The word for this quarter is volatility and I think we will see more of it. The broad Morningstar index is down .61% year-to-date. The small stocks were down 1.58%, followed by large caps with a minus .67%. The market has pulled back from what a lot of people felt were overly high valuations. I think the reason we have seen the big swings in the indexes are threefold; the technology stocks have dropped, potential rate increases from the Fed, and fear of a trade war. The FANG stocks I discussed in my last letter were the ones who were beaten up the most. Facebook in an interesting twist. It is in very hot water for selling information about people which they themselves posted for the world to see. Does anyone really think that once you post something to Facebook it’s not “out there” for the world to see or to be sold? Even after the CEO Zuckerberg apologized, the stock still dropped 23% last month. Amazon is in the cross hairs of our President’s tweets for putting small retailers out of business and paying little or no local taxes. Good for the consumer, bad for government revenues. The market capitalization of the FANG companies is around $2.126 Trillion and represent a large part of the indexes value, so when these companies get hit the index drops. In February, Jerome Powell replaced Janet Yellen as head of the Federal Reserve Bank. After their first meeting there were subtle changes to the report such as job growth changing from “Solid” to “Strong”. Interestingly when (Powell) was asked about a trade war he said he does not expect the economic outlook to change. Perhaps this is a subtle “tell” that President Trump may not actually start a trade war. The press is obsessed with a potential for a trade war with China. There is no mention of the $375 billion deficit in 2017, the $347 billion in 2016 or the $367 billion in 2015, those years alone are over a $1,000,000,000,000. Regardless something needs to be done. They also raised GDP growth just slightly for 2018 and 2019 and told us to expect 4 rate increases this year. Add all these things up and you get a lot of volatility. After digesting all this as well as the other economist I read, I expect corporate earnings to grow 3% to 5% and with the new lower taxes the market should climb but with lots of drops in between. Remember the only people who get hurt on a roll coaster are the ones who jump off.
On a regulatory/business note FINRA is imposing new trading fees on all sell transactions on certain stocks and bonds. This fee will be reflected on your trade confirmations. There is no way for us to calculate this fee without extreme time and expense. Our business model is to have all our clients in a WRAP (all in) fee structure. Unfortunately, this is one we must pass on to you. We are sorry to do this and be assured we receive none of these fees. On a positive note the fee is capped at $5.95 per trade and is $0.000119 per share for stocks, and $0.00075 per bond capped at $0.75 per trade. Again, I regret this extra expense, but it appears unavoidable. Using our benchmarking with other firms we are still a lower cost, very experienced, and accessible firm and we are grateful and thank you for your business. If you ever have questions or concerns, please contact us.
Willis G. Ashby, CFP®
Wall Street Journal
FAANG is also used and includes Apple