This month I will be posting a series of articles that were published on the Albuquerque Journal. These articles will explore the relationship between money and happiness. This week’s topic covers retail earnings.
During May, several “brick and mortar” department stores reported disappointing corporate earnings, among them Macy’s, Nordstrom, Kohl’s and Gap. However, it seems that consumers are not actually spending less.
The Commerce Department reported that retail sales – which include restaurants and online retailers in addition to traditional department stores – increased 1.3 percent in April compared to March. Consumers may be spending more online (Amazon and others) and at restaurants, while spending less in traditional retail stores. (WSJ 4/14/16). Home Depot reported a robust 9 percent increase in first quarter sales (over the prior year), suggesting that consumers are spending on their homes rather than on apparel. (thestreet.com 5/17/16). Wal-Mart reported a 1 percent increase in first quarter revenue, and noted that over half its U.S. revenue comes from food and groceries, products that are less likely to be purchased online. (WSJ 5/20/16).
Who owns America’s debt?
The U.S. debt totals $19 trillion. Where is that debt? Who owns it?
A total of $12.9 trillion (68 percent) is owned by U.S. entities, $1.3 trillion (7 percent) is owned by China, $1.1 trillion (6 percent) is owned by Japan and $3.8 trillion (20 percent) is owned by other countries.
Of the $12.9 trillion owned by Americans, $5.3 trillion is held by government trust funds, such as Social Security, and $5.1 trillion is held by individuals, pension funds, and state and local governments. The remaining $2.5 trillion is held by the Federal Reserve. (money.cnn.com 5/10/2016).
No respect
Bonds are the Rodney Dangerfield of the investment world. They have historically provided income and stability to an investment portfolio. When compared to the volatility of equities, bonds are meant to be boring. Yet, in 2016, they are playing a much larger role in global economics and are getting plenty of attention. With many European nations and Japan offering negative interest rates, investors have been buying longer-term maturities in an attempt to get a slightly higher yield. This poses a serious risk when interest rates increase. The Wall Street Journal reported (5/19/16) that a 1 percent increase in interest rates in the U.S. would cause a 10-year U.S. Treasury bond to decline in value by 9 percent. A 2 percent increase in interest rates would cause the same bond to decrease in value by 17 percent and a 3 percent increase would cause a 24 percent decline. The best way to make sense of bonds (and fluctuating values) is to remember that the yield and the price of a bond are inversely related so that, when interest rates rise, bond prices fall and vice versa.
Interest rates
The Federal Reserve is being cautious about raising rates in the U.S. Jeff Cox (cnbc.com 5/23/16) reported that the Fed may choose to raise rates following its July 26-27 meeting (rather than June 15, as previously assumed). On June 23, British citizens will vote on whether or not they want to leave the European Union. With the catchy term “Brexit” (British exit), the issue is getting plenty of attention throughout Europe and the U.S., and it is considered a potential risk to the global economy.
U.S. financial industry
Rana Foroohar wrote a feature article titled “Saving Capitalism” about the “broken” financial industry in the May 23 issue of Time magazine. She states: “America’s economic problems go far beyond rich bankers, too-big-to-fail financial institutions, hedge-fund billionaires, offshore tax avoidance or any particular outrage of the moment.” She believes the correct role of finance is to support job creators and that businesses need to be back in the driver’s seat. Foroohar reports that the financial sector currently represents around 7 percent of the U.S. economy, creates only 4 percent of all jobs and takes around 25 percent of all corporate profits. Her suggestions to begin repairing our economic problems include: 1) Make finance more transparent, 2) stop rewarding debt over equity, 3) rethink who companies are run for, and 4) build a national growth strategy. The entire article can be found online at www.time.com/4327419/american-capitalisms-great-crisis/.
Donna Skeels Cygan has been the owner and financial planner for her own firm in Albuquerque for 18 years. She is the author of the multi-award-winning book “The Joy of Financial Security.” Her website is www.sagefuture.com.
