Monday Morning Outlook

Monday Morning Outlook Jobs, Coronavirus, and the Budget To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 2/10/2020
In January, US payrolls expanded by 225,000, not only beating the consensus forecast, but also forecasts from every single economics group. Since January 2019 (12 months ago), both payrolls and civilian employment – an alternative measure of jobs that includes small-business start-ups – are up 2.1 million. The labor force – those who are either working or looking for work – is up 1.5 million, while the jobless rate fell to 3.6% from the 4.0%.

The labor force participation rate (the share of adults who are either working or looking for work) increased to 63.4% in January, the highest reading since early 2013. Participation among "prime-age" adults (25 to 54) hit 83.1%, the highest since the Lehman Brothers bankruptcy in 2008.

Meanwhile initial claims for unemployment insurance hit 202,000 in the last week of January, and initial claims as a percent of all jobs are at the lowest level ever. In other words, the job market and the economy look strong.

Only a few months ago, some analysts were saying that the inversion of the yield curve - with short-term interest rates above long-term rates - was signaling the front edge of a US recession. Now a recession seems nowhere in sight.

Lately, financial markets have become very jumpy on any news – good or bad – regarding the coronavirus. We aren't immunologists (or doctors) and would never make light of a virus that has killed more than 900 and infected over 40,000, but data released by the World Health Organization (WHO) cautiously suggests a positive turning point has been reached.

So far, the virus has had minimal impact outside of China, and the growth rate of new cases worldwide has slowed. Yes, these numbers must be taken with a grain of salt, given that the news is coming from China. But China's leaders have an interest in limiting the spread of the virus and the economic damage it causes, and they have allowed the WHO access.

China's President Xi Jinping has been able to accumulate more power than any leader since at least Deng Xiaoping, perhaps since Mao. We assume he is well aware that a major failure to contain the virus could give his political opponents an opening to vent their frustration with the current leadership, and perhaps push for change.

It's true that the Chinese economy has slowed precipitously, and this is affecting many companies' sales and production. However, we do not believe that this will damage global growth in a significant way, and the US stock market suggests that global investors agree.

Meanwhile President Trump is presenting his budget plans to Congress this week, and early reports suggest some proposals to rein in entitlement spending. We wouldn't hold our breath waiting for these policies to get implemented. No matter who controls Congress, the one bi-partisan thing DC is able to do is spend more taxpayer money. And even with a slowdown in spending growth for entitlements, the President's budget proposal still won't balance the budget until 2035.

To be clear, we do not think deficits are the proper tool to use for economic forecasting. What matters is spending, and federal spending has grown to be too large a share of US GDP. The bigger the government, the smaller the private sector.

In 1983, according to the OMB, federal spending was 22.9% of GDP. In 1999, under President Clinton, it had fallen to 18%, and from 1983 through 1999, real GDP grew 3.7% at an annual rate. This trend was reversed with government spending rising to 21.1% of GDP in 2019, and from 2002 to 2019, real GDP grew just 2.1% annualized. Bigger government leads to slower growth.

Taking all of this together, no recession on the horizon and improving news about the coronavirus suggests corporate profits will continue to grow in spite of moderate growth. Stay bullish! ~

Secure Act Update

Dear Clients and Friends -    

We hope this finds you well. For some time now, we’ve been following the SECURE Act as it made its way through Congress. Now the retirement savings reform bill has become law, and we wanted to offer an update on its provisions.  

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 broadens the effectiveness of individual retirement accounts and employer-sponsored retirement savings plans.

Essentially, it expands access to tax-advantaged retirement savings accounts and, ultimately, aims to help Americans save enough for a secure retirement. That’s a goal we can all get behind.

Among other things, the Act:

  • Provides a startup credit to make it easier and more affordable for small businesses to set up retirement plans for their employees, even allowing them to band together to set up a plan for their collective employees.

  • Introduces a credit for those small employers who encourage savings through automatic enrollment, which has been shown to increase employee participation and boost retirement savings.

  • It removes the age cap that limits contributions to traditional IRAs after age 70½, which would give working people more time to contribute toward retirement.

  • Delays required minimum distributions (RMDs) until age 72, which allows the account to continue growing as life expectancies increase. 

