Economic Data Influences Stocks – U.S. Equity Update

Major equity indices all posted gains for the third quarter, with the S&P 500 advancing 7.2%, the Dow Jones Index gaining 9%, and the Nasdaq rising 7.1%. It was the single best quarter for stocks since 2013, buoyed by recent corporate tax cuts, improving earnings, and stable economic growth.

A notable shift occurred in the third quarter as equities surpassed real estate as the largest portion of household wealth. Real estate has out-valued equities as a percentage of household wealth for nearly 20 years.

Investments by companies in the S&P 500 Index increased to $341 billion in the first half of 2018, exceeding the same period last year by 19 percent. The increase in investments is on pace to be the most significant in nearly 25 years.

Several analysts are forecasting that the positive effects of the recent tax cuts will begin to fade as higher interest rates begin to inflate capital borrowing costs.

Growth estimates from the Organization for Economic Cooperation and Development (OECD) place U.S. economic growth at 2.9% for 2018, up from 2.2% in 2017, making it the fastest pace of growth since 2005. (Sources: S&P, Bloomberg, OECD, Dow Jones, NASDAQ)

Household Equity Rising as Mortgage Debt Falling – Housing Market Overview

Following the debacle of the housing crisis from ten years ago, homeowners have become less ambitious and more conservative. Equity levels in homes across the country have respectfully increased past mortgage debt levels over the past few months. The latest data from the Fed shows that household equity is approaching $16 trillion, exceeding the level of mortgage debt standing at $15.1 trillion.

Contributing to the rise in home equity includes rising real estate values, a sustained low rate environment, limited housing supply, and an improving economic environment.

The amount of mortgage debt held by homeowners has not yet returned to the levels seen since before the housing crisis. Homeowners have become more conservative and less ambitious as they were during the crisis. Americans are also staying in their homes longer which helps build equity faster as opposed to moving and taking out a new loan laden with fees and interest payments. The Fed report notes that homeowners are taking much less equity out of their homes relative to the crisis period. The Fed data has also identified that more cash buys are prevailing throughout the market, helping to somewhat reduce the reliance on mortgage loans. (Sources: FRED; Federal Reserve Bank of St. Louis)

Products Exempted From New Tariffs…..For Now – Trade Policy

Of the 5,745 products that have been tagged with tariffs as they arrive in the U.S. from China, a handful have been omitted from tariffs. Among the exempted products are ibuprofen, barite, fluorine salts, and smartwatches. As newly imposed tariffs became effective in late September, numerous industries and companies have realized how vulnerable the U.S. is to various products and materials exclusively supplied by China.

Fluorine salt, an essential chemical used to manufacture electrolytes for electric car batteries, is exempt from tariffs for the time being. Certain auto manufacturers and battery manufacturers located in the U.S. lobbied heavily to keep the chemical off the tariff list. The mineral barite is used widely in the U.S. energy industry for the purpose of facilitating the use of drilling fluids in oil and gas exploration.

Department of Commerce data reveals that 90% of ibuprofen consumed in the U.S. is imported from China. Even though actual pills and tablets are produced in the United States, the key ingredient is imported directly from China. Various medical groups lobbied to have ibuprofen exempt from tariffs since it is widely used as a safe and easily available medication. Because of its broad medical application, the World Health Organization has placed ibuprofen on its list of Essential Medicines.

A range of businesses from enormous energy companies to smaller suppliers of specialty parts have lobbied for tariff exemptions ever since the tariff wars began. Many have agreed that China has become an indispensable supplier of many raw and essential products used in the U.S. China has become a global producer of relatively obscure industrial commodities used in a host of numerous products, which the U.S. has become increasingly reliant on.

Recently imposed tariffs currently affect about $250 billion of Chinese imports, with an additional $267 billion proposed by year end. China has thus far retaliated with $110 billion in tariffs on U.S. products, yet exempted certain products such as oil. The ratio of trade between the U.S. and China stands at 4-to-1, meaning that for every 4 Chinese products the U.S. buys, China buys 1. (Sources: Commerce Department, World Health Organization)

Rates On The Rise – Fixed Income Update

The Fed announced its third rate hike for the year, indicating another rate increase anticipated in December and three more to follow in 2019. The Fed’s key policy rate, the Federal Funds Rate, now stands at a range of 2% – 2.25%, the highest in ten years. Borrowing rates are gradually increasing in various consumer sectors including autos, appliances, and home mortgages. Many analysts believe that the current Fed Chairman, Jerome Powell, may have the ability to orchestrate a soft landing, meaning raising interest rates gradually without triggering a recession or economic slowdown.

