Fed minutes released yesterday showed that the Fed was closer to raising rates than many expected, which is lifting expectations that the central bank could hike before the end of the year. Three members wanted to raise rates immediately, but they were held off in a “close call”. The big consideration is the job market and whether it had strengthened enough to push inflation towards the Fed’s 2% goal. However, the other two considerations are harder to measure—the market’s preparedness for a hike, and how the US election might affect the economy. On the first point, the Fed even explicitly discussed the market’s odds that it would hike in September, a point that does not always show up in Fed minutes. The market thinks there is about a 65% chance the Fed will hike by the end of the year, but November looks unlikely because the meeting is the week before the presidential election. But depending on how that goes, it could prove a big hindrance to a hike.
FINSUM: The only election situation in which we think the Fed will still hike this year is a Clinton presidential victory and a Republican congressional victory. Markets would react mutedly or favorably to that, which would not scare off the Fed. In any other scenario, which seems less likely right now, the Fed would likely be derailed.
Source: Wall Street Journal
Let’s face it, the market is expensive across the board. This is a reality investors will need to live with in the immediate term. But how does one make good investing decisions in the current environment? The WSJ has published an article citing recommendations from a number of top firms. Russell Investments, for instance, is recommending being underweight US stocks and overweight European and EM ones. “The corporate credit market is overvalued”, says an MD from Brean Capital, particularly in the high yield space. Another commentator argues US stocks will jump higher because of a potentially strong economy in 2018, a reality that many investors aren’t ready for.
FINSUM: We have mixed feelings on US stocks. On the one hand they do seem to be overvalued, but on the other, companies appear to be in a good position to capture margin expansion if we see a good economy next year.
Gary Cohn, former Goldman Sachs executive and top economic adviser to president Trump, is leading the search for a new Fed chief to replace Janet Yellen. But guess what, he seems the most likely to fill the role. Putting oneself forward in a search role is not foreign in Washington—that is how Dick Cheney got his position as vice president under George W Bush. Speculation about the next Fed boss has grown as Yellen has not made her intentions clear and Trump has long been an opponent of her tenure. If Cohn were to take her place he would be the first Fed leader in decades that did not have an extensive economics background.
FINSUM: We think this would be a perfect fit for Cohn. Given the turmoil at the White House and the fact that he seems to be at odds with Trump on some issues, it might be a very good role for him to be the leader of the Fed.
Climate advocates seem to be largely upset with Donald Trump. His policies on things like climate change and the EPA have angered many, but this Bloomberg article points out an ironic fact. Despite Trump’s skepticism of climate change, he has been great for the renewable energy industry, especially solar. Despite pledging to take the US out of the Paris climate agreement as well as tumbling oil and gas prices, solar stocks have seen a big run up. The two key factors in rising prices have been state rule changes and equipment prices. Nevada has recently advanced legislation which should restart the industry in the state (Nevada gets the most sun of any state). Solar panel prices have been rising too as companies stock up ahead of what they fear with be a Trump-led tariff on imported equipment.
FINSUM: So Trump has not been supportive of renewable energy, yet his policies have had the effect of boosting the industry. Interesting unintended consequences. In a sense though, the whole situation is productive, as renewables will never truly flourish unless they are economically subsistent on their own merits without government support.
Trump friends and foes alike—take notice, the biggest firestorm of the President’s career may be about to ignite. In an interview with the New York Times this week, Trump seems to have communicated that he is considering and may try to fire Robert Mueller, the special counsel hired to investigate the President’s ties to Russia, and his whole probe. Trump cannot fire him directly, according to the law, but he could fire the entire senior staff of the DoJ until he finds a replacement that would be willing to dismiss Mueller, so theoretically it is possible. The news follows the announcement that Mueller has expanded his probe into Trump’s private business transactions.
FINSUM: No matter whether you support Trump or not, this would cause an unbelievable political storm in Washington and likely with the public. Our own view is that Trump does not have any troubling connections to the Kremlin and he just needs to ride this misery out rather than reacting and making it worse.
Everything was expected to go very smoothly in the British election. The dominant Conservative party, led by Theresa May was expected to cruise to a huge majority in parliament. However, yesterday everything went wrong, as Labour (the left) gained a huge share of parliamentary seats and stripped the Conservatives of their majority. May may be compelled to resign as PM, potentially setting the stage for another election in the near-term. The lack of a majority means there is a “hung parliament”, which will force a coalition government. All of this is leading to doubts over the Brexit negotiations with the EU, and even Brexit itself. On the whole, it seems the coalition government will lead to a significantly “softer” Brexit, where the country might stay in the single market.
FINSUM: This was a shocking development. The Pound dropped on the news, but in the long run it is probably good news for the economy (i.e. a softer Brexit).
Venezuela has been in a state of protest and disarray for the last couple of years. Chaos may be a more appropriate term. However, this article argues a much scarier new term is emerging: civil war. The country has suffered from inflation and a lack of basic goods, which have spawned increasingly intense protests from those demonstrating against Maduro’s government. Now things have worsened to the point where an all-out civil war may emerge. “We’re seeing much larger masses protesting across all major cities, including the working-class neighborhoods” where Maduro used to enjoy support, says a retired Venezuelan general formerly in charge of putting down such unrest. “The government is losing control”, he continued.