The SECURE Act also eliminates the “stretch IRA,” an estate planning strategy that allowed much-younger beneficiaries to inherit an IRA and “stretch” the required minimum distributions across their actuarial life expectancies. Basically, the heirs received smaller RMDs over a longer period of time until the money ran out, reducing their tax liability on the withdrawals. In the meantime, the account would continue to grow tax-deferred.

Withdrawals over a lifetime are no longer an option for inherited defined contribution accounts. The SECURE Act gives non-spouse beneficiaries (including trusts) just 10 years to withdraw all the money from inherited IRAs, 401(k)s or other defined contribution plans. These supersized distributions are likely to trigger higher taxes for heirs, with few exceptions. This change does not apply to IRAs inherited in 2019 or prior, but will be effective for IRAs inherited in 2020 and beyond.  

For those of you who have extensive estate plans, it would behoove you to consult with your estate planning attorney, as there could be significant impact for reducing taxes for your heirs.  

As we sort through the potential tax, retirement and estate planning implications, we will reach out again if we need to adjust your plans.

Please contact me with any questions.

Thank you, as always, for your continued trust in us.

Matt

Matt Goodrich                                             

President, Goodrich & Associates, LLC

Branch Manager, RJFS  

Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James financial advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. The information contained within this newsletter has been obtained from sources considered reliable, but we do not guarantee the foregoing material is accurate or complete.  

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. © 2019 Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.  

Any information provided in this email has been prepared from sources believed to be reliable, but is not guaranteed by Raymond James Financial Services and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for informational purposes only and does not constitute a recommendation.

Look for Steadiness from the Fed

Monday Morning Outlook Look for Steadiness from the Fed To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 1/27/2020
The Federal Reserve is set to make its first policy statement of the year on Wednesday, so this is as good a time as any to reiterate our view that the Fed is likely to keep short-term interest rates steady through 2020 and, while pressures will build, the Fed seems content to hold them steady next year, as well.

We still think monetary policy is far from tight, and the economy could easily withstand higher short-term rates. Nominal GDP – real GDP growth plus inflation – is up 3.8% from a year ago, and up at a 4.8% annual rate in the past two years, figures consistent with higher short-term rates.

But the Fed is very unlikely to raise rates given its fear of an inverted yield curve, its desire to see a period of inflation in excess of 2.0%, and its propensity to always find something going on elsewhere in the world that could, at least theoretically, lead to slower growth. Last year it was political wrangling over Brexit, fears of a trade war with China, and slower growth abroad. This year it could be Brexit again, and perhaps the coronavirus coming from China.

Meanwhile, with equities so much higher than a year ago and the economy growing at a moderate pace, the Fed will lack a justification for cutting rates.

In the background, the Fed is likely to continue to gradually increase the size of its balance sheet via repurchase operations after having (temporarily) ended Quantitative Easing in October 2014 and reducing the balance sheet (Quantitative Tightening) starting in late 2015. The Fed restarted QE (without calling it that) near the end of last year, but even with the recent increases, the balance sheet finished 2019 at $4.13 trillion, still below the $4.45 trillion it hit during QE3.

And yet the S&P 500 is up 66% since the end of QE. By contrast, the Euro STOXX 50 is up only 25%.

What makes this so important is that it flies in the face of the theory that QE is behind the increase in equity prices. While the Fed pulled back, the European Central Bank continued expanding its balance sheet and even implemented negative interest rates in an attempt to stimulate the Eurozone economy. If QE and negative rates were so powerful, it should be US equities that lagged, not European equities.

It also suggests the Fed doesn't need to be gradually expanding its balance sheet again. There were still $1.49 trillion in excess reserves in the financial system at the end of 2019, and the banking system is far better capitalized than it was before the financial crisis.

When short term interest rates started periodically spiking upward in mid-September, the Fed had three possible courses of action. First, it could have let the free market work. No banks were going bust because of a temporary lack of liquidity; it just meant those in need of liquidity had to pay a high price so they wouldn't run afoul of tough financial regulations. Maybe some financial institutions needed to unwind positions that ate up cash.

Second, the government could have adjusted the very stringent liquidity regulations put in place after the financial crisis. These rules lead to temporary shortages of reserves when companies remove deposits to make large tax payments, participate in large Treasury auctions, or, when hedge funds attempt to borrow more money from banks. Loosening the rules would have quickly made more cash available!

