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Market Update - November 3, 2014

A Stock Market Rollercoaster

Whether you’ve been on a rollercoaster or tried to bungee jump, October’s action probably compares to both – a sharp descent followed by a steep rebound.

 

Index

Weekly Return %

thru Oct 31, 2014

YTD Return %

Dec 31, 2013 – Oct 31, 2014

DJIA1

+3.48

+4.91

NASDAQ Composite2

+3.28

+10.87

S&P 500 Index3

+2.72

+9.18

Bond Yields

Oct 31 Yield & Weekly Change

Yield - % a/o Dec 31, 2013

3-month T-bill

0.01       Unch

0.07

2-year Treasury

0.50       +0.09

0.38

10-year Treasury

2.35       +0.06

3.04

30-year Treasury

3.07       +0.02

3.96

Commodities

Oct 31 Price & Weekly Change

Year end 2013

Oil per barrel4

     $80.70            -0.60

    $98.42

Gold per ounce5

  $1,164.25            -68.50

$1,201.50

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

 

With the headlines telegraphing all kinds of angst in early October (in reality, the S&P 500 Index lost a modest 7.4% from its September peak to its October 15 closing bottom [St. Louis Federal Reserve]), the S&P 500 Index added 2.3% during the month and claimed a new high. The Dow also climbed out of its hole, rose 2.0% last month, and also notched a new record (St. Louis Federal Reserve).

 

Good news is good news

Advance data from the Bureau of Economic Analysis revealed that Q3 Gross Domestic Product (GDP – the broadest measure of economic activity) grew by 3.5%, which makes it the fourth quarter in five that growth has exceeded 3% (BEA).

 

Moreover, the expanding economy is generating faster employment growth (BLS), which is helping to put the economy on a firmer footing.

 

It’s not that we’ve entered a new economic boom; far from it. But it’s steady, it’s putting people back to work, and it’s generating rising profits. And higher profits are one of the key variables in the stock market equation.

 

Without a doubt, we aren’t experiencing the kind of growth we saw in the 1990s. Yet, some of that growth was driven by an unsustainable tech boom. Nevertheless, the general trend is encouraging.

 

Note: unlike the quarterly announcement of GDP, which is reported as an annualized 3-month rate of growth, the above graph examines the rate of change in GDP versus one year ago.

 

The end of QE

Last Wednesday, the Federal Reserve confirmed it will end quantitative easing or QE. QE is the complicated-sounding name given to the bond purchases the Fed has been making on a monthly basis using freshly created cash.

 

But if we go back a couple of years, any talking of ending bond buys was typically greeted negatively by investors simply because Fed support has been viewed as a positive for stocks. The general thinking: stocks might falter without the monthly liquidity injections into the financial system.

 

As the economic picture has brightened, there’s a growing sense that a broadening recovery can play a bigger role in aiding stocks rather than Fed support from its bond buying program.

 

The program has not been without its detractors and many question how effective it has really been for the economy. Note that data from the BEA reveal this has been the weakest recovery in over a generation.

 

 

Bad news is good news

A growing economy is a big factor in how stocks will perform. But so is the posture of central banks. And not just the U.S. central bank – the Federal Reserve – but global central banks, too.

 

Economic weakness in Europe has forced the European Central Bank to implement unconventional measures designed to aid its faltering economy. That’s been a plus for stocks.

 

Early last year, the Bank of Japan significantly ramped up its version of QE. As a percent of its total economy, the amount of assets it is buying dwarfs what we’ve seen in the U.S. (Bank of Japan, Wall Street Journal).

 

As the month came to a close, the Bank of Japan surprised investors by announcing even more aggressive measures. What’s happening in Japan – weak economic growth (bad news) – has prompted the Bank of Japan to inject even more cash into its financial system as way to stimulate its sagging economy. The result – markets rallied around the world as the month came to a close (Wall Street Journal).

 

Market Update - October 27, 2014

Shifting Sentiment amid Volatility

 

The major market indices snapped a four-week losing streak (MarketWatch data) in style, with the S&P 500 Index registering its best gain since the first week of January 2013 (MarketWatch data).

