Rising Inflation Lingers 1/30/17

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Weekly Market Commentary

January 30, 2017

A historic moment for U.S. stock markets...

The Dow Jones Industrial Average surpassed 20,000 last week. Barron's cautioned investors not to make too much of the milestone since, "There are only 30 stocks in the index so each one carries a lot of weight."

Regardless of the significance of the Dow's move, U.S. stock markets generally were upbeat about President Trump's first week in office. Financial Times reported 'animal spirits' - a term British economist John Maynard Keynes used to describe the emotions that drive consumer and investor confidence - returned as rapid executive action indicated the new President would follow through on campaign promises, including infrastructure spending.

"However, the Trump trade - reflecting hopes of tax cuts, higher infrastructure spending, and an easing in business regulation - that had dominated financial markets since November also underwent a subtle shift this week. While financial shares still shone, it was sectors that will benefit from infrastructure spending and cope with higher inflation that led the way. Up 3.4 percent, the materials sector was the best performer on the S&P 500 with miners also seeing gains."

Concerns about trade protectionism and rising inflation lingered.

U.S. stocks upward move was also supported by earnings growth. At the end of each quarter, companies report their earnings (which indicate how much profit they made during the period). FactSet reported 34 percent of companies in the Standard & Poor's 500 Index have reported fourth quarter earnings, so far. Altogether, earnings are 2.7 percent above the estimates, although they remain below the five-year average.

Markets could be in for a bumpy ride next week as investors weigh in on President Trump's immigration ban. Bloomberg reported one large technology company, "...inserted language in a securities filing on Thursday on the issue, cautioning investors that immigration restrictions 'may inhibit our ability to adequately staff our research and development efforts.'"

Are your children smart shoppers?

Science Daily reported a meta-analysis of 73 studies nationwide evaluated parenting styles and children's buying habits. The findings suggest, "children raised by parents who set limits and explain the reason behind these limits are most likely to develop into wise consumers."

The study, which was conducted by the Society for Consumer Psychology, looked at the ways parents raise and communicate with their children. It defined four basic parenting styles:

* Authoritative parents generally tell children what to do and also explain why the children should do it. "These parents tend to relate quite effectively with their children and expect them to act maturely and follow family rules, while also allowing a certain degree of autonomy."

* Authoritarian parents are restrictive, too. They tell children what to do, but don't often explain why it should be done. These parents are "...not as likely to exhibit as much warmth in their communications."

* Neglecting parents don't offer much guidance or actively monitor children's activities. "They neither seek nor use parental power and control and, as a result, communication between Neglecting parents and their children is generally strained and minimized."

* Indulgent parents often "...give children adult rights without concomitant responsibilities while maintaining an open communication environment with children." These parents are described as "lenient, compliant, accepting, affirmative, and non-punitive."

The researchers concluded children whose parents take an authoritative approach to parenting tend to make better choices. The children choose to consume healthier foods (like fruits and vegetables), make better safety decisions (such as wearing a bike helmet), develop self-esteem, and offer viable opinions with regards to family consumption decisions.

Weekly Focus - Think About It

"Americans of all ages, all conditions, all minds constantly unite. Not only do they have commercial and industrial associations in which all take part, but they also have a thousand other kinds: religious, moral, grave, futile, very general and very particular, immense and very small; Americans use associations to give fêtes, to found seminaries, to build inns, to raise churches, to distribute books, to send missionaries to the antipodes; in this manner they create hospitals, prisons, schools. Finally, if it is a question of bringing to light a truth or developing a sentiment with the support of a great example, they associate." 

--Alexis de Tocqueville, Author of 'Democracy in America'

Around the World 1/17/17

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Weekly Market Commentary

Around the world in a few paragraphs...The post-election adrenaline rush may be over in the United States. Barron's reported:

"The new year began with high hopes, with the bulls expecting the rally that began with Donald J. Trump's election victory to continue into 2017, while the bears salivated at the opportunity presented by a market that had gotten way ahead of itself. Instead, the market has failed to break up or down...At his press conference last week, Trump covered a lot of ground...But he didn't cover the three subjects investors especially wanted to hear about - namely taxes, fiscal policy, and infrastructure. As a result, some of the primary beneficiaries of the Trump trade stalled: The S&P 500 Financials index declined 0.1 percent, while the energy sector dropped 1.9 percent."

