The World's Billionaires Are Hurting

Think you had a rough 2018? The stock market meltdowns in 2018 obliterated $1 trillion of the fortunes of the world’s richest individuals. That's according to a list by wealth compiler Hurun Report, China’s version of the Forbes rich list.

The list showed Chinese billionaires still outnumbered those from any other country as of January 31, with 658, although China also lost 212 billionaires last year. The U.S. had 584 billionaires, followed by Germany with 117.

Though Chinese and other Asians are steadily gaining in wealth, Amazon founder Jeff Bezos topped the global chart for the second year running, with wealth estimated by Hurun Global at $147 billion. Bill Gates ranked second with $96 billion and Warren Buffett was third with $88 billion.

Housing Is Down, but the News Isn't All Bad

The bad news: Construction on new houses sank 11 percent in December. Housing starts tumbled to an annual rate of 1.08 million in the final month of 2018 from 1.21 million in November, according to a report delayed by the recently ended partial government shutdown. That is the lowest level since September 2016.

Here's the good news: Builders applied for more permits in December, a sign that a rebound may be near. Permits to build additional houses edged up 0.3 percent to a 1.33 million annual pace, so builders will break new ground at a faster pace in early 2019.

Construction was flat in the Northeast, but that's not so bad, given the overall national landscape. New home construction fell in every other region of the country.

The Power of Buybacks

Is this market rally being fueled solely by buybacks? In the fourth quarter last year, American companies bought an estimated $240 billion of their own shares, according to an analysis by Goldman Sachs. That’s nearly 60 percent higher than during the same period in 2017.

More buybacks are coming. The Union Pacific railroad has bought nearly $32 billion in its own shares since 2007, and this month authorized buying over $20 billion more. Cisco has spent roughly $20 billion on buybacks in the past year, and has authorizations to spend another $24 billion. And Bank of America, which planned to buy $20 billion of its own shares by the end of June, just added $2.5 billion on top of that.

Meanwhile, individual investors remain nervous. Despite the market's strength, in every week this year, money has flowed out of domestic stock market mutual funds and exchange-traded funds — as much as $15 billion in the last week of January, according to EPFR Global.

Buffett's Big Loss

Warren Buffett is possibly the most successful investor ever, so when his investment vehicle Berkshire Hathaway posts a sizable quarterly loss, it's worth paying attention to why. According to the shareholder's letter that was released over the weekend, Berkshire suffered losses of $25.4 billion in the fourth quarter, in large part the result of a surprise write-down at Kraft Heinz.

On Thursday Kraft Heinz reported weak fourth-quarter earnings and a $15.4 billion write-down. Berkshire owns a nearly 27 percent stake in the food conglomerate. “Indeed, in the fourth quarter, a period of high volatility in stock prices, we experienced several days with a ‘profit’ or ‘loss’ of more than $4 billion,” Buffett wrote in his shareholder's letter.

Overall, Berkshire owns $173 billion of stocks, and the market's swoon in the fourth quarter helped cause losses of $22.7 billion on those securities. But stocks have recovered this year, and many of those losses have now been reversed. We'll find out how much in the next Berkshire letter.

A World of Dividends

Last year was a good one for dividend investors. Global dividends rose to a new record in 2018, with a strong fourth quarter for dividend payments, according to the latest Janus Henderson Global Dividend Index. Total dividends jumped 9.3 percent to $1.37 trillion. This is the best performance since 2015 and exceeds the long-term trend of 5 percent to 7 percent.

Some sectors showed even more growth than that. Banking dividends, the largest dividend-paying sector, jumped 13.6 percent. Oil company distributions surged 15.4 percent.

Meanwhile, according to the index, the telecom sector stood out as the weakest, with payouts flat or down in half the countries. That's striking considering that only one in 25 U.S. companies cut its payout.

Patience, Says the Fed

The Federal Open Market Committee released minutes from its two-day January meeting on Wednesday. In the minutes, the Fed laid out more detail as to why it decided to be patient with monetary policy, and it looks like more rate hikes are off the table for the time being.

Following four rate hikes in 2018, the Fed announced last month that it would hit the pause button and keep its benchmark Fed funds rates steady at the 2.25 percent to 2.5 percent target range. But it was unclear how long the central bank planned on doing so.

Now we know a bit more detail. The FOMC meeting minutes included 13 mentions of the word “patient,” saying there were a “variety of considerations that supported a patient approach.” Furthermore, “a patient posture would allow time for a clearer picture of the international trade policy situation and the state of the global economy to emerge and, in particular, could allow policymakers to reach a firmer judgment about the extent and persistence of the economic slowdown in Europe and China.”

