WEEKEND WRAP: Green Lights for Stocks; Flight From High Tax States Varies US Landscape

For equity investors, the week was all about Friday.

After flailing about the prior four sessions, US indices got a sizable boost on the final day of the week, sending traders home satisfied with a positive result for the week.

With the Dow, NASDAQ, and Composite mere percentage points short of all-time highs, the S&P 500 is within three points of its record closing high, recorded earlier this year, on July 26 (3,025.86).

So, with all the uncertainty surrounding geo-political events - impeachment, Brexit, trade war - stocks continue to perform magic as solid investments in a ZIRP and NIRP environment.

With the Fed committed to "not QE" through the second quarter of 2020 (at least), stocks have in front of them a glowing green light signaling fresh all-time highs. The FOMC is expected to cut another 25 basis points at its meeting this week, the second to last of the year.

In commodity trading, WTI crude oil was bid, closing out the week at 56.63 a barrel after slumping down to $52.45 over the prior two weeks. Gold and silver, both sluggish over the past month, finally were bid on Thursday and Friday. Gold was as high as $1518 on Friday, settling in at $1504, while silver crested above $18 per ounce and closed right on that number Friday.

Ten-year treasury notes continued to be shunned, finishing out the week with a yield of 1.80%, with some correlation to ongoing cuts in the federal funds rate. Bond traders are expressing a preference for short-term maturities, with 1, 2, and 3-month bills nearly at the same yield as the 10-year. While the yield curve has returned from inverted to a rather dull slope, there's certainly no consensus on direction. With the 10-year yield at its best level since August, it is still well below the average 2.72% which prevailed in the first quarter.

Earnings reports have been unreassuring, with as many misses as those topping estimates. Overall, mega-corps are still making money, just not so much to boost their prices significantly. In this environment, banging out 5-8% year-over-year gains has to be considered pretty solid, being that the current economic cycle is well past the mid-point and may be nearing an end.

Recession talk has subsided for now, though different regions throughout the vast US landscape offer varied results. In general, flight from high-tax states - New York, New Jersey, Massachusetts, Maryland, Connecticut, Illinois, and California, in particular - to Southern enclaves continues apace. Retirees are taking their money and running for the state line, seeking reduced property, income, and estate taxes in more conservative states.

States that have not raised their minimum wages significantly are experiencing an influx of new residents, and with that, housing, roads, and commercial spaces are being constructed at a hot pace. Meanwhile, the Northeast continues to suffer from an overabundance of taxation, regulation, and handouts to the indigent at the same time its infrastructure is crumbling and best residents are leaving.

New York is a prime example of the dangers of liberal policies causing middle and upper class flight. While undocumented (illegal) migrants (aliens) are offered free food, housing, and education, long-suffering native New Yorkers are feeling put out, footing the bill for government largesse while good jobs are scarce and property taxes are near the highest in the nation. Home values are depressed, despite low interest rates and job creation is limited by the excessive minimum wage and other requirements of employment paid for by companies.

New York leads the nation in lost manufacturing jobs in 2019, estimated to have shed 10,000 positions through the first nine months of the year. The Empire State has also suffered significant losses in the hospitality and construction industries, due to the higher minimum wage and lack of growth in commercial and residential building.

These so-called "high tax states" are going to face a cash crunch, as higher paid workers are replaced with low-skill, low pay employees. The revenue will not be enough to sustain the high costs of state agencies and pensions. A major bust has been building for years in many states who will have to face the reality that the days of big promises are over and government staff reduction and budget cuts are on the table.

The United States is a big country, and, similar to the nations of Europe, some states may be booming while others are failing.

Caveat Emptor.

At the Close, Friday, October 25, 2019:
Dow Jones Industrial Average: 26,958.06; +152.53 (+0.57%)
NASDAQ: 8,243.12, +57.32 (+0.70%)
S&P 500: 3,022.55, +12.26 (+0.41%)
NYSE Composite: 13,146.24, +27.33 (+0.21%)

For the Week:
Dow: +187.86 (+0.70%)
NASDAQ: +153.58 (+1.90%)
S&P 500: +36.35 (+1.22%)
NYSE Composite: +139.60 (+1.07%)