3/15/19 – Stocks Rebound

Fresh off last week’s worst-weekly performance of the year, equity indices rebounded nicely. It was a light week for financial news and stocks used the lack of headlines to move higher. For the week, the Dow gained 1.6% while the S&P 500 increased 2.9%. Boeing accounted for much of the difference between the Dow and the S&P 500 as all the company’s 737 Max planes were grounded in the US following an Ethiopian Airlines crash. Boeing is now ~15% below its highs reached in early March on the issue.¬†

Financial transaction taxes have been discussed over the years, including by Bernie Sanders during the 2016 primary. Over the last week, legislation was introduced in the House and Senate to apply a 0.1% tax on all stock, bond and derivative transactions. This means on a $10,000 stock purchase, a tax of $10 would be collected. This tax would apply to all investors – from large institutions to average people buying stocks in their retirement accounts.

The tax is being proposed as a way to discourage high frequency trading, which some people blame for market volatility. The argument is that a tax will discourage high frequency trading, which often attempts to exploit small price discrepancies, by increasing the required return to justify the trades. I’m not convinced a 0.2% (after paying for the buy and sell transaction) is enough to significantly alter behavior. But even if we assume it is, it raises the question of whether reducing high frequency trading is a worthy goal and whether all investors should have to pay to attempt to solve the issue.

There is no question that high frequency, computerized trading increases volatility. However, those traders also provide significant liquidity in the market. It’s easier and cheaper for all investors to buy/sell securities when trading volumes are higher. There is value to that liquidity. Additionally, for long-term investors, the occasional period of volatility shouldn’t really be a concern. While it can be unpleasant, the technical sell-offs we’ve experienced in the last 10 years have been very short-term in nature. In my mind, the cost to pension funds, mutual funds (largely owned by regular investors) and retail investors isn’t worth the loss of liquidity and won’t really do anything to improve the long-term health of the market. Read More¬†

Oil increased 4.1% this week to close at $58.42/barrel. The yield on the 10-yr Treasury moved lower, closing at 2.59% from 2.63% last week. The average rate on a 30-yr fixed rate mortgage moved sharply lower, to 4.31% from 4.41% a week ago.

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