Confidence in Retirement

Are you increasingly confident about your retirement? More Americans are these days. The University of Michigan's "Change in the Likelihood of a Comfortable Retirement Compared with Five Years Ago" hit a level of 109 in February. The index hadn't been at that level since January 2001.

Supporting that positive outlook, a recent Fidelity Investments survey of more than 3,100 households showed that the typical saver is on track to have 80 percent of the income the financial services company estimates older Americans will need to cover expenses in retirement. The average 401(k) account at Fidelity hit $104,300 during the fourth quarter of 2017.

The median savings rate in a retirement plan is now 8.8 percent of pay, up from 3.6 percent in 2006, according to Fidelity. However, that is still far below Fidelity's suggested savings rate of 15 percent of salary, including employer matches.

An Incredible Six Weeks

The year-to-date gain for the S&P 500 eclipsed 10 percent on Friday. That is already better than what the index typically sees over an entire year, and it's the best start to a year for the market in 32 years.

The gains have been remarkably broad-based. Through the first month and a half of 2019, all the sectors in the S&P 500 are in positive territory. In fact, none of them are even close to negative. The worst performing sector has been the utilities, and even they are up 4.7 percent so far.

On the other hand, industrials are up 17.3 percent, energy is up 14.6 percent, and real estate is up 12.7 percent. That's a remarkable performance for about six weeks' worth of trading.

Thoughts for Presidents' Day

“99 percent of failures come from people who make excuses.” ~ George Washington

"He was reluctant to accept office. Nothing would have pleased him more than to remain in equable but active retirement at Mount Vernon, improving the husbandry of his estate. But, as always, he answered the summons of duty." ~ Winston Churchill

“I am not bound to win, but I am bound to be true. I am not bound to succeed, but I am bound to live up to what light I have.” ~ Abraham Lincoln

"Mr. Lincoln was not only a great President, but a great man — too great to be small in anything." ~ Frederick Douglass

Retail Falls in December

U.S. retail sales recorded their biggest drop in more than nine years in December as receipts fell across the board, the Commerce Department said yesterday. (The release of the December figures was delayed by the government shutdown.) Retail sales tumbled 1.2 percent, the largest decline since September 2009, when the economy was still in the depths of the recession.

Even more surprising, sales at internet sellers tumbled 3.9 percent, marking their worst performance since November 2008, in the midst of the financial crisis. Those sales had increased 2.8 percent in November. Receipts at service stations dropped by 5.1 percent, the biggest fall since February 2016, reflecting cheaper gasoline prices.

In other categories, receipts at restaurants and bars fell 0.7 percent. Spending at hobby, musical instrument and book stores fell by 4.9 percent, the biggest drop since September 2008.

For Love or Money

Happy Valentine’s Day! Do people look more for love or for money in their romantic relationships? Merrill Edge recently conducted a survey on that very question, and found that 56 percent of Americans say they want a partner who provides financial security more than “head over heels” love (44 percent).

This sentiment is held in almost equal measure by both men and women (54 percent and 57 percent). Only the youngest group,  those born between 1996 and 2010, chose love (54 percent) over money.

One other finding: Wealthier couples don’t necessarily last longer than those who earn less. Indeed, the more you spend on a wedding ceremony, the shorter the marriage: Couples who spend $20,000 on their wedding are 46 percent more likely than average to get divorced; that risk falls to 29 percent higher than average for those who spend $10,000 to $20,000.

Completely Back from the Recession

Americans' optimism about their personal finances has climbed to levels not seen in more than 16 years, with 69 percent now saying they expect to be financially better off "at this time next year," according to a new Gallup survey. That's only two percentage points below the all-time high of 71 percent, recorded in March 1998.

Ten years ago, as the Great Recession neared its end, the percentage saying their finances had improved from the previous year was at a record low of 23 percent. More than half the public, 54 percent, said they were worse off. Now, the number saying they are worse off than a year ago has dropped to 26 percent, the lowest level since October 2000.

Fifty percent say they are better off today than they were a year ago. That 50 percent represents a post-recession milestone - the first time since 2007 that at least half of the public has said they are financially better off than a year ago.

What Keeps Inflation in Check?

It may seem obvious, but a new paper on inflation from the San Francisco Federal Reserve confirms it. The key to keeping prices from rising too quickly is keeping the public confident inflation. The paper also suggested the unemployment level is all but irrelevant to the inflation trajectory.

The San Francisco Fed economists tested what would happen to inflation with varying levels of unemployment, or if there were a lot less slack in the labor market. The results were very little change to the inflation trajectory. But when the researchers modeled what would happen if inflation expectations were to rise, they found that actual inflation would rise very quickly,  too.

