The Journal

Corporate America is reporting its fastest earnings growth in nearly five years — a pace no 6% nominal economy can explain. The AI boom accounts for less of it than you might think, and the two headline-grabbing tech windfalls even less. The real driver traces back to a February courtroom, and it comes with an expiration date.

California’s Proposition 40 would levy a 5% tax on the wealth of the state’s richest residents, raising billions for healthcare without borrowing a dollar. That is the static arithmetic. But the wealthy are the most mobile and most tax-sensitive investors in the economy, and the interesting question is not whether they leave — it is what the ones who stay do next.

Tariff revenue is projected to surpass $300 billion annually — a figure that commands attention. Yet consumer prices have not moved in proportion. The gap between what tariffs should theoretically cost and what households are actually paying raises a question that most market commentary has not seriously engaged with.

The United States has placed a baseline tariff of 10% across the board on all countries, and multinational companies are moving rapidly to adjust their global supply chains. The implications for national security and financial markets run considerably deeper than the trade balance.

Q2 earnings announcements finished in late August, and we are now well into Q3. The headline story is that the S&P 500 had positive earnings growth year-over-year — including the non-tech sector, which hadn't seen earnings growth in over a year. Earnings grew by 11% for the S&P 500 as a whole.

Annualized existing home sales in the US have recently been running as low as 3.7M per year, the worst level since 1993 — despite the population being about 70M people more than it was then. High mortgage rates also deter sellers, because they will need a place to live after selling, making the seller a reluctant buyer too.

Supply chain disruptions and Quantitative Easing by the Federal Reserve were the two major disruptions to the US economy since the Covid pandemic began. The result was overly rapid economic growth, an extremely tight labor market, and high levels of inflation. As inflation fades, the majority of economic statistics now indicate a steadily weakening US economy.

Most Wall Street strategists have been saying that a recession is 3–6 months away — but they've been saying this for the last two years and so far, no recession has materialized. With US equity markets up over 10% and GDP growth last quarter of 2.1%, many Wall Street firms are now completely reversing their calls.

Most financial crises are the result of a combination of liquidity mismatch and leverage on balance sheets. The majority of the time the balance sheets are of financial institutions. The recent blowups of several banks such as Silicon Valley Bank and Silvergate Bank are all a result of this effect.

In aggregate, the US financial markets in 2022 had one of its five worst performances in over a hundred years. What made the year so bad was not just the equity markets — it was the simultaneous and historically bad drop in the bond markets, the worst in over a hundred years.

2022 has been an unusual year for the US economy; inflation and deflation have been occurring at the same time. Prices in the goods markets are currently increasing at about 8.5%, causing short-term inflation, but the prices of financial securities have been decreasing. How did the Fed get it so wrong?

The world's financial markets have had a tough start to the year. The global economy is facing an unprecedented combination of major risk factors including the pandemic, the Ukraine-Russia war, and inflation — and the uncertainty is showing up in asset prices across the board.

The September Effect gets its name from the observation that average historical performance in Septembers has been significantly below all other months. Since 1945, the S&P 500's performance in September has been -0.6% — that isn't a typo; it's been a loss of 0.6%.

The financial press has been talking about inflation quite a bit during the last few months. Indeed, inflation for the 2nd quarter was over 5% and is anticipated to be well above the Federal Reserve's 2% target for several years. While the belief that current high inflation would be transitory is quickly fading, the question is how to invest during periods of inflation.

The call for a substantial and long-running fiscal stimulus bill is getting louder and louder. The reason is that economic growth is beginning to stall out. Back in Spring, most businesses and investors were expecting that the economic downturn would be reversed very quickly.

Now that there is no longer a question as to whether the US is in a recession, the question on everyone's mind is how long will the recovery take. Will it be a V-shaped recovery — a quick bounce-back — or a U-shaped recovery, the slow kind more typical of recessions?

Market volatility due to Covid-19 has been at the top of the financial news. When a sudden crisis hits, we need to be concerned with two types of impacts to financial markets: the short-term direct impact, and the longer-term latent impact. The reconciliation of the two by investors is what leads to equity market volatility.

Over the past few weeks, financial press coverage has centered around the Federal Reserve "injecting hundreds of billions of dollars of liquidity into the US banking system." The Fed has not had to do this since the Great Financial Crisis of 2008–2011, and the media has taken this as a sign of returning instability.

For the last 12 months, stocks have returned about 3%, while interest rates have dropped significantly — long-term Treasury rates have gone from 3.1% to 2.6%. When interest rates drop, bond prices go up, leading to significant appreciation in bond holdings. What is an inverted yield curve, what causes it, and does it signal a recession?

In October, we wrote that Sept/Oct has historically produced negative returns, usually reversed in November — and markets did indeed produce a reversal. However, a combined recession/inflation scenario became much more probable due to economic news from China and the European Union. Reacting to that news, equity markets took a beating in December.

While there has been a lot said in the mainstream press about utilizing tariffs to increase domestic production, the financial markets seem to be relatively unaffected so far. The first thing to understand about current international trade is that most countries, including the US, use tariffs to protect specific domestic industries.

The S&P 500 dropped 6.2% from February until May, then increased by 9.3% since. Nowhere was this true more than in the consumer staples sector, which is a particularly important sector for our portfolio. One of the most important factors has been a change in the ability of firms to increase prices.

With the significant fiscal boost to the economy in the form of individual and corporate tax cuts as well as additional leverage from increased government borrowing, the markets are worried whether this economic boost could spark inflation. Recent evidence has provided both positive and negative indicators.

2017 looks to have been a banner year for the world's economy, particularly when considering the relatively lackluster performance of 2016. World GDP increased about 3%, a step up from 2.4% in 2016 and 2.8% in 2015. While GDP growth is a definite positive, an extended period of overly strong growth has a potential downside: an increase in inflation.