Financial Review

Stuck in Neutral

…Stocks bounce. Turkey? Home Depot shines. Household debt increases. Collections drop. CBO forecasts 3.1% growth this year. Wages have been stuck in neutral for 45 years.

Financial Review by Sinclair Noe for 08-14-2018

DOW + 112 = 25,299
SPX + 18 = 2839
NAS + 51 = 7870
RUT + 17 = 1692
10 Y + .02 = 2.89%
OIL – .48 = 66.72
GOLD + .60 = 1194.70

Stocks snapped a 4-day string of losses Yesterday we said the problems in Turkey really should not plague the US stock market. The country’s currency, the lira, has fallen sharply, dropping more than 25 percent in the past week to a record low, though it recovered somewhat today. Sure, the collapse of the lira was a legitimate concern, but Turkey is not a major trade partner. Turkish president Erdogan called for a boycott of American made electronic products. Apple did not flinch. There really is very little downside to having an all-out trade war with Turkey. There is danger with other countries; there is the danger of contagion.

 

The markets are not able to enjoy a Federal Reserve “put”. The Fed is actually tightening now, selling off its balance sheet and raising interest rates. Don’t count on a Powell Pause. That’s the message seasoned watchers of the Federal Reserve have for any investors hoping that turmoil in Turkey and the wider emerging-market selloff would stay the hand of Chairman Jerome Powell from raising interest rates. While international developments did cause the U.S. central bank to hold back in 2015 and 2016, there are big differences between now and then. U.S. unemployment was higher and underlying inflation was lower. But perhaps more importantly, the nexus of the turbulence was China, whose economy is the world’s second largest and more than 10 times the size of Turkey’s. The broad conclusion from history is that the U.S. can generally ignore what happens in emerging markets.

 

Traders piled back into the same old trades (in other words, the FAANGS did well) because money has to go somewhere, even if you aren’t committed to anything. Today, traders’ attention was refocused on earnings and other bright and shiny objects.

 

Home Depot posted better than expected earnings, despite signs of a slowdown in the housing market. It sort of makes sense – if people aren’t buying a new place maybe they are fixing up the old one. Home Depot earned $3.05 per share for the second quarter, beating the consensus estimate of $2.84 a share. Revenue rose to $30.46 billion, from $28.11 billion, also topping projections of $29.98 billion on Wall Street. And Home Depot raised full-year guidance.

 

Tomorrow, Macy reports earnings; and while that might not normally be an exciting earnings report – consider that Macy’s is up over 105% over the past 12 months.

 

Also, solid gains for tech, after Nvidia rolled out its newest generation of chip technology.

 

Bank shares saw a small rebound after being beaten down on concerns about Turkey.

 

Oil futures held small gains early in the session after Saudi Arabia said it had cut production in July, on top of market expectations for lighter Iranian output, but prices slipped after API reported a surprise build in crude.

 

Coca-Cola has agreed to buy a minority stake in sports drink startup BodyArmor for an undisclosed price. BodyArmor is backed by Los Angeles Lakers legend Kobe Bryant and a number of other well-known athletes.

 

Tapestry, the company formerly known as Coach reported adjusted fiscal fourth-quarter profit of 60 cents per share, 3 cents a share above estimates. Revenue also topped forecasts.

 

The Office of the Comptroller of the Currency said last month it would accept applications for banking licenses from the likes of LendingClub and OnDeck Capital, online lenders that do business outside the traditional banking system. They then could operate nationwide under one banking license rather than a patchwork of state-specific regulations. Fintech executives lobbied for the license and applauded the OCC’s decision, but they are not rushing in. No companies have formally applied for a charter yet. Many fintech companies expect the charter to become embroiled in a legal battle between the federal government and states. The banking industry has pushed hard for the OCC to ensure fintech companies are held to a comparable standard and the charter will force fintechs to grapple with new banking demands, including being subject to capital and liquidity requirements. One key addition to the application process is the requirement that companies provide detail on how they would navigate financial stress, a process many banks have found extremely onerous when it involves anything more than taxpayer bailouts.