Of the various fixed income sectors, U.S. corporate high-yield bonds had the least amount of price declines in September, outperforming both government and investment grade debt. Some analysts view this as a validation of improving financial conditions for U.S. companies and their ability to repay debt. (Sources: Treasury Dept., Federal Reserve, Bloomberg)

Larger Increase in Benefits Than Income – Labor Market Review

As companies struggle to keep existing qualified workers as well as attract and hire new workers, the task of keeping labor costs minimized becomes an increasing challenge. Rather than paying higher wages, some employers are compensating their employees with enriched benefits.

The Department of Labor monitors not only how much companies pay their employees, but the breakdown of how companies are compensating their employees. The most recent data released shows that companies are spending more on health insurance, retirement savings, bonuses, vacation time, and other group benefits rather than increasing wages. The recent gain in benefits grew by nearly 12% for bonuses and benefits.

With unemployment near 18-year lows, the 3.9% unemployment rate has led to numerous job openings that exceed the number of jobless seeking work. This tightening has led to employers using bonuses and benefits to maintain and recruit skilled employees.

This past month, the White House Council of Economic Advisers reported that 623 U.S. companies announced bonuses, pay increases, and better benefits as a result of the tax law changes. (Source: Labor Department; September 18, 2018 Release,USDL-18-1499, White House Council of Economic Advisers)

When Taxes Replaced Tariffs – Historical Note

As a young country, the first of tariffs enacted to protect American business interests was the Tariff Act of 1789. The act was written to raise funds for the newly established government, reduce debt from the Revolutionary War, and protect U.S. companies from unfair foreign competition. At the time, Congress passed tariff amounts from 5% to as high 50%. For the next 150 years, tariffs generated the vast majority of revenue for the federal government, until Congress ratified the 16th amendment in 1913 allowing the imposition of federal income taxes. Tariffs began to lose their importance thereafter once federal tax revenue began coming in.

Presidents varied on their views regarding tariffs over the decades, yet Abraham Lincoln said in 1847 that “Give us a protective tariff and we will have the greatest nation on earth”. Tariffs eventually paid for some of the costs of the Civil War for the north.

By the end of the second World War, the U.S. economy had become enormous with American companies dominating the international markets. For the next 60 years, U.S. policy sought to reduce trade barriers and tariffs in order to expand and maintain commerce throughout the world. (Sources: Library of Congress; https://archive.org)

Protecting Your Child from Identity Theft

In September 2017, about a year ago, a massive Equifax security breach became public knowledge. If there was a silver lining to this infamous event, it likely spurred more consumers to take more measures to protect their identities. Perhaps you’ve placed a fraud alert or frozen your lines of credit, or you’re at least checking your credit reports more regularly these days.

All well and good. But what about your kids? As distasteful as the idea may be, child identity theft is a serious and growing concern, for several reasons:

It happens more often than you might think. In a 2018 Child Identity Fraud report, Javelin Strategy & Research found more than a million children were identity fraud victims in 2017, costing families more than $540 million in out-of-pocket expenses.

Your kid’s identity is a tempting target. Identity thieves especially love your child’s Social Security Number, since it usually offers them a clean slate, devoid of credit history. If they can get ahold of it, they can create all sorts of havoc, such as racking up debt, filing bogus tax returns or applying for public aid – all under your child’s identity.

It’s easy pickings. Kids may not be as careful with their identity, and new technologies expose them to added risks. Javelin’s report also connected kids’ susceptibility to being bullied with a higher likelihood they’ll end up giving out personal information – online or to people they know.
The theft often goes undetected. While we may be vigilant about monitoring our own credit reports, many parents don’t realize they should be doing the same for their children. As described in this Wall Street Journal piece, lax oversight “often allows theft to go unnoticed for years, until the victims reach college age and start applying for credit cards and student loans.”
Fortunately, a few basic steps can go a long way toward protecting your child from identity theft.

Know the early warning signs, and take them seriously. Is your seven-year-old receiving credit card offers in the mail? Has a collection agency called and asked to speak to your toddler? Don’t laugh it off. It could mean your child’s identity has been compromised.

Check your child’s credit history regularly. Use AnnualCreditReport.com to check in with the three major credit agencies, to see if your child has a credit history. Unless you’ve opened a file in your child’s name, they shouldn’t have one; if they do, this is a big red flag.

Consider establishing and freezing your child’s credit file. For added protection, you may choose to create credit files for your children, and then freeze them until needed. This makes it much harder for an identity thief to successfully use any stolen information to establish a fake line of credit. Note: Effective September 21, 2018, a new Federal law makes it easier to freeze your own and your minor children’s credit files.

Educate your child. As soon as your children are old enough to understand, recruit them to assist. The Federal Trade Commission offers this handy information on how to talk to your children about computer security. Also assure them, they should never be afraid to tell you if they feel they’re being bullied by anyone – under any circumstances.

Just as it is second nature to help your children apply sunscreen when the sun is shining or to bundle them up on a winter day, protecting them from identity theft should be part of your regular, all-weather routine these days. A few sensible and regularly applied defenses could ward off years of damage done from an “overexposure” to identity theft.