Market News – Week of February 26th, 2018

LOTS OF QUESTIONS, FEW ANSWERS:

Economic and market issues took a back seat in people’s minds this past week. The Parkland school shooting, its aftermath, the memorials, the grieving, the anger, and the heated rhetoric regarding what to do about it remained front and center. Meanwhile, a number of unanswered questions that will impact the economy and the markets hung in the air with no immediate answers:

• With a strengthening economy, will workers see their wages go up?
• If higher wages come, will we get too much of a good thing, and will inflation be excessive?
• How many times will the Fed raise interest rates this year under the new chair Jerome Powell?
• Will the U.S. economy keep adding jobs at or around the 200,000 per month rate, and will that cause the labor force participation to rise?
• When the Fed hikes rates, will the dollar increase in value at just the right rate, or too fast?
• A lot of questions and not many anwers. By this summer we should be much clearer on some of these items.

LEADING ECONOMIC INDICATORS UP AGAIN:

The Conference Board tracks a group of ten data points which are known as leading indicators (as compared with lagging indicators) as to what the economy is going to do. In January, these indicators rose for the fourth straight month. Eight of the ten indicators were positive.

END-OF-WEEK RALLY PUSHES STOCKS HIGHER:

U.S. stocks rallied on Friday to end another volatile week with slight gains. The S&P 500 has risen 4.9% in the past two weeks. New Fed Chair Jerome Powell will address Congress this Thursday. Watch for the market to react as prognosticators look for clues in his words regarding interest rate hikes for the rest of the year.

THE MARGIN PROBLEM:

One of the things that causes volatility is the record amount of stock currently owned “on margin”. If you have a brokerage account, you are legally allowed to use the balance in your account to borrow money against that balance. These are called margin loans, and investors pledge all or part of their portfolio of stocks and bonds as collateral to borrow money to buy more stocks and bonds. An investor with a margin account can usually borrow up to 50% of the total purchase price of the pledged assets. This creates a significant problem when the markets go down quickly. For example, let’s say an investor had a $100,000 brokerage account that was fully invested in large U.S. company stocks. She decides to borrow $50,000, and invest that borrowed money (using a margin loan) in more large U.S. company stocks. She now has $150,000 invested in such stocks, and the total value of the account is $100,000 ($150,000 minus the $50,000 loan). Then, as happened after January 26, these stocks tumble in value by 10%. Now her stock is worth $135,000, and her balance has slipped to $85,000. By using leverage, she turned a 10% loss into a 15% loss. (The lure of this working the other way on the way up is what gets people to do this.) Now the brokerage will look at her account and see that she has $50,000 borrowed on margin against a value of $85,000. That isnot enough (not 50%), and so the brokerage will send the investor a “margin call”, meaning the investor must immediately pay $7,500 in cash to get the loan down to 50% of the balance. What does the investor do? She will sell $7,500 of her stock. When a whole bunch of investors do this at the same time, it exacerbates the downward spiral by forcing investors to sell while stock prices are going down. There is currently approximately $643 billion in current margin loan balances.

HOTEL OCCUPANCY STILL RISING:

Last year, as you can see below in the blue broken line, hotel occupancy had a great year. 2017 was a record year, but some of that was due to the hurricanes which displaced a lot of people. 2018 is getting off to a great start.

References:

HOTEL OCCUPANCY STILL RISING: http://www.calculatedriskblog.com/2018/02/hotels-solid-start-for-occupancy-rate_22.html
LEADING ECONOMIC INDICATORS UP AGAIN: https://www.marketwatch.com/story/leading-indicators-shoot-up-1-in-january-for-fourth-straight-monthly-gain-2018-02-22
THE MARGIN PROBLEM: https://www.wsj.com/articles/investors-zeal-to-buy-stocks-with-debt-leaves-markets-vulnerable-1519560001?mod=searchresults&page=1&pos=1