News this week shows how quickly times are changing with the new British Prime Minister courting the U.S. and self-driving cars just around the corner. Read more in this edition of Steady Investor’s Week
No Change to Interest Rates – The Federal Reserve announced Wednesday that there would be no change to the benchmark interest rate, which they held steady at 0%-0.25%. Like a broken clock, Janet Yellen signaled once again that the Fed has every intention of normalizing interest rate policy based on the current state of the U.S. economy, but emphasized that the timing just wasn’t quite right yet. There were three dissenters in the meeting, and indications were strong that a December hike is in the works. Which begs the question: was the delay in raising rates politically motivated? It’s an interesting question that the Fed and Yellen would vehemently deny, but let’s not forget that the Fed chairman is hired by the president, so jobs are on the line here. It’s also true that it is rare for the Fed to raise rates within two months of an election. Just food for thought.
A Borrowing Spree – with the cost of borrowing so low (global interest rates near zero), global bond issuance is running at a blistering pace, its highest in ten years. Stable sovereign governments (like the U.S.) and mega cap corporations are the biggest beneficiaries, as they can take most advantage of ultra-low rates. According to Dealogic, there has been a total of $4.88T of debt sold in 2016, which is comparable to 2007’s figure of $4.17T over the same period. There are two caution flags investors should wave at these figures. The first is being aware of companies that are taking advantage of low rates to issue risky debt at discounts, essentially capitalizing on investor thirst for yield. The second is taking a close look at what corporations are doing with the borrowed money. If there is too much equity-boosting via stock buybacks, instead of companies investing in new capital and growth, it’s a warning sign. CEOs might be more concerned with keeping shareholders placated versus long-term growth plans.
A Growing “Euroskeptic” Population – the “euroskeptic” political movements have been gaining popularity recently. France’s Marine Le Pen has been gaining followers in her quest to leave the European Union, and this week Angela Merkel’s CDC party (Germany) suffered its second electoral blow in two weeks in a regional state election in Berlin, falling to its lowest level of popularity since 1990. Voters have been pivoting to the anti-immigrant Alternative for Germany, which gained 12.9% of the vote. These movements in Italy, France, and Germany are gaining relevance, but their chance of actually winning and having enough support to form governments are slim.
Will Your Grandkids Even Learn How to Drive? – According to the ride-hailing company, Lyft’s, co-founder John Zimmer, the answer to that question is a simple “no.” He expects self-driving cars to handle all of his company’s rides in the next ten years, and he believes the notion of private car ownership will be extinct by 2025. It’s hard to imagine a future where no one drives, but then again it was hard to envision a time when most humans worked on computers and relied on the internet on a daily basis. Innovation tends to change the way of things faster than we can comprehend.
Courting America – the new British Prime Minister, Theresa May, was in the United States this week holding meetings with some of our country’s biggest players, like Goldman Sachs, Morgan Stanley, and Amazon. It makes perfect sense what she’s hoping to accomplish – maintaining strong ties with the U.S. in light of a breakdown with Europe. It’s smart posturing on her part, as Britain’s relationship with the EU is likely to run into complications over the next few years.
As the week comes to a close, recent headlines prove that many factors are currently at work in the market—from self-driving cars to the not so shocking static state of interest rates. With so many factors affecting the market, ultimately the question becomes—what is the overall state of our economy? We at Zacks Investment Management are always looking hard data instead of getting caught up in the headlines to provide context for investing decisions. If you want an inside look at what we’re seeing, download our Stock Market Outlook Report. Learn more by clicking on the link below.
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