June 18
Markets and Stocks
The market is fine. My year end target for the S&P 500 is around 5,700, up say 5% from current levels, 5430. Over the course of the next 12 months, I am looking for a 10% move to around 6,000.
The market has two major worries, the narrowness of the forward momentum, just a few stocks, the mega technology names are pulling the market higher. Historically, a positive market with narrow leadership signals nothing. See Mike Santoli of CNBC. My take is that the broad market is very attractive. I like the industrials and banks a lot.
I have changed my opinion on Corning. I am glad I mentioned my intention to buy the stock, a reader alerted me to some internal troubles and maybe the press are feeding on a PR effort to hype the stock and raise capital. Moreover, Jim Cramer of CNBC recently expressed concern about GLW’s management. So I am staying away. If anyone wants more detail please get in touch.
GLW is at a 52 week high so I doubt anyone has lost money on my call.
The market is also concerned about an economic slowdown and that is a legitimate concern. But I believe the economy will thread the needle, slower growth but no recession which will bring lower inflation.
Real income growth is positive. Personal consumption is 70% of GDP. And energy prices particularly gasoline prices are stable to lower. Gasoline at the pump averages $3.45 a gallon, unchanged on the week and down 4% from one month ago.
I continue to predict a strong rally in Treasuries. The PCE inflation read for May will be released on June 28. The core PCE inflation rate should be 0.1%.
European equities and sovereign debt will be volatile as France holds parliamentary elections.
Bloomberg reports: Escalating concern about political volatility in France spurred a flight to haven assets at the end of last week, with a gauge of global stocks falling the most in two weeks on Friday and the spread between French and German bonds widening sharply.
A potential far-right majority in France is among the factors fueling risks around European equities, according to Citigroup strategists, who downgraded the region to neutral from overweight.
Wages and prices will converge. The labor market is loosening. The unemployment rate must increase in order to reach the 2% target. But as explained above I do not foresee a recession.
I pay attention to Jason Furman, economics Harvard’s Kennedy School, and formerly an advisor to Obama.
Jason Furman writes at the Journal: Wage growth and price growth feed into each other, and both of those are running 1 to 1.5 percentage points higher than before Covid.
Shorter-term measures of inflation expectations are also elevated. While this may not be a full-blown wage-price spiral, wage-price persistence will keep inflation higher until something pushes it in a different direction.
There is reason to expect inflation to continue falling. The labor-market loosening will work with a lag, and wages and prices appear to be in a diminishing dynamic. I believe underlying inflation is in the 2.5% to 3% range.
Given strong U.S. job growth, the Fed can afford to spend several more months assessing just how big the reflation risk is.
https://www.wsj.com/articles/the-fed-can-take-its-time-taming-inflation-a188b912
Economics
As the November elections approach, tax policy will be front and center.
Corporations do not pay the corporation tax: shareholders, workers and consumers pay the tax. Lower corporate taxes increase investment and ultimately productivity which raises the standard of living for everyone.
The 21% U.S. corporate tax rate is the biggest single variable in the sprawling 2025 tax debate, and the two parties are trying to turn that dial in opposite directions with major consequences for companies’ profits and federal revenue.
The rate could climb as high as 28% if Democrats sweep November’s elections and move as low as 15% if Republicans gain full power.
Each percentage point is worth more than $130 billion over a decade in tax revenue, creating a $1 trillion-plus gap between the poles of the parties’ positions and giving the largest U.S. companies an outsize interest in the election’s outcome.
Economists and government agencies generally agree that shareholders ultimately bear much of the cost, with workers and consumers paying some.
Trump is generally clueless about tax policy.
This past weekend, former President Donald Trump announced that, if elected for a second term, he would seek to exempt tip income from federal taxes.
We estimate exempting all tip income from federal income and payroll taxes would reduce federal revenues by $150 to $250 billion over ten years on a static basis and could reduce revenue significantly more once behavioral effects are incorporated.
https://www.crfb.org/blogs/donald-trumps-proposal-exempt-tip-income-federal-taxes
The U.S. dollar is the world’s reserve currency and that is fantastic.
In the face of calls around the world to diversify out of the dollar in recent years, the US has nabbed almost one-third of all the investment that flowed across borders since Covid struck.
An International Monetary Fund analysis sent by request to Bloomberg News shows that the share of global flows has climbed — not fallen — since a shortage of dollars in 2020 spooked global investors and the 2022 freezing of Russian assets stoked questions about respect for free movement of capital. The pre-pandemic US average share was just 18%, according to the IMF.
For all the angst over the dollar’s dominance, a run-up in US interest rates to the highest levels in decades proved a major draw for overseas investors. The US has also pulled in a fresh wave of foreign direct investment (FDI) thanks to billions of dollars worth of incentives under President Joe Biden’s initiatives to spur renewable energy and semiconductor production.
The trend marks a major shift from the pre-pandemic days when capital poured into emerging markets, including a rapidly growing China. The big US geopolitical rival has seen its share of gross global inflows more than halve since the pandemic hit.
Sociology
People are returning to print media and that makes me happy.
https://www.nytimes.com/2024/06/16/business/media/outdoors-print-magazines.html
In an ordinary industrial building off a busy Orange County street, a Seussian contraption, nearly 100 feet long, clattered to life. The room filled with the hum and squeaks of belts and machinery. There was the smell of hot glue.
Like passengers on a dark amusement ride, bundles of colorful magazine pages, printed a week earlier, began a wild, circuitous journey, through tunnels and up ramps, that lasted a few minutes. The bundles were somehow cut and collated. The long edge of each new 130-page sheaf was dipped into a pool of melting glue, then dropped into a U-shaped cover. After drying during a series of slow corkscrews, the new magazine’s edges were chopped smooth by guillotines and emerged through an opening. Unimpressed men stacked them into boxes.
Nearby, Stephen Casimiro held one of the 7,200 copies in his hand.
Casimiro, a former editor of Powder and National Geographic Adventure, is the founder and publisher of Adventure Journal, an unapologetically analog magazine at the heart of an old-school trend.
At NBER working paper 32563 researchers again detail the devastation of the opioid epidemic. Addiction is a pernicious disease. The addict spreads anti social behavior in many directions.
The opioid crisis generates broader societal harms beyond direct health and economic effects, impacting non-users through adverse spillovers on children, families, and communities.
We study the spillover effects of a supply-side policy aimed at reducing the over-prescribing of opioids on women’s wellbeing by examining its effects on intimate partner violence (IPV).
Using administrative data on incidents reported to law enforcement, in conjunction with quasi-experimental variation in the adoption of stringent mandatory access prescription drug monitoring programs, we find that these policies have generated a downstream benefit for women by significantly reducing their overall exposure to IPV and IPV-involved injuries by 9 to 10 percent.
Strongest effects are experienced by groups with higher rates of opioid consumption at baseline, including non-Hispanic Whites.
However, we also find a significant uptick in heroin-involved IPV incidents, suggesting substitution into illicit drug consumption.
Our results highlight the need to identify high-risk groups prone to switching to illicit opioids and to address this risk through evidence-based policies.
Accounting for effects on IPV adds to the estimated societal burden of the opioid epidemic.
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