Quote of the Week
“The computer model tells us when to get in and when to get out. The computer understands what the price is telling us about the trend of the market. All of the systems are designed to risk modest amounts of capital and to stay with winners as long as possible.” — Ken Tropin, Trend Following Trader
Tariffs: Deja vu All Over Again
I don’t know what to say. Mr. Trump has re-instituted the tariffs again. Frenetic policymaking. I hope he has an end in mind. I don’t understand what he is doing. Tariffs on Canada?
The markets didn’t move much last week. The S&P 500 was up 0.49%, the Dow was down 9.48%, and the Nasdaq was up 1.62%. Year to date the S&P 500 is up 2.28%, the Dow is down 0.34%, and the Nasdaq is up 9.43% mostly driven by the large tech companies.
Are the Trump Tax Cuts Increasing Business Spending?
Economists are watching closely for signals that the Trump tax cuts are boosting business spending, which would signal more hiring, rising pay, and stronger economic growth.
They are still squinting.
A variety of economic indicators shows that business spending, which Trump and his allies predicted would surge on account of the tax cuts Trump signed late last year, is healthy but little has changed from recent years. Business investment is on track to have a solid year, but there’s little evidence we are in a boom. The new tax legislation isn’t providing a significant boost to capital expenditures.
It still could, as business leaders execute strategic decisions that typically play out over several years. But the trend so far in 2018 has actually been a bit weaker than in 2017. Here is the data for four measures of business spending.
Capital goods orders, excluding aircraft and defense. This includes business spending on machinery, equipment, computers, office furniture and most other things companies need to operate. Spending picked up in 2016 and accelerated in 2017. But the rate of growth has actually slipped since then.
Small business spending plans. This survey by the National Federation of Independent Business measures the percentage of business owners saying they plan to increase spending on equipment or facilities within the next three months. It has generally been drifting upward since the lows of 2009, but at 29% it is now three points lower than it was last August.
ISM manufacturing new orders index. This is a survey of businesses conducted monthly by the Institute for Supply Management which asks, among other things, about the level of new orders manufacturing firms are receiving from customers. The index has been climbing since 2015, but it is lower now than it was at the end of 2017.
Morgan Stanley capital-expenditure plans index. This index tracks data on manufacturing spending plans in several Federal Reserve business surveys and often signals spending that takes place about three months in the future. This index hit a record high in March but fell back in April and May. Morgan Stanley says the data “remains consistent with continued strength in capital spending” but doesn’t attribute that to tax cuts.
The bottom line is that businesses will invest money back into their companies when they can see a future increase in demand. People need to spend more money goods and services than they are currently spending to grow demand. With the Boomers and the Millennials being the largest generations, spending doesn’t look to increase. Half of the Boomers are living on Social Security and the other half that are well off doesn’t spend money because they don’t need stuff and they are afraid of running out of money. The Millennials don’t spend money on stuff either. Half of them are basically unemployable in today’s high-tech economy because they are not educated. The other half are highly educated and successful but don’t spend money on stuff because they are into spending on experiences.
What the tax cut has done is to encourage business to buy back their own stock, which raises earnings per share, which raises stock prices, which raises executive bonuses. Thus, adding no value to expanding the economy.
By the Numbers
NO NEW RECORD – The S&P 500 last achieved an all-time closing high on 1/26/18 or 87 trading days ago. That’s the longest stretch without a new closing high for the index since it went 286 trading days with no record closes between 5/21/15 and 7/11/16 (source: BTN Research). – Michael A. Higley, BTN 06-04-2018
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These are the opinions of Larry Lof and Stephanie Mayoral and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs. The S&P 500 is an index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly. Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.