DIASTOLE ECONOMIC AND MARKET COMMENT
January 22, 2019

Remember when the market only went up?  And then a couple of times a year it would bounce around just to remind us that there were other possibilities?  And then we would forget again?  That was fun!  But it’s not now.

Last week the markets had a couple of sunny days, mostly caused by rumors that China and the U.S. were making progress in trade talks.  Such progress has not yet materialized, and in the interim, we have heard from the International Monetary Fund (IMF), which lowered its global growth forecast for 2019 from 3.7% to 3.5%.  The forecast for 2020 was revised downward from 3.8% to 3.6%.

We also heard from Standard & Poor’s Global that fallout from the partial government shutdown could cost annual U.S. Gross Domestic Product about $1.2 billion per week.  As we are now on day 32, with no end in sight, we are looking at upward of $6 billion in lost production by the end of this week.  (GDP is the total of the prices of all final goods and services produced in an economy over a specific period of time.)

China reported its fourth quarter GDP yesterday: 6.4% (annualized).  And full-year GDP was announced at 6.6% - China’s lowest reading since 1990.  And because China is the world’s second largest economy (after us, yay!) AND has double the growth of the rest of us, its numbers have an outsized effect on global growth.

Furthermore, South Korea announced that exports fell sharply in the first 20 days of 2019 - down 14.6% versus an increase of 1% in the same period last year.  This confirms to bears (those who think that stocks are overvalued) that the world economy is slowing.

Is there any good news, you ask?  Why yes.  Chinese stocks actually rose on the news of slowing GDP growth, because investors now think that the Chinese government will initiate new stimulus efforts.  Stimulus, you’ll remember, generally means that the government will spend more money, lower interest rates, reduce reserve requirements for banks, or some combination of these.  Those kinds of stimuli helped the U.S. climb out of the financial crisis of 2008-2009, and led to the bull market we have enjoyed ever since.  Until lately.

British Prime Minister Theresa May lost (badly) the battle to get her Brexit agreement approved by Parliament.  But this doesn’t settle anything.  The date at which Britain must leave the European Union is unchanged (Friday, March 29th).  Lots of ideas are floating around: a new referendum on the whole idea, cancelling Article 50 (which required Brexit in the first place), extending the deadline (which would require EU agreement).  None of them is easy.  PM May barely won a vote of no-confidence which her opposition brought last week.  One must wonder if she would have rather lost.

Apple stock has had a couple of tough weeks, following CEO Tim Cook’s announcement that it was lowering forecasts for future sales and growth.  Then Apple said that it would buy fewer batteries and other phone parts as it cut production.  In some ways, Apple and other smartphone makers are the victims of their own successes.  Their phones are so good, with so many bells and whistles (and cameras), that new models are barely differentiated from what is already in your pocket.  So there’s not much incentive for people to replace their iPhone 6s or 7s with a new X.

The Saudi Arabian government has made an important decision: women whose husbands divorce them must now be notified of the divorce.  Yes, you read that correctly.  Apparently women whose husbands divorced them were previously NOT notified.  Is Saudi Arabia even living in the 21st century?  You judge.  Women will be notified of their divorces by text message.

What do you say about the richest husband and wife in the world, who are now getting a divorce?  You say: what is going to happen to their stock?  Amazon founder Jeff Bezos, and his wife Mackenzie, who has been with him since before the beginning, announced that they are amicably splitting after 25 years of marriage and no prenuptial agreement.  Will she get voting shares?  Will she get a text message when the divorce is final?

For the week ending January 18th, the S&P 500 finished at 2,670, the Dow Jones Industrials at 24,706, and the Nasdaq Composite Index at 7,157.  The yield on the ten-year Treasury Note closed at 2.79%.  U.S. crude oil cost $53.80 per barrel, New York gold cost $1,281.30 per ounce, and one Euro was worth $1.1363.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including The New York Times, The Wall Street Journal, The Economist, Business Insider, Bloomberg, Reuters, The Associated Press, and Spark Notes.  If you have questions, please call us at 203.458.5220 or reply to this email.  Happy Tuesday!
DIASTOLE ECONOMIC AND MARKET COMMENT
January 28, 2019

This coming Saturday is Groundhog Day - the day we celebrate Bill Murray movies and find out if the government will shut down again on February 15th.  Do I have that right?

