(Washington)

Few would argue that the tax cut passed in late 2017 was one of the main drivers of the strong economy we saw this year. Corporate earnings have been stellar, the economy is expanding at a good clip, and the labor market is tight. However, the IRS looks about to undermine the benefit of the tax cuts. The agency just announced a new policy for 2019 regarding how it accounts for inflation. The move will undermine much of the value of the tax cuts by raising tax bills for almost all Americans. The new policy will increase tax revenue for the government by $133.5 bn over the next decade.

FINSUM: This is the kind of policy that is going to hurt more over time. That said, the current deficit is huge, so from a fiscal responsibility view it is hard to argue this is unnecessary.

(New York)

This is a tricky environment for income investing. On the one hand, rising rates generally mean better yields, but at the same time, the chance of rate-driven losses is high. What if investors wanted to get safe 5% yields? Doing so is a little bit tricky and requires a blend of riskier credit and a mix of durations. However, investors can get pretty close with some individual ETFs. For instance, BlackRock’s iBoxx $ Investment Grade Bond ETF yields 4.39% and has shorter dated maturities with comparable credit quality to other funds.

FINSUM: This seems like a good choice, but there are also a number of rate hedged ETFs that have similar yields and almost no interest rate risk.

(San Francisco)

We have covered a lot of bear market indicators this year. Every investor is understandably wondering when the next bear might bite. So how about this for an indicator—Apple just entered a bear market. Now we know that Apple’s decline seems to be quite particular to its own situation—especially the fear over iPhone sales that were cemented by the company’s announcement that it will stop reporting such figures—but what if it is a leading indicator for the whole market? Apple is not alone among big companies either—over 40% of the S&P 500 was in its own bear market at the October low in equities.

FINSUM: We do not think Apple’s bear market in its self signifies much about the underlying market. Apple’s trouble really stems from one issue—one of the most successful products in history is finally starting to see slower growth as the result of its own spectacular success. We do not think that is a bear market indicator.

(New York)

It might not always feel like it, but rising rates are good if you are an income investor. Rates are most definitely rising. Treasury yields are up strongly and the Fed is hiking quarterly. That can cause some rate driven losses even as yields on fixed income assets rise. One fund manager summarized the risks and benefits this way, saying “Rising rates and/or lower equity valuations should lead to higher long-term expected returns, although the movement from low yields to high yields, or high valuations to low valuations, often requires a painful short-term capital loss”.

FINSUM: The move to “low valuations” sounds terrifying as an investor, but the key is to take advantage of higher yields while holding hedged positions.

(New York)

Those worried about rate hikes will be happy to hear this news. Ever-hawkish Jerome Powell is finally starting to sound just a bit more dovish. Powell says the economy is strong, but could face “headwinds”. He says the Fed is discussing how much and how fast to raise rates and acknowledged that the Fed’s actions could inhibit the economy. He said the Fed’s goal is to “extend the recovery, expansion, and to keep unemployment low, to keep inflation low”.

FINSUM: It is good to hear some public consideration that rates might get in the way of the economy. While we would not exactly say this is dovish, it is certainly less aggressive than previously.

(London)

Just a couple of days ago it seemed like the UK and EU were on the verge of coming to an agreement over Brexit. Now, just 48 hour later, a deal actually seems further away than it ever has. Reviewing UK headlines, the irony of PM May’s proposed deal is that it did what no one else has been able to—unite Britain. However, the unity is driven by shared hatred from all sides over what a terrible agreement the government has proposed. Numerous government ministers have resigned on the back of the proposal.

FINSUM: The pushback to this deal has been more than anyone would have anticipated. A no-deal Brexit looks increasingly likely.

(New York)

With all the volatility of the last month, and midterms, less focus has been on one of the most ominous of economic signs—the yield curve. Well, Goldman Sachs has just weighed in, warning investors that a yield curve inversion is looming. Goldman went further than to say that 2-years might be flat or overtake 10-years, the bank said that spreads between 2- and 30-year bonds would fall to zero. To put that call into perspective, it would be a narrowing of 50 basis points versus now. Goldman highlighted the move in its top themes to watch for 2019.

FINSUM: We have to give Goldman Sachs a little credit here as they have been consistently hawkish about rates for at least a year and are sticking to it. We tend to agree with this view.

(New York)

The biggest and most famous investor of them all just took a big position in US financials. In particular, Warren Buffett just made a large investment in JP Morgan to the tune of $4 bn. Buffett already holds a $23 bn position in Wells Fargo. Berkshire Hathaway has a history of making successful investments in banks, including in Bank of America. Buffett also boosted its holdings in BAC, Goldman Sachs, and US Bancorp.

FINSUM: Rising rates are good for banks. Recessions are not. The risk and reward is clear.

(New York)

One of the guiding mantras of small cap investing has always been that small caps tend to outperform their larger peers over the long-term. While always cyclical, small caps have outperformed large caps over the last several decades. However, in recent years that has all changed. In fact, since 2005, the relative performance between the two share classes has been trendless, with no discernible relationship. This is directly counter to the almost century-long trend that preceded it. One CIO explained the change this way, saying “Market-cap tilts have historically been about catching, and riding, strong and persistent performance waves … Over the last 13 years, in an unconventional fashion, the opportunities to add performance from cap tilts have been relatively small and have required frequent and expert timing”.

FINSUM: Interesting change for small caps. We suspect the change has to do with a combination of the pre-Crisis boom and the extraordinary liquidity thereafter.

(Seattle)

Amazon may get all the fan fare, but Walmart is lurking. For many years, Amazon was considered so far ahead of rivals in ecommerce, that anyone catching up with it was considered unlikely. And while Amazon is still the undisputed leader, that view is changing. Walmart’s most recent earnings show that its commitment to ecommerce is thriving. Walmart is leveraging its food business particularly well in transforming its operation. The company is already operating click-and-collect food businesses in 600 US locations. Amazon only has such operations in 22 cities, via Whole Foods.

FINSUM: Both companies seem to want to be the “everything” of 21st century retail, but they are going about it from different angles. Amazon is going from ecommerce into groceries, and Walmart is doing the opposite.