Fed minutes released yesterday showed that the Fed was closer to raising rates than many expected, which is lifting expectations that the central bank could hike before the end of the year. Three members wanted to raise rates immediately, but they were held off in a “close call”. The big consideration is the job market and whether it had strengthened enough to push inflation towards the Fed’s 2% goal. However, the other two considerations are harder to measure—the market’s preparedness for a hike, and how the US election might affect the economy. On the first point, the Fed even explicitly discussed the market’s odds that it would hike in September, a point that does not always show up in Fed minutes. The market thinks there is about a 65% chance the Fed will hike by the end of the year, but November looks unlikely because the meeting is the week before the presidential election. But depending on how that goes, it could prove a big hindrance to a hike.
FINSUM: The only election situation in which we think the Fed will still hike this year is a Clinton presidential victory and a Republican congressional victory. Markets would react mutedly or favorably to that, which would not scare off the Fed. In any other scenario, which seems less likely right now, the Fed would likely be derailed.
Source: Wall Street Journal
Let’s face it, the market is expensive across the board. This is a reality investors will need to live with in the immediate term. But how does one make good investing decisions in the current environment? The WSJ has published an article citing recommendations from a number of top firms. Russell Investments, for instance, is recommending being underweight US stocks and overweight European and EM ones. “The corporate credit market is overvalued”, says an MD from Brean Capital, particularly in the high yield space. Another commentator argues US stocks will jump higher because of a potentially strong economy in 2018, a reality that many investors aren’t ready for.
FINSUM: We have mixed feelings on US stocks. On the one hand they do seem to be overvalued, but on the other, companies appear to be in a good position to capture margin expansion if we see a good economy next year.
In what could either be taken as a good sign for the economy, or an omen of a big fall to come, new research is out which shows that Americans are spending record amounts on home improvements. Home inventory is very weak right now, which means many buyers seem to be sticking in their current homes rather than trying to buy. This seems to have led to a surge in home improvement investment. According to Harvard, Americans are forecast to spend a whopping $316 bn on home improvements this year alone. Economists say the splurge is a sign of broken housing market, with low inventory and no new construction.
FINSUM: To us this may be more of a sign of restraint and good lending practices than it is a frothy economy or a broken housing market.
Climate advocates seem to be largely upset with Donald Trump. His policies on things like climate change and the EPA have angered many, but this Bloomberg article points out an ironic fact. Despite Trump’s skepticism of climate change, he has been great for the renewable energy industry, especially solar. Despite pledging to take the US out of the Paris climate agreement as well as tumbling oil and gas prices, solar stocks have seen a big run up. The two key factors in rising prices have been state rule changes and equipment prices. Nevada has recently advanced legislation which should restart the industry in the state (Nevada gets the most sun of any state). Solar panel prices have been rising too as companies stock up ahead of what they fear with be a Trump-led tariff on imported equipment.
FINSUM: So Trump has not been supportive of renewable energy, yet his policies have had the effect of boosting the industry. Interesting unintended consequences. In a sense though, the whole situation is productive, as renewables will never truly flourish unless they are economically subsistent on their own merits without government support.
The Republican party is set to press ahead with a vote on their healthcare package today despite the fact that they appear to be short of the votes to succeed. The president has been pushing senators to stage the vote, and it is set to be held today. The strangest thing about the vote is that the Republicans are planning it despite the fact that no one is quite sure what the healthcare package is. It will be discussed on the floor before any vote is held, a high unusual gamble by the party. Senator John McCain, who was last week diagnosed with cancer, will return for the vote today.
FINSUM: Anyone’s guess how this plays out. One wonders if the Republicans have a trick up their sleeve, as this can’t be as haphazard as it seems.
Everything was expected to go very smoothly in the British election. The dominant Conservative party, led by Theresa May was expected to cruise to a huge majority in parliament. However, yesterday everything went wrong, as Labour (the left) gained a huge share of parliamentary seats and stripped the Conservatives of their majority. May may be compelled to resign as PM, potentially setting the stage for another election in the near-term. The lack of a majority means there is a “hung parliament”, which will force a coalition government. All of this is leading to doubts over the Brexit negotiations with the EU, and even Brexit itself. On the whole, it seems the coalition government will lead to a significantly “softer” Brexit, where the country might stay in the single market.
FINSUM: This was a shocking development. The Pound dropped on the news, but in the long run it is probably good news for the economy (i.e. a softer Brexit).
Venezuela has been in a state of protest and disarray for the last couple of years. Chaos may be a more appropriate term. However, this article argues a much scarier new term is emerging: civil war. The country has suffered from inflation and a lack of basic goods, which have spawned increasingly intense protests from those demonstrating against Maduro’s government. Now things have worsened to the point where an all-out civil war may emerge. “We’re seeing much larger masses protesting across all major cities, including the working-class neighborhoods” where Maduro used to enjoy support, says a retired Venezuelan general formerly in charge of putting down such unrest. “The government is losing control”, he continued.