But as of this morning, at least, the partial government shutdown is over.  Within a few days, affected federal employees will receive their back pay, and museums and national parks will reopen.  But contract workers may never receive catch-up checks, and federal workers who are worried about the next looming shutdown (in three weeks) may choose this time to look for other jobs.

It’s a good market in which to find work, with Friday’s initial unemployment claims coming in under 200,000 for the week ending January 19th.  That’s the lowest level since November of 1969.

The U.S. economy is chugging along, but fears of global economic weakness are creating choppiness in our stock markets.  The latest news from China is of a shrinkage of industrial profits, which were down 1.9% in December (versus December 2017).  And in Japan, consumer prices rose just 0.9% last year, while the Japanese Central Bank has been hoping to reach 2%.  The two countries are in very different spots, with Chinese GDP still growing at over 6% annually, but apparently beginning to slow down, while the Japanese economy fights hard to avoid deflation.

Stuff happening this week: trade negotiators from the U.S. and China will meet on Wednesday and Thursday to try to come to a trade rapprochement.  Or detente.  Why do the French have all the best words for reconciliation?  (Reconciliation is a word with Latin AND French roots.) 

The Federal Reserve Open Market Committee meets mid-week.  Beginning this year, each monthly meeting of the Fed’s OMC will be “live” - meaning that they will hold a press conference and could conceivably raise rates.  A rate hike, however, is NOT expected this month.  What we might hear more about is the Fed’s consideration of a change to its balance sheet.   During the Great Recession, the Fed acquired lots and lots and lots of bonds and mortgages in an attempt to keep liquidity flowing through our economy.  This was called Quantitative Easing (QE).  Well, now that the Recession is over, the Fed stopped buying, and has been quietly selling its bonds.  They may stop doing that if they believe that the economy is not strong enough to handle the unwinding.  Just the fact that they’re thinking about slowing down may worry some investors.

Tomorrow, the British Parliament will vote again on some amendments to Prime Minister Theresa May’s Brexit deal, including one that states that if there is no agreement with the European Union about Brexit, the U.K. will ask for an extension rather than take a “hard” Brexit with no deal at all.  This amendment is unlikely to pass since members of Parliament (MPs) appear not to know what they would do with the extra time.  Unsubstantiated reports (i.e. gossip) indicate that the British government is working with pharmaceutical companies to prevent Brexit-induced drug shortages and may even invoke martial law if a “hard” Brexit causes civil unrest.  Let us hope that Brexit fears are as overblown as Y2K fears were.  Sadly, I date myself.

Other international news is focused on Venezuela, home of hyperinflation, food shortages, and fleeing citizens.  Last week the head of the national assembly, Juan Guaido, declared himself acting president on the grounds that the recent reelection of strong man Nicolas Maduro was illegitimate.  Guaido promises to hold new elections.  But Maduro is not stepping down, and the country’s problems may grow worse under rival regimes.  The final determination of who is in charge may come from the military, which has supported Maduro, but is now showing signs of cracking.  Army officers who choose to back Guaido will almost certainly face stern (or worse) repercussions if Maduro remains in charge.  The U.S. was quick to recognize Guaido as the interim president, and Canada and the major South American countries followed suit.  Further complicating the situation is the fact that the U.S. is Venezuela’s number one oil customer, buying 39% of Venezuela’s deliveries last year.  And Venezuela is America’s fourth largest oil supplier.

Big tech companies will be releasing their fourth quarter earnings reports this week.  Apple has already prepared us for bad news.  The real question is whether other tech companies like Microsoft and Amazon will be caught up in the same downturn.  Good reports from chip manufacturers last week indicate that maybe Apple is a one-off.  Fingers crossed.  (That is a technical term used widely among stock analysts.  Now you know.)

