Too much? Too little? Or just right?
U.S. stock markets were relatively calm, although they finished the week lower. U.S. Treasury yields hit a 7-year high and finished the week above 3 percent. While these were notable, the most remarkable events last week occurred beyond our borders. These include:
Rising oil prices have pushed the cost of gas higher, but that’s not expected to deter Memorial Day travelers, according to USA Today. We wish you safe travels during the holiday weekend.
How do employers lure staff in a tightening labor market? The curly tail grubs and spinnies of the business world are higher wages and better benefits.
During the past decade, the employment picture in the United States has shifted dramatically. In mid-2009, 15.4 million unemployed Americans were chasing 2.2 million available jobs. At the end of 2017, just 6.6 million Americans were unemployed, and employers were casting eagerly to fill 6.6 million open jobs, reports Barron’s.
Bloomberg offered some colorful examples:
“Want ads for truck drivers to haul crude oil in Texas are touting salaries as high as $150,000 a year. Some nurses are getting $25,000 signing bonuses. The U.S. unemployment rate just fell to 3.9 percent, one tick away from its lowest since the 1960s. And, on May 8, the Bureau of Labor Statistics reported there are 6.5 million unfilled jobs in the United States, the most on record. Some employers say they’re feeling the squeeze.”
Clearly, wages are moving higher for some types of jobs, but they’re not increasing everywhere. Last week, the Bureau of Labor Statistics reported real average hourly earnings for all employees were flat from March to April. ‘Real wages’ mean wages after inflation is subtracted.
The National Federation of Independent Business’ Small Business Optimism Index hit a record high in April, as small companies reported record profits. It was the 17th consecutive month of record optimism.
Major U.S. stock market indices moved higher last week as did many global stock market indices.
What in the world?
A lot happened last week. Some of the notable events included:
What do asset managers and researchers make of the current state of world economies and markets? A portfolio manager cited by Barron’s said, “…until proved otherwise, we remain in a long bull market, and there is an absence of indicators outside of the equity market itself (most notably in credit markets or financial conditions) to suggest this has ended.”
Michael Wilson, Chief U.S. Equity Strategist at Morgan Stanley has a different opinion. “Even strong earnings results haven’t been able to boost most stocks into positive territory. Why? Because rising interest rates have reached a point at which they have become a constraint on valuations.”
Some researchers are concerned about growth outside the United States. Alvise Marino, an FX strategist for Credit Suisse told The Wall Street Journal, “This is really a Goldilocks [U.S. employment] report…But investors are worried that global growth is not as strong as some had thought.”
We’re tracking events and their potential impact on markets, and we’ll keep you informed.
* Warren Buffet wasn’t really the Left Shark. Her comments were part of a humorous video.
A meeting of the minds.
The Federal Reserve and the U.S. bond market appear to be in agreement about the direction of interest rates. For more years than anyone cares to count, investment professionals have been predicting the end of the bull market in bonds. Bond guru Bill Gross called the end of the bond bull in 2011 – and called it again in 2013. He wasn’t alone. Strategists who participated in Barron’s Outlooks anticipated rising interest rates in 2014 and 2015, too.
The Federal Reserve began encouraging interest rates higher in December 2015 when it increased the Fed funds rate for the first time in a decade. However, the yield on 10-year Treasuries remained stubbornly low. In fact, it fell below 2 percent following the rate hike and stayed there until November 2016.
Since 2015, the Fed has raised rates six times. The latest increase, along with signs of higher inflation, helped push bond rates higher. Higher interest rates could shift investors’ preferences in some significant ways, according to sources cited by Barron’s:
“Two years ago, dividend stocks provided investors a one-percentage point advantage over risk-free rates…Now those places have been swapped…this ability to get a “safe yield” for the first time in a decade, with no risk from falling stock or bond prices, represents a ‘seminal shift and a huge source of competition for the dividend allure of the stock market.’”
We may be at a turning point.
