What’s Going On?
First, last week’s results! The Dow Jones Industrial Average was down (4.46%), the S&P 500 (4.57%), the Nasdaq Composite(4.9%), the Small Cap Russell 2000 (5.53%). Over the pond, the results weren’t quite as bad with the MSCI EAFE International down (2.26%) and the MSCI Emerging Market Equity Index down (1.33%).
Bonds did what they are supposed to do during equity sell-offs. The 10 Year US Treasury yield finished @ 2.85% last Friday, down from 2.99% the previous week. The Barclays Aggregate Bond Index was up .85%
With Stocks flat to down and Bonds mostly still down, it will be somewhat interesting to see how the 2 Broad Based Asset Classes finish 2018!!
What’s Going On? A LOT!
Here is a list:
- In October, our Federal Reserve Chairman said the Neutral Rate of Interest is still way off and we may have to rise above neutral. In December, he said we are now close to neutral! ANYONE MISS JANET YELLON!!!!!
- A Little Yield Curve Inversion, where the 3 Year US Treasury moved higher than the 5 Year US Treasury.
- Will the Fed now raise rates in December and how many times in 2019? Many conflicting opinions by Market/Economic prognosticators. We have now raised Rates 8 times during this cycle with the first on 12/15/2015.
- Remember late 2018, we switched from Quantitative Easing to Quantitative Tightening as our Fed is letting Bonds mature without purchasing new. Roughly 60 Billion per month is maturing.
- Brexit is now attempting to move forward which adds to the uncertainly.
- Tariff increase on the last round of $200 Billion Chinese imports has been put off for 90 days. Apparently, this is a new firm date! WILL THIS END AND IF SO, WHAT WILL BE THE RESULTS!
- The concern of a Corporate Earnings Recession where profits will decrease for 2 or more quarters. With Corporate Profits rising over 20% in 2018, it should be expected the Rate of Growth will slow. Hey the Profits are at record levels!
- Wages have risen 3.1% in 2018. The unemployment rate is down to 3.7%. Oil has dropped and is being reflected at the gas pump. This equates to continued strength in Consumer Spending. The holiday shopping season looks very healthy!
- The Housing Market has slowed down in 2018, at least somewhat attributable to rising rates. Rates have recently reversed and if they stay lower, this may provide the housing market a little wind to push forward.
- If you’re a Corporate CEO, you are now faced with rising wage costs, higher debt service payments, and the impact and uncertainly of Tariffs. The wage costs at this stage are good, as most of the wages get recirculated back into the economy. Higher interest payments are still reasonable, however the uncertainly of the Tariff War has many companies holding back on expansion plans and instead are looking to buy back their own stock.
- It will be interesting to assess the true impact on the tax cuts for both Corporate America and Consumers when tax time rolls around. Has the tax cut benefit been neutralized by the Tariffs?
Because the Stock Market is supposed to be a discounting mechanism, it should not be a surprise that we are in the middle of a true Market correction.
I certainly hope that all readers have an Asset Allocation that has been structured specifically to their income needs. It is times such as these that true diversification between Stocks, Bonds and cash equivalents tends to keep our heads above water.
Economic Expansion: After the first 3 Quarters of 2018, the US economy has expanded by 2.4% which is equal to 3.2% annual growth which could be the best expansion in 13 years (source: Commerce Department)
China Tariffs: China is imposing 40% Tariff on American-made cars going into China and the US is imposing 27.5% Tariff on Chinese cars coming into the US. Certainly not on a equal footing!!
Auto Imports/Exports: In 2017, the US imported $192 billion of new autos and light trucks (8.3 million vehicles). We exported $57 billion.
Question of the Week
Who is eligible to Collect Social Security Benefits?
a) U.S. citizens
b) Green Card Holders
c) Foreign Spouses of Qualifying workers
d) All of the above
Answer to Last Week’s Question of the Week
Who is the longest service Federal Reserve Chairperson? One hint, he served for over 2 Presidents!
a) Ben Bernanke
b) Paul Volker
c) Alan Greenspan
d) William McChesney Martin Jr.
The answer is –
d) William McChesney Martin, Jr. – McChesney served from 4/2/1951 thru 1/31/1970, 5 Presidents