2Q17 Capital Market Outlook

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If the dual mandate of the FOMC is full employment and stable price (i.e. fighting inflation) and the FOMC’s preferred measure of inflation, the core personal consumption expenditures price index (“PCE”) is tipping downward by their own admission, why is the FOMC continuing on their tightening path? Well, the FOMC’s Philips Curve models say so. Named after a British economist named A.W. Philips, the Philips Curve suggests that there is an inverse relationship between unemployment and inflation. As we approach what the FOMC considers full employment, the members expect that inflation will start to pick up. In anticipation, the FOMC has embarked on a path of reducing monetary accommodation. The Committee has raised the target range for the federal funds
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2Q17 Capital Market Review

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Politics provided plenty of entertainment during the quarter but looking back on the past three months, nothing much has really happened and the effect of politics on the financial markets have been ephemeral. President Trump firing FBI director Comey might have created a media firestorm and a sharp one-day drawdown in the equity markets but it may end up being a big fat “nothing burger” for the financial markets. Ditto for “Trumpcare” as the Senate’s version, fomented in secret, may not have enough Republican votes to pass and the President’s tax plan, detailed in all of one page. Economic data released during the quarter was somewhat weak, headlined by an “advance” estimate for First Quarter 2017 GDP growth of just
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Amazon’s $13.7 Billion Step into Bricks & Mortar

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Last Friday, e-commerce juggernaut Amazon announced an agreement to acquire Whole Foods Market in an all-cash transaction valued at $13.7 billion. Whole Foods Market generated sales of nearly $16 billion in 2016 across more than 460 stores in the U.S., Canada and the U.K., which represents an estimated 2.5% share of the entire grocery industry. Share prices of competing grocers and retailers selling grocery items unsurprisingly fell on this news, given Amazon’s disruptive nature and willingness to forgo immediate risk-adjusted profits in its indomitable quest for growth and greater market share; the world’s largest grocery retailer Kroger was down 9.2%, which follows the prior day’s 18.9% decline on lower guidance. A bit more surprising was the negative market reaction by
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1Q17 Capital Market Outlook

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There are a number of mitigating factors keeping a lid on the 10-Year Treasury Note yield: “monetary offset,” global yield differentials and the possibility that Trumpflation may disappoint in actuality. Thus far, the legislative accomplishments of President Trump and a unified Congress have been underwhelming. After demonizing Obamacare for the past seven years, Speaker Ryan and the Republican House of Representatives couldn’t even muster enough partisan votes to bring the hastily prepared American Health Care Act up for vote, blocked by hard-core conservatives on their own side of the aisle. Aside from ideology, there was apparently a procedural rationale for trying to enact AHCA before taking on tax reform. AHCA would have reduced the deficit for the current fiscal year
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1Q17 Capital Market Review

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Not surprisingly, politics dominated the start to the New Year. The optimism that permeated the investment/corporate community after the election of Donald J. Trump managed to survive (i) an ill-fated immigration ban, (ii) a half-assed attempt to “repeal and replace” the Affordable Care Act and (iii) a never-ending investigation into the potential collusion between members of the victorious Trump campaign and Russia. Readings of economic data in the US have been steadily improving leading up to the election, which improvement continued in First Quarter. As a result, implied probabilities of an increase in the federal funds rate steadily climbed intra-quarter; when the Bureau of Labor Statistics reported an addition of 235,000 in February non-farm payroll employment compared to estimates of
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