21 Dec 2018 Too Much Bah Humbug

During the past few weeks, markets have been batted around like a pinball, flipped by the Federal Reserve on the one side and government shut-down on the other. The active bumpers of China, BREXIT, oil prices, regulating big tech, global economic slowing, TWEETS, and a host of other recent news events have bounced our pinball market all over the table with more noise than points.

Stocks, as measured by the Dow Jones Industrial Index are down 5.4% year to date, while the larger market, as measured by the S&P 500 and the CRSP Total US market are down more than 6%. 7-10-year US Treasurys are flat having recovered from their 1.4% deficit earlier in the year and are now heading higher.

When the Federal Reserve raises interest rates, they actually show their confidence in the US economy. They fear that an economy growing too fast might drive up prices as it struggles to acquire the resources and labor necessary to produce goods and services, resulting in chronic inflation. Officials attempt to keep a lid on that threat by tapping the brakes just enough to keep inflation under control, but not so heavy as to stall economic growth. The Fed’s effectiveness, or lack of it, in the eyes of investors, is continually measured by market indexes, as investors and traders buy and sell the latest news.

Our government’s inability to pass a budget also impacts markets and the problem has been going on a long time. Between fiscal year 1977 and fiscal year 2015, Congress only passed all twelve regular appropriations bills on time in four years – fiscal years 1977, 1989, 1995, and 1997, according to Jessica Tollestrop. When Congress and the president fail to agree on and pass one or more of the regular appropriations bills, a continuing resolution can be passed instead. A continuing resolution continues the pre-existing appropriations at the same levels as the previous fiscal year (or with minor modifications) for a set amount of time, says Tollestrop.

Congress has averaged roughly 5.5 CRs per year going back to fiscal 1998, according to Congressional Research Service figures analyzed by Roll Call. Increasing dysfunction caused by a widening political divide seems to have doomed the budget process, making it difficult, if not impossible, for government agencies and private contractors alike to effectively plan for the future. As a result, markets have become much more sensitive to the gyrations of our increasingly partisan and aimless Congress.

But take heart. Beneath all the noise of the markets, the economy is strong and appears to be holding its own. The Commerce Department reported today that consumers stepped up their spending in November, once again. Personal-consumption expenditures, a measure of household spending increased a seasonally adjusted 0.4% in November from the prior month. It was the ninth straight monthly increase in household outlays, according to the Wall Street Journal. And personal income from wages, salaries and investments, rose 0.2% in November.

Gross domestic product, a broad measure of economic growth for the third quarter, announced today, was revised down slightly to a still-strong rate of 3.4% from 3.5%. The economy grew at a 4.2% rate in the second quarter. Gains over the six-month period well outpaced the modest growth of just better than 2% annually recorded since the recession ended in mid-2009, according to the WSJ. Consumer spending, which accounts for more than two-thirds of U.S. economic output, grew at a 3.5% annual rate in the third quarter, compared with a prior estimate of 3.6%.

According to Econoday, after-tax corporate profits rose 6.1% in the third-quarter, up 0.2% from the initial estimate. The annualized rate for profits was $1.980 trillion. Taxes on corporate income fell 33.3% percent from a year ago. Time will tell whether the economic boost from the 2018 tax bill is a sugar high or a long-term bull-work for stronger future economies.

While we’ve heard little concern from our clients about the market’s declines and volatility, we understand there’s angst out there and the media and doomsdayers aren’t helping to dissuade it.

But backing away from the fray, there are few signs, beyond the stock markets’ swoon, that the economy is in trouble. But given current volatility, it’s important to make sure you are not taking more risk than you need and that your portfolio is designed to absorb the shocks. Please give us a call if you want to make sure.