Investors in the Asia Pacific region were less optimistic last week, too. Disappointing economic and international trade data from China unsettled markets, as did uncertainty about the global trade policies the new U.S. administration will pursue. National indices for Australia, Japan, China, Indonesia, Malaysia, and the Philippines finished the week lower.

In the United Kingdom, the FTSE 100 gained for the 14th consecutive day, closing at an all-time high for the 12th time in as many days, according to Trading Economics. Bloomberg reported European shares eked out a gain for the third straight week. Financials led the way after a large industry firm reported better-than-expected profits, inciting optimism about fourth quarter's earnings season.

Burgernomics: Here's A big mac index update.

The Economist invented the Big Mac index in 1986 as an entertaining way to assess whether currencies were at the "correct" levels. The index reflects the idea that countries' exchange rates should balance so the same product (in this case, a hamburger) costs the same in two different countries when the price is denominated in the same currency. After updating the index on January 11, 2017, The Economist reported the "all-meaty" dollar was stronger than usual: "The dollar is now trading at a 14-year high in trade-weighted terms. Emerging-world economies may struggle to pay off dollar-denominated debts. American firms may find themselves at a disadvantage against foreign competition. And, American tourists will get more burgers for their buck in Europe." A Big Mac in the United States cost about $5.06 last week. In the Euro area, the price was about $4.06 and in Britain $3.73. A Big Mac is cheapest in Russia ($2.15) and most expensive in Switzerland ($6.35). Here are the prices of a Big Mac (a.k.a. the Maharaja Mac in India) in a few other locales:

• Norway $5.67
• Sweden $5.26
• Brazil $5.12
• Japan $3.26
• China $2.83
• India $2.49
• Mexico $2.23 

It should be noted the Big Mac index is not a perfect measurement tool. The price of a burger should be less in countries with lower labor costs and more in countries with higher labor costs. When prices are adjusted for labor (using gross domestic product per person), the Brazilian real is the world's most overvalued currency, followed by Pakistan and Thailand. The most undervalued currencies include Egypt, Malaysia, and Hong Kong. Weekly Focus - Think About It "The charm of fishing is that it is the pursuit of what is elusive but attainable, a perpetual series of occasions of hope."--John Buchan, Former Governor General of Canada

And, They're Off!

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Weekly Market Commentary
January 9, 2017

The Markets

...And, They're Off!
Bullish sentiment helped world equity markets get off to a fast start last week. Just name a country or region - developed markets, emerging markets, the United States, Latin America, Asia, Europe, the United Kingdom - and it's likely the area's benchmark index may have been up for the week.

Not everyone was in the bullish camp, though. Barron's reported:

"The market optimism is understandable. After a long spell of zero interest rates, a baton transfer from monetary manipulation to fiscal stimulus and pro-growth chutzpah can be an exciting regime change...But investors' hopes could be misplaced. It would be one thing if there were shovel-ready infrastructure projects or proposed tax cuts on the table that could quickly boost spending. Instead, Republicans propose, for example, changing the basis for corporate tax from location of operations to location of sales. The aim is to encourage domestic production and exports, but the plan could hurt companies that import materials or goods. Will big importers like [big box stores] pass the tax hit onto consumers by raising prices?"

For contrarians, record highs for U.S. stock markets (both the Standard & Poor's 500 Index and NASDAQ closed at new highs last week) and strong bullish sentiment (Barron's reported, "The Investors Intelligence survey of newsletter writers showed the bullish herd swelling above 60 percent...") are red flags, signaling an inflection point may be near.

No matter which camp you fall into, there is a lot of uncertainty. Which policies will the new administration pursue? Will China's growth slow more quickly than expected? How quickly will the Federal Reserve raise rates? Will interest rates continue to move higher? Will a stronger dollar negatively affect emerging markets? In the face of so much uncertainty, it's important to be diversified.

