Economic Turnaround 7/30/18

The Markets Is it a sugar rush or something more sustainable? Economic growth in the United States was strong during the second quarter. Gross domestic product (GDP), which is the value of all goods and services produced in the United States, grew by 4.1 percent. That’s the fastest growth in four years, reported the BBC. The news was received with varying levels of enthusiasm. President Trump said the gain is “an economic turnaround of historic importance” and thinks the economy should continue to grow rapidly, reported Shawn Donnan in Financial Times. Economists were less certain. They think second quarter’s GDP gains were underpinned by one-time factors. These included high levels of profitability attributable to last year’s corporate tax cuts and an increase in exports as U.S. producers and their buyers abroad tried to avoid upcoming tariffs, reported Financial Times. Another consideration is the business cycle. The business cycle tracks the rise and fall of a country’s productivity over time. The U.S. appears to be in the latter stages of the current cycle. John Authers of Financial Times explained: “…President Donald Trump’s self-congratulation yesterday was fully merited. Things are going according to plan. This business cycle looks ever more like a normal one, which is a fantastic and welcome development after an epochal crisis and then a decade of doldrums…The advent of a normal cycle is itself a problem because a normal cycle terminates with high interest rates and declining growth. The president has voiced his disapproval of these things, but they are the logical and sensible consequence of the economic developments that are now unfolding.” In the United States, the Dow Jones Industrial Average and the Standard & Poor’s 500 Index moved higher while the NASDAQ Composite gave up some ground.

IT’S CAMPING SEASON! In 1869, the first recreational camping guide, Adventures in Wilderness, was authored by minister William H.H. Murray and became a bestseller. The book’s success may have owed something to a new train route that made the Adirondacks more accessible. Time.com reported his practical guide offered advice on important topics: “For sleeping, he describes how to make ‘a bed of balsam-boughs.’ On what to wear, he suggests bringing a ‘felt hat,’ ‘stout pantaloons,’ and a ‘rubber blanket or coat.’ For warding off woodchucks, ‘a stick, a piece of bark, or tin plate shied in the direction of the noise will scatter them like cats.’ As for wolves, his technique would likely not pass muster with fire wardens: ‘touch a match to an old stump and in two hours there will not be a wolf within ten miles of you.’” His book inspired Kate Field to try camping, and she became an early advocate of land preservation. She wrote for the Adirondack Almanac in 1870. A more recent article in the publication reported: “Field advised her readers to bring a tent rather than kill trees. ‘It is cruel to stab a tree to the heart merely to secure a small strip of bark,’ she said. ‘It is ungrateful to destroy the pine and balsam that have given us our beds of boughs, and fanned us with their vital breath. Let there be tents.’” Additional advice can be found in Civil War veteran John M. Gould’s 1877 guide to backpacking, titled How To Camp Out. He warned against the allure of new gear: “Do not be in a hurry to spend money on new inventions. Every year there is put upon the market some patent knapsack, folding stove, cooking-utensil, or camp trunk and cot combined; and there are always for sale patent knives, forks, and spoons all in one…Let them all alone: carry your pocket-knife…” He might have been willing to make an exception for some of the gear available today! Weekly Focus – Think About It  “Camping is nature's way of promoting the motel business.” --Dave Barry, Humorist

A Recession May Be Ahead 7/23/18

The Markets

Last week, there was some good news and some notable news.

Here’s the good news: Corporate earnings have been strong. As of July 20, 17% of the companies in the Standard & Poor’s 500 Index had reported second quarter results. More than 85 percent of those companies reported positive earnings surprises, according to FactSet, which means they earned more than expected.

“It appears the lower tax rate is more than offsetting the impact of rising costs, resulting in a record-level net profit margin for the index for the second quarter,” explained FactSet.

Here’s the notable news: U.S. stock markets largely ignored a slew of domestic and global issues to finish up a basis point or two last week. (Performance was flat when you round to one place, as we do in the table.) Barron’s reported:

“President Donald Trump took on the Federal Reserve, telling an interviewer that he’s ‘not happy’ about rising interest rates, the kind of meddling we haven’t seen in a while. We also had the usual trade war concerns, as the president and his advisors talked about the need to take on what they consider China’s unfair trade practices. China’s yuan, meanwhile, tumbled in a way that was a little too reminiscent of August 2015, when its slide caused global markets to shudder. Those concerns, however, were offset by strong corporate earnings.”

