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

Stock Market 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 Associate

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. The current Chair of the Fed, Janet Yellen, is scheduled to chair her last Fed meeting on January 30^th & 31^st, with Jerome Powell assuming the post in February. (Sources: Federal Reserve, U.S. Treasury, Bloomberg)

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.

As of the end of the year, short-term rates such as the 2-year Treasury yield had risen to 1.89% 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