@themarket: Global Interest Rates Rise, Global Stocks Fall
It is something we really haven't seen in quite some time. Back in the day, before the financial crisis, interest rates and stocks most often moved in opposite directions. This week investors got a taste of what the future might hold.
U.S Treasury yields on the 10-year note (the benchmark average) ticked up to 2.39 percent at one point. Across the pond, the German Bund (their benchmark) rose .5 percent. Those were big moves in the debt world. Why are interest rates on the rise all of a sudden after years of declines?
Some would say it just had to happen. Global central bank policy has just been too loose for too long. I don't necessarily agree with that view, but at the same time, our own Fed has given the markets ample warning that the time to tighten is upon us.
But before we bid adieu to their past policies, let's give all those central bankers a hand. In the absence of any fiscal help from the world's politicians, these heroes single-handedly not only pulled us away from the brink, but have guided global economies to their present state of growth. What is different this week from other weeks is the perception among investors that other central banks may now be following our lead.
Throughout the first half of the year, I wrote that it was not Trump and his promises, but low interest rates, a growing economy, and declining unemployment that was supporting the stock market. I also warned that the real arbiter of further equity gains would be the Fed and how they implemented their new tighter, monetary policy.
So far, their actions have been transparent, moderate and, to the best of their ability, telegraphed to the markets well ahead of any future moves. The problem now is that if (and right now, it is only an if) other central banks begin to tighten, than no one knows what will happen.
How will various central banks coordinate policies? What will tighter monetary policy overseas mean for our bond market yields? Will Japan start to tighten as well, and if so, what will that mean for both U.S. and European interest rates? One thing we do know is that today's traders are quick to pull the trigger before taking the time to see what transpires.
Stock indexes hit six-week lows this week. That doesn't mean much in the grand scheme of things. Granted, we hit my target on the S&P 500 Index at 2,444 weeks ago but that doesn't mean I called a "top." We could still start to rally back next week when this holiday-shortened work week is over. In the summer, when participants are on vacation and volumes are low, it is easy to manipulate the markets.
Technically, we had better rally hard in the coming week because we are hovering just over support for the S&P 500 index at 2,414. The action of technology stocks is also bothering me. It is this sector that has led the market up and it feels like we still have more to go on the downside.
But so what; I and everyone else have been waiting for a sharp, shallow sell-off of the 5-6 percent variety so let it happen. July would be an auspicious months for that. As for your portfolios, do nothing right now. If this is truly the beginning of that downdraft, I see 2,345 as the first support for the index. That would bring us down to a 4 percent decline or so. Big deal!
|Write a comment - 0 Comments|
The Independent Investor: The Market's Half-Time Report
Financial markets worldwide ended the first six months of the year much better off than they started. Here in the U.S., the Dow and the S&P 500 Indexes both gained 8 percent, while NASDAQ delivered 15 percent.
The Russell 2000, the small cap index, underperformed (up 4 percent) and the Transports gained 5 percent. All-in-all, it paid to be in large-cap, especially the large cap growth sector for the first half. At the same time, the Volatility Index continued to make new lows, despite the fact that at least half the investing population was/is worried and fearful of our new president's agenda.
All of the top 20 economies around the world are growing this year. That recovery is broadening out to include emerging markets as well. It's the best global growth investors have experienced in five years. And economic forecasts have continued to indicate gains, especially in Europe. While over in Asia, recession-ridden Japan has managed to gain ground (up 8 percent).
Their economy is stronger than at any time in the last 10 years.
As a result, international developed markets outperformed our own stock market. The French market gained 15 percent, Germany 16 percent, while Spain and Italy also gained by double digits.
Emerging markets have done even better, racking up a 17 percent gain. Individual countries like Hong Kong were up 16 percent, while China lagged (only up 12 percent). Most investors do not realize that the decline in the dollar since the beginning of the year had a lot to do with that overseas performance.
As the greenback fell, the foreign currency-denominated stock prices overseas gained.
Just this currency effect alone boosted foreign returns by 5 percent or more. If you subtract out the currency impact, foreign stocks actually lagged their U.S. counterparts, despite stronger economic growth. All of this was especially impressive given the political climate, as well as the changes in monetary policy here at home.
For years, investors have been concerned with what might happen to the stock market once the easy money policies of our central bank ended. Dire predictions of major declines caused by Fed tightening have not come true. Given that we have weathered three rate hikes since December and stocks are at or near record highs, says volumes about those overblown fears.
Two variables have saved the market from those bearish predictions. The economy and employment are both gaining with the jobless rate hitting historical lows over the last six months.
Low foreign interest rates have also kept a lid on rising rates here at home. Believe it or not, even at these low rates, foreigners are buying our bonds because interest rates and bond yields are much lower in their own countries.