I did not watch the football playoffs, but I sure heard about them.  Even the business-news shows to which I am addicted covered the games and the questionable calls and non-calls.  And now a New Orleans attorney has filed a lawsuit which asks NFL Commissioner Roger Goodell to force a replay of the Saints/L.A. Rams game from the moment of the missed pass-interference call.  It seems unlikely to happen, but who doesn’t love a good lawsuit?

The most expensive home ever bought in the U.S. is no longer yours.  It belongs to hedge-fund manager Ken Griffin.  Mr. Griffin just paid $238 million for a 24,000 square foot, multi-floor penthouse that is under construction on Central Park South in New York City.  It is not expected to be his primary residence.

And finally, for $200,000 or $250,000, depending on whom you ask, you can now book a suborbital flight on a Richard Branson Virgin-Galactic rocket for later this year.  The rocket will zoom you to the edge of the earth’s atmosphere, providing you with a minute or so of weightlessness.  Jeff Bezos’ company Blue Origin is getting ready to offer the same kind of flight for an unknown ticket price.  It seems that all of the best billionaires now have rocket companies.  What do they know that we don’t?

Remember that if you know of someone who might like to receive this weekly Comment, we are happy to add new free subscriptions.  Just let us know the email address.  And if you know people who are nervous about stock market volatility, please have them call us.  We are happy to set up free, introductory appointments and write financial plans for anyone who is interested.

For the week ending January 25th, the Standard & Poor’s 500 closed at 2,664 (up about 6% for 2019 to date) although by midday today stocks were sliding on the news of a Chinese slowdown.  The Dow Jones Industrial Average closed at 24,737, and the Nasdaq was at 7,164.  The yield on the ten-year Treasury Note finished at 2.76%, very close to the yields on the two-year and thirty-year - implying more economic confidence in the short-term than the long-term.  U.S. crude oil ended at $53.69 per barrel, N.Y. gold ended at $1,297.40 per ounce, and one Euro was worth $1.1414.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including Business Insider, The Wall Street Journal, The New York Times, Barron’s, The Economist, Bloomberg, Reuters, CNBC, and The Associated Press.  If you have any questions, please call us at 203.458.5220 or reply to this email.  And best wishes to Punxsutawney Phil!
DIASTOLE ECONOMIC AND MARKET COMMENT
February 4, 2019

So the groundhog didn’t see his shadow, and I guess neither did the Patriots?  And now spring really is coming, or at least spring training is.  Preseason baseball games begin in 17 days.

The U.S. markets finished January strong (Thursday) and then had a meh Friday.  Last week, all three major indices rose by more than 1.3%.  The month of January was the best since October 2015.  You’ll remember that December 2018 was the worst month for stock performance since 1931. 

What made the difference between December and January?  The Federal Reserve Chairman Jerome Powell changed his tune from automatic rate hikes to watch and see.  The U.S. and China resumed trade talks.  Oil prices began to rise.  And of course the partial government shutdown was resolved - at least for three weeks.

Still dragging on stocks are concerns about a global economic slowdown, which was underlined by news last week that Italy has entered a recession.  Also Brexit.  Ah, Brexit.  Like a fruit of the month club that no one wants but which keeps on coming.  The original vote (which was a non-binding plebiscite) in June of 2016 was won by “leavers” with a majority of 51.9%.  Now “remainers” outnumber Brexiteers by 8%.  The answer seems clear, but other people’s problems always do.

January employment numbers were better than expected, with 304,000 new jobs created.  Unemployment rose slightly to 4%.  It was the 100th straight month of job creation.  Average hourly wages increased by an annualized 3.2%.  With 2018 inflation at 1.9%, that is a real wage increase of 1.3% over January of 2018.