Or third, the Fed could decide to start increasing its balance sheet again because that would increase its power.

Of course, the Fed picked Door #3. In the end, it behaved in just as self-interested a way as people do in the private sector. Except policymakers are doing it with other people's money, not their own. We don't agree with more QE, but the Fed will not get in the way of a continued economic recovery. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security. ~

Moderate Growth in Q4 of 2019

Monday Morning Outlook Moderate Growth in Q4 To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 1/21/2020
Back in mid-November, the highly respected GDP forecasting model from the Atlanta Federal Reserve Bank (also known as "GDP Now"), estimated that real GDP would only grow at a 0.3% annual rate in the fourth quarter, which, if accurate, would have been the slowest growth for any quarter since 2015. At the time, we were forecasting economic growth at a 3.0% rate.

Now, nine days from the government's first official report on Q4 GDP, the Atlanta Fed's model is saying 1.8%, while we're at 2.5%. In other words, they've moved a lot higher, we've moved a little lower. The consensus among economists is 2.1%, right between our forecast and the Atlanta Fed's.

Here's the thing: international trade and inventory figures are likely to have a huge impact on Q4 real GDP, with international trade a positive factor and inventories a negative. Trade relations with China were very volatile until recently, in part explaining a big drop in imports in Q4, which has a temporary positive influence on GDP. But, at the same time, fewer imports also meant less inventory accumulation in Q4.

We're telling you this because the day before the GDP report next week, we will get reports on both trade and inventories, which might lead us to make a substantive revision up or down to our 2.5% forecast.

Either way, what's most important is the trend, and we see healthy economic growth coming in 2020. Monetary policy is far from tight, companies are still adapting to a world where corporate profits earned in the US face lower tax rates, the regulatory environment has become more favorable, home building is poised to add to GDP, and consumer purchasing power (already strong) is growing.

Here's how we get to our 2.5% real growth forecast for Q4:

Consumption: Car and light truck sales shrank at a 5.3% annual rate in Q4, while "real" (inflation-adjusted) retail sales outside the auto sector shrank at a 1.4% rate. So far, not so good. But most of consumer spending is on services, and it looks like real spending on services grew at a 2.4% rate. Take the good with the bad, and it suggests real personal consumption (of goods and services combined) grew at a 1.9% annual rate, contributing 1.3 points to the real GDP growth rate (1.9 times the consumption share of GDP, which is 68%, equals 1.3).

Business Investment: It looks like continued investment in equipment and intellectual property offset a contraction in commercial construction. Combined, business investment grew at a roughly 3.3% annual rate in Q4, which would add 0.4 points to real GDP growth. (3.3 times the 13% business investment share of GDP equals 0.4).

Home Building: Residential construction turned up in Q3, the first positive quarter since 2017. Look for another positive quarter in Q4, with growth at about a 2.7% annual rate, which would add 0.1 point to real GDP growth. (2.7 times the 4% residential construction share of GDP equals 0.1).

Government: Both national defense spending and public construction projects show solid growth in Q4, which means overall government purchases were probably up, as well. Looks like an increase at a 1.7% rate, which would add 0.3 points to the real GDP growth rate. (1.7 times the government purchase share of GDP, which is 18%, equals 0.3).

Trade: Signs suggest China trade-policy related volatility led to an unusually large drop in imports in Q4, which translates into a large increase in net exports (exports minus imports). At present, we're projecting that net exports will add an unusually large 1.3 points to real GDP growth in Q4 but, as we mentioned above, this number could change dramatically with next week's advance report on trade. Also, a big plus from net exports in Q4 may lead to a large negative in Q1 as trade tensions ease and imports return to a faster pace. Only time will tell.

Inventories: Inventories are also a huge wild card in Q4. As of now, we're penciling in a drag on the real GDP growth rate of 0.9 points. After Q4, look for a rebound in the pace of inventory accumulation, which should add to economic growth in 2020.

Add it all up, and we get 2.5% annualized real GDP growth. Expect growth to average at least that pace in 2020, with our projection in the 2.5 to 3.0% range. There's no recession on the way, and plenty of reason to believe better profits will see this bull market continue to run.

