Certainly no one cheered this morning when Bank of America and Goldman Sachs announced big one-time hits from the recently passed tax bill, but as with JP Morgan Chase and Wells Fargo last week, the big deal for investors was what these huge financial institutions had to say about future quarters. And on that Bank of America and Goldman Sachs delivered differing degrees of optimism
U.S. stocks came racing out of the gates on strength in overseas markets with the Dow Jones Industrial Average trading at 26,000–283 points higher than the Friday close at one point during the day. Then came the plunge. As indexes gave back all their gains and then some. The  Dow closed 10.3 points lower at 25,793. The Standard & Poor’s 500 traded above 2,800 for the first time and then fell to close down 0.4% for the day. The NASDAQ Composite also finished lower on the day. This kind of intraday reversal is never a sign of market health.
Back in October 2017 I set up a very simple portfolio of 5 ETFs with the goal of beating the performance of a Standard & Poor’s 500 ETF (so that’s the benchmark) with less risk (because of the added diversification.) I said that I would rebalance this portfolio as needed–or on a six month schedule (which ever came first.) But that this would be a relatively passive portfolio of passive ETFs–but with some active management thrown in by way of those shifting allocations. Well, the portfolio certainly isn’t six months old, but we have flipped the calendar page into 2018 so I’m going to do the first performance report now and at the same time do an initial rebalancing of assets.
Ever since the January 11 announcement from Wal-Mart (WMT) that it would increase the starting wage rate for hourly workers to $11 (and provide a one-time cash bonus of up to $1,000 plus expanded maternity and parental leave b benefits,) pundits have seized on the news to say either “See, the Tax Cuts and Jobs Bill is already working,” or “This is all about competition for workers in a tight jobs market and has nothing to do with recent tax cuts.”
There is a possibility that the recently passed tax cuts will depress housing prices or at least the rate of growth in housing prices. That’s a big deal for any discussion of asset allocation in our portfolios because for most of us our house is by far our biggest asset since many of us are counting on the growth of value in our homes to fund part or all of our retirement.
By this time we’re used to insanely divisive rhetoric out of Washington and financial markets have come to react to it with a shrug: The children will get something–probably the minimum–done even if they can’t learn to play together. Was last week more of the same, or different? Should be take the possibility of a shutdown after Friday when the temporary funding agreement that is now keeping the federal government open expires? Will the financial markets take this threat seriously?
Another week dominated by bank earnings reports will give traders and investors time to get really excited about the shift to earnings reports from other sectors in the week that begins on January 22. The big fourth quarter earnings reports for this coming week are Citigroup (C) on Tuesday (remember the market is closed on Monday for Martin Luther King’s birthday), Bank of America (BAC) and Goldman Sachs (GS) on Wednesday, and then finally some non-financial stocks on Thursday and Friday with IBM (IBM) and Schlumberger (SLB).
Going into earnings this morning from JPMorgan Chase (JPM) and Wells Fargo (WFC) what I wanted was an indication as to whether or not the stock market would care about the billions in one-time write offs that these banks would report for the fourth quarter due to the recently passed tax bill. That’s important because this one-time charge will show up on the earnings reports of other banks, of technology companies, and of big drug makers. On the early evidence today, the market doesn’t and won’t care.
This morning the yield on the two-year Treasury note hit 2%. The yield on this shortish term Treasury, which is extremely sensitive to expectations on interest rate moves by the Federal Reserve, hasn’t seen 2% since September 2008. The yield on the two-year Treasury is now up 17 basis points in a month and 83 basis points in a year. That’s an extraordinarily fast climb in yields and remember that bond prices fall as yields rise
Yesterday a report from Reuters that Chinese officials had recommended slowing that country’s purchases of U.S. Treasuries rattled the bond market. Today a Bloomberg story adding up the hundreds of billions in debt that Chinese companies have coming due this year doesn’t seem to have had much effect on bond markets. In fact the yield on the 10-year Treasury fell by 1 basis point to 2.54% as bond prices rose today, January 11.