We’ll need a new kind of umbrella for this. In February, a new research paper disclosed a finding no one wants to hear about: Viruses are falling from the sky. Literally. Science Daily summarized a report from the University of British Columbia. The report said:
“An astonishing number of viruses are circulating around the Earth's atmosphere – and falling from it – according to new research…‘Roughly 20 years ago we began finding genetically similar viruses occurring in very different environments around the globe,’ says [University of British Columbia virologist Curtis Suttle.] ‘This preponderance of long-residence viruses travelling the atmosphere likely explains why – it's quite conceivable to have a virus swept up into the atmosphere on one continent and deposited on another.’”
The New York Times reported the researchers journeyed to Spain and used buckets on mountaintops to catch whatever might fall from the sky. The scientists weren’t surprised to find viruses, but they were surprised by the quantity of viruses captured. Best estimates suggest 800 million viruses shower every square meter of the Earth every day.
Don’t panic! Viruses are responsible for a lot more than diseases. Scientists theorize viruses and humans may have a symbiotic relationship. According to Popular Science:
“Each of us has a unique collection of viruses although there are some species common to us all…endogenous viruses make up some 8 percent of our genetic material. Originally, they were thought to be nothing more than junk pieces of evolutionary history. But we now know they have a variety of functions. One of the most studied topics…focuses on reproduction. A particular protein encoded by one particular virus…appears to be imperative for proper formation of the placenta.”
Good or bad, the question remains: where do atmospheric viruses originate? No one knows for sure. There are a variety of theories. One theory is viruses are swept from the planet into the atmosphere. Another is viruses originate in the atmosphere. A third is viruses arrive from outer space.
The truth is out there!
The world is in debt.
The April 2018 International Monetary Fund (IMF) Fiscal Monitor reported global debt has reached a historically high level. In 2016, debt peaked at 225 percent of global gross domestic product (GDP) (the value of all goods and services produced across the world). Public debt is a significant component of global debt. The IMF wrote:
“For advanced economies, debt-to-GDP ratios have plateaued since 2012 above 105 percent of GDP – levels not seen since World War II – and are expected to fall only marginally over the medium term…In emerging market and middle-income economies, debt-to-GDP ratios in 2017 reached almost 50 percent – a level seen only during the 1980s’ debt crisis – and are expected to continue on an upward trend.”
There are numerous reasons high levels of government debt (the amount a government owes) and significant deficits (the difference between how much a government takes in from taxes and other sources and how much it spends) are a cause for concern:
The IMF Fiscal Monitor wrote, “countries need to build fiscal buffers now by reducing government deficits and putting debt on a steady downward path.”
Last week, the interest rate on 10-year U.S. Treasuries rose above 2.9 percent, which raised concerns about inflation. Markets moved higher early in the week and tumbled later in the week. The major U.S. stock indices finished the week higher.
What do you think?
During the first four months of 2018, U.S. stocks have experienced not one, but two, 10 percent declines. These short-term reversals are known as corrections. They occur relatively often, helping to wring out investor exuberance and, sometimes, to create buying opportunities as share prices drop.
The current twinset of corrections appears to have created a fair amount of uncertainty, according to Barron’s bi-annual Big Money Poll of professional investors. The ranks of the bullish have diminished, and the bearish remain relatively unchanged, but the number of those who are ‘neutral’ has swelled:
Fall 2017 Spring 2018
Bullish 61 percent 55 percent
Bearish 12 percent 11 percent
Neutral 27 percent 34 percent
Professional investors say their clients are also unsure about stock markets. They indicated 60 percent of clients were neutral about stocks, while 23 percent were bullish and 17 percent were bearish.
When asked about market valuations, a majority thought U.S. stocks were fairly valued (57 percent) after the corrections. Thirty-five percent believe stocks remain overvalued, and 8 percent believe stocks have become undervalued.
If either ‘political/policy missteps’ or ‘rising interest rates’ was your answer to the biggest threat to U.S. stocks, then you’re thinking like a professional investor. Their list of worries included:
Political/policy missteps 35 percent
Rising interest rates 32 percent
Earnings disappointments 7 percent
Geopolitical crises 7 percent
Last week, the Dow Jones Industrial Average gained 1.8 percent, the Standard & Poor’s 500 Index was up 2.0 percent, and the NASDAQ Composite rose 2.8 percent.