This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.   

Morning Brew

Portfolio Strategy

By: Michael Gibbs, Director of Equity Portfolio & Technical Strategy
Joey Madere, CFA
Richard Sewell, CFA
Mitch Clayton, CMT, Senior Technical Analyst

December 24, 2019

The S&P 500 futures trade three points, or 0.1%, above fair value on this Christmas Eve. It's been a tight-ranged session, with many other equity markets closed or closing early for the Christmas holiday.

The U.S. stock market will close at 1:00 p.m. ET today, but many market participants have likely already checked out for the holiday. Trading conditions may be thin, which could lead to some noticeable price swings in the shortened session.

The prevailing bias is positive, though, as investors have shown little interest to sell a market trading at all-time highs. Although not a certainty, the market does tend to rise in the last five trading days of December and into early January in a calendar effect known as the Santa Claus rally.

Elsewhere, the U.S. Treasury market will close early at 2:00 p.m. ET. Currently, the 2-yr yield is up one basis point to 1.66%, and the 10-yr yield is down one basis point to 1.93%. The U.S. Dollar Index is up 0.1% to 97.73. WTI crude is up 0.4%, or $0.26, to $60.78/bbl.

For more information on this article please click on the link below:

https://raymondjames.bluematrix.com/sellside/EmailDocViewer?encrypt=521bcf85-f3de-4bae-98d4-cc9a758c4a02&mime=pdf&co=raymondjames&id=matt.goodrich@raymondjames.com&source=mail

S&P 3650, Dow 32500

Monday Morning Outlook

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist

Date: 12/16/2019

A year ago, we projected the S&P 500 would hit 3100 at the end of 2019. In spite of the swoon in equities in the fourth quarter of last year, we didn't see a recession coming and our model for estimating fair value for the stock market was screaming BUY.

At mid-year, seeing the economic and trade-policy stars aligning for further growth, and with our model for equites (more on that below!) still showing room for gains, we lifted our year-end forecast to 3250. At a Friday close of 3169, we were only 2.6% below that level with 16 days to go.

For 2020, we remain bullish. Our call is for the S&P 500 to end the year at 3650, which is about 15% higher than it finished on Friday, with the Dow Jones Industrials' average moving up to 32500.

The first consideration we make when forecasting the stock market is whether we see a near-term recession. This step is important because even if the stock market is undervalued relative to long-term norms, a recession would almost certainly send equities lower in the short term; stocks would go from undervalued to more undervalued.

Needless to say, we don't see a recession anytime soon. The economy is still adapting to lower tax rates and monetary policy remains loose. In addition, home builders are still generating too few homes given our population growth and scrappage rates, while banks are sitting on ample capital.

The second step, and usually the most important one, is to use our Capitalized Profits Model. The model takes the government's measure of profits from the GDP reports, divided by interest rates, to measure fair value for stocks. Our traditional measure, using a current 10-year Treasury yield of 1.85% suggests the S&P 500 is grossly undervalued.

However, we think long-term interest rates are headed higher and this change can have a large effect on the model's assessment of fair value. We anticipate that the 10-year Treasury yield will finish the year at 2.5%. Using 2.5% (instead of 1.85%) suggests an S&P fair value of 3775. In other words, we should finish 2020 with more room for the bull market to keep running.

In addition, it's important to notice that in recent years operating profits generated by the companies in the S&P 500 have risen much more than the government's measure of corporate profits that we use in our model. In the prior business cycle, the one that ended in the Great Recession, profits peaked in the second quarter of 2007. Since then, S&P operating profits are up 55% while the GDP measure of profits is up only 31%. This divergence suggests using the GDP measure of profits in our models may be underestimating the fair value of equities.

The biggest risk to our forecast is that someone on the far left wins the White House in 2020 and the Democrats simultaneously get a majority in the US Senate. We think that's very unlikely. Most likely, the outcome of the election ensures that the tax cuts remain in place without any radical new entitlements or expansions of the entitlements already in place.

Like we said last year, this will probably to be one of the most optimistic forecasts you'll see, if not the most optimistic one of all. But, in the end, we do best by our readers when we tell them exactly what we think is going to happen, without altering our projections so we can run with the safety of the herd.