FINSUM: It is hard to discern what impact this may have on the US political and investment climate. It does seem the US would be more inclined/obligated to get involved given the closer proximity of the country. The oil market would probably gain on the prospect of decreased supply from Venezuela.
Source: Wall Street Journal
Investors should be worried about US real estate. That is the conclusion of new data analyzing the US housing market. This worries are particularly high at the top end of the market, where a mountain of new luxury apartment inventory is about to hit the market at a time when vacancy rates are already rising. As a result of the glut, banks have been tightening credit lines to developers, and previously planned projects are stalled. Rental inflation also appears to have peaked, all of which has weighed on residential REITs.
FINSUM: This article paints a pretty bleak picture of US real estate, but on the flip side, the low end of the market seems like it will stay strong as first-time Millennial buyers keep things buoyant.
Source: Wall Street Journal
It feels like years that we have been writing about the forthcoming “great rotation” in markets, or the big move out of fixed income and into equities. It has many times been predicted, and generally fallen far short of expectations. However, it may be about to occur, says Bloomberg. For the first time in a long while the risk-adjusted return on stocks has been outperforming bonds, a key factor in how the market might turn. “Flows do follow performance, and we know U.S. retail investors are less valuation-sensitive than smart-money investors … The increase in total returns from stocks, if it continues over the next couple of quarters, raises the prospect of a tipping point in asset allocation in favor of equities”, summarizes an equities analyst at Credit Suisse.
FINSUM: Perhaps a great rotation has not fully happened, but US average allocation to equities is near a long-term high, so it is not as if people have been holding back. We are still skeptical allocations are going to change much from here unless the Fed gets really active with hikes.
Bloomberg thinks it is time for markets to accept reality. Despite a lot of effort, the president has overpromised and under delivered when it comes to repealing Obamacare, tax cuts, and infrastructure spending, and at some point soon the market is going to react to that, says Bloomberg. The failure over the Obamacare repeal is not a big deal for markets, but it does signal that Trump will likely not be successful in his other efforts, a troubling realization for investors. This may mean that markets react with stocks moving lower as current valuations cannot be justified, and that yields also move downward as the Treasury would need much less debt than has been anticipated.
FINSUM: The fissure of the Republican party has already been laid bare, so we do not think markets are suddenly going to react. We think a lack of action on taxes and infrastructure are already priced in.
The efforts to combat the fiduciary rule are numerous, including an encouraging new proposal out of the house which would replace the current rule with a new one to be drafted by the SEC (not the DOL). However, aside from this, it appears that advisors are going to have a lot more time and freedom as the current version of the DOL rule looks almost certain to be delayed well beyond its January 2018 implementation date; likely to the end of 2018 or beyond. The reason why is that even the DOL is considering major revisions, such as expanding the exempt transactions list, doing away with the private right of action clause, and allowing rollovers to be exempted.
FINSUM: There is so much going on to defeat the rule it is hard to imagine there will not be big changes. We hope the SEC-driven rule being pushed by the House comes to pass, but even if it doesn’t, we think the fiduciary rule will eventually end up being toothless.
Anyone who thinks oil prices are headed higher is misguided. Most experts agree that the future for oil is not bright at all. While there may be short-term rallies in the near future, the long-term outlook is very bleak. This is driven by three primary factors. Firstly, US shale will keep the market oversupplied for some time to come, secondly electric vehicle demand will grow, undermining oil, and thirdly, emerging market demand will not stay as robust as it has been (solar and electric vehicles are growing there too), taking away a fundamental growth driver.
FINSUM: The writing is on the wall for oil, and in our view, even near term prices are likely to stay weak because of the competitive and over-supplied market.
One of the bright spots in the post-Crisis era has been the collectibles market. Everything from antique cars to high end art has surged in value since the Crisis, making collectibles one of the better returning asset classes. However, at least for the art market, that appears to have changed, as 2016 saw sales shrink 11% to their lowest point since the recession. 2016’s poor performance follows a down year in 2015 as well, when sales slipped 7%. The combined losses have now wiped out all the gains seen in 2013 and 2014. 2016 was particularly poor for auction houses.
FINSUM: Hard to say exactly what slowed the sector down as it had been doing so well. One interesting factor—the declines directly coincide with the bear market in oil.
McDonald’s has made a lot of changes over the course of the last couple years. Investors were skeptical at first, but the company’s CEO seems to have one its shareholders over. Now McDonald’s has a new plan to reverse its sliding grip on US fast food sales: take over the “dead zone”, or the period between lunch and dinner which are a doldrums for fast food chains. Between roughly 2 and 5 pm, fast food outlets do very little business. McDonald’s thinks there is an opportunity there, and counter to its recent focus on healthy food, it is rolling out the sweets and pastries to try to lure customers in during those hours. It will offer some new indulgent treats with aggressive pricing. It also says there is an opportunity to expand its coffee business.
FINSUM: We think this is a sharp idea. People seem to get an energy low in the middle of the afternoon, so peddling fresh coffee and sweets then seems like a solid strategy.