Nonetheless, U.S. consumer confidence has fallen for three consecutive months.  Often, confidence poll numbers trail movements in the stock market, so it isn’t a big surprise that people were nervous following the market uncertainty of the fourth quarter.  Nor was it a surprise that confidence fell from the October level, which was the highest of this economic cycle.  Markets dislike uncertainty and people dislike disrupted markets, and can’t we all just get along?

In our regular weekly segment called “Who just leaked your data?”, this week’s culprit is Apple.  It turns out that a bug in Apple’s FaceTime allows a FaceTime caller to hear audio from the other end before the call is answered.  Oops.  Apple said it would release a software fix for the bug soon.  In the meantime, make sure you don’t say anything sketchy before you receive a FaceTime call.  Or, in this world, ever.

In “Who ELSE just leaked your data?”, a reminder about the 2017 Equifax hack: it still isn’t fixed.  And all of us are at risk, because although we never agreed to be Equifax customers, we still are.  Use your free credit freezes at all three credit-rating agencies (including Experian and TransUnion) in order to make sure that no one else is accessing your good credit.

Americans over the age of 60 now owe $86 billion in student loans.  This is 161% higher than in 2010.  The average amount owed per borrower is $33,800, which includes loans for oneself and loans for one’s children.  It’s no wonder no one can afford to buy a home!

But oops again, sales of new homes rose strongly in November, as we learned in January, making homebuilder stocks also rise.  And strong fourth quarter corporate earnings have been reported by Facebook, General Electric, and Boeing - along with communications, health-care, and consumer-goods-and-services companies.  Companies reporting less-than-stellar earnings include Harley Davidson and Caterpillar, which both mentioned tariffs as hurting their bottom lines.

Last week much of the nation suffered through a polar vortex that took some temperatures to minus thirty and wind chills to minus fifty degrees fahrenheit.  (Factlet: the one temperature at which fahrenheit and celsius are the same is -40.)  The midwest was hit especially hard.  So that was the perfect time to hold a 135-mile endurance race!  In northern Minnesota!  146 people entered the annual race between International Falls and Tower, Minnesota, but only 52 finished.  Racers, who are screened for experience and proper equipment, either hiked, skied, or biked the ultramarathon, which was won by a cyclist in a new record of eleven-plus hours.  The last finisher took two days.  And all of this in weather that could freeze skin in five minutes.  What, no swimming?

For the week ending February 1st, the Standard & Poor’s 500 finished at 2,706, the Dow Jones Industrials at 25,063, and the Nasdaq Composite Index at 7,263.  The yield on the ten-year Treasury Note closed the week at 2.68%.  U.S. crude oil cost $55.26 per barrel, N.Y. gold cost $1,316.90 per ounce, and one Euro was worth $1.1457.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed to be reliable, including The Wall Street Journal, The New York Times, Barron’s, The Economist, Bloomberg, CNBC, Business Insider, CNBC, Reuters, and The Associated Press.  If you have questions, please feel free to call us at 203.458.5220 or reply to this email.  Reminder: Valentine’s Day is a week from Thursday.  It’s time to call the florist!
DIASTOLE ECONOMIC AND MARKET COMMENT
February 11, 2019

December was the worst month for stock-market performance since 1931.  January was the best month in three decades.  So what are we seeing in February?  For the first full week of the month, markets were volatile, but ended up - barely.  There was profit-taking, and concern about a slowdown in global economies.

And what happens when there is “concern”?  Money flows out of riskier investments (which might be equities or high-yield bonds) into safer investments, like government bonds.  Money buying those bonds pushes prices higher and yields lower.  And in some countries (not ours) yields are actually pushed below 0%.  As of last week, almost $9 trillion in global debt securities had negative yields.  The Japanese ten-year Note fell below 0%.  That means that you will get back less than you invested, when the bond matures.

Why would you buy any bond with a negative yield?  I struggle with this question, and I’m not the only one.  I guess the best explanation is that you think your other options are worse.  For instance, you expect a correction in the market.  Or you expect bank robbers to clean out the local bank (and the saloon) in your one-horse town and you’d rather lose 1% of your money than all of it.  As I said, I struggle with the question.

