A great paradox of the financial world is found in the axiom that ‘markets rise on speculation but fall on uncertainty’. Sometimes all we can say is ‘Ain’t it the truth!’

Poor Mr. Market has been put through some neck-snapping whipsaw action all week and it may continue for a while. So, what’s up? Well, a couple of things really.

First it is important to maintain perspective. Yes, we’ve been mired in a correction now for a couple of weeks and it may be a couple more before things settle down. However, when you hear doomsayers talk about the ‘steep drops’ keep in mind that the markets have put together the longest monthly winning streak since 1959. That is a pretty comforting statistic. Still, no matter how good the economic picture may be markets can and do sometimes get ahead of themselves. When that happens we need a correction to help consolidate valuations. In a bull market these conditions more often than not set up a new floor from which to press onward and upward. Barring outlier events, I think that’s where we are right now. That being said, let’s take a look at a couple of those possible outliers.

The current week started out quite nicely with a Dow gain of 399 points. But then on Tuesday the new Fed Chair Jay Powell spoke to the House Banking Committee. His prepared remarks were well received and one could even watch the big board at the NYSE get greener as he spoke.

However, after his prepared remarks, there was a brief Q&A in which a couple of reporters pushed him on the issue of just how many rate hikes the Fed had in mind for the year. He indicated that their thinking remained on a track for three. When pushed harder he responded by saying that the Fed always considers fluid changes in the economy and responds accordingly. Unfortunately, some were wanting to hear instead that there was no possibility — no matter what — of a fourth hike. Absent that utterance, thinking that ‘He must be foreshadowing that ‘an over-heated’ situation is in the works’, the markets sold off. Fortunately, Powell would have another go at it.

On Thursday Powell spoke to the Senate Banking Committee and had learned to not leave any room for his remarks to be misinterpreted. Several of his comments stated his strong feeling that the ‘next two years’ would be ‘good for the economy’. Specifically he provided this sound bite: “There is no evidence the economy is overheating.” Within an hour this comment had pushed bond yields lower and equities higher. One of our outliers had lowered its profile.

But then, President Trump decided to announce his intent to apply tariffs on imported steel and aluminum. One can legitimately discuss the pros and cons of the effects, and even the wisdom, of tariffs but one thing is sure: in our political climate anything Trump does will fire up the crowd…and some will arrive with pitchforks (verbally of course). Our second outlier is then still out there, (and it may be lying too!).

Let me leave you with a couple of thoughts. The first is that our economy is pretty much consumer-driven and consumer confidence is still running at all time high levels. That cannot be painted up to be a bad thing no matter how hard one may try. Thing two is this; a lot of the discussion regarding the likelihood of  interest rate hikes is really expressing the fear of wages rising too fast and thus igniting an inflationary spiral. Powell acknowledged that with the current 4.1 % unemployment rate we are at what most economists call ‘full employment’ (meaning that the last 4% of the work force is made up of chronically unemployable people). Being at ‘full’ employment’ would mean a labor market tight enough that employers have no choice but to offer higher wages as enticement to work and also to keep existing workers happy. But Powell also reminded us that the labor participation rate is still lower than it could be. That is an extremely important thing to consider because it recognizes that the labor pool is not of a fixed size. Increasing the participation rate would be an effective pressure-release valve on a tight labor market. Additionally, wage increases that reflect correlated increases in productivity are obviously not inflationary and are instead a boon to the economy by enhancing the purchasing power of worker’s paychecks.

Market Minute 3/2/2018 – The Tax Law Change Effect

Now that we’re into March, many (but far from all) of you who are getting a paycheck (i.e. not retired), have changed your withholding information with your employer, and have seen an increase in take-home pay. For those who have not yet changed your withholding info, note that according to a new survey conducted by LendEDU, on average you can look for about 3.5% net increase in your paycheck. (Hardly ‘crumbs’ in my opinion.) In addition, about 90% of the people who receive a paycheck are seeing the increase.  Also, of interest- so far it appears that Blacks, Hispanics, and Women are seeing the largest increases.

And so? One of my grandsons is seeing about $100 per month increase – he mentioned to me that he has already increased his IRA contribution by that $100 per month. By his calculations, in 20 years that could increase his investments total by about $68,000 (in case you are wondering, he’s using a 7% return average). In 30 years (he’s in his early 20’s) that could amount to about $157,000 additional. (Definitely not ‘crumbs’!)

If you, like most people, live on your take-home pay, your budget will not feel a pinch if you redirect that additional income into your own IRA or 401k. You haven’t had it, so you won’t miss it. And your future self will likely be quite pleased. So today, let me suggest you take some advice from my grandson. Smart kid!

You may want to pass this thought on to your kids or grandkids.  I think it’s a good idea too!

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051

Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk

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