Financial Review

What Could Go Wrong?

….S&P 500, Nasdaq, and Russell 2000 hit record highs. At this point in the expansion… Cold weather, heating fuel record usage. North Korea, Iran, Pakistan. Minimum wage increases. Air travel is safest. California goes to pot. Amazon goes bananas. Shoppers’ debt. Unexpected threats…

Financial Review by Sinclair Noe for 01-02-2018

DOW = 104 = 24,824
SPX + 22 = 2695
NAS + 103 = 7006
RUT + 14 = 1550
10 Y + .06 = 2.46%
OIL – .04 = 60.38
GOLD + 14.60 = 1318.10

 

Picking up where we left off last year. The S&P 500, the Nasdaq, and the Russell 2000 closed at record highs. The Dow Industrials were close to a record. Major stock indexes closed out 2017 with their best performances since 2013. Today, Wall Street moved higher. Global stocks moved higher. The dollar dropped. And the VIX dropped under 10. More of the same. Apple, Facebook, Alphabet, and Microsoft pulled the technology index higher, following a 37-percent surge in 2017 that made it the best performing S&P sector. MSCI’s gauge of stocks across the globe gained 0.61 percent. The index had set scores of record highs and rose by one-fifth in value in 2017. The dollar index fell about one-quarter of one percent. The dollar had already hit a three-month low on Friday, bringing its losses for 2017 to 9.8 percent, its worst performance since 2003. Bitcoin moved higher today after reports that billionaire Peter Thiel has amassed hundreds of millions of dollars of bitcoin.

 

The Dow Jones Industrial Average gained 25% last year, marking the 10th time since 1950 that it scored an annual advance of that magnitude or more. The Dow has been higher in the next year on eight occasions — posting a double-digit percentage rise six times. The average next-year jump has been 12.6%, topping the 8.5% bump that you get on average overall.

 

The S&P 500 posted positive total returns in every month of the calendar year in 2017. In a dataset stretching back 90 years, this is the first calendar year without a monthly loss. Some might look as this streak as primed to break given the historical record. It is interesting to note that this was not a U.S.-only phenomenon as the FTSE All-World Index ex-US also delivered positive total returns in each month.

 

The National Bureau of Economic Research dated the end of the Great Recession as June 2009, and the economy has not re-entered recession, marked as a decline in economic activity lasting more than two quarters, in 102 months and counting. Going all the way back to the Great Depression, the current expansion of 102 months is the third longest in the sample period, and will assuredly become the second longest by May. The current expansion still trails the 1990s bull market by 18 months, a streak that would be bested in July 2019. The last four economic expansions are among the six longest of the post-Depression era. This may suggest that the maturation of monetary policy could be increasingly impactful in balancing inflation and unemployment. Demographic impacts like the economy’s aging population may also be subduing inflation. Business cycles do not die of old age. They die due to restrictive monetary policy or other exogenous shocks. A move towards domestic energy independence and a generally peaceful global climate have lessened the likelihood of economic shocks. Odds of a recession in 2018 appear subdued. Many people assume that the economy will soar in 2018. The Fed doesn’t. Its forecast calls for 2.5% growth in 2018, slowing to 2.1% in 2019. These forecasts include the new tax law, which outgoing chair Janet Yellen says, “will likely provide some lift to economic activity.”

 

Keep a close eye on the Federal Reserve continuing to hike rates even as inflation remains below target. The two things that have supported stocks these past nine years—rock-bottom interest rates and a $4.5 trillion spending spree by the Federal Reserve designed to push investors into risky assets (i.e. equities)—are going away. The Fed raised rates three times last year and three more hikes are expected in 2018. And that $4.5 trillion balance sheet—comprised of government bonds and mortgage-backed securities—is being wound down. These two things are the principal reasons corporate profits and stocks have skyrocketed, and the housing market came roaring back since 2009. Forget the political rhetoric. Those are the reasons.

 

Prices for heating fuel rose to the highest in a month as the U.S. burned the most natural gas ever on Monday, breaking a record set during the so-called polar vortex that blanketed the nation’s eastern half with arctic air in 2014. America consumed 143 billion cubic feet of gas as temperatures dipped to all-time lows on New Year’s Day, topping the previous high of 142 billion from four years ago. Ice on the Hudson River delayed fuel-barge deliveries, and the government warned of a home heating-fuel shortage from the East Coast to Texas. Natural gas prices have jumped 19 percent from a 10-month low on Dec. 21. Beyond the energy sector, the cold weather is having an impact on wheat plants and cattle. March futures tracking both hard red winter wheat and soft red winter wheat climbed to the highest since early December in Chicago, while feeder-cattle futures rose as much as 4.5 cents, the exchange limit.

