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Economic Update 2/10/2014

Last week started out on a sour note, with a 326-point selloff in the Dow (MarketWatch). The culprit – the closely followed ISM Manufacturing Index registered its 3rd largest decline since 1990, falling 5.2 points in January to 51.3 (ISM data). A reading of 50 suggests no growth, a reading above 50 suggests expansion, and a reading below 50 suggests contraction. At 51.3, manufacturing starts the year in low gear.

 

Index

Weekly Return %

thru Feb 7, 2014

YTD Return %

Dec 31, 2013 – Feb 7, 2014

DJIA1

+0.6

-4.7

NASDAQ Composite2

+0.5

-1.2

S&P 500 Index3

+0.8

-2.8

Bond   Yields

Feb 7   Yield & Weekly Change

Yield - % a/o Dec 31, 2013

3-month T-bill

0.08             +0.06

0.07

2-year Treasury

             0.30           -0.04

0.38

10-year Treasury

2.71             +0.04

3.04

30-year Treasury

3.67             +0.06

3.96

Commodities

Feb 7 Price & Weekly Change

Year end 2013

Oil per barrel4

     $100.14             +2.73

    $98.42

Gold per ounce5

$1,259.25             +8.25

$1,201.50

 

On Friday, the Bureau of Labor Statistics (BLS) reported that nonfarm payrolls in January rose by a sluggish 113,000, below the forecast of 181,000 (Bloomberg). To put it into perspective, payrolls have risen at an average rate of 183,000 per month since January 2011 (BLS).

 

Unlike the ISM Index, it does not appear that weather played a role due to a 48,000 increase in construction, the fastest rise since January 2007 per BLS. If any category might be affected by weather, it’s construction.

 

And stocks rallied on that sluggishness – bad news is good news – amid the possibility the Fed could delay measured cuts in its $65 billion in monthly bond buys.

 

We may get more clarity this week when the new Fed Chief Janet Yellen testifies before a House Committee on Tuesday and a Senate Committee on Thursday. Still, we’ve got plenty of data to decipher before the next Fed meeting in March (Fed meeting calendar).

 

Meanwhile, the unemployment rate fell from 6.7% in December to 6.6% in January, continuing its descent (BLS). But remember, the jobless rate doesn’t fully capture what’s happening in the labor force.

January 2014 Market Review

Last year’s advance in the S&P 500 Index came up just shy of 30% (St. Louis Federal Reserve data) and investors were primed for a strong start to 2014. Besides, the market experienced a strong start to 2013 (St Louis Fed data). Why wouldn’t we get a repeat?

 

Well, the market can be fickle. Sometimes, it just seems to have a mind of its own, doing what it can, at least in the short term, to confound and confuse. In a word or two, stocks tripped out the 2014 gates, snapping a four month winning streak (MarketWatch data).

                                   

Index

January   Return %

2014 YTD   Return - %

DJIA1

-5.3

-5.3

NASDAQ   Composite2

-1.7

-1.7

S&P   500 Index3

-3.6

-3.6

Bond Yields

Yield* - % a/o Jan 31,   2014

Yield - % a/o Dec 31,   2013

3-month   T-bill

0.02          -0.05

0.07

2-year   Treasury

0.34         -0.04

0.38

10-year   Treasury

2.67         -0.37

3.04

30-year   Treasury

3.61         -0.35

3.96

Commodities

Jan 31 price, monthly change

Year end 2013

Oil   per barrel4

      $97.41                -1.01

   $98.42

Gold   per ounce5

$1,251.00               +49.50

$1,201.50

       

Sources: MarketWatch, U.S. Treasury, CNBC, St. Louis Federal Reserve, Energy Information Administration    

*Includes monthly change

 

Let’s look at the key themes that greeted investors in January. First of all, there weren’t any strong catalysts to fuel the next leg of the bull market.

 

Last year’s surge in stocks and relative weakness in bonds had left asset allocations out of alignment. We’re in a new tax year and some folks may have locked in profits on stocks in order to get back within their recommended equity percentages. Cash proceeds – some may be going into bonds, including Treasuries, which to the surprise of many have performed admirably in January.

 

But the real culprit for the weak start originated overseas, and in particular, emerging markets. Emerging markets, sometimes called developing markets, exclude the U.S., Western Europe, Japan, Canada, and Australia. What it does include is Asia, South and Central America, and Asia-Pacific economies.

Many developing nations around the world have plenty of long-term potential, but there is heightened risk when investing in emerging markets. They may play an important role in the international component of a portfolio, they reduce investment risk over the long-term, but these countries are subject to big swings.

