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Market Update - August 25, 2014

Against the backdrop of the grandeur of the Teton Range in Wyoming, Fed Chief Janet Yellen delivered a key address at the annual Economic Symposium hosted by the Federal Reserve Bank of Kansas City.

 

Index

Weekly Return %

thru Aug 22, 2014

YTD Return %

Dec 31, 2013 – Aug 22, 2014

DJIA1

+2.0

+2.6

NASDAQ Composite2

+1.7

+8.7

S&P 500 Index3

+1.7

+7.6

Bond Yields

Aug 22 Yield & Weekly Change

Yield - % a/o Dec 31, 2013

3-month T-bill

             0.03           Unch

0.07

2-year Treasury

0.53            +0.11

0.38

10-year Treasury

2.40             +0.06

3.04

30-year Treasury

3.16             +0.03

3.96

Commodities

Aug 22 Price & Weekly Change

Year end 2013

Oil per barrel4

       $93.36             -1.83

    $98.42

Gold per ounce5

$1,277.25           -18.75

$1,201.50

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

 

Entitled Labor Market Dynamics and Monetary Policy, it was heavy on academics, and at many times, drifted deep into the weeds.

 

Since Yellen took over as chair early this year, her focus has been on cutting back on the Fed’s monthly bond purchases while keeping interest rates low as a way to stimulate economic growth and boost employment.

 

Her thinking – there’s still plenty of slack in the labor market (defined as able-bodied men and women who want to work, have the skills to work, but can’t find employment), and the Fed’s monetary policy can boost economic activity and rev up employment growth.

 

She remained noncommittal on how the improving job market might affect monetary policy, but she is beginning to carefully consider the idea that slack in the labor force is dwindling. If that is the case, she appeared to be laying the groundwork for an eventual hike in interest rates.

 

Yellen noted that labor market gauges “have improved more rapidly than the (Fed) had anticipated (Federal Reserve website)."

 

With the economy getting closer to our objectives, the (Fed’s) emphasis is naturally shifting to questions about the degree of remaining slack (in the labor market), how quickly that slack is likely to be taken up, and thereby to the question of under what conditions we should begin dialing back our extraordinary accommodation (raising interest rates).”

 

But she was quick to point out that measuring slack in the labor force is imprecise, and “there is no simple recipe” when it comes to setting a course for monetary policy given the many complexities and changing dynamics in the labor force.

 

 

Notably, she repeated her comment from her July testimony before two Congressional committees that the Fed stands ready to hike rates sooner and at a more rapid pace than anticipated if employment or inflation comes in above forecasts.

 

But she gave the Fed plenty of wiggle room if growth disappoints or the rate of inflation slows.

 

New highs

The modest downdraft in stocks at the end of July has been followed by three-consecutive weekly gains, culminating with a record high in the S&P 500 Index last Thursday (MarketWatch data).

 

Moderate economic growth, rising corporate profits (Thomson Reuters), and low interest rates remain the standard “go-to themes.” But we’ve also seen tensions recede in Ukraine.

 

In addition, the jump in yields for junk bonds in July and the subsequent flow of cash out of riskier debt (Wall Street Journal, Lipper, and St. Louis Federal Reserve) has attracted buyers, calming nerves in the bond market, which also lent support to stocks.

A Note on Interest Rates - August 19, 2014

As the Federal Reserve makes strides in the easing of their monetary policy, the markets have used that as fuel for down days recently. This chart is a good reminder that higher interest rates do not always generate negative returns for stocks.

 

Source: Ritholz.com

Market Update - August 14, 2014

This morning we are seeing the markets hold on to some early morning gains after the Dow closed strong yesterday, ending back in positive territory for the year. Today we also saw U.S. jobless claims increase by 21,000. This number was more than economists had forecasted.

Over the last month, we saw the markets rise & fall with no real traction. Although the Dow is now positive for the year, we are still below its July high. This is fairly normal as we have seen some global turmoil with an increase in geo-political risks, as well as uncertainty here at home with the pending changes to the Federal Reserve’s monetary policy.

Locally, we have seen some dry lightning strikes in recent days. This is a good reminder that it is important to have a fire /disaster checklist in place. Make sure that it is easily accessible (such as stored on your phone), and it includes important documents and a list of personal valuables that would be difficult to replace in the event of a catastrophe. If you only had three minutes to get your most treasured personal belongings out of your house, it would be highly beneficial to have this list current and at your fingertips in a moment’s notice.

Market Update- August 11, 2014

Last week felt like what might be called a “trader’s market.” Not that we were particularly volatile, but shares were up on Monday, down Tuesday, up Wednesday, down Thursday, then surged on Friday, with the Dow Jones Industrials rising 186 points to close out the week (Big Charts, MarketWatch).