As of Friday, the yield on the U.S. ten-year Treasury was 2.63%.  Back in November, the yield briefly broke above 3%, causing inflation fears.  Today, not so much.  The yield on the Italian ten-year is 2.945% - higher than the U.S. rate because the Italians have to lure investors, especially since their economy entered recession in the 4th quarter.  By comparison, the German ten-year bond is paying 0.11%.  That shows that investors are willing to accept a lower yield from Germany than from the U.S.  Is Germany prettier?  No, but it is in better shape fiscally than we are.  Germany’s debt is 64.1% of its gross domestic product (GDP), while the U.S. owes 105.4% of GDP (and rising).

Tax policy is an interesting (yes, I said interesting) and complex issue.  We tend to think of it as a way to fund our government, which it is, but it is also a way to influence the behavior of citizens.  Case in point, Hungary.  Prime Minister Viktor Orban announced yesterday that the government would begin a lifelong interest rate exemption for women with four or more children.  Why would Hungary do this?  Because it WANTS women to have four or more children, rather than the current average of 1.45.  Hungary is experiencing a shrinking population and a birthrate that is lower than the replacement rate and the European average.  Prime Minister Orban is opposed to immigration, and believes that the way to increase the number of Hungarians is to pay women to have more children.

Japan, which is facing the same problem of an aging and shrinking population, is instead implementing a new program which encourages skilled immigration.  The U.S. is now also confronting the problem, as our birthrate has fallen below the replacement level too.

Saudi Arabia has been flirting for years with an initial public offering (IPO) of its sovereign oil company Saudi Aramco.  After interviewing potential stock exchanges and postponing the date several times, it now appears that the Aramco IPO is further off than ever.  The Saudis want to diversify the sources of their wealth away from oil, which has diminished in value of late as renewable fuel sources become more popular.  But their cost to produce oil is estimated at only five dollars per barrel.  When they can sell it for ten times as much, it is apparently hard to give that up.

But OPEC (the Organization of Petroleum Exporting Countries), led by the Saudis, is planning to formalize its currently informal agreement with non-OPEC oil producers, led by Russia, in the hopes of raising the price of oil above $60 per barrel.  (Current price is $52.72 in New York.)  While $60 is a great deal higher than the price of production for most of the Gulf states, it is not sufficient for them to balance their federal budgets.  The problem, as we have seen in recent years, is that as the price of oil rises, it encourages more American shale-oil producers to drill (or frack, as the case may be) - which increases supply and reduces prices.  No wonder that OPEC seeks to reestablish its monopoly on production.  It just doesn’t seem possible.

Last week Facebook turned 15.  Mark Zuckerberg is now 34.  You do the math.

And if you’re older than Mark Zuckerberg, you may have already given up on your dream of being a supermodel.  Take heart from Iris Apfel, who has just signed a modeling contract with global agency IMG at the age of 97.  Apfel, who has had a varied career as an interior designer, textile producer, and style maven, has already been the subject of a documentary, created her own makeup line, and last year became the oldest person to have a Barbie doll created in her image.  Apparently 97 is the new 25.  Yay!

For the week ending February 8th, the Standard & Poor’s 500 closed at 2,707, the Dow Jones Industrials at 25,106, and the Nasdaq Composite Index at 7,298.  The yield on the ten-year Treasury finished at 2.63%.  U.S. crude oil cost $52.72 per barrel, N.Y. gold cost $1,313.70 per ounce, and one Euro was worth $1.1321.

Elizabeth E. Cook
Partner

News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including The New York Times, The Wall Street Journal, Barron’s, Business Insider, The Economist, Bloomberg, Reuter’s, The Associated Press, and CNBC.  if you have any questions, please call us at 203.458.5220 or reply to this email.  Next week this Comment will be written by my colleague Ted Reagle.  Please give him a warm round of applause.