Economic Update – Earnings Season:

Here are a few thoughts as we head towards the close of the first month of trading for 2014.

Last week was a good reminder that stocks don't consistently move in one direction, and we've hit a new round of turbulence in the markets.

Yet, when the week ended, the S&P 500 was just 3.1% from its all-time high (St. Louis Fed). Blame the latest pothole in the road on international, and in particular, emerging markets. Weakness started on Thursday after a Purchasing Managers Index (PMI) of manufacturing in China unexpectedly fell to a six-month low (Markit Economics).

Then there are the general themes that have weighed on emerging market stocks over the last year, including continued fears of a cutback in Fed bond buys, political instability, and the three-year downtrend in commodity prices (CoreCommodity Indexes).
With U.S. stocks at record highs, the shift in sentiment around the globe sparked selling at home. Beneficiaries included longer-term U.S Treasuries, which have rallied since the start of the year.

While global events were felt in the U.S., Q4 earnings season is well underway. After a sluggish start and a number of high-profile misses (Wall Street Journal, Bloomberg), last week's spate of reports is helping to lift overall numbers.
Of the 122 S&P 500 companies have reported earning so far, 64% have topped analyst expectations, which is just ahead of the long-term average of 63% (Thomson Reuters).

Q4 2013 Market Update

 

2013 Financial Market Update and Look Ahead                                 —December 31, 2013                                                                  

 A Year to Remember

 Stocks had a banner year in 2013, and much of the commentary will concentrate on the forces that fueled U.S. equities. Not only did the S&P 500 Index post its best advance since 1997, 90% of S&P 500 stocks ended the year positively, the highest since records began in 1980 (Thomson Reuters).

  The Dow Jones Industrials, the oldest and best-known index, registered its best performance since 1995 (MarketWatch). Meanwhile, riskier small-cap stocks easily outperformed their larger counterparts, with the S&P SmallCap 600 Index racking up a gain of nearly 40%.                   

Index

Q4 Return %

2013 YTD Return - %

DJIA1

+8.6

+26.5

NASDAQ Composite2

+10.7

+38.3

S&P 500 Index3

+9.9

+29.6

S&P SmallCap 600 Index4

+9.5

+39.7

Bond Yields

Yield* - % a/o Dec 31, 2013

Yield - % a/o Dec 31, 2012

3-month T-bill

0.07        +0.05

0.05

2-year Treasury

0.38       +0.05

0.25

10-year Treasury

3.04      +0.40

1.78

30-year Treasury

3.96        +0.27

2.95

Commodities

Dec 31 price, quarterly change

Year end 2012

Oil per barrel5

        $98.70                 -1.35

   $91.82

Gold per ounce6

$1,201.50                     -125.00

$1,664.00

       

  Before we jump into the “why” behind the rally, let’s briefly examine a couple of major hurdles that, once removed, enabled the bulls to run freely on Wall Street. Remember the swoon in stocks in the summer of 2011? Seems like a distant memory, but a number of factors created a large degree of uncertainty, including an ominous and expanding debt crisis in Europe. As 2012 progressed, the fiscal cliff loomed large over the markets and the economy. Without any action by Congress, hefty across-the-board tax increases beginning in 2013 threatened to throw the economy back into a recession. But Congressional negotiators crafted a narrow deal at the midnight hour, permanently enshrining nearly all of the Bush tax cuts into law.

 With a couple of stiff headwinds out of the way, investors found solace in a number of strong tailwinds, which drove the DJIA, the S&P 500 Index, and small-cap stocks (BigCharts) to new highs.

  A super-easy monetary policy -- In order to stoke economic activity and hiring, the Federal Reserve has been holding the fed funds rate at near zero since late 2008 and has embarked on a series of long-term bond purchases, popularly called quantitative easing or QE for short. Undoubtedly, QE has been controversial.

However while QE has ‘fertilized’ the equity fields, I believe other, more fundamental elements have also contributed to the rally.

 Don’t discount earningsWe’ve experienced a subpar economic recovery, but that hasn’t prevented companies from posting record profits, on near record profit margins (S&P Dow Jones Indices). Reason – a gradual improvement in the economy has led to very modest improvements in sales. Coupled with a laser-like focus on expenses and you’ve created the perfect recipe for record earnings. Longer-term, stocks are heavily influenced by corporate profits.

Stock buybacks

 Given record profits and few opportunities to expand and re-invest, corporations have returned an enormous amount of cash to shareholders via stock repurchases and dividends. The repurchases of shares in the open market represent real demand for stocks, and buybacks are up significantly over the last year.  

