In my previous week’s commentary, I explained why higher interest rates will hurt stock assets more than many might think. Naysayers pointed to the fact that rate levels are still quite low on a historical basis. Unfortunately, these folks are neglecting to place their comprehension of borrowing costs in context. Take a look at the last 20 years of U.S. monetary policy via the Federal Funds Rate (FFR). The Federal Reserve’s tightening phase from the 4% level up to the…
The broader U.S. market has finally recovered from its late January meltdown. Indeed, most sectors have gone on to reach all-time highs. On the flip side, a number of influential segments and sub-segments are still laboring. For instance, the Financial Select Sector SPDR (XLF) remains roughly 5% below its January peak. Theoretically, financial stocks should benefit from a rising interest rate environment. A healthy economy typically implies that borrowers have the capacity to repay. Moreover, with a strong economic backdrop,…
Net worth used to be a simple concept. Add up assets. Subtract liabilities. And celebrate (or mourn) the tangible book value of the company. It is not so simple anymore. In a service-oriented economy, the value of a corporation partially depends on several intangibles. How influential is the company’s brand? What about the impact of the personality of one or two key individuals? Nevertheless, the increasing importance of intangibles should not diminish the relevance of tangible net worth. Tangible book…
In the private markets, buyers and sellers care a great deal about valuation. For example, a financial advisory practice might fetch between 1 percent and 2 percent of assets under management. Or it might go for 2.3 times trailing 12 months’ gross revenues. Higher or lower valuations depend largely on things like key personnel, average account size, client retention, economies of scale and the growth rate. The critical importance of valuation also comes to light on the popular television show,…
The mainstream financial media love to tell you, “Bull markets don’t die of old age.” True enough. Indeed, the current uptrend remains a shining example of cyclical durability and persistence. For many, then, the fact that the stock bull has set an all-time record in length is cause for celebration. 3,453 days and counting. If you choose to listen, Kool & The Gang will even let you know where the party is at. It is worth noting that the S&P 500 needs to…
The S&P 500 – a broad market barometer for U.S. stocks – last hit a record high six-and-a-half months ago. Why has the stock market failed to close above its previous peak set back on January 26? The short answer is that not everyone is buying the media-hyped “Goldilocks” scenario. Granted, the country is enjoying the near-term benefits associated with tax cut stimulus and relatively low interest rates. Employment trends have been favorable. Consumers are willingly spending both the money…
According to the National Association of Realtors, existing home sales have declined for three consecutive months. Similarly, the year-over-year data have been negative in every month except for February. Existing home sales are hardly the only weak spot in real estate. Sales of new homes fell 5.3% in June. Meanwhile, the Mortgage Bankers Association reported that purchase applications dropped 5% and overall application volume decreased 2.5% (through the week ending July 13). There’s more. Housing permits shrank on a year-over-year…
Tax-cut infused earnings have been solid. The rapid-fire rise of longer-term borrowing costs has slowed considerably. And corporate share buybacks have dwarfed earlier records. In Q2 alone, corporations purchased a staggering $436.6 billion in stock buybacks. That brings the year-to-date total to $670 billion. Similarly, announced S&P 500 buybacks are practically leaping off of the chart. More than most factors influencing market direction, buybacks have kept large-cap stocks from succumbing to legitimate concerns about Federal Reserve policy error, China trade…
If the Federal Reserve raises the federal funds rate much further, it risks triggering a recession. That’s not my opinion; rather, it is the opinion of Neel Kashkari, president of the Federal Reserve Bank of Minneapolis. Kashkari’s thesis? When shorter-term rates rise above longer-term ones – a phenomenon known as yield curve inversion – the financial markets are anticipating an economic slowdown in the near future. Additionally, Kashkari does not care why longer-term Treasury yields are flat or falling (e.g.,…
There has been a great deal of chatter about the strength of the American job market. And with good reason. Most measures of employment health – U-2 unemployment rate, jobless claims, wage increases, year-over-year job growth, etc. – support the notion that U.S. workers are “winning.” On the other hand, very few folks have addressed the possibility that the data are more likely to weaken than strengthen. On the contrary. So much faith is being placed on tax cut stimulus…
