Market Update - January 15, 2015

Yesterday was another volatile day for equities.

The Dow lost nearly 190 points and was down over 300 at its lowest. Treasuries continue to benefit from the uncertainty, with the 10-yr bond ending the day down 5 bp at 1.86%; it briefly cracked 1.80%.

Worries about China pushed copper to 5.5-year low, while the ETN JJM, which is a good proxy for industrial metals, traded at its lowest level since April 2009.

Yesterday’s equity selloff:

You can't blame oil, which rallied sharply in afternoon trading. Instead, a very weak retail sales number raised fears the U.S. consumer is entering hibernation. That would be bad news if it were happening.

Retail sales fell 0.9% in Dec. Ex-autos, sales were down 1.0%. Exclude gas stations and autos, core sales were surprisingly weak: down 0.3%. Per the data, savings at the pump are going into our savings accounts.

But I would be leery of this report. Yes, it was very weak, but did aggressive discounting early in the Christmas season pull some sales into November? What type of statistical noise may have skewed the report? Though it is a narrow indicator, December same-store sales were strong.

Annualize the final 3 months of the year and core sales are up 3.6%.

This volatile report seems to be an outlier and is subject to revisions.

Job growth has been strong, consumer confidence has improved, falling gasoline prices keep more cash in our pockets (even if there is a lag in spending it), interest rates are low and falling, mortgage rates are below 3.75%, and refinancing has increased.

It all bodes well for the economy, even if rich equity valuations create volatility when bad news strikes.

Scorecard - the S&P 500 Index is down 3.8% from its peak.

Market Update - January 12, 2015

Stocks began the first full week of the New Year in a volatile fashion. The Dow Jones Industrials registered a triple-digit move in each of the five sessions. But it wasn’t all bad. Two of the five days saw the Dow post an advance, with Wednesday and Thursday racking up a combined gain of 536 points (St. Louis Federal Reserve).



Weekly Return %

thru Jan 9, 2015

YTD Return %

Dec 31, 2014 – Jan 9, 2015




NASDAQ Composite2



S&P 500 Index3



Bond Yields

Jan 9 Yield & Weekly Change

Yield - % a/o Dec 31, 2014

3-month T-bill

0.02      Unch


2-year Treasury

0.59      -0.07


10-year Treasury

1.98      -0.13


30-year Treasury

2.55      -0.14



Jan 9 Price & Weekly Change

Year end 2014

Oil per barrel4

       $48.21               -4.60


Gold per ounce5

  $1,217.75            +45.75


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


I believe a confluence of events created an atmosphere that led to an early week selloff, which mostly abated as the week progressed.


First, Greece is back in the headlines. A January 25th parliamentary election threatens to hand over power to the radical leftistSyriza party, which opposes the current terms in the Greek bailout (Reuters, various sources). It’s not that Syriza wants to exit the 19-nation bloc that uses the euro as its currency. Instead, it wants to renegotiate the terms of the deal that keeps the country afloat financially.


Based on current posturing by Germany, that seems to be a non-starter. A leftist win could set the stage for a Greek exit from the euro-zone. Such an exit could be manageable or messy – no one truly knows. But it creates a heightened level of uncertainty, including the possibility of bank failures and bailouts.


Next, oil prices resumed a disorderly decline. This led to the belief that global economic demand is slowing too rapidly. In turn, cash from the stock selloff found a safe-haven in Treasuries, which only added to the angst.


Furthermore, earnings estimates for Q4 have come down rapidly due to sharp adjustments in the energy sector. However, we have yet to see a significant upward revision to most industries that would likely benefit from falling gasoline prices (Thomson Reuters).


Then there are jitters that the slow motion crash in crude will force bankruptcies in the energy patch, creating a much more cautious attitude in credit markets and slowing the economic recovery. Such a scenario is unlikely, but it probably contributed to last week’s selloff.


Finally, some of the decline may have simply been portfolio rebalancing in wealth management accounts following last year’s advance. If stock allocations are too high, sales are necessary to get back to a more appropriate target.


As the week wore on and oil stabilized, the fundamentals – an expanding economy and low interest rates – reasserted themselves.


Another batch of good economic news

Shares ended the week on a somber note, despite another upbeat employment number. The U.S. Bureau of Labor Statistics (BLS) reported nonfarm payrolls rose a solid 252,000 in December, which comes on top of an upwardly revised 353,000 in November.


Over the last four months, nonfarm payrolls have averaged a robust monthly increase of 284,000 (BLS), highlighting the improving economy is generating a significant number of new jobs. Furthermore, last year’s rise of 2.95 million in nonfarm payrolls is the best annual performance since 1999 (BLS).



Meanwhile, the unemployment rate fell from 5.8% in November to 5.6% in December (BLS); yet, there are few indications the Federal Reserve is about to lift the fed funds rate, which has been near zero since the end of 2008 (St. Louis Federal Reserve).


