The WMA Weekly Market Wrap | 4/23/2019

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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