Last week’s jobs report showed 151,000 new jobs in January, down from December’s 292,000 new jobs. The three month average remains north of 200,000, however. The official unemployment rate dropped to 4.9%, the lowest since the Great Recession, even though there has been 500,000 new entrants into the labor force. In addition, average hourly earnings rose 0.5% in January, the highest growth rate in many months.
Combine good employment numbers with higher wages, and gasoline prices lower than they were in 1979, and it’s easy to see why the restaurant parking lots are packed. What’s interesting though, is that not all this increase in discretionary cash flow is being spent. The savings rate in December hit 5.5%, as consumers seem to want to move into the future in a stronger cash position than has been their preference in the past.
This relatively good news would seem to bode well for the stock market, though there isn’t as close a correlation between economic numbers and the stock market as one would think. Speaking of the stock market, the DJIA dropped from 17,425 at the beginning of the year to about 15,765 on January 20th, a 9.5% drop. Since that time, the DJIA has traded in a relatively tight range of 15,800 to 16,300, with the other major indices in similar ranges.
Our guess, though this is only a guess, is that the major indices will muddle without direction until either there are clear front runners in the presidential campaigns, or all the short term market timers have thrown in the towel, and gone to cash, or economic growth numbers are revised upward from the 2% annual range. The challenge with the economic growth forecasts is how accurately they actually measure economic activity.
True to form though, many investors have liquidated their stock holdings over the last five or six weeks, and are either holding cash, or buying bonds. The yield spread between 90 day Treasuries and thirty year Treasury bonds has shrunk by about 50 basis points since the start of the year.
On the real estate front, according to Vero Forecasts, Portland Oregon, Seattle, Denver, and Bend Oregon are the top four strongest real estate markets in the country at the moment. Rounding out the top ten are San Francisco, San Jose, Greeley CO, Salem OR, Port St. Lucie FL, and Fort Collins CO. According to Vero, these markets have strong economies, growing populations, and less than a 60 day supply of homes.
At the other end of the spectrum, Ocean City and Atlantic City NJ, Fayetteville NC, Torrington CT, and Gadsden AL are the numbers one through five weakest markets in the country. The balance of the top ten is clustered in NY, and the Appalachians of WV, PA, and OH. The weakness drivers seem to be either high housing costs, or lack of economic opportunity, or a combination of the two.
Overall, Vero expects residential market values to increase by more than 4% over the next twelve months, with 94% of markets expected to appreciate.
Apple reported selling 75 million cell phones, with quarterly revenue of $75.9 billion, and quarterly net income of $18.4 billion, or $3.28 per share, for the quarter ended December 26, 2015. Gross margin was 40.1%, compared to 39.9% a year ago, and international sales accounted for 66% of the quarter’s revenue. The current stock price of $93.90 is at the very low end of the 52 week range of $92 to $134.
Since this is an election year, following is a short history of our two major political parties. The Democrats trace their roots to 1792 and Thomas Jefferson. The Jeffersonians were originally called Republicans, advocating for a decentralized government with limited powers. Their name evolved before 1800 to the Democratic-Republicans, and they stood in contrast to the Alexander Hamilton-led Federalist Party, which advocated for a strong central government.
Jefferson was elected president in 1800, and the Democratic-Republicans held office through the early 1820’s (Adams, Madison, Monroe). New states joining the union and differences among factions led to a split, with Andrew Jackson representing Democrats, whose strength lay in the South and West, and John Quincy Adams representing the National Republicans, whose strength was mainly in the East, and which party faded quickly from the national scene.
The Democrats won all but two elections from 1828 to 1856, with Jefferson Davis leading the Southern Democrats, who favored slavery in all new territories, and Stephen Douglas leading the Northern Democrats, who favored allowing each territory to make its own decision regarding slavery.
In the early 1850’s, a number of individuals, including remnants of the Whigs, Democrats disaffected with the pro-slavery forces in their midst, the Know-Nothings, and the Free-Soilers, combined to form the Republican Party. One of their primary purposes was the containment of slavery, though this wasn’t the only plank in their platform. John Fremont was the first Republican presidential nominee in 1856, and Abraham Lincoln was the first Republican president.
While politics and political parties have always been a part of our national fabric, income taxes have not. Congress passed the Revenue Act of 1861 which included a tax on income. This tax was repealed ten years later. Congress also enacted a flat rate Federal income tax in 1894. It was ruled unconstitutional the following year because it was a direct tax, not apportioned according to the population of each state. The 16th amendment, ratified in 1913, overcame this objection, allowing the Federal government to tax the income of individuals.
The top marginal tax rate in 1913 was 7%, and was applied to taxable incomes of greater than $500,000. In 1917, the top marginal rate jumped to 67%, and was applied to taxable incomes of $2 million. The top rate dropped to the 25% range in the 20’s, and moved through the 60%, 70%, 80%, and 90% range through the 1930’s, and into the 1960’s.
When Reagan took office in 1981, the top marginal rate was 69%, and was applied to taxable incomes of greater than $215,000. At the moment, the top marginal rate is 39.6% on taxable incomes of more than $464,000.
Quotes of the week:
“Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies.” – Groucho Marx
“I predict future happiness for Americans, if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.” – Thomas Jefferson
Randy Brunson is the founding shareholder of Centurion Advisory Group. Mr. Brunson
has invested most of his thirty five year career in the area of financial services.