Equity Overview – Global Stock Update

Global markets accelerated throughout 2017, marking new highs and sending broader market indices higher. The election prompted rally in domestic stocks continued on in 2017 as optimism and expectations that growth oriented policies and tax cuts would fuel earnings appreciation.  International markets excelled in 2017 as both developing and emerging stocks were boosted by expanding economies throughout Europe and Asia.

The new tax law imposes a repatriation tax on cash held overseas by U.S. corporations. A tax of 15.5% on liquid assets will affect various sectors and numerous companies that are estimated to have amassed over $2 trillion overseas. The new rate is considerably lower than the previous rate of 35%, incentivizing companies to bring cash back to the U.S.  Of the several sectors encompassing the equity markets, technology and healthcare companies hold the most cash overseas, placing them at the forefront of bringing billions of dollars back to the U.S. at the preferable tax rate. (Sources: Bloomberg, Reuters, www.congress.gov/bill/115th-congress/house-bill/1)

Oil Prices Rose In 2017 – Commodities Update

Production caps by OPEC, dwindling supplies, and stronger international demand elevated oil prices to levels not reached in over two years.  Prices recovered from lows set in 2016 when an abundance of domestic production and excess supplies from OPEC member countries flooded markets. Improving global economic conditions in 2017 led to demand increases for oil from both OPEC and U.S. production. The U.S. Energy Information Administration estimates that oil demand increased by 1.5 million barrels a day in 2017 and forecasts an increase by 1.3 million barrels a day in 2018.

Producers in the United States are expected to benefit as the abundance of domestically produced oil is exported rather than kept in the United States. The benchmark index for U.S. oil production is known as West Texas Intermediate (WTI), which has become less expensive relative to international oil as measured by Brent over the past year. The price difference has led to greater demand for U.S. oil internationally.  (Sources: EIA, U.S. Dept. of Energy)

Short Term Rates Heading Higher – Bond Market Overview

The Federal Reserve raised a key short-term rate as expected by the markets and made fairly optimistic comments about economic growth projections for 2018. The federal funds rate rose to a target range of 1.25 – 1.50%. The increase is a strategy of tightening and also meant to alleviate inflationary pressures. Concurrently, the Fed is also shrinking its $4.4 trillion balance sheet, a dual monetary policy effect expected to curtail inflation and reduce stimulus. Members of the Federal Reserve indirectly expressed concern about the labor market, suggesting that improvements in the job market were expected to ease. The Fed committee also maintained a conservative growth estimate for 2018 of 1.8%, hinting that the new tax plan may not yet produce economic benefits in 2018. The yield curve flattened throughout 2017, with a rise in short term rates and a drop in longer-term rates. The yield on the 2-year Treasury Note had its largest annual increase in over 10 years, ending the year at 1.89%, up from 1.22% at the beginning of January 2017. The benchmark 10-year Treasury bond yield saw almost no change in 2017, falling to 2.40% at year end from 2.45% in the beginning of January. (Sources: Federal Reserve, U.S. Treasury, Bloomberg)

Bitcoin & The Greater Fool Theory – Consumer Behavior

A Bitcoin exchange in South Korea went out of business in December after it was hacked by cyber thieves that stole roughly 20% of it’s clients holdings, validating that cyber currency exchanges are still extremely susceptible to losses. Unlike a bond, stock or real estate, a crytocurrency offers no intrinsic value, such as cash flow and earnings. Instead, the value is solely based on what the next buyer is willing to pay leading to speculation, also known as the greater fool theory.

The greater fool theory states that the price of an item is determined by unreasonable expectations and ideals about that item. As speculation inflates prices, sellers profit as there will always be a bigger fool willing to pay a higher price.

Many believe that the price of Bitcoin in the final weeks of 2017 exemplified behavior relative to the greater fool theory. Volatility in December alone was considered irrational and speculative in nature, as the cyber currency value skyrocketed over 40% in early December, then tumbled over 30% later in the month.  (Sources: coindesk.com/price, cointelegraph.com)

Number of Shares of Exchange Listed Corporations Continues To Shrink – Historical Note

Over the past 20 years the number of corporations with listed shares traded on U.S. exchanges has actually dropped by approximately 40%. In the 1990s, there were once over 8,800 publicly traded companies with a total market capitalization of about $20.9 trillion. As of the end of December 2017, total market capitalization was $27.7 trillion, yet with 40% less stocks than in the 1990s.

Supply and demand has become a key valuation component of the equity markets, as there are far fewer stocks available, but at higher prices.

Shares have decreased for various reasons, including aggressive share buybacks and higher regulatory costs. Mergers and acquisitions have also reduced supply while fewer firms are willing to deal with the costs and regulations involved in being public. As fewer companies are willing to be publicly traded, more are eager to become private or be acquired by private equity firms.

As the equity markets have consolidated, so have some of the indices made up of these publicly traded stocks. The broadest equity index of all is the Wilshire 5000 index, which no longer includes 5000 companies, but currently includes only 3503 companies (as of September 2017).  (Sources: Federal Reserve; fred.stlouisfed.org/categories/33194, Wilshire Associates)