You’ve read it before – and it’s true. Markets hate uncertainty.
Failure to pass the American Healthcare Act, which was supported by Republican leaders in Congress and President Trump, may have spooked U.S. stock markets last week.
In an article titled, “How To Make Investing Decisions Based On Politics: Don’t,” Nasdaq.com reported controversy over the bill was “raising questions about [Republicans’] ability to focus on and pass policies that the market has been eagerly anticipating, such as tax reform and infrastructure spending.” Financial Times concurred:
“The post-election stock market rally has been largely powered by hopes Donald Trump’s administration would swiftly launch a bevy of aggressive economic stimulus measures, including tax cuts, deregulation, and infrastructure spending. However, Mr. Trump’s difficulty in Congress over the government’s healthcare plan has prompted some reappraisal by investors of the prospect of significant stimulus arriving later this year.”
Financial Times pointed out it’s likely other factors played a role in investors’ decision-making, as well. Some professionals have become concerned about market valuations. About 34 percent of fund managers believe global equity markets are overvalued and 81 percent say U.S. equities are the most expensive in the world, reported Fortune Magazine citing Bank of America Merrill Lynch’s survey of fund managers.
In addition, estimates for corporate earnings have been revised lower for the first quarter of 2017. Take that with a grain of salt, though. FactSet wrote, “In terms of estimate revisions for companies in the S&P 500, analysts have made smaller cuts than average to earnings estimates for Q1 2017 to date…”
Politics is one factor affecting markets, and partisanship may be affecting consumer sentiment. Richard Curtin, chief economist of University of Michigan Surveys of Consumers, said consumers’ expectations about future economic growth were split along party lines in March. “…among Democrats, the Expectations Index at 55.3 signaled that a deep recession was imminent, while among Republicans the Index at 122.4 indicated a new era of robust economic growth was ahead.”
We live in interesting times!
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so,” wrote Mark Twain.
In 2016, NerdWallet commissioned a survey* to get a better handle on North Americans’ thoughts about lying when money is involved. It’s interesting to note which money-saving lies participants found acceptable. The list included:
- Logging on to someone else’s retail or media account to avoid subscription fees (33 percent)
- Not reporting under-the-table income to avoid taxes due (24 percent)
- Lying about your age or your child’s age to receive a discount at a restaurant or retailer (21 percent)
- Lying about annual mileage to lower auto insurance rates (20 percent)
- Lying about income on a loan or credit card application (12 percent)
- Lying about smoking tobacco to lower life insurance rates (11 percent)
(The number in the parentheses reflects the percent of those surveyed who said the lie was okay.)
The survey found far more men than women believe it is acceptable to tell lies to save money. For instance, 30 percent of men said it was okay not to report under-the-table income to the Government. Only 18 percent of women agreed. One-fourth of male survey participants thought it was okay to fudge annual mileage to receive lower auto insurance rates, while just 16 percent of female respondents agreed.
Age also makes a difference. People who are age 65 or older were far less likely to find financial dishonesty acceptable:
“The survey found that 11 percent of seniors say it is acceptable to use someone else’s paid account for online movies, music, or articles to save on subscription costs, compared with 39 percent of people ages 18-64. Just 7 percent of people ages 65 and older think it’s acceptable to lie about annual mileage for lower auto insurance rates compared with 23 percent of people ages 18-64. Among all of the lies in the survey, the one that gets the most support from those 65 and older is not disclosing under-the-table income to the Government in order to pay less in taxes – 14 percent say that’s acceptable.”
When it came down to it, “For all questions, retirees had the lowest rates of acceptance of lies compared with students, employees, and the unemployed.”
*The survey included 2,115 Americans, ages 18 and older, and was conducted February 18-22, 2016, by Harris Poll on behalf of NerdWallet. This survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated.
Weekly Focus – Think About It
“I believe that there is a subtle magnetism in Nature, which, if we unconsciously yield to it, will direct us aright.”