That's not the only factor, though. The U.S. unemployment rate is still at a very low 4 percent, but inflation has barely touched the central bank’s 2 percent target. Some Fed policymakers continue to believe the tightening job market will at some point put upward pressure not only on wages but also on prices. At some point, inflation will be back.

The Big Legacy Questions

A disconcerting new report from Merrill Lynch in partnership with Age Wave found that only 55 percent of Americans aged 55 or older have wills. Only 18 percent have the three recommended essentials — a will, health care directive and durable power of attorney.

Respondents with $1 million or more in investable assets were the most prepared — 41 percent of them had taken care of the three essentials, compared with 27 percent for those with $250,000 to just under $1 million in assets. But even for this group, that’s still less than half.

Passing on values and lessons was considered the most important part of one’s legacy, cited by 59 percent of respondents. Asked to identify what they want to be remembered for, respondents overwhelmingly said it was the memories they shared with loved ones (70 percent) rather than the wealth they had accumulated (5 percent).

The Market Beats Earnings Season

Here's a paradox: Even though corporate earnings have been relatively weak so far, with fewer companies beating Wall Street expectations than in recent quarters, the S&P 500 is up roughly 5 percent since the middle of January. Stocks of companies that have reported their results have risen by an average of 1.1 percent, the largest post-earnings jump in a decade, according to Bespoke Investment Group.

They're doing all right even if they don't beat the Street's analysts. In recent years, the shares of companies that didn’t beat expectations lagged behind the broader market by 3.5 percentage points in the trading day that followed. This year, they have trailed by only 1.1 percentage points, according to Credit Suisse.

Over the last three months, overall, stocks reporting earnings have posted a median one-day gain of 0.78 percent.  That’s the strongest upside reaction to earnings in at least the last five years.

Apple Retakes the Throne

Two months after losing its title as the most valuable U.S. public company, and a month after revealing that iPhone sales were disappointing in the holiday season, Apple has regained its throne as the world's biggest company. Apple ended the session with a market capitalization of $821.6 billion, according to FactSet data. That performance was good enough to land atop Microsoft and Amazon.com, which both declined 1.1 percent on the day.

What's most remarkable is how similar the valuations are for America's top four companies. At the end of yesterday's trading, they looked like this:

1. Apple $821.6 billion
2. Microsoft $813.5 billion 
3. Amazon $805.7 billion 
4. Alphabet $778.1 billion

Why Is Lending Slowing Down?

The U.S. Federal Reserve’s quarterly survey of senior loan officers, just out yesterday, showed that the demand for loans weakened among U.S. businesses and households in the last three months of 2018. Banks had kept standards for commercial and industrial lending “basically unchanged” in the quarter, although they had tightened standards for credit card borrowing.

And the banks said they were likely to be even less generous with credit in the coming year. In an assessment that sounded foreboding for the economy, banks said they expected in 2019 “to tighten standards for all categories of business loans as well as credit card loans and jumbo mortgages."

In the fourth quarter of 2018, U.S. "banks reported weaker demand for all categories of loans to households," the Fed said. That will be something to keep an eye on in the first quarter of 2019.

What January Means

The S&P 500 jumped 7.9 percent last month, its best January performance since 1987, and its biggest gain in any month since October 2015. The Dow rose 7.2 percent in January, which was also its largest one-month rise since 2015 and biggest January gain in 30 years.

Remember December? In that month, the S&P 500 fell 9.18 percent and briefly dipped into bear-market territory on Christmas Eve. Since December 24, however, stocks have been on a tear, with the S&P 500 rising about 15 percent.

It’s often said that as goes January, so goes the year. According to Stock Trader’s Almanac, going back to 1950, January’s performance has predicted the year’s returns 87 percent of the time. But the indicator also signaled a positive year last year, and the market’s December sell-off ended up wiping out all of the gains. The S&P 500 ended 2018 down 6.6 percent, despite rising 5.6 percent in January.

January's Jobs Report

Another strong month for the employment figures, as the Bureau of Labor Statistics reported this morning that the economy added 304,000 jobs in January. That compares with an average monthly gain of 223,000 in 2018, and 241,000 over the past three months.
 
The headline unemployment figure ticked up to 4.0 percent, which the BLS attributed in part to the now-ended government shutdown. But federal employees on furlough during the partial government shutdown were counted as employed in the establishment survey, because they worked or received pay for the pay period that included the 12th of the month.
 
In January, jobs in leisure and hospitality rose by 74,000, construction employment rose by 52,000, and employment in health care increased by 42,000.  The BLS also reported that there were 17,000 jobs added in the category of “sporting goods, hobby, book, and music stores.”