February 9, 2018
Weekly Market Comment
“Keep your fears to yourself, but share your courage with others.” – Robert Louis Stevenson
The TSX Composite lost -3.7% while the S&P 500 fell -5.2%. On Monday, the Dow dropped over 1,600 points at one moment (it started the day at 25,451.3 points).
Last summer, the Congressional Budget Office estimated the U.S. deficit would be $689 billion for this fiscal year. Today, the Committee for a Responsible Federal Budget estimates it will be roughly $1.2 trillion. The Republican Senator Rand Paul chastised his colleagues on both sides of the aisle: “When the Democrats are in power, Republicans appear to be the conservative party. But when Republicans are in power, it seems there is no conservative party. The hypocrisy hangs in the air and chokes anyone with a sense of decency or intellectual honesty.” Paul is advocating for balanced budgets, as would John Maynard Keynes at this point of the economic cycle.
To be clear, this round of tax cuts plus the increased spending cap of $300 billion from this week’s budget will boost the economy but economists at Evercore ISI say the multiplier will be an extra 0.7 to 0.8 percent in GDP growth. It’s less of a kicker than what would happen during a recession.
But what’s got the stock market spooked is the fear of inflation and rising interest rates. Adding stimulus to an already robust economy with unemployment close to its cycle lows, and most economists suggest it will become inflationary. According to well-known market economist Ed Yardeni, bond market yields are climbing partly due to the dramatically increased budget deficit. America’s risk premium is rising which means their borrowing costs must rise.
Nobody knows how high rates will go, and we have had some false starts these past few years. But imagine you were one of the investors who used margin to buy stocks (we know you aren’t, because virtually none of our clients use margin and neither do we). Your cost of borrowing would be on the rise just as the value of the leveraged stock positions in your account were falling. Here is a chart of margin usage on the New York Stock Exchange:
(Wall Street Journal)
But we don’t mean to sound too bearish at this point. Corporate earnings have been on fire this quarter, with about 80% of companies that have reported thus far (about 361 of the S&P 500) having beaten earnings estimates by an average of 4.8% while actual earnings growth is clocking 15.7% from a year ago. This is a really bullish data point.
This pullback is hardly without precedent. Below are several recent examples, none of which turned into a bear market and, in all instances, investors who didn’t panic lived to see new highs for their portfolios.
Which leads us to a worthy reminder:
Musings Beyond The Markets
Check out Lori’s latest column in Business in Vancouver’s Retirement Ready issue that discusses how to be prepared and plan for the unexpected, ensuring your retirement is not at risk!
The New York Times listed five technology myths to be aware of, which you can read about here.
Myth 1: Better specs mean better devices
Myth 2: A battery should be at zero before you recharge it
Myth 3: More megapixels mean better cameras
Myth 4: “Planned obsolescence” is why your phone slows down right before a new model comes out
Myth 5: Extended warranty plans are worth your money.
Word of the Day
rapacious (adj.)– aggressively greedy or grasping. “Thus did a handful of rapacious citizens come to control all that was worth controlling in America.” – Kurt Vonnegut