 

Index

Weekly Return %

thru Oct 24, 2014

YTD Return %

Dec 31, 2013 – Oct 24, 2014

DJIA1

+2.59

+1.38

NASDAQ Composite2

+5.29

+7.35

S&P 500 Index3

+4.19

+6.29

Bond Yields

Oct 24 Yield & Weekly Change

Yield - % a/o Dec 31, 2013

3-month T-bill

0.01       Unch

0.07

2-year Treasury

0.41       +0.02

0.38

10-year Treasury

2.29       +0.07

3.04

30-year Treasury

3.05       +0.07

3.96

Commodities

Oct 24 Price & Weekly Change

Year end 2013

Oil per barrel4

       $81.29               -0.96

    $98.42

Gold per ounce5

  $1,232.75              -1.50

$1,201.50

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

 

I won’t speculate on this page as to whether we’ve bottomed. I’ll defer to baseball legend Casey Stengel when it comes to calling short-term gyrations in the market: “Never make predictions, especially about the future.”

 

I’ll assume Casey’s crystal ball isn’t any better than mine or any one of the other pundits who have called a bottom or are expecting further weakness. Put another way, it’s impossible to consistently and effectively time the market.

 

What I will do is review some of the factors that supported stocks last week. So let’s get started.

 

  1. Upbeat Q3 earnings (Thomson Reuters) and commentary suggest fears of a global slowdown are overblown. A review of the large industrials and conglomerates that do business at home and around the globe offers a unique ‘boots on the ground’ look at the economy.

     

    For the most part, these firms have surpassed profit expectations and a number have raised their outlook for the remainder of the year (respective Investor Relations, Wall Street Journal, Reuters, Financial Times).

     

    Moreover, we’re not seeing much in the way of profit or revenue warnings, nor is the commentary peppered with heightened uncertainty and/or a diminished outlook, including on Europe. Yes, some uncertainty exists, but there is cautious optimism going forward.

     

  2. Expectations of a Fed rate hike have been delayed, which is a plus for stocks. Although few expect a rapid rise in interest rates next year, any delay in the first rate increase would typically be viewed as positive for equities.

     

    Note: recent market volatility and the drop in Treasury bond yields, including the 2-year Treasury yield (viewed as a proxy for what may happen to the fed funds rate), has delayed expectations for the first rate increase by the Federal Reserve.

     

  3. Oil is being used as a gauge of global sentiment. For now it has stabilized, and that is being viewed positively for the global economy.

     

    I recognize that stability and not a continued drop in crude oil prices seems counterintuitive. Lower costs at the gas pump provide extra cash to spend. However, oil is a commodity, and absent a supply shock, rising prices would normally be viewed as acceleration in global economic activity and falling prices would be viewed as a slowdown or contraction in activity.

 

 

For much of the past 12 years, oil prices and stocks have moved together – see Figure 1. That relationship broke down late 2011. For now, it may be reasserting itself.

 

  1. I’m neither a medical expert nor an authority on pandemics, but investor concerns about the virus played a role in dampening sentiment earlier in the month. More recently, however, Ebola worries have receded.

     

    Case in point, a physician who resides in New York City has tested positive for Ebola after treating patients in West Africa. Although announced late Thursday evening, the Dow finished up 128 points on Friday (MarketWatch).

     

  2. We’re headed into a seasonally strong period for stocks based on the historical data – see Figure 2, and some investors may fear being left behind.

     

October, November, December include data through 2013

 

Market Update - October 23, 2014

After watching the markets nervous reaction to the Ottawa shootings yesterday, we saw a positive reversal today. All three indexes closed up today, as stocks had one of their strongest days for the entire year.  Much of the good sentiment was based on strong earnings from numerous companies.

While concerns on many subjects from Ebola to yesterday’s shootings continue, many investors are taking advantage of recent downswings in the market as potential buying opportunities.

