@theMarket: The Market's Winter Storm
Stocks worldwide have experienced a downdraft since October. All the gains so painstakingly made thus far in 2018 have been erased. Volatility has battered markets with all the severity of a Nor'easter. Next year may prove to be a continuation of the same.
It is interesting that the culprits responsible for this change of heart in the markets have been around for just about all of the past year. Leading the list is Donald Trump. It was our president that decided to wage a trade war against the world. There has been little success in his battle thus far. The prospect of more of the same faces us well into the new year.
The Federal Reserve Bank can also take some blame. After over a decade of "easy money," the new Fed chief, Jerome Powell, (appointed by Donald Trump), has decided to raise interest rates and sell $50 billion in Treasury bonds every month for the foreseeable future. In his own way, Powell is draining the system that has been swamped with money for years.
As a result of both the continued threat of a trade war and rising interest rates, the economy is slowing. It has not lost enough steam to threaten a recession, but it has removed the wind from the market's sails, to say the least.
Let us not forget the controversy raging across the pond. The United Kingdom is having a devil of a time pulling off their exit from the European Community. On the one hand, the EU doesn't want to make it too easy for this to happen, lest other members might follow the UK's lead. At the same time, the electorate, as represented by the UK Parliament, are not happy with the deal Prime Minister Theresa May has struck with the EU.
Finally, oil prices have collapsed since October. While the price decline has been a boon to the consumer, it threatens an array of companies related to energy production. Employment, capital spending, earnings and worries about debt servicing have added to the worries of stock investors as a result. In the recent past (2014-2015), declining energy prices put a large dent in the overall earnings of the S&P 500 Index of companies and could do so again.
As if all of the above were not enough, we are now faced with two immediate threats within our own political system. The House will be turned over to the Democrats in less than a month. And, within that time frame, the long-awaited Mueller Investigation should also reveal its results. Neither event is expected to help the presidency of Donald Trump.
Investors have no idea what will happen as a result of these developments. Will Donald Trump be proven right in his almost-daily denial of any collusion in regard to the Russian investigations? What if he is exonerated in part, but his family members are not? Has he committed any impeachable offenses in other areas? If so, how will that affect his trade negotiations or any future legislation?
In summary, few, if any of these issues can be resolved any time soon. Therefore, readers should expect the markets to exhibit the same kind of volatility into January and maybe into the end of the first quarter of 2019. That is not to say that many of the issues could turn out to be positives for the markets.
The Fed, for example, is already talking about easing up on the interest rate hikes. China seems to be amenable to further trade negotiations over the next three months. And who knows, Trump could turn out to have been right all along in blaming the entire Mueller probe on the fake news media and Democrat machinations.
In the meantime, expect stocks to ride a continued wave of wild swings of one percent or more almost daily in either direction. Most of these moves are fueled by computer programs that indiscriminately buy and sell stocks, sectors and entire country markets in a blink of the eye. My advice is to ignore these moves and wait out the storm.
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The Independent Investor: Will Our Country's Military Win the Next War?
There was a time, not long ago, when most Americans would answer that question in the affirmative without much thought. It was one of those "truisms" that we didn't give much thought. But today, many experts are debating that answer.
Back in the day, after World War II, our military prowess, (aided by the development of the atomic bomb) was unquestioned throughout the world. Growing up, it was never a question of spending on defense for me, it was simply how much. Republicans wanted more, Democrats wanted less. Today, not only is the amount of spending crucial but also its predictability and even more importantly, what those billions are spent on.
The Pentagon's National Defense Strategy was issued in January. Like all of their tomes before, it is heavy reading and fairly boring but this time around things were different. The United States Institute of Peace, a federal institution, issued a 98-page report rebutting some of the assumptions made about peacetime competition or wartime conflict.
The authors focused primarily on our top competitors for global hegemony, Russia and China, but also included recognized threats in Europe, Asia, portions of the Middle East. The report authored by a panel of former security officials and military experts did not mince words.
"The U.S. military could suffer unacceptably high casualties and loss of major capital assets in its next conflict. It might struggle to win or perhaps lose, a war against China and Russia. The United Sates is particularly at risk of being overwhelmed should its military be forced to fight on two or more fronts simultaneously."
Unlike WW II, where we did fight successfully on two fronts, on future battlefields we will face enemies that have developed extremely lethal weaponry, outnumber us, will be fighting on their own turf and will get to hit us first. In addition, it would be a big mistake to assume that our enemies would confine their attacks to the war theater. America and its military should expect devastating kinetic, cyber or other types of attacks (biological or otherwise) while fighting us abroad.
Until recently most of our conflicts were fought with America enjoying total air dominance, our logistics base (supply lines) were safe and secure from interdiction. Rarely, if ever, did we face long-range fire. About the worst anti-armor our tanks and Humvees faced were rocket-propelled grenades. We also owned the field when it came to unimpeded communications.
What our soldiers can expect to face in the next war will be advanced, tandem warhead anti-tank guided missiles, precision-guided artillery projectiles, long-range guns, armed drones and air-delivered weapons. The skies will no longer be exclusively ours as well. By now you are getting the picture.
