Earnings took center stage in financial markets this week. So far, earnings have generally been better than expected. Much of the gain has been driven by the tax cuts, but we have also seen strong revenue growth. The weak dollar has also helped sales and earnings as foreign earnings are worth more in dollar terms when the dollar is relatively weak. While tax cuts and a weak dollar are providing non-company specific tailwinds to earnings, we are also seeing companies genuinely perform well. For the week, the Dow gained 0.4% while the S&P gained 0.5%.
Wells Fargo has been in a news a lot over the last year since a scandal involving the bank setting up new accounts for unsuspecting customers and then charging fees on those accounts. This week, the government imposed a $1 billion fine on the bank for the activity and retained the unprecedented authority to fire managers and even adjust business strategy going forward if regulators feel the bank is engaged in other bad behavior. Many observers wondered how the Trump administration would handle this case given its more business friendly stance on many issues. This shows the penalty for legitimate wrongdoing remains very high. Read More
A new study out this week suggests many Americans are worried about the financial viability of Social Security. 51% of pre-retirees, those aged 50-64, are concerned the program won’t be able to pay them their full benefits. I’m surprised the figure is that low. Social Security faces several challenges that will make paying full benefits to all recipients difficult. The number of workers paying into the system relative to the number receiving benefits keeps declining. In 1955, there were more than eight workers for each beneficiary. Today there are less than three. As a result the system is no longer collecting in payroll taxes as much as it pays in benefits. The Trust Fund is supposed to make up that difference, but the reality is there is no real trust fund. There isn’t $2.5 trillion sitting in a bank account waiting to pay SS benefits. The Trust Fund money has all been spent and the government has to borrow the money owed to the Trust Fund to meet those obligations. The system won’t implode, but many people in the years to come could see lower benefits. Means-testing benefits seems like an easy answer, but even beyond that, it seems likely that benefits for many will have to be cut. Current beneficiaries will likely see minimal impact, but people expecting to receive benefits in the future should plan their retirement with a smaller Social Security benefit. Read More
Oil increased again this week, rising 1.5% to close at $68.26/barrel. The yield on the 10-yr Treasury moved sharply higher to 2.96% from 2.82% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 4.47% from 4.42% a week ago.