Trifecta of Records
….Dow, S&P and Nasdaq hit record highs. Fed minutes – policymakers uncertain about a certain rate hike. JOLTS shows labor market remains strong. Tweets on the market and taxes send mixed message. Japan’s Nikkei hits record. Catalonia at the crossroads. Airline earnings. Everybody loves Carole King.
Financial Review by Sinclair Noe for 10-11-2017
DOW + 42 = 22,872
SPX + 4 = 2555
NAS + 16 = 6603
RUT – 1 = 1506
10 Y un = 2.35%
OIL + .39 = 51.31
GOLD + 3.60 = 1292.10
The Dow Industrials, S&P 500 and Nasdaq Composite all closed at record highs. With the S&P 500 up 14 percent in 2017, investors are betting on strong earnings growth across the S&P 500. Banks take the focus as JPMorgan Chase and Citigroup report results on Thursday, with analysts warning that results in the sector will largely be held back by low trading volumes compared with a year earlier. Profits at companies in the S&P 500 stock index are expected to increase by 4.6% in the July-thru-September quarter, once corporations have finished reporting results, according to earnings-tracker Thomson Reuters. That’s a sharp deceleration from the 10%-plus gains in the first two quarters of 2017.
The Federal Reserve released the minutes from their September 20th FOMC meeting. At that meeting, the Fed decided to begin quantitative tightening, by selling off some of the Treasuries and mortgage backed securities held on their balance sheet; they also left interest rates unchanged. It is widely expected the Fed will hike rates at the December meeting but the minutes reveal policymakers are a bit skeptical. Inflation is still well below the Fed’s target of 2%. They don’t want to wait until inflation goes flying past 2% but they are also at a loss to explain why inflation remains stubbornly low.
Minutes portray the Fed as roughly divided into three camps. The first, which included “many” Fed officials, thought another increase in interest rates “later this year” was likely to be warranted “if the medium-term outlook remained broadly unchanged.” The second camp, comprising fewer officials, said they were data-dependent and were looking for “confidence that inflation was moving up.” And the remaining “few” said rate hikes should be deferred until inflation “was clearly on a path toward the Fed’s symmetric 2% objective over the medium term.” Bottom line is that the Fed will probably hike rates in December.
For the “data dependent” camp, they are at a disadvantage. The hurricanes have skewed economic reports on inflation and jobs. The September jobs report showed a loss of 33,000 jobs, breaking an 83 month string of consecutive gains, but today’s JOLT survey shows the labor market remains fairly strong. The Job Openings and Labor Turnover Survey showed job openings in the country fell slightly to 6.08 million in August from a record 6.14 million in July. Some 5.43 million people were hired and 5.23 million lost their jobs. Job openings declined for most industries, though the biggest drop was in education. Educational employment is always hard to capture at the start and end of school years. Hurricane Harvey may have also had a negative impact at the end of the month. The quits rate among private-sector employees was unchanged at 2.4%. It slipped a notch to 2.1% if government workers are included. Quitting a job is seen as a positive because people voluntarily quit one job before accepting another, hopefully better job. Many firms complain they can’t find enough skilled workers, but available jobs tend to stay open longer. We still have not seen companies willing to pay more to make a good hire.
If you have a Twitter account, or just follow the news, you know that Trump takes credit whenever the stock market hits a record high. It’s a routine that has played out in 2017. The bull market has been running since mid-2009. Trump had nothing to do with the first 7-1/2 years of that rally. While there have been times this year when the so-called Trump trade — or the promise of business-friendly policies — has undoubtedly been responsible for the gains, there have also been long stretches when other factors were driving returns. Earnings growth exploded for the first- and second-quarter reporting periods, which largely occurred in April and July. The S&P 500 saw profit growth of 14% during the first three months of the year and 11% for the second quarter, its best stretch since 2011. Trump had nothing to do with that earnings growth. At some point the bull market will end. If Trump takes credit for the past 9 months, he must also be willing to take the blame when the market inevitably crashes, but you know this is a one-way street.
Today, Trump tweeted: “It would be really nice if the Fake News Media would report the virtually unprecedented Stock Market growth since the election. Need tax cuts.” As a matter of economics, Trump’s tax pitch is nonsensical. “Virtually unprecedented stock market growth” is not a problem for tax cuts to solve. The argument for tax cuts is that they might boost a sluggish economy. During a recession or depression, tax cuts may provide stimulus to get money circulating through the economy, especially if the tax cuts are directed at the middle class. A tax cut directing half the benefits to the richest percentile is more likely to distort the price action of already extended valuations – something that never ends well. Republicans have “basically just given up on trying to pay for the tax cuts that they’re going to do. They’re now just trying to figure out what size of tax cut could they pass and how could they put together a coalition of 50 percent plus one. A tax cut now would explode the deficit, at the exact time when the Fed is starting quantitative tightening. Considering the Fed won’t be the big buyer of all that debt, you could reasonably expect debt prices to tumble, pushing yields much higher and slowing economic growth. And this is a tax plan predicated on dynamic scoring and much faster economic growth. The timing for this tax plan is completely wrong. And that is one reason why Trump is having a hard time trying to sell it.
Japan’s main stock index rose to its highest level in almost 21 years on Wednesday. In large part, Japan’s stronger stock market is part of a global rise in optimism. But Japan has some of its own good news to share. Japan’s gross domestic product has expanded for six consecutive quarters, the first time it has gone that long without a contraction in 11 years. Unemployment is at multidecade lows, and corporations are experiencing a surge in profits. Even Japan’s longtime economic bugbear — persistent wage and price deflation — has eased, with both consumer prices and incomes showing modest gains.
Spanish authorities gave Catalonia’s separatist leader five days to explain whether his ambiguous statement on secession was a formal declaration of independence and warned that his answer dictated whether they would apply never-used constitutional powers to curtail the region’s autonomy. Threatening to invoke a section of the Spanish Constitution to assert control over the region, Prime Minister Mariano Rajoy said Catalan president Carles Puigdemont’s response to the central government’s ultimatum would be crucial in deciding “events over the coming days.” Puigdemont announced on Tuesday that he was using the victory in a banned Oct. 1 referendum to proceed with a declaration of Catalan independence, but proposed freezing its implementation for a few weeks to allow for dialogue and mediation with the government in Madrid.
Airlines are feeling the impact of a brutal hurricane season. Delta Air Lines said net income fell 6% to nearly $1.2 billion during its July to September quarter, with $120 million of the decline blamed on Hurricane Irma last month. JetBlue Airways, meanwhile, projected that operating income could be affected by as much as $105 million through the end of the year.
Meanwhile, Delta Air Lines pledged not to pay import duties on Bombardier’s jetliner, which was socked in the last two weeks with 300 percent tariffs by the U.S. Commerce Department. It’s possible Delta will delay deliveries of the C Series planes, which are scheduled to begin next year. The airline is also considering “various other plans” if the preliminary duties are finalized, he said without elaborating. Delta last year agreed to buy at least 75 of the jets at a list price of more than $5 billion.
Luxury handbag maker Coach is changing its name to Tapestry. Perhaps they are changing names because they think the new name is a good metaphor, or something – but I think they’re just Carole King fans.