You could almost hear the spurs jingling.
Trade tensions ratcheted higher last week as the United States and China staked new positions on the not-so-dusty main street of trade. It was the latest round of posturing in what has the potential to become a trade war between the world’s largest economies. Barron’s explained:
“The trade battle has escalated since President Trump announced steel tariffs in March. China retaliated to those tariffs with its own duties, and the resulting back and forth resulted in announced tariffs on $50 billion worth of goods on both sides. Late on Thursday, Trump also directed the U.S. trade representative to identify $100 billion more in potential tariffs on Chinese goods.”
It was unwelcome news in financial markets where one-upmanship created uncertainty and unnerved investors. Distress in stock and bond markets may have been exacerbated by analysts’ warnings about worst-case scenarios, including the possibility of China reducing its $1.2 trillion position in U.S. Treasuries and diversifying its foreign exchange reserves into other nation’s currencies, according to Financial Times.
American manufacturing businesses have concerns about supply chain and other issues that may be created by tariffs, reported Forbes. In addition, farmers are bracing for the impact of a potential trade war. The New York Times wrote:
“China’s aggressive response to Mr. Trump’s tariffs is aimed squarely at products produced in the American heartland, a region that helped send him to the White House. A trade war with China could be particularly devastating to rural economies, especially for pig farmers and soybean and corn growers. Nearly two-thirds of United States soybean exports go to China.”
Major U.S. indices finished lower last week for the third time in four weeks. The Dow Jones Industrial Average was down 10.1 percent from its January closing high. Technically, that puts the Dow in correction territory.
the not-so-secret march madness effect. Have you ever wondered how students select colleges? Economic theory suggests, “Models of college choice typically assume that high school students are fully informed and choose to apply to and eventually attend a school that maximizes their expected, present discounted value of future wages less the costs associated with college attendance.”
It’s a good theory, if you’re an economist who believes people act in perfectly rational ways. Of course, there aren’t many high school students (or parents) who can explain the present discounted value of something, much less use it as a tool to choose a college.
The filters on college search tools include criteria that may be more relevant to the decision. College Board’s BigFuture online interactive guide asks students to consider their test scores – as well as a college or university’s geography, size, type, cost, diversity, and support services – among other factors.
Those other factors include college sports. As it turns out, the success of a school’s sports teams plays a significant role in the college selection process for some students. The Journal of Sports Economics published ‘Understanding College Application Decisions: Why College Sports Success Matters.’ It’s the work of economists at the University of Chicago (UC) who found:
“A school that is invited to the NCAA basketball tournament can on average expect an increase in sent SAT scores in the range of 2 percent to 11 percent the following year depending on how far the team advances in the tournament. The top 20 football teams also can expect increases of between 2 percent and 12 percent the following year.”
Having a sports team make it to the Final Four is roughly equivalent to a college adjusting tuition or financial aid by 6 percent to 32 percent or moving halfway up the list on the U.S. News College Rankings, according to UC researchers.
Weekly Focus – Think About It
“They say that nobody is perfect. Then they tell you practice makes perfect. I wish they'd make up their minds.”
--Wilt Chamberlain, American basketball player
In like a lion…
Investors roared into 2018.
During the first week of the first quarter of the New Year, the Dow Jones Industrial Average rose above 25,000 for the first time ever. Less than two weeks later, it closed above 26,000. The Standard & Poor’s (S&P) 500 Index and NASDAQ Composite also reached new all-time highs.
Strong performance was supported by strong fundamentals. In December 2017, Mohamed A. El-Erian wrote in BloombergView economic and policy fundamentals, including synchronized global recovery, progress on U.S. tax reform, improved certainty around Brexit, and orderly acceptance of changing U.S. monetary policy, “…reinforce the prospects for better actual and future growth, thereby increasing the possibility of improved fundamentals validating notably elevated asset prices.”