 

Index

Weekly Return %

thru Aug 8, 2014

YTD Return %

Dec 31, 2013 – Aug 8, 2014

DJIA1

+0.4

-0.1

NASDAQ Composite2

+0.4

+4.7

S&P 500 Index3

+0.3

+4.5

Bond Yields

Aug 8 Yield & Weekly Change

Yield - % a/o Dec 31, 2013

3-month T-bill

0.03           Unch

0.07

2-year Treasury

0.45         -0.02

0.38

10-year Treasury

2.44           -0.08

3.04

30-year Treasury

3.23           -0.06

3.96

Commodities

Aug 8 Price & Weekly Change

Year end 2013

Oil per barrel4

       $97.35             -0.27

    $98.42

Gold per ounce5

$1,309.75         +18.50

$1,201.50

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

 

Unlike long-term investors, traders buy and sell stocks using a number of indicators, including chart patterns, momentum, complex algorithms, and scary or calming news headlines.

 

For many stock traders, it’s a delicate game that thrives on speculation, adrenaline, and large amounts of capital that can be quickly lost. For long-term investors, it’s a sport that’s best avoided.

 

Long-term investors typically side-step day-to-day action and remain focused on the long-term objective, as equities have historically outperformed more conservative plays such as cash socked away in a savings account or bonds. It is usually not a good idea to trade simply on headlines.

 

Global headwinds and markets

The inspiration for last’s week’s action: primarily news flowing from the global arena, and most of that was in response to the Russia/Ukraine crisis.

 

Much of what’s happening is simply geopolitical fears that temporarily create an unusual amount of uncertainty. Longer-term, it’s any possible economic impact from uncertainty that will have a longer-lasting impact on markets.

 

For example, new sanctions against Russia by the European Union were met with a set of restrictions by Russia, which increases the stress on Europe’s fragile and uneven economic recovery. It’s why European stocks have slipped over the last month (StockCharts).

 

U.S. companies aren’t completely immune but have a more diversified customer base than their counterparts in Europe.

 

By week’s end, stocks erased losses after Interfax reported Russia had ended military exercises the U.S. had criticized as a "provocative" step. The report followed secretary of Russia's Security Council, who told state-run RIA Novosti news agency that "Russia will continue to make all efforts for a very fast de-escalation of tensions (Wall Street Journal)." Posturing in a global chess match or something more permanent? Only time will tell.

 

In the meantime, a renewal of U.S. military strikes in Iraq did little to dent the enthusiasm on Friday. Notably, the price of oil barely reacted (MarketWatch).

 

A brighter picture in the U.S.

We’ve seen a number of false starts on the U.S. economic front since the recovery began, but several economic indicators suggest we may be set to break free of the low growth orbit.

 

Weekly initial jobless claims

Source: St. Louis Federal Reserve Shaded areas mark recessions Last date: Aug 2, 2014

 

You’ll note from the chart above that weekly initial jobless claims are near historic lows, suggesting that many companies are growing increasingly reluctant to lay off workers amid an apparent firming in business conditions.

 

Nonfarm payrolls have risen in excess of 200,000 in each of the last six months (BLS), which is a sign that rising activity is encouraging hiring. Of course, the labor market has not completely healed from the Great Recession and job growth is not exploding, but the current growth rate of 200,000+ net new jobs over the last six months hasn’t been matched since 1997 (BLS).

Market Update - August 8, 2014

Despite the United States military air strike in Iraq against ISIS (Islamic State of Iraq & Syria), the markets remain upbeat today. After seeing some market correction over the last few weeks, many investors feel that many of these geo-political risks have already been priced into the market, and are starting to focus more on the current earnings season. Overall, despite a few hiccups, earnings have been fairly positive.

Today the Labor Department also released the latest US non-farm Productivity Report, which showed an increase of worker productivity by 2.5% in the second quarter, as opposed to the 4.5% drop which we saw in the first quarter. The Productivity Report is a measure of hourly output per worker.

If you are a music fan, then Billings is the place to be this weekend! Along with the Magic City Blues Festival, we also have the Montana Fair opening this weekend. The Blues Festival is a 3 day event which opens tonight and will include acts such as Huey Lewis & the News, Ben Harper with Charlie Musselwhite, Johnny Lang, and even Trombone Shorty! The Montana Fair runs Aug. 8 – 16th, and highlights Train performing on the main stage this Saturday. Between these two events and a great weather forecast, it is time to get outside and enjoy summer in Montana while you still can.

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