Last year we told investors to "grit your teeth" because "those who stay invested in the year ahead should earn substantial rewards." Our advice remains the same. The bull market is not yet done.

To view this article follow the link below:

https://www.ftportfolios.com/Commentary/EconomicResearch/2019/12/16/sp-3650,-dow-32500

Giving Thanks

Monday Morning Outlook

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist


Date: 11/25/2019

What an incredible time to be alive! We stand just five weeks from the end of a decade that saw prosperity spread far and wide. Some don't see it that way, as pouting pundits and rancorous politics skew our visions. But, if we simply step back from the day to day noise and take in the magnitude of progress around us, there is a great deal to be thankful for.

For starters, the US macroeconomy – the big picture – is in solid shape. The unemployment rate is 3.6%, just a tic above September's 3.5% reading - the lowest since 1969. What some people call the "true unemployment rate" (known to the Labor Department as the "U-6" rate), which includes discouraged workers and part-timers who say they want full-time work, currently stands at 7.0%, and recently touched lows not seen since the peak of the first internet boom nearly twenty years ago.

Average hourly earnings are up 3.0% from a year ago, compared to an increase in 1.8% in consumer prices. In fact, "real" (inflation-adjusted) earnings are likely to be up again for the year, making this the seventh consecutive year of higher real wages.

Importantly, the benefit of earnings growth has been widening out. In the past year, median usual weekly earnings for workers age 25+ with less than a high school diploma are up 9.0%. In the year before, these wages were up 6.5%. This is faster growth than for those with college and graduate school degrees. Making jobs plentiful is still the best way to raise living standards.

Meanwhile, US equities have recently hit all-time highs, pushing IRAs, 401ks, pension funds, and retirement wealth higher. Both workers and investors have good reason to be grateful.

But it's not only the big picture that looks good. The day-in, day-out lives of people the world over have improved because of the grit and determination of inventors and entrepreneurs.

A decade ago, how many of us had instantly ordered a car to pick us up via our phones (now more like pocket computers), and then watched its progress toward us in real time, not left to wonder when and if the car would ever show up? How many of us could optimize our travel routes with free apps that tell us the best time of day to take the route in question, or where to turn to cut travel time?

Think about the standardization of car and truck technology that used to be reserved for the upscale, like adaptive cruise control or blind-spot warnings, even self-parking cars. Backup cameras now come standard!

But it's not just the day-to-day, innovation is also helping save lives in crisis situations. This includes the 3D printing of body parts...skin cells, lungs, and soon partial livers. Yes, livers! We are on the cutting edge of gene therapies that are being used to treat cancer. Cancer death rates have dropped consistently for decades, and new technology promises further improvement.

Think about the advances in energy production. The average price of a barrel of oil (West Texas Intermediate) was $78 in November 2009, a decade ago, and that was when the jobless rate was around 10% and the global economy in the doldrums. It's now down to $58. Natural gas was trading around $3.70 per mmbtu, now $2.67. Lower prices are a direct result of the combination and widespread use of horizontal drilling and fracking. As a result, Americans can heat and cool their homes and businesses and travel for much less than they used to.

Put it all together and if we're honest we have so much to be thankful for. There has quite simply never, in the history of mankind, been a better time to be alive. Our ancestors could find faults in some things in the world today, but they'd be left speechless at our abundant (and growing!) opportunity.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Long Live the Bull Market

Monday Morning Outlook

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 11/18/2019

Last December, almost 12 months ago, we set our year-end 2019 target for the S&P 500 at 3,100. Many thought we were way too bullish, but our model for the stock market suggested 3,100 was well within reach. We believed the bull market had plenty of room to run.

Now, with six weeks to go until year-end, the stock market has already closed above our initial target. As of Friday, the S&P is up 24.5% year-to-date, and up 32.7% since its Christmas Eve low. And that's without including dividends.

We were so confident there wouldn't be a recession - and that the market was still cheap - that we raised our target to 3,250 in the middle of 2019. That's only 4.2% above last Friday's close.

With one possible (and very unlikely) exception, nothing we see on the horizon suggests the bull market is nearing an end. We're forecasting moderate economic growth for the foreseeable future, and see continued corporate profit growth as margins stay high.

