DIASTOLE ECONOMIC AND MARKET COMMENT
December 31, 2018
Do you have market whiplash? Do yourself a favor and take tomorrow off! No, really. Markets will be closed for New Year’s Day, and presumably by Wednesday everyone will be back from vacation and orderly markets will resume. Presumably.
One of the reasons for the recent volatility in markets is obvious. Markets crave predictability and it has been in short supply. We don’t know when the partial government shutdown will be resolved. We don’t know how trade talks with China are progressing, or whether new tariffs will be imposed in the future. We don’t know what the Fed will do about interest rates in the new year, although clearly the most recent Fed rate hike added to market volatility. And oil prices continue to fall, which delights individual consumers but hurts energy producers and their stocks.
A week ago, Treasury Secretary Steven Mnuchin announced that he had initiated phone calls with the CEOs of the six largest U.S. banks and was happy to report that they had “ample liquidity”. While he no doubt intended his remarks to calm the markets, they had the opposite effect, making investors wonder what concerns had prompted his calls in the first place. Kind of like when the police say, “move along, nothing to see here”.
Other factors are entirely predictable but added to market uncertainty anyway. Investors who were short shares (meaning that they borrowed stock in order to sell it, figuring the stock price would fall and they could buy it back cheaper) were thrilled when the markets dropped sharply, and rushed in to cover their shorts, driving prices higher. There was also tax-loss selling, and mutual-fund portfolio rebalancing. And all of those active managers who were taking time off during the holiday left the field open to computer-driven trading and the passive managers who blindly follow. (Passive managers don’t make investment decisions in an attempt to beat the market, they mirror existing stock indices and therefore reap the same returns.)
New and existing home sales have both fallen this year. With interest rates rising, mortgages are more expensive. The average rate on a 30-year mortgage was 4.87% recently, versus 4.03% in January. Rates are still historically low, but consumers who were burned in the Great Recession, and then spoiled by artificially low interest rates during the recovery, still view current rates as steep. And house prices need to fall as interest rates rise, in order to make monthly payments on home purchases affordable. Those pressures are working their way through housing markets.
With the government in partial shutdown, approximately 380,000 federal employees have been placed on furlough, without pay. An additional roughly 420,000 workers are deemed essential, and are working without pay. Usually after a shutdown, these workers will receive their back pay. But there are also hundreds of thousands of subcontracted workers, like custodial and cafeteria staffs, who are not working and will not receive back pay when the government comes back online. In addition to the hardships faced by unpaid workers, the government closures cost more taxpayer money than the government at work, and contribute to a temporary slowing of the economy.
Although many of the figures have not yet been released, from all anecdotal reports the 2018 holiday season was strong for retail. Amazon, of course, announced that it had “record-breaking” sales. It also said that it shipped more than one billion items through its Prime service (no more than half to me, at most). And Mastercard SpendingPulse, which tracks retail spending trends, said that holiday sales increased 5.1% to more than $850 billion this year. Online sales were up 19.1% versus 2017.
As Americans become more educated, and while the unemployment rate sits at a record low, firms are finding it harder to attract blue-collar workers than white-collar ones. This may lead to increasing wages for manual laborers in the short run, but may also lead to increasing automation and the use of robotics in the long run. Hiring in the transportation, construction, manufacturing and mining sectors grew twice as fast as other private employment this year, and if wages increase, profitability may shrink.
The Russian firm Rosatom is experimenting with nuclear reactors on barges. What could go wrong? Rosatom expects to move two nuclear reactors into place off the Siberian coast in the spring of 2019. It’s not as crazy as it sounds, since some ships and submarines have been nuclear powered since 1954. The reactors will be moored behind tsunami-resistant breakwaters and will provide power to the area around Pevek, a town in the harsh Siberian countrywise. Cost for the floating reactors has reached $500 million apiece. Rosatom, which hopes to attract foreign buyers to the idea, has yet to sell one.
The Royal Statistical Society announced that 90.5% of all plastic ever produced has not been recycled. That’s the equivalent of 7.2 trillion grocery bags full of plastic. That much plastic would climb to the moon and back over 5,700 times. Each of those grocery bags would be worth about one dollar in plastic, meaning that all of the unrecycled plastic has a worth of $7.2 trillion - enough to buy Apple, Amazon, Google, Microsoft, Walmart, Exxon, G.M. AT&T, Facebook, Bank of America and all of the professional football and baseball teams. Remember when recycling that your plastic grocery bags and bubble wrap must be returned to a grocery store for recycling, NOT placed in your recycling bin. And light bulbs are not currently recyclable.
We have a morbid fascination with hyperinflation, which luckily we do not face. But in Venezuela, prices rose by 109% in just November. By contrast, in the worst month of postwar hyperinflation, Hungary’s prices rose by 41,900,000,000,000,000%. Just consider the consequences of inflation run amok, and you may have a greater appreciation for the Federal Reserve Board which is charged with keeping inflation under control, keeping prices stable, and keeping us at full employment.
And now it’s time to write down your New Year’s resolutions. Mine? More cookies, more economic growth, and more readers. Remember that we are happy to add your friends to our mailing list. And if you know people who are concerned about volatile markets, please have them call us. As you are aware, we do not charge for consultations or financial plans.
For the week ending December 28th, 2018, the Standard & Poor’s 500 closed at 2,485, the Dow Jones Industrial Average at 23,062, and the Nasdaq Composite Index at 6,584. The yield on the ten-year Treasury Note finished at 2.72%. U.S. crude oil cost $45.33 per barrel, New York gold cost $1,279.90 per ounce, and one Euro was worth $1.1440. (Which can also be represented by one dollar being worth .8741 Euro.)
Plus, we heartily advocate against gambling, but tonight’s Mega Millions drawing is expected to be worth more than $415 million. Whatever you do, don’t buy a ticket!
Happy New Year!
Elizabeth E. Cook
News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including The New York Times, The Wall Street Journal, Barron’s, The Economist, businessinsider.com, The Economist, Bloomberg, Reuters, and The Associated Press. If you have questions, please call us at 203.458.5220 or reply to this email. Thank you for your attention.