But what about all this crazy partisan politics, tweets and the like, why hasn't this political turmoil decimated the markets as so many expected? Well, I come to discover (thanks to work done by Ned Davis Research, the Fed and Liz Ann Sonders, Charles Schwab's equity strategist), that "stocks rise faster when partisan conflict has been elevated on an absolute basis and relative to the recent past." There have been times since 1984 when the S&P 500 Index has made gains of 17 percent annually under these circumstances.
It simply proves that stocks do climb a wall of worry. But what is in store for us in the second half of the year? It appears that as long as the same set of circumstances prevails, we should have another strong year in the stock market. Let's hope they do.
|Write a comment - 0 Comments|
The Independent Investor: Small Business Linchpin of America's Success
The facts are that small businesses still create the lion's share of jobs and at least half the economic growth in this country. It would be wonderful if our lawmakers would finally realize that.
Look around you: with few exceptions, we are surrounded by entrepreneurs who have created over 60 percent of the jobs in our communities since the financial Crisis of 2009. What we don't see is the enormous burden that these heroes are living under on a daily basis.
A startup is largely a game of survival. Those who stay in business the longest are most likely to succeed. About two thirds of businesses only survive two years. Of them, another 50 percent will go under within five years. And only 33 percent will make it through ten years. The Labor Department, which supplied these statistics, found the same results across all industries.
The biggest challenges small business owners face is economic uncertainty, regulatory burdens, taxes and health-care costs. All but one of those obstacles depends on decisions that are largely made in Washington.
In recent small business surveys, a quarter of small-business owners said taxes are the most critical concern they face right now. As such, the outcome of the present debate in Washington over tax reform (or just plain tax cuts) will shape the actions of business owners in the future.
Most of us think in terms of tax cuts for the rich (or poor) but that is a simplistic way of looking at this issue. Tax cuts have far more impact on small businesses than on any single individual. Most small-business owners are neither rich nor poor. They are employers who plow back every cent they make into their businesses. As such, how many employees they hire and what they pay them has a direct relation to the taxes they pay.
If you think that these business owners would simply pocket the tax savings — think again. Many owners plan to funnel any tax savings they may receive into additional training and education. It is the entrepreneur's solution to the mismatch we have in this country right now between the demand for and supply of skilled labor.
A related issue is holding onto their existing labor force. Unemployment is at historical lows. More and more enterprises will find themselves in a bidding war for labor in a tightening job market. In order to hold on to his existing employees, owners also plan to raise wages with any new tax savings. The implication is that employees could receive a double whammy: their own individual tax cut plus a wage increase.
On the other end of the spectrum are Baby Boomer small-business owners that are looking to sell their businesses and retire. Most owners have plowed back every cent they have earned over the years into their businesses. Many have no IRAs or other tax deferred savings plans. Once again, taxes come into play. A lower capital gains tax can make a big difference to someone hoping to sell their company for a few million dollars.
Is it any wonder that new business creation in this country continues to decline? Entrepreneurial startups are at nearly a 40-year low. Part of the reason is structural. Internet shopping, companies like Amazon or Walmart, have gobbled up competitors, both large and small, in areas where the Mom and Pop store once thrived.
But rising taxes and a growing mountain of rules and regulations from federal, state and local governments threatens to finally kill America's goose that laid the golden eggs. The small-business person, faced with more and more licenses, fees and permits simply to get started are opting not to try.
Our new president, to his credit, has promised relief in just about every area that is near and dear to the hearts of entrepreneurial America. But so far, it has been all words but little action. I blame our bickering Congress for that.
Although increasingly frustrated by this inaction, small-business people, by their very nature, are a hopeful lot who still sees the glass as half full when it comes to Donald Trump. Let's hope they are not disappointed.
|Write a comment - 0 Comments|
The Independent Investor: A Tale of Two Charities
As Senate Republicans unveil their version of a new health care law replacing the Affordable Care Act on Thursday, Democrats are already crying foul. But while politicians are busy back-stabbing each other, there are real people out there who are sick and getting sicker.
These are Americans who can't afford, or can no longer find, insurance. Their stories are evidently not "newsworthy." Instead, the media prefers to accentuate the divisions among our lawmakers, while President Trump describes the House "Choice Act" as "mean." In the meantime, who is taking care of all those sick and elderly victims in this supposedly divisive America?
Well, the national, 90-clinic strong, Volunteers in Medicine (VIM) are doing their damdest to help.
"A national solution to America's uninsured," is the slogan of this the non-profit organization founded in 1994 by a physician, Dr. Jack McConnell, in Hilton Head, SC. They provide free medical, dental and other health-related services to all those who have no insurance and can't afford it. Sound familiar?