Monetary policy is not tight, far from it, and we don't see any hikes to short-term interest rates through at least 2020. And after many years of 6% M2 money supply growth, M2 has accelerated, growing at a 9.2% annualized pace in the past six months.

Corporate America is still adapting to a much more favorable tax environment. And trade policy is more likely to get better going forward, rather than worse.

The "new NAFTA" looks likely to pass by early next year, in part because as the Democrats target President Trump with impeachment, it becomes more important for them to reach some bipartisan goals. House Speaker Nancy Pelosi recently described a political deal on the trade pact as "imminent." Mexico and Canada are the US's #1 and #2 trading partners. A deal with #4, Japan, is being worked out and is already benefiting the US. Meanwhile, news reports suggest a deal with China (#3) is approaching.

Want more reasons for optimism? The ball and chain of regulation continues to ease around the ankles of entrepreneurs. And a surge in the appointment of federal judges who believe in legislation, not administrative regulation, will make it tougher for the administrative state to hamstring innovation.

In addition, consumers have plenty of purchasing power, both from wage growth and relatively low financial obligations. Home builders still need to raise the pace of construction just to keep up with population growth and the scrappage of homes (including voluntary knock-downs, fires, floods, tornadoes, and hurricanes).

Notice, too, that the US isn't alone in the stock market rally. The Euro Stoxx 50 is up 19.4% in dollar terms so far this year (as of the Friday close) while Japan's Nikkei is up 18.2%.

We think those gains, at least in part, reflect investors looking ahead and expecting better policies. By cutting tax rates and regulation, the US has become more competitive. Eventually, the political pressure on other countries is to follow suit. When Regan and Thatcher cut tax rates in the 1980s, many other countries took the cue, which led to a global boom.

One thing that could throw a monkey wrench into the bull market would be a shift by voters toward less growth-oriented policies of more government spending, expanded entitlements, and higher tax rates. This would take a sweep of the White House, House, and Senate with politicians willing to pass the votes. We put the odds of that happening at roughly 5%. We know investors are worried about this, but it's way too early - and way too unlikely - to change investment strategies at this point. Think about it: if a sweep like this would cut the stock market by 25%, but has only a 5% chance of occurring, that's a drag of only 1.25% on the market (5% of 25%).

A year ago, we were in the distinct minority in remaining bullish while so many were predicting the supposed "sugar high" was over and a bear market had begun. We didn't see it that way then, we still don't now.

Stocks are still cheap, the economy is not slipping into recession. The policy environment is tilted more toward growth than it was three years ago, even though it could be better. And that means the bull market should continue.

To view this article click on the link below:

https://www.ftportfolios.com/Commentary/EconomicResearch/2019/11/18/long-live-the-bull-market

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected

Income Inequality, Taxation, and Redistribution

Monday Morning Outlook

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 11/11/2019


One of our favorite economic parables is the Fish Story, from Paul Zane Pilzer's 1990 book, "Unlimited Wealth." It is an excellent tool for thinking about wealth creation, inequality and redistribution.

Imagine 10 people live on an island. Each day they wake up, catch two fish, eat them, and go back to bed. Its subsistence living at the most basic level. There are no savings – no stored or saved wealth. If someone gets sick and can't fish, there's no way to help them. No one has any extra.

Now imagine two of these people dream up a boat and a net. They spend six days catching one fish per day, slowly starving, but they make the boat and net. On the 7th day, they go out into the ocean and catch 20 fish in the net – it worked!!!!

At this point, the island can go one of two ways. First, since two people now produce what previously took ten, resources are freed up to do other things. Farming corn, picking coconuts, cleaning fish, cooking, repairing the boat and net, the possibilities are endless. The island ends up with more (and better!) food, new technologies, higher standards of living, more assets, more wealth, and they can now afford to take care of their sick and vulnerable!

Or...the eight people who don't have a boat and net could become envious. Two now produce ten fish per day, while everyone else can only produce two. Income inequality now exists: it's no longer 1:1, it's 5:1. So, they devise a plan to tax 80% of the income of the boaters (16 fish) and redistribute two fish to each of the other inhabitants.

If the second plan is adopted, no one is better off. Each inhabitant still only has two fish. Moreover, the entrepreneurs have no incentive to fix their boat and net. The island will eventually revert to subsistence.

