Good morning everyone. In case you missed it, here is what's happening in the markets. The S&P 500 crossed the 3,000 mark this week. The index is up over 20% year to date, and up 8.5% over the past 12 months.
Interest in Interest Rates. Fed Chairman Jerome Powell spent last Wednesday and Thursday testifying before the Senate. At this hearing, Powell signaled an interest rate cut is likely later this month. Or, to be more precise, Powell said nothing to discourage this expectation. And this in and of itself has investors happy.
Why is this significant? Interest rate cuts are one way the Federal Reserve can help a weakening economy. While the U.S. economy isn't weak. It isn't exactly strong either. Record-low unemployment numbers have still not created significant increases in wages or inflation. The economy is in limbo. So, are rate cuts the answer? If you believe the main factors harming world growth are tariffs and the threat of a re-escalation in our trade dispute with China, the answer is "not likely". Lower interest rates would not lower the cost of tariffs. And a 0.25% cut is unlikely to help rate-sensitive sectors of the economy either (e.g. housing). In other words, people probably aren't going to rush out to buy a home because mortgage rates went down ~0.25%.
Where does this leave the market? Tax stimulus supported business last year, with many companies reporting record growth. But in the absence of additional tax stimulus, this year is a different story with many companies lowering or missing their revenue projections. However, the market is still doing extremely well. The S&P 500 is up over 20% year to date. One reason the market is doing so well is interest rates are still very much below normal levels. Unable to earn money in bonds or cash, investors have turned to stocks. And this has caused the price of stocks to continue rising. The question now becomes, at what point do these price increases become unsustainable?
So what's an investor to do? Ray Dalio, the founder of Bridgewater Associates, offered his thoughts this week. According to Mr. Dalio, every 10 years or so the economy goes through a "paradigm shift." Each new paradigm lasts until the majority of investors adapt. And this causes another shift to happen. As this current paradigm has lasted over 10 years (since 2008), Ray offered the following thoughts.
In a nutshell: Investors will soon experience diminishing returns as equity markets become overbought and it becomes harder and harder to justify high stock prices. He believes the next shift will be towards assets that excel when money is depreciating and domestic and international conflicts increase. The asset he’s referring to is gold.
His reasoning for this claim is the "easy money" the market has received since the financial crisis has created a system flush with cash. Case in point: Boeing. From 2009-2017 Boeing spent close to $30 billion buying back shares of its own stock. Meanwhile, it's underfunded pension received only $10 billion in contributions. Add significant government liabilities (Medicare and Social Security) on top of this and eventually, Dalio believes, central banks will run out of stimulant.
Speaking of Earning Misses…Shares of Netflix fell this week after the company reported fewer paid subscribers globally than projected. Far fewer. Netflix projected that its subscriber base would increase by 5 million last quarter. The actual total came in at 2.7 million. Netflix has blamed this miss on price increases and the platforms original content. This in and of itself is surprising given the $12 billion the company spent on content last year. To make matters worse both The Office and Friends will soon be leaving Netflix's platform, and competition is increasing from Apple, Disney, and AT&T. On the bright side, Netflix kicked off the 3rd quarter with the premier of Stranger Things season 3. The show drew in 26.4 million views in its first four days.
Have a great weekend everyone!
*These are the general views of Stanton Burns and they should not be construed as investment or financial advice for any individual. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Stanton Burns does not maintain positions in any securities mentioned as of the writing of this article. Past performance is historical and does not guarantee future results.