We are still seeing a decline in mortgage rates which may possibly spur further refinancing, as well as sway the decision making for first-time home buyers. The nationwide average for a 30 year fixed rate mortgage fell from 3.97 % to 3.92%. 

With the first two games of the World Series in the books, and the series tied at one game each, it looks as though we still have some good ball games to look forward to as the teams head to San Francisco for Game 3 of the Fall Classic.

Market Update - October 21, 2014

Last week’s trading activity saw a range of emotions. There was fear on Wednesday, when the Dow Jones Industrials fell 223 points (MarketWatch) and investors flocked into the safe arms of Treasuries.

 

Index

Weekly Return %

thru Oct 17, 2014

YTD Return %

Dec 31, 2013 – Oct 17, 2014

DJIA1

-0.99

-1.18

NASDAQ Composite2

-0.42

+1.96

S&P 500 Index3

-1.02

+3.13

Bond Yields

Oct 17 Yield & Weekly Change

Yield - % a/o Dec 31, 2013

3-month T-bill

 0.02      +0.01

0.07

2-year Treasury

0.39       -0.06

0.38

10-year Treasury

2.22       -0.09

3.04

30-year Treasury

2.98       -0.05

3.96

Commodities

Oct 17 Price & Weekly Change

Year end 2013

Oil per barrel4

       $82.92               -2.60

    $98.42

Gold per ounce5

  $1,234.25            +15.25

$1,201.50

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

 

Highlighting the concerns, the yield on the 10-year Treasury bond briefly traded as low as 1.87% on Wednesday morning (Wall Street Journal; bond prices and yields move in opposite directions). This compares with the previous Friday’s close of 2.31%. That’s a colossal move for the bond market!

 

Turning to the weakness in stocks, big liquidations from the big hedge funds likely played a role (CNBC) – both voluntary and forced margin calls. Worries about the Ebola virus are difficult to quantify, but analysts will always look for various reasons to pinpoint heavy market volatility.

 

In addition, Europe is still flirting with deflation and a recession (I’ll deal with this in a moment), and central bankers across the Atlantic seem unwilling or powerless to tackle the economic challenges that bedevil them.

 

Then there was Friday’s relief rally, with the Dow finishing up a strong 263 points (MarketWatch).

 

The downturn in stocks encouraged some bargain-hunting. There were also dovish comments from officials at the European Central Bank (Wall Street Journal), the Bank of England (Reuters), and a surprising injection of cash into the Chinese financial system by the Central Bank of China (CNBC).

 

The timing of the news led to talk of a behind-the-scenes, coordinated response by some of the major global central banks. That’s possible but there was nothing substantial from the Federal Reserve.

 

If anything, the president of the Boston Federal Reserve seemed to throw cold water on the idea of delaying the scheduled end of the Fed’s bond-buying program in October (CNBC interview). On Wednesday, the president of the St. Louis Fed floated the idea (Bloomberg News interview).

 

Europe’s less-than-significant role in U.S. economic affairs

European deflationary fears and the potential for slipping into its third recession since 2008 are being blamed in part for the recent selloff in U.S. stocks. Changes in sentiment can and do impact stocks at home.

 

The market choppiness can sometimes be unnerving. But it’s also important not to let emotions rule long-term investment decisions.

 

So let’s step back for a moment and review overseas sales in relation to the U.S. economy.

 

Table 1: Major components of U.S. Gross Domestic Product (GDP)

GDP Components

Final Q2

Personal consumption expenditures

68.2%

Govt. consumption expenditures

18.0%

Gross private domestic investment

16.9%

Exports

13.0%

Data Source: BEA

Note: Figures add up to more than 100 as imports detract from GDP and are not included in the table. There is also a plug figure for the change in private inventories.

 

Exports have grown in the last 25 years, aiding the U.S. economy and multinationals at the margin. But at 13% of total economic activity, the U.S. is not dependent on exports. Put another way, when the U.S. sneezes, the rest of the world is the one that catches a cold.

 

Europe is even a smaller percentage of the overall pie.