 

The Federal Reserve Bank of New York reports total household debt increased by $82 billion (0.6%) to $13.29 trillion in the second quarter of 2018. It was the 16th consecutive quarter with an increase, and the total is now $618 billion higher than the previous peak of $12.68 trillion, from the third quarter of 2008. Further, overall household debt is now 19.2% above the post-financial-crisis trough reached during the second quarter of 2013.

 

There’s been a big drop in the number of collections accounts after changes imposed on credit-reporting agencies by state regulators. The 2015 settlement between 31 state attorneys general and Experian, Equifax and TransUnion created what’s called the National Consumer Assistance Plan, which was designed to limit credit reporting errors that impair scores. That went into effect in the second half of 2017. Among other things, credit-reporting agencies have to more frequently and accurately report collections as well as remove some medical bills. In a new report, the New York Fed found immediate results. Between June 2017 and June 2018, the number of individuals with a collections account on their credit report fell from 33 million down to 25 million. The number of collections accounts reported also dropped substantially, from more than 66 million collections accounts to about 47 million. The aggregate balances reported on collections accounts also declined, by about $11 billion. That said, credit scores weren’t noticeably better afterwards. For one, the population that was impacted by these changes had lower credit scores to begin with. A third had some kind of delinquency in their credit accounts, compared to only 8% of everyone else. Most didn’t see a big boost — the average gain was 11 points — but for 18%, there were gains of at least 30 points. Those big gainers typically still had bad credit afterwards. The New York Fed said those who saw an increase of 40 or more points in their score began with a 529 on average and ended with an average of 588. It’s a small change but it is a change in the right direction.

 

The Congressional Budget Office forecasts The US economy will grow by 3.1 percent this year, as more government spending and tax cuts help propel an expansion. Economic growth will slow to 2.4 percent in 2019 and to 1.7 percent in 2020, staying at about that level over the next decade. The CBO’s report suggests the economy is being temporarily juiced, in part because a large government spending package passed this spring and the Republican tax law passed last fall. The law slashed the corporate tax rate and income tax rates at all levels, with the largest breaks for the highest-paid workers.

 

Forget the chatter about tight labor markets, low unemployment, and vastly improved productivity. Purchasing power for most Americans has stagnated for decades. If you get a $1,200 annual raise on the same day that your rent goes up by $100 a month, you don’t need an accountant to tell you that you didn’t actually make any financial progress. And while that’s an excessively simplified example, it’s nonetheless a pretty fair representation of what has been happening to most American workers over the past four decades.

 

Even though the official unemployment rate has been hovering around record lows in recent years, wage growth has stayed stagnant, a new study from Pew Research reveals. In fact, the real average wage, which Pew defines as “the wage after accounting for inflation” has roughly the same purchasing power as it did 40 years ago. And while some workers have seen gains, most of the increases have gone to those who were already the highest-paid.

 

Average hourly wages for non-management, private-sector workers were $22.65 in July, up 2.7% from a year earlier, according to Bureau of Labor Statistics data cited by Pew. That’s in line with general patterns over the past five years, when wage growth has been between 2% and 3% annually. In the 1970s and early 1980s, however, when inflation was high, average wages commonly jumped 7%, 8% or even 9% year over year.

 

After adjusting for inflation, however, today’s average hourly wage has just about the same purchasing power it did in 1978, following a long slide in the 1980s and early 1990s and bumpy, inconsistent growth since then. In fact, in real terms average hourly earnings peaked more than 45 years ago: The $4.03-an-hour rate recorded in January 1973 had the same purchasing power that $23.68 would today.

 

For some workers, the reality is actually worse. Real wages among the lowest-paid quarter of workers have increased just 4.3% since 2000, while the top tenth of earners has seen an increase of 15.7% to $2,112 a week (compared to $26 each week for the bottom 10%).

 

The heart of the problem is that while wage increases may make people feel like they’re getting ahead, they don’t necessarily mean folks are actually doing better, or that they have more discretionary income. To determine the real state of the economy and how the “average worker” is doing, you need to examine purchasing power — which for the most part has not really changed.

 

For now, despite a few job categories where employers have been compelled by a tight labor market to nudge wages up a bit, this period of low unemployment has yet to improve the situation of average worker from where it was when President Ford was in the White House.

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