Friday, September 21, 2018

Those Soaring Corporate Profits

These are boom times for American corporations. The Commerce Department said this week that after-tax profits across the U.S. rose 16.1 percent in the quarter ended June 30 from a year earlier. That's the largest year-over-year gain in six years.

Lower taxes were a big driver of this. Because of the lower corporate tax rate signed into law last year, taxes paid by U.S. companies in the quarter were down 33 percent from a year earlier, according to the government data, or more than $100 billion at an annual rate.

Strong economic growth also played a role. The Commerce Department recently revised upward its estimate of how fast the U.S. economy grew in the second quarter, to an annual rate of 4.2 percent from an earlier estimate of 4.1 percent.

Thursday, September 20, 2018

Safety First

What's been driving the market rally in September? A flight to security. This month, the biggest gainers in the S&P 500 include firms focusing on telecommunications services, consumer staples and utilities—so-called safe sectors whose steady dividend payouts have long made them investor favorites when markets are volatile or declining.

These shares typically lag behind major indexes during rallies, in part because they are perceived to offer limited potential gains. But in September, telecom shares are up 3.1 percent, consumer staples are up 1.5 percent and utilities are up 1.5 percent, versus a 0.1 percent increase in the S&P 500.

Meanwhile, many well-known high-flyers have been tumbling. Apple, Amazon.com and Alphabet each has declined at least 3 percent apiece in September, partly reversing double-digit percentage gains for the year. Facebook has declined more than 8 percent this month, adding to its retreat in the second half of this year.

Wednesday, September 19, 2018

The Strength of the U.S. Market

The American economy is increasingly becoming the envy of the world. The latest evidence: According to the latest monthly survey of fund managers by Bank of America Merrill Lynch, released yesterday, global investors are favoring U.S. stocks more and more strongly.

There is currently a net allocation of 21 percent overweight to the United States equity market, the highest such level since January 2015, and the U.S. was named as the most favored equity region globally for a second straight month. The allocation to global equities fell 11 percentage points to a net overweight of 22 percent, slightly below the long-term average.

In large part, the optimism about U.S. stocks is related to the outlook for corporate profits. According to the survey, a net 69 percent of those polled said that U.S. is the most favorable region when it comes to earnings expectations, a record level in the 17-year history of the survey. Currently, the divergence between U.S. and emerging-market earnings expectations is at the widest it's been since January 2014.

Tuesday, September 18, 2018

The U.S.: Bad for Retirement?

The U.S. ranked just 16th as one of the best nations to retire in, according to the 2018 Global Retirement Index, just released by Natixis Investment Managers. The U.S. maintained its top 10 ranking for finances, chiefly because of improvements in tax pressure, fewer nonperforming bank loans and rising interest rates, which improve saving levels and income in retirement. But the U.S.’s quality of life sub-index score declined in the 2018 index, and its happiness indicator score, which evaluates the quality of retirees’ current lives, also fell.

So which countries provide a better retirement landscape than the U.S.? Here is Natixis' Top Ten:
1. Switzerland
2. Iceland
3. Norway
4. Sweden
5. New Zealand
6. Australia
7. Ireland
8. Denmark
9. Canada
10. The Netherlands

Monday, September 17, 2018

The Good News on Inflation

August's consumer-price index was a welcome slowdown on the inflation front. The CPI, which gauges what Americans pay for everything from rent to razor blades, was up 2.7 percent from a year earlier, a drop from the prior two months. Core inflation, which excludes food and energy, rose 2.2 percent, slightly slower than in July.

Worker pay gains, by contrast, are accelerating. Adjusted for inflation, hourly earnings rose 0.2 percent from a year earlier. While modest, that’s an improvement from the prior three months when there was no real wage growth.

That's significant because since the recession ended, inflation-adjusted pay is up just over 4 percent for American workers. Inflation-adjusted wages are up less than 1 percent for all workers and a scant 0.2 percent for production and nonsupervisory workers over the past two and a half years.

Friday, September 14, 2018

Lehman, Ten Years Later

Ten years ago this weekend, the U.S. government allowed a major global investment bank, Lehman Brothers, to file for bankruptcy. It remains the largest bankruptcy filing in U.S. history, with Lehman holding over $600 billion in debts.

By that point, Lehman had already announced an expected $3.9 billion loss in its third quarter, as well as a near $5.6 billion loss in write-downs of so-called "toxic" assets. In the first week of September, Lehman's stock dropped drastically, losing more than three quarters of its value. The Fed had already helped salvage Bear Stearns, but there was to be no bailout for Lehman.

The American economy was already technically in recession at that point, but the Lehman bankruptcy seemed to trigger an entire meltdown of the U.S. financial system.  By the time it was over with, an estimated 6 million jobs were lost, unemployment reached 10 percent, and the Dow Jones Industrial Average dropped an astounding 5,000 points. Let's hope we never see the likes of that again.

Thursday, September 13, 2018

The Value of a Degree

Is a college degree losing its value? The Census Bureau’s annual report on income and poverty released yesterday highlights this depressing fact: Among bachelor’s degree recipients, roughly 3.6 million or 4.8 percent were living in poverty in 2017, according to the Census Bureau. That’s up from 3.3 million and 4.5 percent in 2016. Bachelor’s degree recipients were the only educational cohort to see the number or the share of people in poverty rise among their ranks.