This is the problem with taxation for redistribution: it robs the economy of the benefits of new technology. Certainly, some of our brothers and sisters need help, sometimes permanently; sometimes temporarily. However, taxation for redistribution doesn't make the economy stronger; redistribution hurts growth.

Everyone on the island is better off because of the boat and the net. Taxing the inventors' wealth or income and redistributing it removes resources from a highly productive new technology. Moreover, the income inequality that exists on the island is a sign of more opportunity, not less.

There are things the government can do that add to productivity – police and fire protection, national defense, enforcing the rule of law and protecting private property – but once government goes beyond this, it begins to undermine growth.

Today, 17% of all personal income is redistributed by government, while around 40% of all income is taxed and spent by the federal, state and local governments, combined. This is the reason the US economy has not attained 4% real GDP growth. European economies tax and spend even more and this is why they have grown slower than the US in recent decades.

In the meantime, government leaders around the world blame slow growth on a lack of investment by companies and attempt unsuccessfully to use negative interest rates to stimulate lending and investment. They also propose even more government spending and redistribution to help those that big government is holding back.

These policies won't boost growth, and proposals to tax wealth and income because of the perceived problem of income inequality will ultimately reduce living standards. Increasing living standards requires less government, not more.

To view this article click the link below:

https://www.ftportfolios.com/Commentary/EconomicResearch/2019/11/11/income-inequality,-taxation,-and-redistribution

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

No Recession on the Horizon

First Trust Monday Morning Outlook

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 11/4/2019

Since the earliest days of the current economic expansion, there have been naysayers asserting the US was on the brink of another recession. Remember all the fear about another wave of home foreclosures, or a disaster in commercial real estate, or the Fiscal Cliff, or Greece potentially leaving the Eurozone, or German bank defaults, or even the inverted yield curve earlier this year? The list goes on and on.

One by one, the pessimistic theories have been proven wrong. Yes, the US will eventually fall back into a recession. But we don't see it happening this year or next, and probably not in 2021, either.

It's early, but we think the US economy is poised to grow around 2.5% in 2020, about the same pace as this year. Earnings remain at solid levels in spite of the headwind of trade uncertainty, which should diminish in the months ahead. Technological innovation is proceeding at an amazing pace. The key M2 measure of the money supply has accelerated; M2 is up 6.6% in the past year versus a 3.5% gain the year ending one year ago. Businesses are continuing to adjust to a lower corporate tax rate and a better regulatory environment.

This does not mean that every aspect of the US economy is going to be rainbows, teddy bears, and flying unicorns. We are not experiencing the rapid economic growth we had back in the mid-1980s or late-1990s. But the economy has picked up from the Plow Horse pace of mid-2009 through early 2017.

While we expect the economy to grow around 2.5% next year, some sectors won't do quite as well. For example, fundamentals like driving-age population growth and scrappage rates suggest sales of cars and light trucks (like pick-ups and SUVs) will probably continue to slow somewhat in the next few years. This isn't reason to shed macroeconomic tears, however. Autos sales have been gradually slowing since 2016 while the overall economy has accelerated.

Just look at Friday's employment report, which beat consensus expectations and revised up job growth for prior months. Unemployment ticked up to 3.6%, but essentially it was unchanged (from 3.52% to 3.56%) and is at a 50-year low. And, just about every category - female, non-college graduate, minority groups - are seeing unemployment rates near the lowest levels on record.

Although some analysts are bemoaning softness in business investment, "real" (inflation-adjusted) business investment is still 14.3% of real GDP, which is a higher share of real GDP than in any previous business cycle expansion. As a result, while productivity growth looks to have been tepid in the third quarter, the underlying trend has picked up, and that means faster growth in living standards than during the Plow Horse phase of the expansion.

Perhaps the biggest oddity is that Federal Reserve just finished cutting interest rates at three consecutive meetings. At the end of 2018, the Fed was projecting it would raise short-term interest rates 50 basis points this year, while forecasting the US economy would grow 2.3%, unemployment would drop to 3.5%, and PCE prices would increase 1.9%. The forecasts for growth and unemployment look solid, although PCE prices will be up more like 1.5% this year versus 1.9%. That shortfall in inflation doesn't justify a turnaround from planned hikes to three cuts.