 While the repurchase of company stock has underpinned the market, dividends have also sweetened the pot. S&P Dow Jones Indices estimates that companies returned a record $310 billion last year in dividends.

 The road ahead

 The global economy has yet to shake off the shackles of the 2008 financial crisis that threw the U.S. economy into a tailspin. The U.S. economy did show signs of perking up at the top of 2011, 2012 and 2013; yet, it failed to break free of the low growth orbit it has been stuck in since the recovery officially began in the second half of 2009 (NBER). And once again, the U.S. economy is exhibiting signs of strength heading into the New Year. Employment is rising per government data. Nothing spectacular yet, but we’re gradually moving in the right direction. New home sales have sharply accelerated over the past couple of months (U.S. Commerce Dept), manufacturing activity is growing at a respectable pace; and consumer spending (70% of GDP) ticked up.

 Potential clouds

 The skies never really clear and market corrections rarely follow the script laid out by the consensus. The list below is not exhaustive but represents some of the potential problems the U.S. and global economy could face.

    -  The two-year budget deal does not eliminate the possibility of another down-to-the wire debate on the debt ceiling. 

 -  If the economy were to speed up significantly (probabilities remain low), could we see a big spike in Treasury yields and talk of a tightening cycle by the Fed

Europe appears poised for a very slow economic recovery. Banking woes have subsided but structural reforms are still needed. There’s always the possibility that smoldering embers could reignite.

-  China is attempting to transition from investment-led boom to a more balanced, consumer-led economy. But debt levels are up and some worry about overcapacity.

 Warmest Regards,

 

                                                     Donald S. Loveless CFA CFP EA  

 

 

 

Market Update 11/22/13

So far, 2013 has been a good year for most portfolios, one exception being long maturity bonds. Forecasts now indicate that 2014 may be a year in which company profits, worldwide, will increase slightly over 2013. We believe this increase could be in the 3% - 4% range, which would equate to a 6% - 10% return, in theory.  Companies are becoming very nimble at factoring in uncertainty; witness expectations being lowered recently for 2013 Holiday retail sales. Political factors, in only the near term, tend to increase the level of uncertainty. With overall expectations on the low end, any growth above that is a welcome surprise and the market reacts positively. We believe volatility will decrease as 2014 progresses, as we expect uncertainty to decline to some extent.

In the chart below, you can see improvement in the Leading Economic Index. This was driven by positive contributions from the financial indicators, initial claims for unemployment and new orders. In the six-month period ending September 2013, the leading economic index increased 3.0 percent (about a 6.0 percent annual rate), much faster than the growth of 1.2 percent (about a 2.4 percent annual rate) during the previous six months.

As we head towards the end of the year, we recommend that you keep the following things in mind:

  1. Required Minimum IRA Distributions  IRA account owners who turned 70 1/2 prior to 2013 must take their annual RMD by December 31, 2013. IRA owners who turn 70 1/2 during 2013 have until April 1, 2014 to take their first minimum distribution.
  2. Gifting & Taxes
  3. Year end tax planning
    • Charitable gifting of appreciated securities or other assets to Donor Advised Funds must be completed prior to 12/31/2013.
    • So far, Congress has not extended beyond 2013 the ability to make a charitable contribution directly from your IRA. 2013 may be the last year to do so.
    • There is a new 3.8% surtax on investment income for those with total annual income of $250k or greater for 2013.
  4. IRA Contributions – Although you have until April 15th, 2014 to deposit your 2013 IRA contribution, it is important to note that the contribution limits for both IRA’s & Roth IRA’s has increased to $5,500. If you were born in 1963 or earlier, you can put in an extra $1,000.

Heading into Thanksgiving weekend, and with the Holidays right around the corner, I want to thank each of you for your continued support over the past year. It is known in our industry that the most sincere form of thanks is often shown through your referrals. As a direct result, we are proud to say that we have added many new clients this year and look forward to continuing to learn and grow with clients both new & old. We truly appreciate your trust, and look forward to a prosperous 2014.

Please note that our offices will be closed on November 28th & 29th in honor of the Thanksgiving Holiday. Please also view the enclosed reminder regarding our upcoming Holiday Celebration on Friday December 6th, from 3:00 p.m. to 6:00 p.m. , here at our office.

As always, please feel free to contact us at any time, with any questions.

Best wishes to you this Holiday Season!

Donald S. Loveless CFA™ CFP® EA

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