ARTICLES

An Alternative To Money Market Funds

February 2018

2018 is off to a strong start as the Nasdaq, S&P 500 and Dow Jones Industrial Average all reached record highs in January. There is no doubt that the passage last December of Pres. Trump’s Tax Cuts and Jobs Act has had a major impact on the economy and the markets. Data from CNBC shows that over 250 companies have announced bonuses, wage hikes or increases to their 401(k) programs thanks to this legislation. Similar announcements are likely to be made in the coming weeks and months.

Earnings from the major S&P 500 companies have generally been strong along with their earnings outlook for 2018. Recent data from Birinyi Associates, the highly regarded research firm, has both the S&P 500 and Dow Jones Industrial Average trading with a Price Earnings ratio of about 19x forecast earnings for 2018. This figure is high but reflects investor optimism for earnings growth.

US exporters have been bolstered by the recent weakness in the US Dollar. Treasury Secretary Steven Mnuchin spoke at the World Economic Forum in Davos, Switzerland last month. He made clear a weaker dollar is good for American trade as US produced goods become more affordable in international markets.

Oil prices have recently surged. Brent crude oil moved above $70 per barrel and West Texas Intermediate crude oil topped $65 per barrel. Wall Street has taken notice as the shares of the major airlines declined due to higher fuel costs and potential fare wars. Several airlines have announced expansion plans to take advantage of the stronger economy and increased demand from both business and individual travelers.

Jerome Powell will succeed Janet Yellen as Federal Reserve Chairman when her term ends February 3. Mr. Powell was confirmed by the Senate last month and is expected to maintain a low interest rate policy while gradually raising rates. Pres. Trump has several vacancies to fill at the Federal Reserve’s Board of Directors. Once complete, six of the seven Directors will be Trump appointees.

Late last month, ECB President Mario Draghi made clear he sees little chance of a rate hike this year, helping to thwart the Euro’s recent rise vs the US Dollar. As a result, interest rates may remain low in the US due to extremely low yields offered by other major issuers of sovereign debt. The 10 Year US Treasury ended January yielding more than 200 basis points above the yield on the 10 Year German Bund, more than 260 basis points above the yield on the Japanese 10 Year JGB and 120 basis points above the yield on the 10 Year British Gilts. 

My weekly radio show on WWPR 1490 AM airs at 12.30pm each Friday. The show can also be heard live on the station’s website (www.1490 wwpr.com). My prior radio shows and news columns are available on my firm’s website (www.amescapmgmt.com).

If you are unhappy with the returns offered by money market funds, feel free to contact us.

 

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