 

Table 2: U.S. exports to Europe

U.S. Exports of Goods to

the European Union

U.S. Exports in

Billions of Dollars

2009

220.6

2010

239.6

2011

269.1

2012

265.4

2013

262.2

Data Source: BEA

 

The 2012-13 recession in the euro-zone did interrupt rising exports to Europe; however, there was not a significant decline. Moreover, the U.S. economy’s total value at the end of 2013 topped $17.0 trillion (BEA). Putting U.S. exports to Europe into perspective, it’s a small percentage of the overall U.S. economy.

 

 

Stabilizing U.S. markets

For starters, a change in the storyline could play a big role.

 

  1. Q3 earnings season ramps up significantly this week. Strong numbers, upbeat commentary, and more sanguine forecasts from the big industrials might go a long way in alleviating fears that economic problems in Europe are washing up on our shores. In fact, we’ve already started to see some of that (Wall Street Journal, Financial Times).

     

  2. Economic data suggesting U.S. fundamentals continue to improve. Last Thursday, the Dept. of Labor reported that weekly jobless claims fell to the lowest level since April 2000 (Dept. of Labor).

     

  3. Signs the Ebola virus is being contained. Or at a minimum, the public might be reassured by a very low mortality rate among those who are diagnosed early after receiving the proper care.

     

  4. It sounds counterintuitive, but a stabilization in oil prices could help. Though declining oil prices are a plus for consumers, a downturn in one risky asset can spread to other assets, including stocks. With oil near $80 per barrel, expensive techniques that have revolutionized the U.S. oil industry remain profitable, but we also get a break at the pump.

     

    Finally, with all the media attention being focused on the big market swings, the Dow Jones Industrials and the S&P 500 Index have not dropped 10%.

     

Yes, big daily moves can be unsettling for some, and buying opportunities for others, but as long as we’ve had a market for stocks in the U.S., lows have always been followed by new highs.

Autumn Checklist - October 15, 2014

While the weather is still pleasant, the nights are getting colder and the days are getting shorter. This means that winter is just around the corner. Here are a few things you may want to cross off of your checklist to help prepare for the approaching weather conditions.

  1. Blow out your water pipes. As enjoyable as it may be to water your garden all summer, or keep your yard looking fresh and green, it is important to preserve your water lines and prepare them for winter. This may include blowing out any outdoor water lines with an air compressor to prevent residual water from freezing and cracking your pipes. It is also wise to invest in an outdoor water spigot cover for each spigot.

  2. Increase energy efficiency. Take some time to inspect your windows and doors for any areas where there may be drafts. A few small seals and fixes now can save you from having dollars float out your windows and doors throughout the winter.

  3. Store your summer equipment properly. This may include checking your fuel and oil levels in any mowers or lawn tractors, as well as possibly adding fuel stabilizer for the winter.   It is also important to clean summer equipment such as weed whackers, leaf blowers, hoses and garden tools prior to storing them for the winter to preserve their integrity for next season.

  4. Prepare your vehicle. Although it may be a bit early for snow tires, you can get your auto ready for the winter by checking the tire pressure, inspecting the wiper blades, topping up the windshield washer with a winterized formula that helps break up ice, and restocking your car’s emergency kit. It is important to have food items, such as protein bars, and drinking water on hand along with a spare blanket. It may seem unnecessary for your own use, but if you come across someone who has been trapped in a ditch for a few hours due to a slide off, it is nice to be able to offer them nourishment.

  5. Check your winter equipment. Don’t wait until there are 8 inches of snow on the ground to see if your snow blower still works. Dust that blower off and check your fuel, oil & spark plugs. Give it a quick start now and let it run for a few minutes, and you will be primed for that first snowfall. Also break out your snow shovels, ice scrapers and winter gear to make sure all are in fully functional order.

 

These are just a few ideas that can help you save some time and money as we head towards another winter season. As we all know, the weather this time of year can be unpredictable and come at any time. Better safe than sorry!

 

 

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