Are You Thinking About Starting a Business?
Small businesses in the United States employed 56.8 million people or 48 percent of the private workforce in 2013 (the latest numbers available), according to the U.S. Small Business Administration. That's pretty remarkable when you realize that 34 percent of small businesses employ fewer than 100 people.

If you're thinking of starting a business, the AARP suggests you carefully consider legal and tax issues, including:

* Business structure. Will you be a sole proprietor? Or will you establish a corporation, limited liability company, or partnership? The structure of your business will affect taxes, liability, and other matters.

* Licensing. Many cities and states require a new business to register, apply for a business license, and pay an annual fee to do business.

* Tax payments. Talk with a tax professional to determine whether you need to make quarterly tax payments. Also, be aware that people who work for themselves pay both the employer and employee portions of Social Security and Medicare taxes. You'll want to factor that in when deciding pricing for products or services.

* Recordkeeping. In many cases, your business will need its own bank account and credit cards. You'll also need a system for tracking business receipts and expenditures. Investing in business accounting software can make recordkeeping a lot easier.

* Contracts. Contracts specify deadlines, terms of payment, and other particulars, ensuring everyone shares the same understanding and expectations. If your client asks you to sign a contract or asks you to provide a contract, consult with your attorney.

* Liability insurance. Professional liability insurance protects you if you're ever sued, and some clients may require you to have coverage. Talk with your financial or insurance professional to determine what type of coverage you may need.
Of course, when you work for yourself, it's critical to set money aside for retirement. Contact your financial and/or tax professional to discuss options that might work for you.

Weekly Focus - Think About It 
"We have neglected the truth that a good farmer is a craftsman of the highest order, a kind of artist."
--Wendell Berry, American novelist and poet

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What a Difference a Year Makes!

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January 3, 2017

What a Difference a Year Makes!

At the start of 2016, investors were rather pessimistic and risk averse, preferring bonds to stocks. By the end of the year, they were quite optimistic and preferred stocks to bonds. In between, markets traveled a bumpy road.

During January of last year, few investors imagined we would be where we are today. Markets started 2016 in a tailspin with investors worried about slower growth in China, U.S. economic strength, oil price declines, and the possibility of a global recession.

During the first 10 trading days of 2016, U.S. stock markets got off to their worst start for any year on record, reported Financial Times. The Standard & Poor's 500 (S&P 500) Index lost about $1.4 trillion in value and every major sector in the index was in the red, except for utilities.

The sharp drop stunned investors, and many shifted assets from global stocks into bonds. In late January 2016, CNN Money reported:

"Investors yanked $2.9 billion from U.S. stocks last week, marking the seventh week of outflows out of the past eight, according to Bank of America Merrill Lynch. Emerging markets, which have been in turmoil for months, experienced a 13th straight week of outflows of $1.2 billion. Money is fleeing to safe haven government bonds."**

Investor sentiment was near its all-time low. On January 14, 2016, just 17.9 percent of participants in the American Association of Individual Investors (AAII) Investor Sentiment Survey said they were bullish. The all-time low is 12 percent and the long-term average for bullishness is 38.39 percent. Clearly, investors were not feeling optimistic about stock markets. 

A specialist cited by Time.com discussed market performance and investor sentiment in the context of the AAII Survey:

"Historically...the S&P 500 has advanced 7.7 percent in the six months after reaching this level of bearishness. By contrast, stocks have historically gained only 2.7 percent in the six months following the most bullish readings among individual investors."

As it turned out, the S&P 500 Index may have pushed the historic average higher during 2016. Barron's reported the Index finished the year up 9.5 percent and returned 12 percent when dividends were included.

Investors didn't enjoy a smooth ride last year, though. Late in June, the United Kingdom shocked the world when it voted to leave the European Union. Financial Times reported global markets lost $3 trillion during two days of brutal trading, including "...a nearly $1tn loss for the S&P 500, or the third worst two-day drop ever in value terms."

Markets recovered relatively quickly after the Brexit drop. However, it looked like another rout was in the works in November as the U.S. presidential election votes rolled in. The initial reaction of global markets to Donald Trump's election was panic; however, optimism soon prevailed and U.S. markets rallied on hopes the President-elect's yet-to-be defined policies would bolster growth and positively affect the global economy.

