October 2017
Market Update
(all values as of 03.31.2021)

Stock Indices:

Dow Jones 32,981
S&P 500 3,972
Nasdaq 13,215

Bond Sector Yields:

2 Yr Treasury 0.16%
10 Yr Treasury 1.74%
10 Yr Municipal 1.08%
High Yield 4.42%

YTD Market Returns:

Dow Jones 7.76%
S&P 500 5.77%
Nasdaq 2.78%
MSCI-Europe 3.52%
MSCI-Pacific 1.72%
MSCI-Emg Mkt 1.95%
US Agg Bond -3.37%
US Corp Bond -4.65%
US Gov’t Bond -4.28%

Commodity Prices:

Gold 1,709
Silver 24.48
Oil (WTI) 59.64


Dollar / Euro 1.17
Dollar / Pound 1.37
Yen / Dollar 110.19
Dollar / Canadian 0.87

Macro Overview

The aftermath of Hurricanes Harvey, Irma, and Maria are expected to have uncertain affects on government data and continued ambiguity on economic activity. The hurricanes will distort economic reports quite possibly for months, as labor and material costs weigh on employment and inflation numbers, clouding actual economic results.

Despite major disruptions caused by the storms, equity markets managed to post gains in September as the prospect of rebuilding efforts fueled growth estimates across various industry sectors.

Tax reform proposals spurred discussion and anticipation about their impact on the economy and the markets. Among the plan’s primary particulars are: reduce the number of tax brackets from seven to three, double the standard deduction amount, eliminate state and local tax deductions, tax “pass through businesses” at a 25% rate, eliminate the estate tax and the alternative minimum tax (AMT).

From the perspective of the equity markets, the tax proposals include a generous cut in the corporate rate from 35% to 20%. The corporate tax proposals also include a penalty for companies taking advantage of foreign tax havens, where U.S. companies earning profits overseas will have to pay a minimum 10% tax on foreign income even if it isn’t brought home.

Since the tax plan is still only based on proposals, not an actual bill, market reaction to the proposals may change as to what actual details may pass and are eventually enacted. Economists believe that the Federal Reserve will continue to find it difficult to normalize monetary policy until an appropriate fiscal policy is in place.  It will be quite interesting to see who President Trump appoints as Federal Reserve Chair, and their belief in the strength of this economy to withstand upward adjustments.

The most recent median household income data revealed a 3.2% rise over the past year, net of inflation, according to the U.S. Census Bureau. The larger than expected increase helped stoke support for a Fed rate hike later in the year. Overall indicators of inflation are mixed, with rent and gasoline accounting for the primary rise in inflation while grocery costs and service related fees fell.

Puerto Rico, which earlier this year filed the largest bankruptcy in U.S. municipal history, is struggling to regain economic stability in the face of a $72 billion debt load and near insolvent public health and pension systems. And now, eleven days after the devastating storm wiped out power, water and communications systems, about half of the 3.4 million people on the island did not have access to drinking water, and 95 percent remained without power, according to the U.S. Defense Department. Congress has shown it can and will change the law to accommodate territories (read “states”) that have employed fiscally unsound policies.  Insolvency remains a real risk for municipal securities and should always be considered.


September Has Historically Been The Worst Month For The Stock Market

Historically Bad September Pulls Through – Equity Update

Equity markets rose in September fueled by improving economic data and optimism surrounding the proposed tax plan for corporations. The third quarter saw the Dow Jones Industrial Average Index rise 4.9%, its eight consecutive quarterly advance. For September, the Dow Jones Industrial Average Index rose 2.08%, versus an average loss of -1.09% for the month over the past 100 years. All but one of the 11 industry sectors comprising the S&P 500 ended the quarter higher. Banks, industrial, and energy sector companies all saw gains for the quarter.

Small cap company stocks may be the primary beneficiaries of the proposed corporate tax cuts since smaller companies tend to pay higher effective tax rates than larger cap companies. The tax proposals pushed the small cap Russell 2000 index higher. A stronger dollar also lifted small caps as small caps don’t have the international exposure that large multinationals have. (Sources: S&P, Dow Jones, Bloomberg, Reuters)

Yields Move Up – Fixed Income Update

Treasury yields rose in September as the Fed indicated it would soon begin the task of reducing its holdings of government bonds. Additional influences on the bond market include tax proposals by the White House deemed to stoke inflationary pressures as well as better than expected growth data.

The fallout of the hurricanes on the credit markets seems inevitable. As insurance companies begin the process of paying out claims to those insured, they may need to liquidate holdings of corporate and government debt to meet payouts. In addition, the dire financial situation in Puerto Rico has left the municipal markets questioning how the country’s distressed debt may affect mainland municipals.

Comments from the Federal Reserve in response to any possible interference caused by the hurricanes suggested that the storms were unlikely to prevent the Fed from its rising rate trajectory or from reducing its $4.5 trillion balance sheet. (Sources: Federal Reserve, Bloomberg, U.S. Treasury)

China Passes Canada To Become America’s Biggest Trading Partner – World Trade

China surpassed Canada as America’s biggest trading partner this past quarter as reported by the U.S. Department of Commerce. Through September 2015, China had more import and export activity with the United States than Canada, the first time to ever occur. Total trade in 2014 with China and Canada was close, but now China has clearly eclipsed Canada as the primary trade partner with the U.S.