The U.S. bond market has been less sanguine than the U.S. stock market. Debate has focused on the flattening yield curve. The yield curve reflects the difference in yield on U.S. Treasuries from short- to long-term. Normally, investors expect to earn higher yields when they lend their money for longer periods of time (e.g. invest in longer-term bonds).

At the end of last week, two-year U.S. Treasuries yielded 2.6 percent and 30-year Treasuries yielded 3.0 percent. Some say when short-term rates rise above long-term rates, inverting the yield curve, recession is ahead.

Forward Looking Career: Air Broker.  By 2050, about 70 percent of the world’s population is expected to live in cities, reports UNICEF. The United States is ahead of the curve. Since the 1990's, 75 percent or more of Americans have lived in metropolitan areas. The same was true in Spain, the United Kingdom, Australia, and Canada. In 2000, citizens of Mexico, Korea, and Brazil were largely urban dwelling. By 2050, China and India are expected to have almost two billion people living in cities – and neither will have crossed the 75 percent level. If the thought of densely packed cities inspires a bit of claustrophobia, you’re not alone. Anyone who has ever watched ‘Green Acres’ knows city living isn’t for everyone. However, cities are innovation engines, reports Fast Company. “The more people there are in an area, and the more densely they’re networked, the more startups get created and the more patents get filed.” Consider the entrepreneurial example set by a New York City (NYC) deli owner who was trying to figure out how to stay in business on the Lower East Side of Manhattan. The answer was selling air, reports The Indicator From Planet Money: “So when you buy a plot of land in New York, it comes with what are called ‘air rights.’ That essentially says how much you are allowed to build on that plot of land. Let’s say you buy a plot of land and it comes with 10 stories worth of air rights, you could build a 10-story building on it.” The deli owned five stories worth of air rights, or 27,960.66 square feet of air. How much was all that air worth? Reportedly, a developer in New York paid about $17 million for it. Guess who negotiates air deals in NYC. That’s right: Air brokers. Weekly Focus – Think About It   “Growth is inevitable and desirable, but destruction of community character is not. The question is not whether your part of the world is going to change. The question is how.” --Edward T. McMahon, Author

A Rising Market Tide Lifts All Stocks 7/16/18

The Markets Investors are becoming more discriminating. Trade tensions escalated as the U.S. administration expanded tariffs on Chinese goods last week. You wouldn’t have known by watching the performance of benchmark indices, though. Just four of the 25 national stock market indices tracked by Barron’s – Australia, Italy, Spain, and Mexico – moved lower. However, if you look a little deeper into the performance of various market sectors, you discover an important fact: The market tide wasn’t lifting all stocks. It has been said a rising tide lifts all boats. When translated into stock-market speak, the saying becomes, ‘A rising market tide lifts all stocks.’ In other words, when the market moves higher, stocks tend to move higher, too. That wasn’t the case last week. Barron’s reported investors have become more selective: “We went from a market where everything moved largely together to one where sector fundamentals began to matter more than where the S&P 500 was going...At the sector level, it’s apparent that no one has been ignoring tariffs. While the S&P 500 has gained 1.7 percent over the past month of trading, industrial and materials have dropped 2.5 percent, while financials have slumped 2.9 percent, hit by a double whammy of trade fears and a flattening yield curve. Utilities and consumer staples have outperformed, gaining 8.1 percent and 3.5 percent, respectively.” Utilities and Consumer Staples are considered to be non-cyclical or defensive sectors of the market because they are not highly correlated with the business cycle. Defensive companies tend to perform consistently whether a country’s economy is expanding or in recession. For example, a household’s need for power, soap, and food doesn’t disappear during a recession. As a result, the revenues, earnings, and cash flows of defensive companies remain relatively stable in various economic conditions. In addition, the share prices of these companies tend to be less susceptible to changing economic conditions. Defensive stocks tend to outperform the broader market during periods of recession and under perform it during periods of expansion.

What Are The Biggest Risks For Retirement Investors?  If market risk, inflation risk, and interest rate risk were on the tip of your tongue, you need to update your list. Recently, T. Rowe Price surveyed employers that make defined contribution plans, like 401(k) plans, available to their employees. The company asked plan sponsors to rank the risks they were most concerned about for the people who saved in the plan. The top concerns were: 42 percent = Longevity Risk. No one knows exactly how long they will live, which makes it difficult for plan participants (and anyone else planning for retirement) to be certain future retirees won’t outlive their savings. Longevity risk was among the top three risks listed by 95 percent of plan sponsors. 25 percent = Participant Behavioral Risk. “Left on their own, participants tend to take on either too much or too little risk by: failing to properly allocate and diversify their savings; overinvesting in company stock (or stable value/money market funds); neglecting to rebalance in response to market or life changes; and attempting to time the market,” explained T. Rowe Price. 14 percent = Downside Risk. This is the likelihood an investment will fall in price. For instance, stocks have higher return potential than Treasury bonds, and higher potential for loss. When planning for retirement, it’s important to balance the need for growth against the need to preserve assets. If you would like to learn more about these risks and strategies that may help overcome them, give us a call. Weekly Focus – Think About It “Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.” --Sun Tzu, Chinese general and military strategist

Unexpected Hike In Interest Rates 7-9-18

The Markets

What a roller coaster of a quarter!

