Risk/Reward Vol. 382
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
By week's end the tale of the tape was positive. But the fact that the Dow and the S&P 500 were up around a half of a percent, that the NASDAQ did even better and that the rate on the 10 Year Treasury Bond closed unchanged from the previous Friday belies the volatility of the week. Tuesday following the holiday started on a sour note as Walmart reported disappointing earnings. As one of only 30 companies comprising the Dow, Walmart's immediate 10% drop walloped that index. In what has become a lockstep, the other indices followed suit. Wednesday saw a nice recovery in the morning only to experience a quick mid day reversal after the release of the Federal Reserve's January meeting minutes. Investors freaked over the Fed's use of the phrase "further gradual adjustments" to describe future rate increases. Both the stock and bond markets plummeted with the rate on the 10Year spiking over 2.94%. (Remember the higher to rate/yield the lower the price.) The week was salvaged by a massive upward move on Friday.
So why the jitters? I see a few reasons. First, we remain in a polarized political powder keg the importance of which should not be discounted. Second, anytime a major player like Walmart disappoints it sends negative vibes. And third, since 2008 Mr. Market has been buoyed by seemingly ever increasingly accommodative monetary policies. First, zero bound overnight interest rates and then several waves of quantitative easing the result of which was to push investors out of savings, cd's and bonds and into stocks and real estate. These moves contributed to what many believe is a stock market bubble. So naturally when recently the Fed elected to reverse the course of these accommodative policies ( e.g. gradually raising rates and slowly reducing its bond and mortgage portfolio), it raised the specter of that bubble bursting. Although heretofore both the actual and anticipated speed of the reversal has been very slow and although corporate profits have risen to almost justify the elevated stock prices, any hint that the trajectory of the reversal may increase causes a negative market reaction. Indeed Wednesday's precipitous drop was remindful of the "taper tantrum" of 2013 (see Vol. 175 www.riskrewardblog.blogspot. com) a repeat of which the Fed so desperately wants to avoid. Time will tell if the Fed can engineer what Mohamed El Erian has termed "a beautiful normalization." of rates. I think it can. And even with rates on the rise, I believe that TINA will persist for some time. Therefore, on the dip I added to my index ETF positions, bought Walmart and added a utility (SO) and a healthcare REIT (VTR) both of which IMHO are significantly undervalued.
Trigger warning: a soapbox moment. Recently, the Center for Disease Control and Prevention reported that as of September, 2017 the total US fertility rate is now 1.77 lifetime births per woman; down 16.4% since 2007 . This rate is lower than many European countries and is coming ever so close to that of Japan. Hey kids, the replacement rate is 2.1. The bottom line is that the effects of our demographic time bomb of which I have written in the past (see vol. 218) will soon be upon us, if not already. We ain't birthin' 'em so we need to import them. We can chose how many and from where, but let's get on with it. Debates about DACA, Dreamers, Walls, sh#tholes aside, we need people. No country has ever grown an economy while experiencing depopulation. To reiterate, we need an intelligent immigration policy. Can our deeply partisan and feckless Congress provide us one?
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