–Henry David Thoreau, American author
Last week’s U.S. employment report was better than expected. The United States added 235,000 jobs in February, which was a few more than economists had forecast.
It may seem counterintuitive, but the positive economic data helped push U.S. stock markets lower. The jobs report was a sign the American economy continues to be strong and indicates a rate hike may be on the horizon. Barron’s reported:
“If anything, the data just confirms what we’ve known for a while now: The economy is growing, and one rate hike is unlikely to do much damage…There’s still a strong likelihood of some sort of economic stimulus plan from the Trump administration sometime this year…But the fact that tax cuts and infrastructure projects are even being considered at a time when the U.S. economy is adding 200,000-plus jobs a month is ‘unprecedented’…”
Federal Reserve (Fed) interest rate hikes affect stock markets because they make borrowing more expensive. Higher borrowing costs may reduce the amounts people and companies spend and affect companies’ profitability and share values.
At the end of last week, CME’s FedWatch Tool, which gauges the likelihood of changes in U.S. monetary policy, indicated there was better than an 88 percent chance of a rate hike when the Fed meets on March 15.
It’s interesting to note investor sentiment has become less optimistic. Last week, the AAII Investor Sentiment Survey showed investor pessimism had reached its highest level since February 2016. Bearish sentiment increased by almost 11 points, finishing at 46.5 percent. That’s significantly higher than the historic average of 30.5 percent. Bullish sentiment fell by almost eight points to 30 percent. That’s below the historic average of 38.5 percent. The AAII survey is often used as a contrarian indicator.
They’re all on the pro rodeo circuit. They all grow corn and soybeans. They all have renowned universities. In addition, according to The Economist, Texas, Iowa, Nebraska, Mississippi, Alabama, and Michigan are likely to experience the biggest increase in tariffs – as a percent of state gross domestic product (GDP) – if and when the North American Free-Trade Agreement (NAFTA) is revised.
Under NAFTA, goods are imported from and exported to Mexico and Canada without tariffs, which are essentially taxes on imported goods. Tariffs typically increase the cost of imports, making them less attractive to consumers. This can help support the market for domestically produced goods and help protect domestic jobs and industries. Currently, the United States sends about $240 billion worth of goods to Mexico, each year, and Mexico sends even more to the United States.
The Economist’s analysis measured potential increases in tariffs, in tandem with the volume of state exports to Mexico, to determine the possible impact on a state’s economy. (The analysis did not include Canadian exports, even though Canada is also a NAFTA participant.) While the effect on the majority of states’ economies would be relatively small, the impact on others could be more significant:
“In 2015, Iowa’s farmers shipped $132M of high-fructose corn syrup to Mexico. Without NAFTA, Mexico would slap a tooth-aching 100 percent tariff on the stuff…Among this group, Texas stands out. It faces an average tariff of only 3 percent, but its exports to Mexico are worth nearly 6 percent of its GDP (compared with 1.3 percent nationally)…Michigan also fits this category. Its exports of cars and parts – many of which end up back in America – would attract tariffs averaging only about 5 percent. But, with such shipments totaling $4.1B, the bill would be painfully large.”
No one yet knows how renegotiating NAFTA may affect any of the countries involved because talks are not expected to begin for several months.
Weekly Focus – Think About It
“Making good decisions involves hard work. Important decisions are made in the face of great uncertainty, and often under time pressure. The world is a complex place: People and organizations respond to any decision, working together or against one another, in ways that defy comprehension. There are too many factors to consider. There is rarely an abundance of relevant, trusted data that bears directly on the matter at hand. Quite the contrary – there are plenty of partially relevant facts from disparate sources – some of which can be trusted, some not – pointing in different directions. With this backdrop, it is easy to see how one can fall into the trap of making the decision first and then finding the data to back it up later. It is so much faster. But faster is not the same as well-thought-out.”
–Thomas C. Redman, “the Data Doc”