When it comes to the American Association of Individual Investors (AAII) Sentiment Survey, respondents tend to be more bullish than bearish about U.S. stock markets. The survey’s historical averages are:

·        38.5 percent bullish

·        31.0 percent neutral

·        30.5 percent bearish

As the second quarter of 2018 began, investors were feeling less optimistic than usual. (About 36.6 percent were bearish and 31.9 percent bullish.) Their outlook was informed by a variety of factors, according to an early April article in The New York Times, which said:

“First there was the risk that the economy might be growing too fast, which could prompt central banks to hike interest rates sooner than expected. Then there was the risk of a trade war ignited by the White House imposing tariffs on certain products, an action that quickly prompted countries like China to erect trade barriers of their own. Next came the threat of a government crackdown on technology companies, after revelations of their misuse of customer data.”

As the quarter progressed, investor optimism increased on signs of economic strength. In early June, CNBC reported the economy appeared to be “operating close to full employment, with an unemployment rate at 3.8 percent, inflation still hovering at or below 2 percent, and business and consumer confidence strong.”

Robust corporate earnings helped spur optimism, too. FactSet Insight wrote, “The S&P 500 reported earnings growth of 25 percent for the first quarter – the highest growth since Q3 2010.” In mid-June, the AAII survey showed 44.8 percent of respondents were feeling bullish, 21.7 percent were bearish, and 33.5 percent were neutral.

As talk of tariffs and trade wars resumed, investor optimism plummeted. By the end of June, just 27.9 percent of respondents were bullish and more than 39 percent reported they were feeling bearish. AAII explained:

“Many – but not all – individual investors anticipate continued volatility and/or think that the current political backdrop could have a further impact on the stock market. Trade policy is influencing some individual investors’ sentiment as well. While many approve of the Federal Reserve’s plan to continue gradually raising interest rates, some AAII members are concerned about the impact that rising rates will have. Also influencing sentiment are valuations, tax cuts, earnings growth, and economic growth.”

Despite a downturn in bullishness, major U.S. stock indices moved higher last week. 

There’s A Carbon Dioxide (CO₂) Shortage.

Many people agree the world has too much CO₂. It’s the reason representatives from countries around the world signed the Paris Climate Agreement. They committed to “adopt green energy sources, cut down on climate change emissions, and limit the rise of global temperatures,” reported National Public Radio.

The effort has been less successful than many had hoped, according to the International Energy Association (IEA). After several years without increases, energy-related emission rose by 1.4 percent in 2017. That’s the rough equivalent of putting 170 million more cars on the road, reported Scientific American.

Emissions rose primarily in Asia, although the European Union (EU) saw increases, too. The biggest decline was in the United States. There’s a certain irony there, since President Trump announced he would withdraw from the agreement in June 2017, reported The Washington Post.

Despite realizing a 1.5 percent increase in ­­­­­emissions, the EU is experiencing a shortage of food-grade CO₂. The Economist reported:

“Food-grade CO₂ is a vital ingredient: it puts the fizz in carbonated drinks and beer, knocks out animals before slaughter and, as one of the gases inside packaging, delays meat and salad from going off. A shortage of the stuff has therefore created havoc in food makers’ supply chains.”

The EU’s food-grade CO₂ is a harvested by-product of processes for making ammonia and other chemicals, reported The Economist. Three of Britain’s five ammonia plants have been closed because farmers are using less fertilizer, and CO₂ does not deliver enough revenue to keep the plants running.

Let’s hope the shortage of CO₂ doesn’t affect the supply of beverages available to World Cup fans. 

Weekly Focus – Think About It

“My garden is an honest place. Every tree and every vine are incapable of concealment, and tell after two or three months exactly what sort of treatment they have had. The sower may mistake and sow his peas crookedly; the peas make no mistake, but come up and show his line.”

--Ralph Waldo Emerson