November 2017 Market Update
Market Update
(all values as of 07.31.2020)

Stock Indices:

Dow Jones 26,428
S&P 500 3,271
Nasdaq 10,745

Bond Sector Yields:

2 Yr Treasury 0.11%
10 Yr Treasury 0.55%
10 Yr Municipal 0.64%
High Yield 5.44%

YTD Market Returns:

Dow Jones -7.39%
S&P 500 1.25%
Nasdaq 19.76%
MSCI-EAFE -10.64%
MSCI-Europe -10.86%
MSCI-Pacific -10.53%
MSCI-Emg Mkt -3.21%
 
US Agg Bond 7.72%
US Corp Bond 8.44%
US Gov’t Bond 9.35%

Commodity Prices:

Gold 1,992
Silver 24.54
Oil (WTI) 40.43

Currencies:

Dollar / Euro 1.17
Dollar / Pound 1.30
Yen / Dollar 105.01
Dollar / Canadian 0.74

Macro Overview

Both chambers of Congress have passed tax reform plans that will invoke among the most significant changes to the tax code since the Tax Reform Act of 1986. Versions of the Tax Cut and Jobs Act passed by the House in November and the Senate in early December will be modified into a single bill following Congressional deliberations.  Enactment of the tax bill would cut taxes by more than $1.4 trillion over 10 years, as estimated by the Joint Committee on Taxation. Other projections also include a rise in the federal deficit, should economic growth not be sufficient to make up for the cost of the tax cuts.

Passage of the tax reform bill may eventually lead to higher inflation because of possible growth in the federal deficit and an expanding economy. Economic expansion produces inflationary pressures that can increase wages and asset prices such as homes and stocks. In addition, tapering of fiscal stimulus in Europe by the European Central Bank (ECB) may also add to international inflationary pressures, which has been one of the ECB’s primary objectives.

Equity markets rose in November with the Dow Jones Industrial Index climbing past 24,000 and the S&P 500 Index eclipsing the 2600 level, as the likelihood of tax reform passage became more apparent. Companies with strong balance sheets have been out performing those with weak balance sheets, as the market prepares for possible tax ramifications of companies deducting certain interest expenses. Markets expect the Fed to raise short-term rates again in December as improvements in the economy and labor markets materialized further. The unemployment rate dropped to 4.1% in October, the most recent data available from the Labor Department, the lowest rate since December 2000.

The internet will undergo deregulatory efforts with the repeal of an Obama administration rule set in place to regulate the internet with regulations similar to the utility industry. The FCC repealed Net Neutrality in November with the intent of increasing competition and alleviating regulatory oversight.

The Federal Reserve will have a new chief starting on February 3, 2018 with Jerome Powell replacing Janet Yellen. Senate confirmation hearings in late November buoyed markets as Jerome Powell expressed that the steady pace of monetary tightening under Yellen would continue under his watch. Mr. Powell is favored by the banking sector and financial markets because of his hands-on experience over the years.(Sources: Fed, Labor Dept., Dow Jones, S&P, Congress.gov/bill/115th-congress/house-bill/1)

 

 
this has been the fastest yield curve flattening since 2008

What A Flattening Yield Curve Means – Bond Market Update

The anticipation of Fed rate hikes has gradually raised short-term rates this year, with the demand for longer-term bond maturities increasing. The result has been a flatter yield curve, where short-term rates have risen and long-term yields have dropped. A flattening yield curve implies that longer-term economic growth may be subdued or not expected to be very extensive.

At the end of November, short-term rates such as the 2-year Treasury yield had risen to 1.75% from 1.22% at the beginning of the year. The longer-term 30-year Treasury bond yield fell to 2.77% on November 30th from 3.04% in January.

As promised, the Fed has started to curtail its buying of Mortgage Backed Securities (MBS). Through September, the Fed was buying an estimated 20-25% of the roughly $110 billion of MBS sold each month. In October, the Fed scaled back its purchases by $4 billion and is scheduled to reduce purchases by another $4 billion every quarter. As the Fed buys less and less MBS, the market will need to slowly absorb the additional paper made available by the Fed’s lack of buying. As this occurs, it is expected that MBS prices will gradually fall and yields will gradually rise. (Sources: Federal Reserve, Bloomberg, Treasury Department)

 

Equity Update – Domestic Stock Markets

The Dow pierced through 24,000 towards the end of November as optimism about tax reform passage intensified. A primary emphasis to reduce both corporate tax rates and small business rates accelerated equity prices higher as optimism grew with the realization of passage.

The relationship between corporate taxes and equity valuations have been significant with the anticipation of a lower corporate rate, which has been elevating stocks ever since the election. The reduction in the corporate rate from 35% to 20% is expected to benefit certain companies more than others as tax rates vary among sectors.

Analysts view the recent decline in the technology sector as a form of market rotation, the exodus of assets from one market sector to another. The anticipation of various tax reform proposals may adversely affect technology companies while benefiting other industry sectors. The passage of tax reform might also prompt a further rotation to companies that may benefit from corporate tax proposals once in effect. (Sources: Dow Jones, S&P, Bloomberg)

 
There are over 3.7 billion internet users worldwide

The Internet Is Being Deregulated – Government Regulations

The primary growth behind the internet isn’t the number of websites, but the growth of traffic within the invisible freeways it commands. The evolution of technology has enabled nearly every American to have access to the internet, but at a price. As the number of users grew so did the volume of traffic, which like a highway, eventually needs speed limits. These speed limits were imposed during the prior administration with the intent of making the internet equally accessible to all users. Many have complained that the utility-like regulations have hindered competition and limited the entrance of new technology.