Warfare is changing but the report says we are not keeping up. The proliferation of advanced technology, things like hypersonic and artificial intelligence that our enemies are applying to weaponry and soldiers on a mass scale are quickly eroding U.S. advantages and creating new vulnerabilities in a military that has relied for far too long on more ships, tanks and aircraft carriers.
Not only must the actual spending be increased but it should be allocated to those areas where we are behind the competition. The report suggested a 3-5 percent increase (above inflation) for the Department of Defense with areas such as cybersecurity and new technologies taking the brunt of the increase. Of course, that will cause lots of problems in Congress where "pork" has been a tradition among legislators when voting for the defense budget roll s around.
Year after year, politicians allocate the lion's share of defense spending to their states, which manufacture all that traditional and increasingly obsolete hardware. That would need to change but don't hold your breath. Those jobs (and votes) are what make Washington the swamp that it is.
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@theMarket: Markets Hope for Trade Breakthrough
This Saturday evening, Donald Trump and Xi Jinping will sit down to dinner in Buenos Aires at the G-20 conference. Investors are holding their breath, hoping that the two might come to some agreement that could lower tensions and avert a full-out trade war between the U.S. and China.
Given past rhetoric and the president's mercurial temperament, anything could happen. Xi Jinping and his advisors, after years of dealing with Washington, believe if they just hang tough and wait Trump out, the outcome will be "business as usual" on their terms.
Unfortunately, Wall Street and the media have created another binary event out of the dinner. Either there is a breakthrough, in which case the markets roar higher, or there is no deal and stocks fall back to the lows and maybe break them. I wish it were that easy.
The trade relations between our two countries are complicated. I mean really complicated and no single dinner or event is going to solve it. A new economic relationship with China will take months, even years, and require talks on many fronts. Tariffs are just one small issue in these talks, although the president uses that issue constantly in his tweets and rallies.
Whether he is truly that naïve (a possibility) or is just using a dumb-down approach for the benefit of his political base, is unknown. His rhetoric on many other issues (immigrants, the wall, jobs, the media, Mueller, etc.) indicates that he believes his audience has little understanding and even less patience on the issues that beset us than he does.
Clearly, the president has had a "bad hair day" on several fronts this week. GM's announced layoff of 14,000 U.S. workers and the closing of several factories damage his MAGA claims of bringing high-paid jobs back home. Mueller's investigation looms closer and new revelations on his Russian dealings during the presidential campaign have surfaced. And then there is the stock market's decline, which the president believes is his true opinion poll. Something positive out of this weekend might distract the public from these negative developments.
If we consider his "new" North American trade agreement signed this week in Argentina as a template, there is a chance that Trump could claim another trade victory on the China front. Most readers have realized by now that only marginal changes were made in this updated Mexico, U.S., Canada trade pact.
He could use this same kind of sleight of hand in negotiations with China. We know, for example, that the Chinese have already offered a number of concessions to the U.S. on trade, although the administration has not been forthcoming in revealing the details. It would be easy (as it was with Mexico and Canada) to claim victory by simply accepting superficial changes to an existing trade pact.
As for this weekend, if I were passing the gravy, I would agree to a joint statement with Xi after dinner that indicates "progress." Some nebulous statement from Xi, such an increase of soybean purchases by China, or postponing the January deadline on tariff increases by the U.S. from "Don, the Con" could give the markets new hope without much content.
In the meantime, you may be wondering why the markets turned around this week. Fed Chairman Jerome Powell, in a speech before the Economic Club of New York, announced that interest rates were just below a level where further rate hikes might not be necessary. Investors liked that — a lot. As a result, the S&P 500 Index has gained back some of its losses since Oct. 3. It is now down 6 percent from the beginning of last month, and up slightly for the year.
Good news out of Buenos Aires could ignite a Christmas rally and send the Dow up 500-700 points in a short period of time. Bad news might do the opposite. As it stands, November was a positive month for the markets. Stay tuned for the fireworks.
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The Independent Investor: Sustainability Investing and Millennials
The demand for sustainability investments is growing. Companies that offer measurable social and environmental impacts that address issues like world hunger, climate risk, poverty and access to health care, seem like a good investment for those socially-minded. Finding companies that also provide a good financial return at the same time is not so easy.
Sustainability investing is different from the decades-old trend called "social investing." Generally, social investments are those that bet on solar power, clean water, or the avoidance of "sin stocks" such as tobacco, guns or liquor companies. Most of these areas were not viable investments without a great deal of government help.
The idea of sustainability goes far beyond that concept. In this modern-day make-over, the idea is to use your money to solve some of these enormous global environmental, social and governance (ESG) issues and also make a profit over the long-term. Of all social groups measured, it is the Millennials who profess the most interest (80 percent) in social-impact investing. An increasing number of younger investors (28 percent) are putting their money where their mouth is. They want to select investments that reflect their own values and personal priorities.
