January 30, 2018

It’s All Relative

Many have used the above title to explain nearly everything, and cite examples. However I’ve found that more often than not the positions that people need to rationalize for comfort often come at the expense of the facts. The facts I’m talking about are simple ones, such as what goes up must come down. But as the market responded today to massive disruptive actions by Amazon, JP Morgan and Berkshire Hathaway announcing they were entering the healthcare industry some outlets are suggesting that’s why the market went down today. You can probably already guess, I don’t agree, here’s why.

Interest Rates
Recent move in interest rates have seen a rise in the yield of 10 year Treasury Notes to over 2.7%. This is not a level seen since 2014 and can be directly attributed to both the recent action of the Federal Reserve Board and the growing concern of inflation. Needless to say the stock markets can withstand changes in interest rates as long as they don’t happen too quickly. And while there is also over $200 billion dollars in Treasury Debt to be auctioned in the next thirty days that too could be have an effect on current interest rates. In all there is economically much to look at and it’s up to the Fed to make a decision on further rate hikes. That distracts the markets attention, and that can feed a correction.

The Dollar
Recent concerns that the dollar is sinking are often discussed as a negative, and I don’t know why. A lower dollar is inflationary and having studied the behavior of the dollar’s correlation to the domestic trade balance, the impact to the economy is negligible at best. As a service industry the US doesn’t need a weak dollar to grow, even with the current interest in manufacturing. Our economy is based on consumption, not trade, and that isn’t going to change soon (if at all). Likewise as long as the Fed is poised to raise interest rates, that has the effect of pushing the dollar up, which is naturally disinflationary. But right now the currency is feeding inflation fears here, and even abroad, and that can feed a correction.

The Market
As you know investment value can come in two packages, those representing the fundamental value of a company and those the technical value of a stock. The former is an elusive valuation and the latter occurs when the broad markets decline as they’ve done this week.  Coming out of strong year the broad markets found their way higher as earnings results and creeping acceptance of the benefits of the recent tax plan (for companies at least). But since the beginning of last year the recent charge amounting to an aggregate increase of over 30%  rendered the expectations of any corrections either too ambitious or too complacent, but not impossible. And best, not necessarily a bad thing either.


What occurred following the announcement of the mega merger designed to defy the existing rule of the health care industry is, in my opinion, welcome news, but hardly original news. As recently as last year when CVS Pharmacy (CVS) bought Health insurer Aetna (AET) the game was on. The shift of medical consumers toward urgent care centers and other resources for flu shots and prescriptions has sent a clear message to the medical industry that price does matter. Couple that with today’s release of consumer sentiment data that was the highest  since before the financial crisis and I’m not just being optimistic, I see value in the market after today’s decline and the newest disruption that has arrived to deliver it.