Data compiled by Internet Live Stats estimates that there are over 3.7 billion internet users worldwide, with nearly 287 million in the United States. As a percentage of population, the U.S. ranks 40th in internet users internationally, with roughly 88% of Americans having internet access. Scandinavian countries have among the highest percentages of users, with Denmark at 96.9% and Iceland at 100%. Many have argued that unnecessary regulations and minimal competition have limited additional users in the U.S.

The Federal Communications Commission (FCC) voted in November to repeal 1930s era utility style regulation called Title II which has put at risk online investment and innovation since it was enacted in 2015 by the prior administration. The FCC plans to encourage a free and open internet by promoting broadband deployment in rural American towns and new infrastructure investments throughout the nation. The FCC outlines that it will honor and expand on the four “Internet Freedoms” implemented in 2004; freedom to access lawful content, freedom to use applications, freedom to attach personal devices to the network, and freedom to obtain service plan information. (Sources: Internet Live Stats, Federal Communications Commission)

U.S. Oil Gets Less Expensive Internationally – Commodities Update

For decades, the price of domestically produced crude oil, West Texas Intermediate (WTI), closely resembled the price of international crude, Brent. Following production cuts imposed by OPEC on its members and supply constraints in the U.S., the price of both Brent and WTI started to rise over the summer months. Production cuts and supply shifts are a common occurrence in the industry affecting prices, but the rate at which Brent has increased versus WTI is not.

Various factors affecting the price of Brent, such as uncertainty with Saudi Arabia’s leadership and the possibility that the U.S. may resume trade sanctions on Iran, drove overseas oil prices higher. The abundance of U.S. oil production in turn kept domestic prices, WTI, at lower levels.

The advancement of hydraulic fracturing in the United States over the past few years has positioned domestic production as a viable option in the international markets. In addition, the end of the decades old oil export ban lifted in December 2015, has allowed U.S. drilled oil to flow to countries throughout the world.  Some oil analysts see this trend as a validation that the U.S. may now possibly have better price control of domestic production than OPEC has of its multi-member production prices.  (Sources: Department of Energy; EIA)

 
Bitcoin traded above 11,000

Bitcoin Hysteria – Digital Currency Overview

Euphoria has sweep Bitcoin to unreal levels over the past few weeks. Bitcoin, one of many digital currencies, shot past 11,000 in the final week of November after eclipsing 10,000 just hours prior. The cumulative value of all cryptocurrencies throughout the world are estimated to be more than $300 billion, an enormous increase from the $18 billion at the beginning of the year. The commodity futures trading commission granted the Chicago Board Options Exchange (CBOE) to issue Bitcoin futures which will allow traders to bet on the price of the digital currency via a trusted exchange. Traders will be allowed to bet on the appreciation of the cryptocurrency or the demise of it by buying and selling the futures. What took the equity markets decades to establish, the cryptocurrencies market is trying to build in mere months.

Bitcoins emerged in 2008 designed by a programmer or group of programmers under the name of Nakamoto, whose real identity remains unknown. New Bitcoins can only be created by solving complex math problems embedded in the currency keeping total growth limited. Many believe that the development of digital currency it is just beginning of a globally accepted process sometime available in the near future. Bitcoin could merely be a stepping stone to an eventual acceptance of digital currency. Bitcoin currently accounts for roughly 55% the total digital currency market, down from 87% of the total market at the beginning of year. Hence, Bitcoin has incredibly fast growing competition. Bitcoin is currently one of over 1000 other digital currencies in the marketplace. Other popular cryptocurrencies include Ethereum, Ripple, Litecoin, NEM, Dash, and IOTA, to name just a few. Digital currencies are being examined as a store of value and a method of making monetary payments. Gold, an accepted store of value, and currencies issued by countries have been established internationally for centuries and are and now challenged by the cryptocurrency concept. One factor driving Bitcoin’s growth has been the emergence of a broader cryptocurrency ecosystem. Bitcoin serves as the reserve currency for the cryptocurrency economy in much the same way that the dollar serves as the main anchor currency for international trade. Bitcoin has been recognized as the first truly decentralized electronic payment network.

A looming regulatory crackdown is affecting the digital currency as well. Bitcoin has already been hit by a crackdown from Chinese officials who have been severely restricting the use of cryptocurrencies. In the United States, there’s little risk of a direct crackdown on Bitcoin, but there’s a real risk that the Securities and Exchange Commission will crack down on the ICOs (Initial Coin Offerings) that have pushed Bitcoin’s price upward. An unregulated means by which funds are raised for new crypto currency bench ICOs are used by startups to bypass the rigorous and highly regulated capital raising environment. Bitcoins exist as software, not physical currency, and are not regulated by any country or banking authority. Even though U.S. Senate hearings disclosed that Bitcoin could be a means of exchange, it gave no assurance that it would actually become an accepted medium of exchange. Government regulations would need to be created and then enforced in order for Bitcoin to become accepted by other government entities. The currency can be traded without being tracked, thus raising the potential for illicit activity, such as involving weapons, drugs, and prostitution. Even though Bitcoins are not illegal, it is not legally recognized by governments as a currency. (Sources: Bloomberg, Reuters, cointelegraph.com)