During the first quarter, the global economy remained robust, reported Forbes. American companies were profitable (profitability is measured by earnings) and earnings per share for the S&P 500 Index are expected to increase during 2018. FactSet reported analysts currently estimate the S&P 500 Index will deliver double-digit earnings growth (18.5 percent overall) during 2018. Here’s what the analysts anticipate each quarter:
Improving expectations for American companies can be credited, in large part, to tax reform, which lowered corporate tax rates significantly. In addition, rising oil prices may help companies in the Energy sector, and rising interest rates may give a boost to companies in the Financials sector.
Despite a robust global economy, strong earnings, and improving earnings per share (EPS) expectations, the major U.S. stock indices delivered negative quarterly returns for the first time since 2015. On March 29, the last trading day of the quarter, the Dow closed at about 24,100.
If fundamentals are strong, why did major indices in the United States (and many indices around the world) finish the quarter lower? Financial Times suggested uncertainty might have something to do with the retreat:
“The tax cut has been achieved. We are no longer so sure that [President Trump’s] remaining ideas are so good, and most investors think his ideas about trade are downright terrible. And so the market has started reacting to presidential tweets… Most importantly, though, key assumptions have been stripped away. We can no longer rely on low volatility. And critically, the positive view of a low-inflation strong-growth future has been called into question – but only after the stock market had priced in that assumption as a done deal.”
Market declines may also reflect concern about valuations. One financial professional told Financial Times many asset classes have gone from being very expensive to being expensive. They haven’t yet gotten inexpensive.
Out like a lamb…
The last week of the quarter was a good one for U.S. stock markets, which pushed higher. However, the major indices were unable to overcome deficits accumulated earlier in the quarter. The Dow Jones Industrial Average gained 2.4 percent last week, finishing the quarter down 2.5 percent. The S&P 500 Index was up 2.0 percent last week, down 1.2 percent for the quarter. Likewise, the NASDAQ bounced 1.0 percent last week, but ended the quarter down 2.3 percent, reported Barron’s.
Why am I saving and investing?
After a week like last week, it’s an important question. There are many reasons people save and invest, including to:
However, none of these reasons have anything to do with short-term market fluctuations.
Last week, major U.S. stock indices experienced a selloff, and we saw a dramatic downturn in stock markets. The Dow Jones Industrial Average was down 5.7 percent, the Standard & Poor’s 500 index lost 6 percent, and the NASDAQ fell 6.5 percent, reported Barron’s.
Those are big moves for a single week. The kind of moves that light up the emotion centers of investors’ brains and make them want to sell.
It’s not a new phenomenon. In 2002, in an article for CNN Money, Jason Zweig explained the brain’s potentially negative influence on investment decisions, “But in the world of investing, a panicky response to a false alarm – dumping all your stocks just because the Dow is dropping – can be as costly as ignoring real danger. For one thing, it can cause you to flee the market at a low point and miss out when the market bounces back. A moment of panic can also disrupt your long-term investing strategy.”
So, what happened last week? In short:
That’s a lot to take in over the span of five days. The critical thing is to recognize these short-term events are unlikely to change your long-term financial goals. Financial decisions, including buying and selling investments, are important and can be life shaping. They should be grounded by long-term financial goals and foundational principles of investing. They should not be based on the brain’s instinctive fear and flight response.
It’s a good time for a gut check.
Last week, after sliding lower for four days, the Standard & Poor’s 500 Index recouped some of its losses on Friday. The reasons behind the week’s poor showing were diverse. Barron’s reported:
“The market is so discombobulated right now that it can’t even decide what it’s afraid of. What do we mean? When the Standard & Poor’s 500 index suffered its first correction since the beginning of 2016 last month, the cause was easily identified – a good old-fashioned inflation scare caused by a larger-than-expected increase in wages and a rapidly rising 10-year Treasury yield, which almost hit 3 percent…Fast-forward more than a month and those fears seem almost quaint.”
Those fears included:
Here’s the thing: During 2017, volatility settled at historically low levels and stock markets charged ahead. As a result, it was relatively easy for investors to become sanguine about risk. You could say 2017 made investing seem as mundane as driving across the flatlands of the Plains states. It’s possible 2018 will be more like traveling icy switchbacks through the Rocky Mountains.
No matter what happens in the months to come, it’s a good time to reassess your risk tolerance and make sure it aligns with your financial goals and asset allocation.