Current Market Environment by George Tkaczuk, MD, MPH
As October comes to an end, the market escaped the anticipated and dreaded October crash; but of course, if you kept pace with us, you should have not been concerned. As mentioned in our last quarterly newsletter, we are awaiting the “Huge Surprise” (please see last Q3 2017 issue.) On an ongoing basis the market is reacting to news on tax reform, policies, economic indicators and corporate earnings. So, while we cannot predict what will happen, we can take a look at what is happening and weigh the probability of future events on the evidence in this present day.
The market uptrend continues. On October 19, 2017 we saw some selling to celebrate the 30th anniversary of the 1987 crash, after which the market got a bit nervous, only to be rescued by the giant tech leaders earning reports. Yes, once again solid earnings reports reminded us what drives stock prices higher. I am referring to the evening of October 26, 2017 when solid earnings from Amazon (AMZN) Alphabet (GOOGL), Microsoft (MSFT), and Intel (INTC) among others sparked a huge after hour rally which continued to close out the month.
The chart below is a daily chart of the Nasdaq Composite Index highlighting the aforementioned events. The significance of the big volume rally is that institutions (the engine of the markets) continue to buy up the market with vigor.
Currently, earnings are not the only thing supporting this market. Over the last few years financial press was inundating us with headlines and stories titled telling us to get used to the “New Normal” anemic 2% GDP growth, departing from America’s historic 3% growth. This type of static thinking is not surprising since we have been in the slowest economic recovery since the great depression. However, taking a dynamic view, we see changes evolving right in front of our eyes. Current governmental policies appear to be steering the economy onto a faster growth track as witnessed by GDP growth of 3.1% in the second quarter and 3% growth in the third quarter. This happened despite two hurricanes that are likely to push some economic activity into the fourth quarter, thus raising estimates for the 4th quarter again above 3% which would be the first time since pre-financial crisis of 3% GDP growth of 3 quarters in a row.
Furthermore, as pointed out in past letters, the IBD/TIPP economic Optimism Index, the Conference Board’s Consumer Confidence Index, the National Association of Manufacturers survey and the Institute of Supply Management reported stronger optimism and rising factory orders which hasn’t been this high in over a decade.
So, taking all of the above and with the possibility of a “Huge Surprise” we expect the economy to pick up steam mired with a positive stock market.
Now, what can go wrong? It is possible that lawmakers fumble the ball and do not get anything done in terms of the tax bill, and there will be no “Huge Surprise.” However, based on the evidence, we remain optimistic as a virtuous cycle of growth is about to begin. Thus, for now, we stay invested in stocks. Cheers!
What Makes Up Trade Surpluses and Deficits by Christopher Chiu CFA
Since the last presidential campaign, there has been a great deal of discussion of the decline of America’s manufacturing prowess. Some in the administration have attributed this in part to unfair trade practices. The story goes: as industries in other countries developed, they received protections from their governments. For example, it has been said that in Germany there are 10% tariffs placed on American assembled cars, while the United States places only a 2.5% tariff on imported cars from Germany. Consequently, the German auto industry continued to grow as it exported its automobiles abroad, while American exports did not grow to the same extent to keep trade balanced.
Here is the total amount of exports and imports of the world’s four largest economies in 2016 (trillions) including the trade surplus and deficits.
The trade deficits do not come as a result of all goods that are being traded. There are undoubtedly some goods that contribute more to a country’s deficit or surplus than others. The biggest categories of exports and imports that appear repeatedly throughout the four largest economies were:
- Cars and auto parts
- Petroleum—crude and refined
- Computers, software, phones and integrated circuits
- Packaged medicines and medical equipment
I have included the full breakdown of exports and imports at the end if you want to take a closer look, but there are a few takeaways from looking at just these top categories. For one thing, the largest contributors to deficits and surpluses are not the result of just millions of sweaters that have a “Made in China” label. The biggest contributors to the US trade deficits are not small items; they are the bigger ticket items such as cars and computers.
Second, they are goods which are already a large part of our world. We, after all, live in a world of automobiles trucks and transports, where cities are connected by generations of highway infrastructure and the flow of vehicles. Or, they are goods that are becoming an ever-larger part of our world—computing, software, mobile phones, healthcare.
But there is yet another takeaway. The types of goods are highly finished and branded goods that don’t seem to have quick substitutes in their consumers’ eyes. These are highly personal goods that are highly integrated to our daily life. With the exception of crude, the goods are not commodities. These are the things people in other countries are willing to pay for across borders because there is no equivalent substitute at home.
The upshot is that if we want to be a more export driven economy we have to focus more on being manufacturers of highly finished goods that are not seen to have low switching costs, finished goods that are valuable and attractive to the rest of the world. Moreover, if we want to change our trade imbalances, the quickest way is to create a category of goods that other countries are willing to import. This used to be cars; this even used to be computers. But people in other countries are pretty smart too and over time they have learned to make cars and computers that we are willing to buy. Therefore, innovation is not a small factor in the way our economy is going to perform going forward. I would say it is the most important thing and will be the biggest contributor to job creation in the future.
United States 2016 Exports and Imports by Category
China 2016 Exports and Imports by Category
Japan 2016 Exports and Imports by Category
Germany 2016 Exports and Imports by Category
The general information provided in this publication is not intended to be nor should it be treated as tax, legal, investment, accounting, or other professional advice. Before making any decision or taking any action, you should consult a qualified professional advisor who has been provided with all pertinent facts relevant to your particular situation.