After all, when you think about it, they are inheriting a world that we, the Baby Boomers, have totally messed up. Just look around you. Our fossil fuels are burning the planet alive. The air in China, or in Mexico City among many other locales, is so bad citizens routinely wear masks. Millions are starving. Water is fast disappearing from much of the earth.
I know, I know, I can already see your eyes glaze over. By this time, most oldsters of my generation have tuned out these warnings. Most Boomers are immune to socially-responsible rants. They don't want to hear it, have no solution for it, and don't want to face the guilt and shame of their actions.
But realize that there are one and maybe two generations of our population that want (and need) to do something about it. Given that the millennials and the Gen Z populations are the ones who will inherit this earth, from their point of view, they need to tackle these problems, because for them it is a life or death proposition.
A number of studies predict that Millennials are poised to receive more than $30 trillion of inheritable wealth. The money is already starting to flow in as my generation kicks the bucket. These young investors are fully-versed on the issues they face. For example, by 2050, an estimated 2 billion more people will crowd into the earth's cities and towns. Global demand for food, water and energy will drive the need for innovative improvements in infrastructure simply to handle the demand for additional resources.
The question is: can you also make money by fixing these issues? The jury is still out on whether the two can be accomplished together, but initial results are encouraging.
Sustainability investing is experiencing a compound annual growth rate of over 100 percent. Granted, it is still only a niche market, representing only 18 percent or so of the wealth and asset management industry. A recent study by mega-broker Morgan Stanley, which evaluated over 10,000 funds and managed accounts, show that sustainability investing has usually met and often exceeded the investment performance of comparable traditional investments.
Environmental, social and governance (ESG) investment performance achieved an annualized return of 10.2 percent versus the bench market S&P 500 equity Index return of 9.7 percent.
Since all of the challenges facing the world are also long-term in nature, it makes sense that global pensions funds, especially in Europe and Japan, would be interested in this area. Given their own long-term investment views, global pension managers have invested about $23 trillion or 26 percent of managed assets in these areas.
To date, there are 50 ETFs(exchange-traded funds), and about 250 open-end mutual funds that offer access to the ESG/sustainability area. ESG funds (as they are called) have the least assets among the eleven smart-beta categories according to a Bloomberg survey. But before you start buying, investors should beware that most of these investments are extremely illiquid, experience enormous amounts of price volatility, and should be thought of as very speculative, long, long-term investments at best. They are not for widows, orphans or 98 percent of retail investors.
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@theMarket: It Is a Black Friday on Wall Street
Black Friday sales are in full swing. Normally, today is all about the retail trade. Consumers spend the day waiting in line, picking up heavily discounted "door buster" deals, and generally starting their holiday gift shopping. This year, it appears traders are also holding their own Black Friday sales.
The day after Thanksgiving, the stock and bond markets are open for a half day. Few turn up for work, so trading desks are usually manned by a skeleton crew, volumes are light and the indexes meander about the center line. As such, what happens on Black Friday has little consequence in the grand scheme of things.
The real action is before a holiday, especially one that coincides with a long weekend, like this one. In volatile markets, such as the one we have this year, few traders want to go "long" stocks through this long weekend. Their preference is to sell before the holiday and re-examine things when they come back on Monday.
This year, thanks to the Trump trade war fears, the concerns over raising interest rates, and a possible slowing of the economy next year, stocks continued their two-month, long decline on Friday. As I warned readers last week, if the S&P 500 Index failed to hold 2,720, the next stop would be somewhere around 2,600. That is exactly what happened.
So here we are testing the lows that we put in back in February. From a technical point of view, we have a classic case of a "double bottom." That's when stock indexes reach a low, bounce up, and then re-test that low once again. At times it only takes a few weeks or months. In this case, it took longer. Many times, a correction will not be over until a double bottom occurs. Are we at that point now?
I would like to say yes, so I will, but there are conflicting signals. Take sentiment indicators, for example. The number of bulls has dropped to a little less than 40 percent. That's a good sign if you are looking for a contrary indicator. But back in February, bullish sentiment hit a low of 24.7 percent. That would seem to indicate that investors will need to become even more bearish before this pullback is over.
We are also seeing some early signs of "divergence." Back in October, when the S&P 500 hit 2,600, the peak daily reading of new lows for individual stocks was just under 18 percent. But this week, those same stocks hitting new lows was a mere 4.16 percent. So, what?
When you have a situation where the broader market is making new lows (like Tuesday), while the percentage of stocks trading to new lows shrinks, it is considered a positive divergence. If we see this continue next week, it would be a signal that investors are being more selective in their sales rather than just committed to a wholesale selling of all equities. That would be another positive sign.
What would be a bad sign, is if the S&P 500 Index failed to hold this 2,600 level. That would indicate more pain in the near future and lower stock market averages across the board.
Against this backdrop, it is interesting to note that according to early reports, this year's holiday shopping season is starting off with a bang. Consumer confidence is fueling higher holiday spending, even while the stock market is selling off the retail stocks that will most benefit from this trend.
Hang in there, folks, this too shall pass.
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