Some Things That Grabbed My Attention This Week
We’re supposed to be in the quiet days of August, but there were several important developments in the last seven days.
U.S. Treasury bonds, especially long-term bonds, have had a banner year and a great month. We’re benefitting from our investment in Wasatch Hoisington U.S. Treasury (WHOSX).
There are a lot of ways to measure the strong performance of long-term treasuries. The long-term U.S. government bond has had its best performance ever to this point in the year, according to Bespoke Investment Group.
In addition, this month likely will end as the best monthly performance for the long bond since August 2011. And this is likely to be the 19th month, since 1987, in which long-term treasuries returned at least 10 percentage points more than the S&P 500.
The yield on the 30-year treasury declined below 2% and also below the dividend yield of the S&P 500. The latter hasn’t happened since March 2009. The only times the S&P 500 dividend yield has exceeded the 30-year treasury yield were this week and several times during the financial crisis in 2008 and 2009.
Historically, a period of strong outperformance by the long-term bond usually is followed by solid returns for stocks. But, historically, bond outperformance is associated with significant declines in stocks and recessions. Those conditions aren’t present now, so it’s not a good idea to count on a big, sustained bounce in stocks.
Instead, this decline in treasury yields means investors are convinced growth and inflation will be low for some time. It also represents a flight to safety as investors worry about trade conflicts and other geopolitical problems.
In other news, Federal Reserve Board Chairman Jerome Powell spoke at the Fed’s annual conference in Jackson Hole, Wyoming, last week and made some significant statements.
Powell finally recognized that the economy and markets are different from the historic norms. Inflation is low and declining, and economic growth is slowing. This is happening at a time when global central banks are easing monetary policy aggressively. It now is obvious that secular forces are keeping lids on growth, inflation and interest rates.
Powell acknowledged this is unprecedented in recent experience and it is uncertain that central banks have the tools they need to sustain growth after using most of their ammunition in the years following the financial crisis. Exacerbating the situation are high debt levels in most developed countries and the trade conflicts.
Powell said the Fed is taking what he calls an unprecedented review of the Fed’s policy strategies, tools and other matters. This is another acknowledgement that the Fed and other central banks shouldn’t have tightened monetary policy too much beginning in 2015.
The bottom line is we are in for an extended period of easy money and low interest rates. That reality already is reflected in market prices.
The Tax Cuts and Jobs Act, enacted at the end of 2017, had significant and immediate effects on people’s tax returns, according to data on 2018 tax returns released by the IRS.
One change in the law was intended to make far fewer people subject to the alternative minimum tax (AMT). The data showed that only 78,328 taxpayers paid the AMT on 2018 tax returns, with the AMT totaling $967.6 million. By comparison, for 2017, 4.07 million tax returns reported the AMT, paying a total of $21.7 billion.
The law also doubled the standard deduction and limited or eliminated some itemized expense deductions. These changes substantially reduced the number of taxpayers who claimed itemized expenses. For 2018, 14.6 million taxpayers claimed $479.8 billion in itemized expenses. The previous year, 42.1 million taxpayers claimed $1.16 trillion in itemized expense deductions.
The deduction for state and local taxes was one of the itemized expenses that were limited under the new law. On 2018 returns, 14 million returns claimed $156.9 billion in state and local tax deductions. The previous year saw 40.4 million returns claiming $301.5 billion in state and local tax deductions.
The Data
Manufacturing weakened in the Midwest, according to the Kansas City Fed Manufacturing Index. The index declined to a negative 6 from a negative 1. That’s the largest monthly decline in more than three years. Almost all components of the index declined. Yet, the outlook for the next six months improved.
The Dallas Fed Manufacturing Survey had better news. The Production Index increased to 17.9 from 9.3. The General Activity Index increased to 2.7 from negative 6.3. The six-month outlook among survey respondents also improved.
The Richmond Fed Manufacturing Index also increased dramatically. The index was reported at 1, up from negative 12 last month. In this survey, expectations for the next six months still were positive but were lower than last month.
Durable Goods Orders were mixed, reflecting the differences in the recent manufacturing surveys. The headline number was a healthy 2.1% increase. But much of that was in aircraft orders. After subtracting the volatile transportation sector, new orders declined 0.4%.
The good news was in core capital goods. They increased 0.4% in July. June’s increase in core capital goods was revised down to 0.9% from an initial 1.9%. Increases in core capital goods indicate businesses are optimistic.
New home sales declined in July. Yet, June’s sales were revised sharply higher to the highest level since the financial crisis. Over 12 months, new home sales are up 4.3%. The median sales price increased 2.2% in July but is down 4.5% over 12 months. At the recent pace, new home sales for 2019 should be the highest since 2007.
Pending home sales declined 2.5% in July after rising 2.8% in June and 1.1% in May, according to the National Association of Realtors (NAR). Analysts anticipated a modest decline in July after the strong May and June, but the reported number is worse than expectations.
Home prices were unchanged in June, according to the S&P Corelogic Case-Shiller Home Price Index. The index showed only a 0.1% increase in May. Over 12 months, the index shows home prices 2.2% higher. That’s the lowest level in seven years.
The FHFA House Price Index was better but still shows the housing sector weakening. In June, prices increased 0.2%, the same as in May. Over 12 months, prices increased 4.8% in June, compared to 5.1% in May. Last year, the 12-month price increase regularly by 6% or higher.
These housing price indexes are reporting data from before the recent steep decline in interest rates. It will be interesting to see if the reports in a few months show higher prices.
Consumer Confidence, as reported by The Conference Board, held fairly steady at 135.1 in August, compared to 135.8 in July. The present situation component of the index increased to a 19-year high. Economists had expected the trade conflicts and stock market volatility to trigger a decline in consumer confidence. It appears the strong labor market continues to keep a floor under consumer confidence.
New unemployment claims increased by 4,000 to 215,000. The four-week average is 214,500. These levels still are near historic lows and indicate we have a very strong labor market.
The second estimate of second-quarter gross domestic product (GDP) made a few adjustments that netted to a reduction in the growth rate to 2.0 from 2.1. Consumer spending increased by 4.7% instead of the 4.3% in the initial estimate. But nonresidential fixed investment declined by 6.1%. High government spending also supported GDP growth.
The Markets
The S&P 500 fell 1.22% for the week ended with Wednesday’s close. The Dow Jones Industrial Average declined 0.63%. The Russell 2000 dropped 2.55%. The All-Country World Index (excluding U.S. stocks) lost 1.07%. Emerging market equities fell 1.79%.
Long-term treasuries rose 2.24% for the week. Investment-grade bonds increased 0.55%. Treasury Inflation-Protected Securities (TIPS) added 1.04%. High-yield bonds gained 0.41%.
On the currency front, the U.S. dollar nudged up 0.04%.
Energy-based commodities rose 0.20%. Broader-based commodities added 0.79%. Gold increased 2.58%.
Bob’s News & Updates
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