The expectation of stronger growth, along with an anticipated December rate hike by the Federal Reserve, pushed bond yields higher and investors moved assets out of bonds and into stocks. Barron's reported:

"The 30-year bond climbed 0.3 percentage point to 2.94 percent, resulting in a 6.3 percent decline in price. (Bond prices move inversely to yields.)...It wasn't just Treasuries. Municipal bonds, corporate bonds, and preferred securities all fell. Bloomberg estimates $1 trillion in the value of bonds evaporated last week after the election."

At the end of 2016, investor sentiment had risen well above the long-term average. More than 45.5 percent of participants in the AAII Investor Sentiment Survey were feeling bullish. Investors weren't the only ones feeling optimistic. The Investors Intelligence survey of investment advisors found the bulls (59.8) outnumbered the bears (19.6) quite significantly in late December. The Bull/Bear Ratio was at 3.05, according to Yardeni Research.

The ratio is considered by many to be a contrarian indicator. When the Bull/Bear Ratio is at 1.0 or lower, and when it is at 3.0 or higher, we may be near a turning point for stock markets, according to Investing Answers and The New York Times.

How Important is a College Degree?

At the University of Baltimore 2016 Midyear Commencement, Federal Reserve Chair Janet Yellen shared her thoughts about the importance of college:

"Economists are not certain about many things. But we are quite certain that a college diploma or an advanced degree is a key to economic success. Those with a college degree are more likely to find a job, keep a job, have higher job satisfaction, and earn a higher salary. The advantage in earnings is large. College grads' annual earnings last year were, on average, 70 percent higher than those with only a high school diploma. Back in 1980, the difference was only 20 percent. The gap in earnings is significant only a few years after graduation - almost $18,000 a year, according to some recent data. Beyond these advantages, research also shows that a college or graduate degree typically leads to a happier, healthier, and longer life."

There appears to be significant benefits to attending college. However, Aon Hewitt recently suggested there also may be some drawbacks, especially for students who borrow to pay for their degrees. Aon's survey of 2,000 U.S. workers found 44 percent of Millennials, 26 percent of Gen X, and 13 percent of Baby Boomers are repaying student loans which, "...can have a long-term impact on workers' financial future."

The survey found just 71 percent of workers with student loans were participating in employer-provided retirement plans as compared to 77 percent of workers without student loans.

Weekly Focus - Think About It 

"In other words, I claim, if we really want to improve our judgment as individuals and as societies, what we need most is not more instruction in logic or rhetoric or probability or economics, even though those things are quite valuable...We need to learn how to feel intrigued instead of defensive when we encounter some information that contradicts our beliefs."

--Julia Galef, Co-founder of the Center for Applied Rationality

Market Grief 7/11/16

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Weekly Market Commentary

July 11, 2016 

The Markets

When the yield on 10-year Treasuries finished last week at 1.37 percent, a record closing low, Barron's called it a Kübler-Ross rally.

Elizabeth Kübler-Ross was a Swiss psychiatrist whose research identified the five stages of grief: denial, anger, bargaining, depression, and acceptance. According to Barron's, institutional money managers have reached the final stage of grief and accepted that bond yields may remain low for some time:

"Far from irrational exuberance, many institutional investors voice resignation (or worse) to the fact that they are forced to put money to work at record low yields - 1.366 percent for the benchmark 10-year Treasury note - since that's better than nothing, which literally is what they earn on the estimated $11.7 trillion of global debt securities with negative yields."

The Wall Street Journal attributed record low 10-year Treasury rates to investors' concerns about the health of the global economy, as well as "expectations that central banks in Japan and Europe will take further steps to bolster their economies, doubling down on ultra-loose monetary policies that have already helped create a record amount of negative-yielding government bonds."

U.S. stock markets closed near record highs last week after the June employment report showed far more jobs had been created than expected. Once again, this raised questions about whether stocks are pricey in the current environment.

Barron's explained the equity risk premium, which is the potential return investing in the stock market provides over investing in a low risk option such as a Treasury bond, is 4.6 percentage points. That's almost the highest it has been in the past 15 years (excluding the financial crisis and the European debt crisis). However, if earnings don't meet expectations, stocks may prove to be more expensive than they appear.

