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

WMC - China's Downward Currency

Weekly Market Commentary

 

January 12, 2016

The Markets

The People's Bank of China (PBOC) started the New Year with a downward currency adjustment and fireworks followed. 

Last week, three distinct issues affected China's stock market. First, the PBOC's devaluation of the yuan (a.k.a. the renminbi), along with the knowledge the central bank had been spending heavily to prop up its currency in recent months, led many analysts and investors to the conclusion China's economy might not be as robust as official reports indicated, according to the Financial Times.

Not everyone was surprised by this revelation. During the fourth quarter of 2015, The Conference Board's working paper entitled Global Growth Projections for The Conference Board Global Economic Outlook 2016 reported:

"China's economy grew much slower than the official estimates suggest in the recent years. During the last five years, our estimates suggest an average growth of 4.3 percent, which is substantially lower than the official estimate of 7.8 percent. In 2015, we project China to see an average growth of 3.7 percent, which is indeed lower than the official target of 7 percent."

Second, state-run media made it clear the Chinese government would not step in to spur growth. Allowing market forces to play out is a requirement of the reforms international investors have been demanding of China, according to Barron's. The publication suggested Chinese President Xi Jinping is the victim of a Catch-22. The Chinese government took steps toward reform and international investors responded by selling shares in a panic:

"Weaning China off excessive credit, investment and import-led growth in favor of services means slower growth. Markedly slower, in fact, than the 6.5 percent Beijing is gunning for this year. But Monday's 7 percent stock rout shows international investors want it both ways. The rapid growth, innovation, and disruptive forces that capitalism produces? Yes. The downturns and volatility that come with it? Not so much."

The third factor was China's new and very strict stock market circuit breakers, which were introduced on January 4. The circuit breakers were intended to calm overheated markets, but they sparked panicked selling instead. When the Shanghai Shenzhen CSI 300 Index falls 5 percent, Chinese stock trading stops for 15 minutes. When the index is down 7 percent, trading stops for the day. A similar mechanism is employed in U.S. markets, which are far less volatile. However, trading is not delayed until the Standard & Poor's 500 index has fallen by 7 percent, and it does not stop until the index is down by 20 percent. Last week, China's stock markets closed twice as investors, who were worried the circuit breakers might kick in, rushed to sell shares.

China suspended its circuit breakers on Thursday, and the PBOC set the value of the yuan at a higher level. That helped China's stock markets, and others around the world, settle. China's markets gained ground on Friday, although U.S. markets finished the week lower. Markets may continue to be jittery next week as "a tsunami of negative psychology driven by China" works its way through the system, reported Reuters.

FOURTH QUARTER, A LOOK BACK...

The Federal Reserve pulled the trigger.

At the December Federal Open Market Committee meeting, the Fed finally acted, tightening monetary policy by raising the funds rate from 0.25 percent to 0.50 percent. It's important to remember the Fed doesn't actually set interest rates. It takes actions designed to influence financial behaviors. The Fed has given rates a push, it remains to be seen whether its efforts will bear fruit.

The European Central Bank (ECB) acted, too.

Although, its monetary policy moved in a different direction, offering additional stimulus measures to support European economies. Investors were enthusiastic when the ECB announced its intentions; however, markets were underwhelmed when the economic measures delivered were less stimulative than many had expected.

China's currency gained status.

The International Monetary Fund decided to add the Chinese yuan (a.k.a. the renminbi) to its Special Drawing Rights basket, effective October 1, 2016. After the renminbi is added, the U.S. dollar will comprise 42 percent of the basket, the euro will be 31 percent, the renminbi will be 11 percent, the Japanese yen will be 8 percent, and the British pound will also be 8 percent.

Congress tweaked Social Security.

The Bipartisan Budget Act of 2015 (BBA) averted a U.S. default and deferred further discussion of U.S. debt and spending levels until after 2016's presidential and congressional elections. It also did away with two popular social security claiming strategies. The restricted application strategy was discontinued at the end of 2015, and file and suspend strategies will be unavailable after May 1, 2016.

Medicare premiums go up, but not for everyone.

The BBA also limited increases in Medicare premiums. About 14 percent of Medicare beneficiaries will pay higher premiums in 2016. The new premium will be $121.80, up from $104.90 in 2015. Original proposals suggested the premium amount increase to $159.30.

Weekly Focus - Think About It 

"If you do not change direction, you may end up where you are heading."

--Lao Tzu, Chinese philosopher

WMC- Gifts From Congress

   

January 5, 2016

The Markets

Investing in U.S. stock markets during 2015 was a bit like riding a mechanical bull. Markets jolted up and down but, once the year ended, investors were almost where they had started. The Standard & Poor's 500 Index (S&P 500) entered 2015 at about 2,058. It rose as high as 2,130 during May and fell to about 1,867 in August. As the year ended, the index was almost at 2,044. It would have finished in negative territory if it weren't for dividends. With dividends included, the S&P 500 was up 1.4 percent for the year, according to Barron's. Without dividends, it was down 0.7 percent. Market performance left plenty of room for speculation about what the future may hold. Barron's explained: "The problem isn't just that the S&P 500 finished flat but that it finished trendless...So, as 2016 begins, it's very easy to impose whatever narratives we want on the market. For the bears, the fact that the market hasn't been able to hit a new high, and that small caps have underperformed large, is a sign that the market is peaking...Still, there's enough good news to keep the bulls heartened...The price of oil, which pulled down S&P 500 earnings in 2015, might be stabilizing...And, remember, Congress just passed a spending bill that could pick up the stimulus baton from the Federal Reserve." Regardless of whether you lean toward bullishness or bearishness, the performance of the S&P 500 during 2015 reinforced the value of dividends. When it comes to investing in stocks, there are basically two ways to make money. First, the value of a company can increase and investors can earn capital gains. Second, investors may receive dividends, which are a portion of a company's earnings its board of directors chooses to distribute to shareholders. During the past several years, as interest rates have remained persistently low, dividends have become important to many investors as a source of income. They also are a critical component of total return. From 1926 through 2014, dividends accounted for more than 40 percent of the total returns generated by the S&P 500. You may have received a gift from congress Our elected leaders did some re-gifting during 2015. They restored tax cuts that had been allowed to expire and made them retroactive for 2015. Kiplinger's reported, "In an important twist to the habitual year-end gamesmanship, however, this time Congress actually made many of [the tax cuts] permanent and even improved a few." The tax law changes help people who:  Commute to work: During 2016, employees who drive can pay for parking with up to $255 of pre-tax salary, and people who rely on mass transit to get to work can spend the same amount of pre-tax salary on transportation. (Slide 3) Have children in college: The American Opportunity College Credit, a $2,500 tax credit for families with qualifying college students, was made permanent, although the credit phases out at higher income levels. (Slide 4) Live in states with no or low income tax: The choice about whether to deduct state income tax or state sales tax paid during the year on a federal tax return was renewed. It expired at the end of 2014, and now applies retroactively to 2015. (Slide 6) Want to make charitable contributions using required minimum distributions (RMDs): Once again, IRA owners who are age 70½ or older can donate up to $100,000 of their traditional IRAs directly to charity, tax-free, using all or part of their RMDs. It's now a permanent tax break. (Slide 7) Own businesses: The $500,000 "expensing" cap was restored for 2015, and will be permanent going forward. Bonus depreciation also was extended. (Slide 12)  These are just a few of the tax cuts Congress passed. Give us a call to discuss how these tax changes, and others, may benefit you. Weekly Focus - Think About It "I live my life in widening circles that reach out across the world." --Rainer Maria Rilke, Austrian poet