In turn, the current stance of monetary policy - and the Fed looking unlikely to raise rates anytime soon - suggests the path ahead is solid for economic growth and bullish for equities.

Settle in for Continued Election-Related Market Shifts

Economy and Policy

Washington Policy Article 11-4-19.jpg

October 31, 2019

“What I hear [from investors] is a lot of anxiousness,” says Washington Policy Analyst Ed Mills – and that unease will likely translate to market uncertainty for at least the next twelve months.

Washington Policy Analyst Ed Mills shares his thoughts on the upcoming 2020 election and how unease could translate to market uncertainty.

Watch the video to learn more: https://go.rjf.com/2WA5AfB .

Morning Brew

Portfolio Strategy Published by Raymond James & Associates

Michael Gibbs, Director of Equity Portfolio & Technical Strategy

Joey Madere, CFA

Richard Sewell, CFA

10/23/2019

The S&P 500 futures trade six points, or 0.2% below fair value following some disappointing earnings results and guidance from Caterpillar (CAT 131.95, -1.74, -1.3%) and Texas Instruments (TXN 116.70, -11.87, -9.2%).

Both companies missed top and bottom-line estimates, with Caterpillar issuing downside FY19 guidance and Texas Instruments issuing downside Q4 guidance. Shares of Caterpillar, however, have significantly cut losses after being down about 4% earlier.

Boeing (BA 340.85, +3.50, +1.0%) missed earnings estimates, too, but investors have been comforted by the company still expecting the 737 MAX to return to service this year. Shares initially fell 2% as the company also pushed back 777X first deliveries to early 2021, but the 737 outlook has given the battered stock some reprieve.

U.S. Treasuries are up in textbook fashion following disappointing guidance from economically-sensitive companies. The 2-yr yield is down six basis points to 1.55%, and the 10-yr yield is down four basis points to 1.73%. The U.S. Dollar Index is little changed at 97.55. WTI crude is down 1.0%, or $0.54, to $53.96/bbl.

On the data front, the weekly MBA Mortgage Applications Index fell 11.9% following a 0.5% increase in the prior week. Later, investors will receive the FHFA Housing Price Index for August at 9:00 a.m. ET.

U.S. equity futures:

  • S&P 500 Futures -5 @ 2990

  • DJIA Futures -34 @ 26729

  • Nasdaq Futures -3 @7856

Overseas:

  • Europe: DAX +0.1%, FTSE +0.3%, CAC -0.6%

  • Asia: Nikkei +0.3%, Hang Seng -0.8%, Shanghai -0.4%


To view the full report please follow the link below:

https://raymondjames.bluematrix.com/sellside/EmailDocViewer?encrypt=4464a2d1-3b2c-44fc-b894-f58d867c80ae&mime=pdf&co=raymondjames&id=matt.goodrich@raymondjames.com&source=mail



Economic Brief -- A Field Guide to Recessions (updated)

Economic Commentary Published by Raymond James & Associates

Scott J. Brown, PH.D.

10/22/2019

A Field Guide to Recessions (updated)

  • There are few signs that the U.S. economy is currently in a recession. The odds of entering a recession within the next 12 months remain elevated, but are somewhat lower than they appeared in August.

  • Slower global growth and trade policy uncertainty have weakened business fixed investment. If sustained, this would eventually lead to weaker labor market conditions, dampening the growth of income and consumption.

  • The Federal Reserve’s cuts in short-term interest rates ought to help insure against downside risks in 2020. While the financial system is better positioned to withstand a recession, the ability to respond to a downturn is more limited than in the past.

Introduction:

The timing and severity of recessions is difficult to predict. They often depend on mass psychology. That is, if enough businesses and consumers expect a recession, then we may well have one. We are never “due” for a recession, but we know that downturns are inevitable. This Economic Brief covers the definition of “recessions,” how to tell if we are in one, and how to tell if one is coming.

To view the full report follow the link below:

https://raymondjames.bluematrix.com/sellside/EmailDocViewer?encrypt=15a22b66-f249-4ce3-9a14-63c384a0768a&mime=pdf&co=raymondjames&id=matt.goodrich@raymondjames.com&source=mail