It should. In my last column, I wrote about the heroic volunteers of the Mercy Mission, a wholly-volunteer, charitable organization deep in Trump country that is doing a yeoman's job of providing the same — free dental and medical services to the poor and undocumented in Fort Worth, Texas.
This week, I visited a VIM clinic in Great Barrington in Berkshire County. Hillary Clinton once called Massachusetts "the Red Army of the Democratic Party." You can't get more liberal than Great Barrington. It is where Arthur Peisner, the local VIM chairman, oversees 150 volunteers that have provided 4,500 hours of clinical services this year alone to the undocumented, uninsured and poor residents in this hot-bed of liberalism. Since their founding in 2004, they have helped over 2,800 people in 30,000 clinic visits.
This particular VIM, in addition to medical and dental services, provides mental health, optometry, nutritional counseling, acupuncture and even therapeutic massage.
"We help whoever comes through our doors, however we can," says Peisner, who ran Lionel Trains Inc. for many years before retiring to the Berkshires 17 years ago.
His tireless Director of Medical Services Ilana Steinhauer is a firebrand whose compassion and support for the "have-nots" in our society is obvious. Like all their volunteers, she is committed to doing what our politicians can't or won't — helping those in need.
I tracked down Sasha Bianchi, the executive director of VIM's national organization, in Bernie Sander's home state of Vermont. To hear tell, everyone in Vermont wants universal health care and a society where government does everything. We talked about the myths that both liberals and conservatives hold about each other and how the press and political parties tend to perpetuate those ideas.
"We see none of that here nor anywhere else in the nation, and clinics are popping up everywhere," she said.
"But what about the idea, held by so many up here in liberal land, that people in places like staunchly Republican Texas, believe people should fend for themselves and all undocumented Mexicans should be arrested and booted back over the border?" I asked.
"All I can tell you is the facts," she said. "We've got more clinics opening up in Texas than anywhere else in the country."
The moral of this tale of two charities is quite obvious. Although we are led to believe that the tree-hugging liberals on both coasts want government to do everything, while they sit back and clip coupons, is no more true than every Republican Trump supporter is a die-hard, gun-toting, minority-hating, red-neck.
The truth is that most of us are loving people who are doing the exact same thing: caring in our own way for those less fortunate than ourselves. My advice is to ignore the myths of America that the politicians and media would have you believe. The volunteers at the Mercy Clinic and at VIM should be an example to us all. Put away your social media devices, roll up your sleeves, and go out there and help.
|Write a comment - 0 Comments|
@theMarket: Markets in Pullback Mode
Technology stocks continued to consolidate while the Dow made new highs and the S&P 500 Index hovered just below historical highs. Throw in the fact that the markets are notoriously slow and biased to the downside during the summer months, and you have a recipe for further consolidation.
That does not necessarily mean that we will see some sharp and painful correction in stocks. My regular readers understand that the averages could simply move sideways for a month or two before resuming their upward climb. However, within those averages, individual stocks and sectors could experience much deeper declines.
Take the present decline in the technology-laden NASDAQ market, or the carnage investors have experienced in energy shares. Tech stocks are presently down almost 3 percent from last week's high, although several individual shares are down a great deal more than that. At some point, these pullbacks will have run their course.
The oil patch has seen even greater declines as the price of oil plummets, then spikes, only to fall again. But once these areas find a bottom, something else — financials, health care, utilities, etc. — could be the next group to sell off. It will depend on their price level in relation to the rest of the market.
This is the concept of "rotation," which I explained in last week's column. So while the overall averages may show little change from month-to- month, certain areas could experience substantial declines. Small cap stocks have done little all year while many other sectors have risen in price. Some traders are betting that money coming out of technology could conceivably end up in the small-cap Russell 2000 Index and financial sector.
Financials have been held back this year because of the onerous rules and regulations that encumber their business as well as the continued historically low level of interest rates. This could be another area where investors may perceive "value." Some investors have been buying the banks, expecting the beginning of a Fed-inspired, interest rate rise will help their profits.
That may not be too far off, given the actions of the central bank this week. They hiked short-term rates higher by a quarter of one percent (expected) but also revealed additional details on their plan to reduce their balance sheet by selling back trillions of dollars in bonds over the next four years or so. You should simply understand this as another form of tightening monetary policy. A rule of thumb would be $30 billion in balance sheet reduction would be roughly equal to a quarter-percent rise in the Fed Funds rate.
While no one is blaming the Fed for tightening monetary policy too soon or too fast, the fact remains that Fed Chairwoman Janet Yellen and her 12 apostles are no longer expanding monetary policy. The punch bowl of loose money is drying up, at least here in America. The hope is that the economy and the private sector are strong enough to takeover and the Fed can get back to its normal duties of playing the top cop in relation to inflation and employment.
|Write a comment - 0 Comments|