DIASTOLE ECONOMIC AND MARKET COMMENT
November 12, 2018 - Veteran’s Day
Veteran’s Day was yesterday, the 11th day of the 11th month, but it is being observed today. Thank you to all of the veterans who served their countries in the eternal quest for peace and justice, including our fathers and brothers and mothers and sisters and children (my father was in the Navy and the Air Force). On such a solemn occasion, we remember all who considered it an honor to fight for the highest ideals of humanity.
There was an important mid-term election last week, and leaders on both sides of the aisle claimed victory. We will see what difference it all makes when the new electees take their seats in January.
The Federal Reserve Open Market Committee (FOMC) met last week, and to no one’s surprise it kept interest rates unchanged. We expect the next rate hike at the FOMC mid-December meeting.
Fires are burning out of control in California, which has experienced three years in a row of extreme-drought conditions. So far 31 people have died, and 228 are still missing. The Northern-California Camp Fire started on Thursday and spread at a rate of 80 football fields per minute, catching people as they tried to escape. Strong winds and low humidity are making a hard job even harder for firefighters.
It’s tough to pivot to the markets after that news, but we will try. Volatility continued last week as weak economic data from China pulled technology and internet shares lower. Oil prices entered a bear market (down 20% in October) as the expected sanctions against Iran affected fewer Iran-oil buyers than expected, and oil stockpiles around the world grew. Saudi Arabia and Russia met to discuss production goals, and (as expected) Saudi Arabia proposed cutting its oil production while Russia decided to stay full steam ahead.
But despite all the news and market swings, the Dow Jones Industrial Average finished the week up 2.8%. For the past two weeks, the Dow is up 5.3%, but that follows a loss of 5.1% in October.
Tobacco companies’ stocks fell after the FDA announced that it will pursue a ban on menthol cigarettes, even though it could take a couple of years before a ban is approved and implemented. Menthol cigarettes are considered a gateway to traditional cigarettes, because they are less harsh for smokers. At the same time, Juul decided to pull delicious candy-flavored e-cigarettes from stores because they entice teens to smoke. The attractive flavors will remain available on the internet. One fifth of high-school students polled had smoked e-cigarettes in the past month.
While Amazon has not made its announcement, it appears that it has chosen not one, but two locations for its second (and third) headquarters. Betting on HQ2 now favors Crystal City, Virginia (Washington, D.C. area) and Long Island City, New York (across the East River from Manhattan). 25,000 new jobs are expected in each new location. And Alphabet (parent company of Google) will add 12,000 new jobs in New York City.
Alibaba (the Amazon - but bigger - of China) reported record sales of $30.8 BILLION on Singles Day (November 11th) this year. Singles Day is a made-up Alibaba holiday when single people are encouraged to console themselves by buying things. What we call Monday! It is the biggest online shopping day of the year.
South-East Asia’s largest-ever shopping mall opened last week in Bangkok, Thailand. It is as big as 105 soccer pitches (which are themselves bigger than football fields). 150,000 shoppers per day are expected to visit the center, which will use more electricity than some of Thailand’s poor provinces. According to MasterCard, Bangkok was the world’s most visited city last year.
While we rightly worry about the U.S. annual deficit and overall debt (which stands at about 100% of our gross domestic product (GDP), Japan is in even worse shape. Its government debt has reached 200% of GDP. Japan faced decades of recession, which it only recently escaped due to government spending and economic stimulus. The Bank of Japan is keeping interest rates artificially low to help the government make its interest payments (sound familiar?) The government now forecasts that it will return to budgetary surplus in 2025, although it has pushed back this date several times in the past. While the long recession had many causes, the most important of them may have been the strong Japanese yen, which depressed exports.
The Department of Agriculture last week lowered its projections for soybean exports by 160 million bushels to 1.9 billion bushels for the 2018-2019 marketing year. China, previously the number-one foreign buyer of American soybeans, is now turning to South America and other regions for its soybean supplies. Soybean farmers are receiving government subsidies totaling about $3.6 billion to reimburse them for trade lost due to retaliatory tariffs. That means that instead of selling their soybeans to China, farmers are losing market share while they receive a subsidy, which is paid for by sales of U.S. Treasury bonds (including to China).
The British government under Prime Minister Theresa May is now saying a “hard-Brexit” may be necessary (meaning Britain would leave the Eurozone with no agreement for continuing trade deals nor for the free movement of citizens), while a new poll shows that 54% of Britons wish they could stay in the European Union.
Credit Suisse has announced its rankings of the world’s richest countries. But a lot depends on how you sort the data. If you consider total wealth divided by the number of adults (average wealth per grown-up), the U.S. ranks third, after Switzerland and Australia. But if you look at median wealth per adult (meaning the level at which half the people have more and half have less) the U.S. ranks 18th. It is another sign of growing income-inequality here in America. Canada, for instance, ranks 7th by the first metric, and 6th by the second.
For the week ending November 9th, the Standard & Poor’s 500 finished at 2,781, the Dow at 25,989, and the Nasdaq Composite Index at 7,406. The yield on the ten-year Treasury Note was 3.19%. Crude oil cost $60.19 per barrel, gold cost $1,207.70 per ounce, and one Euro was worth $1.1336.
Elizabeth E. Cook
News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including Bloomberg, the Wall Street Journal, the New York Times, Barron’s, businessinsider.com, The Economist, Reuters, and the Associated Press. If you have any questions, please call us at 203.458.5220 or reply to this email. Thank you for your time!