Even with this increase, though, among educational attainment groups, people with at least a bachelor’s degree had the lowest poverty rates in 2017. People with at least a bachelor’s degree in 2017 represented 35.0 percent of all people aged 25 and older, but just 16.5 percent of people aged 25 and older in poverty.

The 2017 poverty rate for those with a high school diploma but with no college was 12.7 percent, down from 13.3 percent in 2016. For those with some college but no degree, 8.8 percent were in poverty in 2017, a decline from 9.4 percent in 2016.

Tuesday, September 11, 2018

New Highs in Small Business Optimism

U.S. small business optimism surged to a record in August, according to a new survey by the National Federation of Independent Business. The NFIB Small Business Optimism Index jumped to 108.8 last month, the highest level ever recorded in the survey's 45-year history and above the previous record of 108 in 1983, set during the second year of Ronald Reagan's presidency.

The August figure was up from an already strong 107.9 reading in July. Six of ten indicators tracked by the NFIB increased last month. The biggest gain came in plans to increase inventories.

On top of that, the NFIB noted record readings for job creation plans and the amount of owners saying it was a good time to expand. Capital spending plans reached their highest level since 2007.

Consumers Keep Borrowing

Here's another sign of a strong economy: Consumer borrowing accelerated in July, the Federal Reserve reported yesterday. Total consumer credit rose $16.6 billion in July to a whopping $3.91 trillion. That’s an annual growth rate of 5.1 percent.

The bulk of the increase came from nonrevolving credit, which is typically auto and student loans. Those debts rose  6.4 percent in July after a 4 percent gain in the prior month, for the category's largest increase in eight months.

On the other hand, revolving credit, such as credit cards, rose only slightly in July. Borrowing on credit cards rose by 1.5 percent, although that was a reverse from a 1.4 percent drop in June.


Monday, September 10, 2018

The Emerging Markets Meltdown

While emerging-market stocks were one of the strongest equity performers in 2017, they have collapsed this year. The MSCI emerging-markets index fell into-bear market territory last week, dropping 20 percent from a recent peak. The Vanguard FTSE Emerging Markets ETF lost 3.3 percent last week, its worst week since March. Year-to-date, it is down 11.5 percent.

Meanwhile the S&P 500 has gained 7.7 percent this year. According to Bespoke Investment Group, the divergence between emerging markets and the U.S. stands at a 14-year high.

There are a number of issues facing emerging economies, including a recession in South Africa, Turkey’s high levels of debt and inflation, political uncertainty in Brazil, and Argentina’s central bank raising interest rates to 60 percent in the face of a currency crisis. Additionally, the category has been pressured by a rising U.S. dollar—a headwind for many emerging markets.

Friday, September 7, 2018

August's Jobs Report

The economy had another strong month, adding 201,000 jobs in August, the Labor Department reported this morning. Over the last three months, employers have added an average of 185,000 workers to payrolls per month, slightly outpacing 2017’s average monthly growth of 182,000. The headline unemployment rate remained at 3.9 percent.

The biggest news in the August employment report was a sharp increase in pay. The average wage paid to American workers rose by 10 cents to $27.16 an hour. The yearly rate of pay increases climbed to 2.9 percent from 2.7 percent, reaching its highest level since June 2009.

White-collar professional firms filled 53,000 positions, bringing the total created over the past 12 months to more than half a million. These are the fastest growing jobs in the country.

Thursday, September 6, 2018

The Markets and the Election

What does the upcoming election season mean for the stock market? A quick look at historical performance shows that stocks often see rough sledding in the September of years that feature midterm elections. But stocks tend to do just fine as Election Day nears as well as in the aftermath of the vote, regardless of the outcome.

Analysts at UBS note that the S&P 500 has rallied an average of 14.5 percent from the end of August to the end of March around midterm elections. That includes a rocky start, marked by a median decline of 1.4 percent from the end of August through early October, followed by a rally into the next year.

This rally in equities around midterm elections has actually been much stronger than the average returns seen in all other years. Taking a more short-term approach, Deutsche Bank has noted that the three-month period running from a month ahead to two months after the election has produced a median 8 percent gain.

Tuesday, September 4, 2018

Inflation Curiosity

The good news is that most investors take inflation into account for their retirement savings, according to a recent Nuveen survey of adults with at least $100,000 in investable assets. The bad news: Most investors don't know what the inflation rate is.

Most respondents said they carefully monitored inflation as they planned for retirement, invested or spent money. Some seven in 10 investors correctly recognized that inflation was low at present, and they largely understood that retirees experienced higher inflation rates than the norm.

Yet, 60 percent incorrectly said the U.S. inflation rate was 5 percent or higher or admitted that they were not sure. Only 32 percent came near the real number of 2 percent to 3 percent.

Monday, September 3, 2018

Thoughts for Labor Day

“All growth depends upon activity. There is no development physically or intellectually without effort, and effort means work.” ~ Calvin Coolidge

“If a man is called to be a street sweeper, he should sweep streets even as a Michelangelo painted, or Beethoven composed music or Shakespeare wrote poetry. He should sweep streets so well that all the hosts of heaven and earth will pause to say, 'Here lived a great street sweeper who did his job well.'” ~ Martin Luther King Jr.

"The best way to learn is by doing. The only way to build a strong work ethic is getting your hands dirty." ~ Alex Spanos