CANADA, EH?

If there were a beauty contest among nations, Canada would probably be crowned Miss Congeniality. The second largest country in the world - known for breathtaking temperatures (-40 degrees Fahrenheit), magnificent scenery, open spaces, and friendly natives - has captured the interest of both Brits and Americans during 2016.

Canada was the top theoretical relocation choice among Brits following the Brexit vote. According to Citylab.com, 'move to Canada' was one of the two most popular 'move to...' searches in British cities. The second was Scotland, which took first among folks living in Manchester, Birmingham, Leeds, Liverpool, and Bristol.

It's interesting to note the top search among residents of Edinburgh and Glasgow in Scotland was 'move to Gibraltar.' CityLab.com opined:

"It seems unlikely that these major cities are genuinely thinking about squeezing onto a tiny rock, but Gibraltar has been on people's minds, I suspect, because it was first to declare a referendum result (for Remain) early this morning and is now finding itself under high-profile pressure for power-sharing from Spain."

U.S. Internet searches for the phrase 'how to move to Canada' were quite popular this year, too, according to The Economist. The search reached its 2016 crescendo to-date after the Super Tuesday primaries in March. Donald Trump won seven states and Hillary Clinton won seven states and American Samoa.

It wasn't the first time American presidential election choices inspired such angst among its citizens. 'Move to Canada' was a popular search phrase in 2004 after George W. Bush defeated John Kerry.

Regardless of the popularity of the search phrase, the number of American and British people who have migrated to Canada remains quite low. During each of the last 10 years, just 15,000 people from both nations together have sallied forth into the Great White North to become Canadian citizens.

Weekly Focus - Think About It 

"Aaah, summer - that long anticipated stretch of lazy, lingering days, free of responsibility and rife with possibility. It's a time to hunt for insects, master handstands, practice swimming strokes, conquer trees, explore nooks and crannies, and make new friends. 

--Darell Hammond, Founder and CEO of KaBOOM!

WMC 6/6/16 Slowing Recovery

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Markets

Statistics means never having to say your certain, and that was certainly true last week. The employment report, which was released on Friday, was a bit short on jobs. Analysts had predicted employers would add about 162,000 new jobs during May, according to CNBC. Instead, a paltry 38,000 jobs added to payrolls. The United States Department of Labor focused on the fact the United States has experienced 75 consecutive months of private-sector jobs growth, as well as the significant decline in unemployment. The unemployment rate fell from 5.0 percent to 4.7 percent - but it was largely attributed to Americans leaving the labor force. United States Secretary of Labor Thomas E. Perez commented, "At this point in a recovery, we expect to see trade-offs between job growth and strong wage growth. Earnings growth in May was encouraging. So far this year, average hourly earnings for private employees have increased 3.2 percent at an annual rate." The anemic employment report triggered concern that U.S. economic recovery may be slowing. That, in turn, means the Federal Reserve may not implement measures designed to push interest rates higher during its June meeting. CNBC reported the probability of a Fed rate hike dropped from 21 percent to 4 percent after the employment report. U.S. markets were nonplussed. Barron's reported the Standard & Poor's 500 Index finished the week flat. The Dow Jones Industrial Index moved slightly lower, and the NASDAQ showed a slight gain. What Are Your Wages Worth? We've written about The Economist's Big Mac Index, which is a lighthearted way to gauge whether countries' currencies are at the correct levels - just compare the price of a hamburger in each country. At the start of the year, you could buy a Big Mac pretty cheaply in Russia ($1.53), Hong Kong ($2.48), or Taiwan ($2.08). There are differences in how much things cost from state-to-state, too. Pew Research Center used federal wage data to determine which regions of the United States had the lowest and highest wages after adjusting for differences in cost-of-living: "As we've noted before, prices for everything from housing to groceries vary widely from place to place, with the result being that a given income can mean very different things in New York, New Orleans, or New Bern, North Carolina. To get a handle on those variations, one can use the "regional price parities," or RPPs, developed by the federal Bureau of Economic Analysis. The RPPs measure local price levels in each of the nation's 381 metropolitan statistical areas, as well as the nonmetropolitan portions of states, relative to the overall national price level." The highest weekly wages for 3rd Quarter 2015, after adjusting for cost-of-living, were found in: 1) San Jose-Sunnyvale-Santa Clara, California, 2) California-Lexington Park, Maryland, 3) San Francisco-Oakland-Hayward, California, and 4) Seattle-Tacoma-Bellevue, Washington. The lowest wages, after adjustment, were paid in: 1) Yakima, Washington, 2) Wenatchee, Washington, 3) Logan, Utah-Idaho, and 4) Grants Pass, Oregon. Weekly Focus - Think About It "The best fishermen I know try not to make the same mistakes over and over again; instead they strive to make new and interesting mistakes and to remember what they learned from them." --John Gierach, American author (and fisherman)