As America’s neighbor to the north, Canada and the U.S. share similar languages and customs, that have allowed for an ample trading relationship. The enactment of the North American Free Trade Agreement (NAFTA) in 1994 expanded America’s reach into Canada, as well as Canada’s into the U.S. Even with China’s distance and cultural differences, it has still been able to build and expand its trading relationship with the U.S. to new levels.

Imports from Canada into the U.S. include petroleum and automobiles, while the U.S. is a major exporter of grains and other food products to Canada. The U.S. is an exporter of food and capital products to China, with Chinese imports into the U.S. primarily led by computers and electronic devices.  (Sources: Dept. of Commerce, U.S. Census Bureau)


File Taxes Early In Order To Avoid Tax Refund Fraud

What The FTC Is Suggesting On The Equifax Breach – Financial Planning

As additional government agencies have become involved in the Equifax breach, there have been a growing number of suggested actions for consumers to take in order to better protect themselves. The Federal Trade Commission (FTC) released various action items and links on their website www.consumer.ftc.gov to help consumers assess their vulnerability.

The FTC acknowledges that there were 143 million consumers affected, with the breach occurring between mid-May and July end. Social Security numbers, birthdates, addresses, and some driver’s license numbers were stolen.

Equifax is offering a free credit monitoring service available at www.equifaxsecurity2017.com that also allows you to determine of you are one of the 143 million affected.  However, this service only applies to credit reports and data maintained by Equifax. Remember that there are two other major credit reporting companies that have consumer data, Experian and TransUnion. The FTC does suggest that consumers check all three credit reports for free via www.annualcreditreport.com.

Keep in mind that this free service generates reports that do not include credit scores.

Placing a freeze on your credit files is a consideration, which makes it more difficult for someone to open a new account in your name. It may also elongate the application process should you be running credit yourself for a legitimate reason.

If you decide against a credit freeze, consider placing a fraud alert on your credit files. A fraud alert warns creditors that you may be a victim of identity theft and that they should closely verify anyone seeking credit in your name. The FTC also suggests to monitor your existing credit card and bank accounts closely for charges that are not recognizable.

As we approach year end and a new tax filing season, the FTC is suggesting to file tax returns early. Filing a tax return earlier might avert a tax scammer from using your social security number to get a tax refund based on your information.  (Source: Federal Trade Commission; consumer.ftc.gov; The Equifax Breach: What To Do)

All that said, Equifax (EFX) has recently been a favored holding in KCG equity portfolios.  Even with the breach and accusations of insider trading, the stock has been recovering nicely.  Certainly, the possibility of insider trading influenced our decision to sell, but cyber breaches are a systemic problem and have impacted even the SEC.  The decision to sell was a result of the realization that, as a midcap company, Equifax has a market cap of just $13.2 million.  As one Egan-Jones bond analyst noted, if each person impacted received a settlement of just $100, it would wipe out the entire value of the company.  Class action suits are piling up and while the company may file for Chapter reorganization bankruptcy, that won’t protect current stock holders.


Looking Ahead

The Three Big Things…Looking Ahead

KCG believes a December hike in the Fed Funds rate is likely considering the uptick in inflation and the Fed’s signals.  Wage inflation could result from the tight labor market. There are a record number of job openings while business owners express concern about the quality of available workers.  The next bear market will likely occur if or when the Fed tightens monetary policy more than the market has “priced in”.  So far, we’ve seen no risk of that, with inflation staying surprisingly low and the Fed continuing to moderate their decisions to the pace of the economy.  The market will be happiest with a Trump-appointed Fed Chair who continues to be thoughtful while moving us toward normalization.

Steady gains in 2017 have come amidst the broadest global economic growth in 10 years with no major economies in recession and Corporate Profits continue to expand.  There are indications, though, that the US is in a later phase of this profit cycle.  Performance of the Russell 200

0 may indicate a potential change in course.  It underperformed the S&P 500 in Q2, but recovered in Q3, seemingly as a reaction to potential tax relief.  Small and Mid-Cap companies failing to deliver risk-adjusted returns would be a first sign of the end of this cycle. We are watching Corporate Profits on a year-over-year basis for any signs of weaker performance.  In the meantime, we stay positive.  While consensus seems to be that the U.S. has 3-9 months to run, global markets are just beginning to break out.  Some analysts suggest a bull cycle for as long as 30 months forward.

Anecdotally, it seems more analysts are expressing cautious optimism.  Perhaps we are beginning to cross over from skepticism to optimism.  Irrational exuberance will be one indication of a looming bear.  We are already seeing articles published about milestones of past big corrections and recession-style markets.  We expect these milestone to come and go without a change in the market trend built on fundamentals.

Solid economic growth and good corporate earnings should allow the U.S. bull market to continue but there can always be corrections or draw-downs due to geopolitics or negative shocks.  KCG’s investment discipline is not event-driven.  It is fundamentals driven.  We will stay diversified, investing according to  your long-term goals.

Participate and Protect!