FINSUM: It is hard to discern what impact this may have on the US political and investment climate. It does seem the US would be more inclined/obligated to get involved given the closer proximity of the country. The oil market would probably gain on the prospect of decreased supply from Venezuela.
Source: Wall Street Journal
Investors should be worried about US real estate. That is the conclusion of new data analyzing the US housing market. This worries are particularly high at the top end of the market, where a mountain of new luxury apartment inventory is about to hit the market at a time when vacancy rates are already rising. As a result of the glut, banks have been tightening credit lines to developers, and previously planned projects are stalled. Rental inflation also appears to have peaked, all of which has weighed on residential REITs.
FINSUM: This article paints a pretty bleak picture of US real estate, but on the flip side, the low end of the market seems like it will stay strong as first-time Millennial buyers keep things buoyant.
Source: Wall Street Journal
Advisors and investors beware, the long-swelling bubble in the bond market looks set to pop. Major bond investors are as worried as they have ever been, mostly because of the reduction in easing that is finally coming to markets. Central banks are letting off the gas pedal for the first time in almost a decade, which could have a devastating effect on the bond market. According to the head of fixed income at JP Morgan Asset Management, who oversees almost half a trillion in AUM, “The next 18 months are going to be incredibly challenging. I am not an equity investor, but I can just imagine how equity investors felt in 1999, during the dotcom bubble”. He continued, “Right now, central banks are printing money at a rate of around $1.5tn per year. That is a lot of money going into bonds. By this time next year, we think this will turn negative”.
FINSUM: There is a lot at stake in bond markets after years of relentless gains on the back of dropping rates. JP Morgan seems to be very wary.
After years trailing behind its biggest rival, Morgan Stanley’s stock did something it hasn’t for years yesterday—it overtook Goldman Sachs in market cap. After a stock gain yesterday, combined with a GS fall, Morgan Stanley’s valuation is now $86.40 bn, ahead of Goldman’s $85.88. The bank’s fixed income division has been surging of late, boosting sentiment amongst investors. Goldman’s FICC division has been headed in the exact opposite direction, with a steep fall in their most recent quarterly earnings.
FINSUM: James Gorman has done a great job steering Morgan Stanley and boosting their ROI. We like the overall direction of the bank.
The efforts to combat the fiduciary rule are numerous, including an encouraging new proposal out of the house which would replace the current rule with a new one to be drafted by the SEC (not the DOL). However, aside from this, it appears that advisors are going to have a lot more time and freedom as the current version of the DOL rule looks almost certain to be delayed well beyond its January 2018 implementation date; likely to the end of 2018 or beyond. The reason why is that even the DOL is considering major revisions, such as expanding the exempt transactions list, doing away with the private right of action clause, and allowing rollovers to be exempted.
FINSUM: There is so much going on to defeat the rule it is hard to imagine there will not be big changes. We hope the SEC-driven rule being pushed by the House comes to pass, but even if it doesn’t, we think the fiduciary rule will eventually end up being toothless.
Anyone who thinks oil prices are headed higher is misguided. Most experts agree that the future for oil is not bright at all. While there may be short-term rallies in the near future, the long-term outlook is very bleak. This is driven by three primary factors. Firstly, US shale will keep the market oversupplied for some time to come, secondly electric vehicle demand will grow, undermining oil, and thirdly, emerging market demand will not stay as robust as it has been (solar and electric vehicles are growing there too), taking away a fundamental growth driver.
FINSUM: The writing is on the wall for oil, and in our view, even near term prices are likely to stay weak because of the competitive and over-supplied market.
One of the bright spots in the post-Crisis era has been the collectibles market. Everything from antique cars to high end art has surged in value since the Crisis, making collectibles one of the better returning asset classes. However, at least for the art market, that appears to have changed, as 2016 saw sales shrink 11% to their lowest point since the recession. 2016’s poor performance follows a down year in 2015 as well, when sales slipped 7%. The combined losses have now wiped out all the gains seen in 2013 and 2014. 2016 was particularly poor for auction houses.
FINSUM: Hard to say exactly what slowed the sector down as it had been doing so well. One interesting factor—the declines directly coincide with the bear market in oil.
One of the big changes coming to the structure of the trading and asset management businesses is that research is increasingly being split out on its own. Directed by European regulations, costs for research can no longer be bundled with trading commissions. This has led to a scramble by research providers to figure out how to price their now stand-alone research. Now, big banks are reportedly locked in tense negotiations with the clients as they are asking firms to pay $1m per year for access to their research. Fund managers think prices will come down.
FINSUM: This change could be headed over to the US soon, so something to keep an eye on. If banks are able to charge high fees, it could lead to a change of direction for the whole industry.