Destined For Slow Growth? 5/9/16

The Markets

Reading economic portents can be tricky

For example, do signs that economic growth is slowing - like last week's employment report, which was anemic relative to consensus forecasts, and first quarter's gross domestic product (GDP) growth - mean the economy is headed for trouble? Or, does it mean the economy is going to continue to grow slowly? 

It all depends on whom you ask. 

Some see current lackluster economic data as a harbinger of trouble. Last week, Barron's cited an expert who was concerned about employment data. "...It could be a sign of trouble...Specifically, falling profit margins will put pressure to trim costs and head counts later this year and into 2017, which would slow consumer-spending growth."

Others believe the United States is destined to experience a persistent period of slow growth. In 2013, Barron's suggested the enviable pace of growth in the United States since World War II was likely to decline, along with the size of its working-age population and gains in worker productivity. The new era:

"...could have broad repercussions that will affect not only the pugilists in Washington but businesses and investors. Weaker growth will make it harder for companies to improve earnings, fatten dividends, or garner better stock returns. It also threatens to fan social inequality and class tensions and limit the ability of government to fund various entitlement programs like Medicare and Social Security. Tax revenues also are likely to fall short of projected levels."

Of course, a lot depends on how you gauge growth. A 2009 discussion in a Harvard Business School blog asked whether slower growth, as measured by current indicators, was meaningful since, as this commentary mentioned last week, gross domestic product (GDP) is a flawed indicator. "Further, in an age of concern about the environment, questions are raised about whether certain forms of growth - let alone incorrect measures - serve a very good purpose."

Investors expressed their opinions last week. They weren't thrilled by mixed economic data or the possibility of slower growth. Reuters suggested markets' downward shift indicated a reduced appetite for risk.

It probably won't surprise you to learn Russia was on top.

In countries around the world, crony capitalism has thrived during the past two decades. The net worth of wealthy business folk, who worked closely with their governments, was almost $2 trillion in 2014, an increase of about 385 percent from 2004. That is about one-third of the total wealth of billionaires around the world.

The National Review defined crony capitalism as "...an insidious system in which businesses' success is based on a close relationship with government and, specifically, with the people in power who dispense favors, subsidies, bailouts, and other forms of special treatment."

The Economist offered some specific examples. "As commodity and property prices soared, so did the value of permits to dig mines in China or build offices in São Paulo. Telecoms spectrum doled out by Indian officials created instant billionaires. Implicit state guarantees let casino banking thrive on Wall Street and beyond."

In an effort to measure the influence of crony capitalism on wealth, The Economist developed an index. The publication took Forbes' annual lists of the world's billionaires, designated each billionaire as crony or not-crony (as determined by the industry in which he or she had accumulated wealth), sorted them by country, and then calculated wealth as a percent of their country's gross domestic product (GDP).

Russia, Malaysia, Philippines, Singapore, and Ukraine topped the 22-country index in 2016. Germany, Poland, South Korea, Japan, and France were at the bottom. The United States was 15th on the list. U.S. billionaires' wealth is equivalent to about 13 percent of GDP, but wealth earned through crony capitalism accounts for just 2 percent of that amount.

Weekly Focus - Think About It

"The price of success is hard work, dedication to the job at hand, and the determination that whether we win or lose, we have applied the best of ourselves to the task at hand."

--Vince Lombardi, Past Coach of the Green Bay Packers