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)

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.