction of the three-year note came in at its lowest level in a decade, according to Bloomberg, a fate previously suffered by the 10-year note in May. This pattern may be particularly concerning given the widening federal deficit and the increased borrowing needs that brings. During his congressional testimony, Chairman Powell urged lawmakers to raise the federal debt limit before the Treasury Department exceeds its borrowing limit in early September.

Stock markets in Europe fell despite fresh signs that the Fed and the ECB are considering further stimulus measures. The pan-European STOXX Europe 600, the UK’s FTSE 100, the exporter-heavy German DAX, and France’s CAC 40 all fell as trade tensions erupted between the U.S. and France and amid more signs of economic weakness across the region.

Stocks in China recorded a weekly loss, as traders digested trade data underscoring the U.S. trade rift’s negative impact on China’s economy. On Friday, China reported that export growth in June slowed 1.3 percent from a year ago, while imports fell a bigger-than-expected 7.3 percent from the prior-year period. Meanwhile, June imports from the U.S. sank 31.4 percent from a year ago, while U.S.-bound exports fell 7.8 percent. Japanese equities edged lower last week and gave back some of the strong gains accrued in the prior week.

From the headlines…

The S&P 500 reached 3,000 for the first time last week. Since the S&P hit 2000 in August 2014, its top performers have been Abiomed (added 892%), Nvidia (rallied 723%), Advanced Micro Devices (risen 706%), Amazon.com (climbed 490%), MarketAxess (up 487%) and Netflix (advanced 456%). The worst performers in that span can be found here.

Last week, Fed Chairman Powell told Congress that the Fed has room to cut rates, saying the relationship between inflation and jobs has “become weaker and weaker.” While the U.S. economy is in a “very good place,” the central bank chairman said the Fed “wants to use our tools to keep it there” and to offset global weaknesses linked to trade tensions. The economic outlook hasn’t improved in recent weeks, an indication the central bank could be prepared to cut its benchmark short-term interest rate when officials meet later this month. Minutes of the Federal Reserve’s June meeting were also released.

The number of available jobs exceeded the number of unemployed Americans by 1.4 million in May.

According to Grant’s Interest Rate Observer, globally speaking, interest rates are at a 4,000 year low.

There is reason to be concerned about the upcoming earnings season.

President Trump has nominated Judy Shelton, a “gold bug,” a long-time critic of low interest rates, and one of his longtime economic advisers for one of the open Fed seats. Not coincidentally, Dr. Shelton has recently changed her mind and become a vocal proponent of slashing interest rates to zero. The president also tapped Christopher Waller, research director at the Federal Reserve Bank of St. Louis (and a more conventional Fed pick).

Republicans used to say they were concerned about debt and deficits. Apparently no more. President Trump’s top economic adviser Larry Kudlow downplayed the U.S. record national debt of $22.5 trillion on Tuesday, claiming that it’s not a cause of concern and that the federal government is prepared to manage it.

In a large poll, 23 percent of Americans said they never plan to retire, many because they feel financially unprepared. Government figures show about one in five people 65 and older was working or actively looking for a job in June. That data suggests a disconnect between retirement plans and the realities of aging. Remaining in the workforce may be unrealistic for people dealing with unexpected illness or injuries.

Morgan Stanley is turning bearish on global equities.

In the first six months of the year, U.S. funds that consider environmental, social and governance factors when making new bets attracted a net $8.4 billion, according to Morningstar.

As the Iranian economy craters, Tehran and its proxies are lashing out in increasingly aggressive ways. In just the past month, Iran shot down a U.S. drone, which the U.S. says was flying over international waters, the Iran-backed Houthis took credit for a cruise missile strike on Saudi Arabia’s Abha airport, Iran’s military is believed to be behind mine attacks on commercial ships near the Strait of Hormuz, and now, per The Wall Street Journal, “Iran said it was taking steps to increase uranium enrichment that would break limits set in a 2015 nuclear deal by Monday morning, violating for the second time elements of the multiparty accord and putting it at risk of collapse.” Indeed, Iran has followed through on its threat to enrich uranium beyond the purity limit set under the 2015 nuclear deal, the UN’s nuclear watchdog has confirmed. Iran warns it will take further steps to breach the 2015 nuclear accord in early September if it doesnt receive relief from U.S. economic sanctions.

Demographics may decide the U.S-China rivalry.

The Wall Street Journal celebrated its 130th anniversary last week with a 14-page commemorative print section.

Here is what you need to know about saving for life after you stop working and getting on the path toward a comfortable retirement, no matter your career or the size of your paycheck. And here is how you might hack your retirement plan.

“Wealth Matters” published column 500. Here are the lessons learned over that decade.

Avoiding volatility may be worse than stomaching it. Good returns must be earned.


July 11, 2019

Quietly Higher

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

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

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

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

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

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

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

From the headlines…

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

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

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

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

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

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

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


July 2, 2019

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

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

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

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

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

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

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

From the headlines…

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

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

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

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

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

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

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

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

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

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

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

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

Americans lose trillions claiming Social Security at the wrong time.


June 25, 2019

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

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

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

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

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

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

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

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

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

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

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

From the headlines…

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

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

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

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

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

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

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

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

An economics lesson from Taylor Swift.

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


June 19, 2019

Wall Street v. Main Street

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

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

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

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

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

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

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

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

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

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

From the headlines…

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

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

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

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

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

·     Earnings growth bottoms out in 2021 at -14 percent

·     A full-blown economic recession hits in 2020

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

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

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

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

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

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

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

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

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


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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