 

South Korea is proposing talks with North Korea about the North’s possible involvement in next month’s Winter Olympics — and its nuclear program. That follows Kim Jong Un saying yesterday that North Korea’s nukes could reach any point in the continental U.S.

 

Iran’s supreme leader accused the country’s enemies of stirring unrest. The death toll from anti-government demonstrations rose to 21. On the sixth day of protests, riot police were out in force in several cities.

 

Trump said the United States had been rewarded with “nothing but lies and deceit” for “foolishly” giving Pakistan more than $33 billion in aid in the last 15 years. He tweeted on Monday, “They give safe haven to the terrorists we hunt in Afghanistan, with little help. No more!” US Ambassador David Hale was summoned by the Pakistani foreign office late on Monday to explain Trump’s tweet. Pakistan’s foreign minister said his government would soon issue a formal response which will “let the world know the truth… difference between facts and fiction.”

 

The minimum wage rose in 18 states on Jan. 1. Wage hikes in 10 of those states (Arizona, California, Colorado, Hawaii, Maine, Michigan, New York, Rhode Island, Washington, and Vermont) are being phased in over several years. The other eight states (Alaska, Florida, Minnesota, Missouri, Montana, New Jersey, Ohio and South Dakota) will make automatic adjustments to match a higher cost of living. Further, 19 cities or counties saw wage hikes. In 2016, Arizona voters approved a series of annual minimum wage increases from 2016 to 2020. That pushed the minimum wage up 50 cents to $10.50 per hour on January 1st. In 2019 the minimum wage will jump to $11 an hour, then to $12 in 2020. And after 2021 it will be pegged to rise with inflation.

 

Last year was unusual in one regard (actually in many regards): there were no fatalities involving scheduled passenger jet airliners anywhere in the world.” On a less unusual note, President Trump rang in the new year by taking credit for the aviation numbers.

 

California rang in 2018 by making recreational pot legal. California is by far the biggest state to legalize marijuana and the next year will provide interesting clues about what such a move will mean for indoor farming technologies, investments in the space, alternative banking options for the mostly cash businesses, the sentence lengths for those currently serving time for pot-related incidents, and even tourism (the stores are welcoming out of state customers as well).

 

Amazon.com said it shipped over 5 billion items worldwide via its subscription based Prime service in 2017 while adding more new members than ever before. Amazon has around 90 million Prime members, although they don’t release exact figures. Amazon said more paid members joined its Prime service than any other year in 2017. Amazon also said its most-purchased items over the year were its own Fire Stick streaming device, its Echo Dot smart speaker, AmazonBasics cables, and, oddly, bananas.

 

Shoppers in the US racked up an average of $1,054 of debt this Christmas season — an increase of 5% over last year, according to a survey from MagnifyMoney, a personal finance website. It found 44% of shoppers racked up more than $1,000 in holiday debt, and 5% accumulated more than $5,000 in debt. Bouncing back from those purchases won’t come quickly. Only half of those surveyed expected to repay the debt within 3 months — others (29%) said they need more than five months to pay it off, often leading to interest on the credit card debt and growing balances. In fact, 10% of people who took on holiday debt said they would only be able make minimum payments on credit cards. If the shopper spent $1,054, and paid a minimum payment of $25 each month at an average 15.9% interest rate, he or she would be paying down that balance until 2023.

 

This year could see a geopolitical crisis on the scale of the financial crash a decade ago, the folks at Eurasia Group warned in their annual outlook. Describing global political challenges as “daunting,” the New York-based political risk consultancy said that if they had to pick one year for a big unexpected crisis, this would be it. China battling the U.S. for global dominance, North Korean missiles, tensions in the Middle East, Russia, hacking, and midterm elections. What could go wrong?

 

And here is a threat you probably haven’t considered. In 2011, China launched a space lab. It has been orbiting Earth for 6 years. Sometime in March the 9-ton space lab will fall out of orbit. While the odds of getting hit by space debris are absurdly remote, it happened to at least one woman. In 1997 Lottie Williams was strolling through a park in Tulsa, Oklahoma when a piece of light metal measuring about 6 inches glanced off her shoulder. She was not injured.

 

Good luck to you in 2018.

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