One reason for the hesitation – wage gains remain muted. November’s initial report that average hourly earnings rose 0.4% (BLS) raised hopes that we might finally be seeing a long-awaited boost in wage growth.


But November’s preliminary reading was revised to 0.2%, and December’s 0.2% (BLS) decline dashed such hopes.



Various surveys of consumer confidence suggest sentiment is improving (Conference Board), initial jobless claims are near historically low levels (Dept. of Labor), the unemployment rate is falling, and job creation has accelerated.


While lower gasoline price leave cash in our pockets, faster wage growth is still missing.

Market Update - January 6, 2015

A Bumpy Start to the New Year

Stocks have stumbled out the 2015 gate, and we've seen a flood of cash flowing into Treasuries.
The Dow pared losses today but finished down 130 points. The 10-year bond hit a yield of 1.89% and ended the day at 1.94%.
In any bull market, you'll get volatility - it's those unexpected events that interrupt the upward trend. 
We know they will happen, but they are very difficult to predict, i.e. no one can effectively time the market.

What's going on?

1. WTI is below $48/barrel - it's a slow motion crash. Yes, it helps the consumer, but it has unnerved markets.

For starters, Thomson Reuters is forecasting a 4.2% rise in Q4 earnings, down sharply from Oct 1's estimate of 11.1%. Analysts have consistently downgraded earnings forecasts as each profit season approaches; however, a sharp downward revision to energy +6.4% to -19.9% is taking a toll on forecasts and the broader market.

Will a continued drop in crude create some type of systemic event? Probably not, but investors are anxious. Since the start of the year, junk bonds are down modestly but not back to the mid-Dec lows (Ticker JNK).

Falling oil price are forcing large cutbacks in energy capital expenditures. At the margin, the boom in the energy sector has bolstered economic growth. Steep reductions in cap-ex will offset some of the benefits of falling oil prices.

2. Greece faces an election later in the month. If the far left takes the top spot, party leaders will likely demand renegotiated bailout terms. So far, European leaders aren't budging, effectively saying Greece may exit the euro-zone. It's public posturing.

If Greece were to exit, it creates an enormous amount of uncertainty. Amicable split or messy divorce? Can weakened euro-zone banks survive? Will we see bank bailouts?

Note what's happening to euro-zone bonds:
German 10-year at 45bp. Incredible. Italy at 1.86%, but it's up 12 bp last couple of days - Greek fears; Spain at 1.64%, but it's up 14 bp last couple of days - again, Greek fears.

3. Portfolio rebalancing. Why take profits in 2014 and pay taxes for 2014. Rebalance in January. Some of the selling may simply be portfolio adjustments.

Please let us know if you have any questions.

Market Update - December 31, 2014

In the final trading day of the year, we are seeing mixed markets with the DJIA hovering below the 18,000 mark.  Yesterday the latest consumer confidence report was released and showed an increase over November’s numbers.  Much of that is seen as a direct correlation to lower gas prices as well as a strong 4th quarter for the U.S. economy.  Automobile & travel group AAA released a report saying that motorists saved $14 billion this year vs. 2013 due to lower gas prices.  We saw this affect November’s U.S. retail sales number which was reported earlier this month.

We want to thank all of our clients & colleagues for another tremendous year, and we look forward to working with you in 2015. 

While celebrating ringing in the new year this evening, please be safe out there on our icy and snow packed roads.  Wishing you a wonderful 2015.

Market Update - December 29, 2014

The final revision to Q3 Gross Domestic Product (GDP, the broadest measure of economic activity) exceeded the most optimistic expectations (Bloomberg). Simply put, it reflects an economy that seems to finally be breaking free of the low growth orbit it has been stuck in for much of the 5-year old recovery (National Bureau of Economic Research).



Weekly Return %

thru Dec 26, 2014

YTD Return %

Dec 31, 2013 – Dec 26, 2014




NASDAQ Composite2



S&P 500 Index3



Bond Yields

Dec 26 Yield & Weekly Change

Yield - % a/o Dec 31, 2013

3-month T-bill

0.01       -0.03


2-year Treasury

 0.73     +0.06


10-year Treasury

2.25       +0.08


30-year Treasury

2.81       +0.04



Dec 26 Price & Weekly Change

Year end 2013

Oil per barrel4

       $55.14                 -2.63


Gold per ounce5

  $1,175.75*            -19.75


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

*Price as of Dec 23, 2014


Real (inflation-adjusted) GDP expanded in Q3 by an annualized rate of 5.0% (Bureau of Economic Analysis-BEA), the fastest pace in 11 years (Figure 1). Further, it easily topped the most optimistic forecast of 4.5% (Bloomberg), as it was revised upward from an earlier estimate of 3.9%.


The advance was broad-based with both consumer and business spending contributing to the better-than-forecast report.


Shaded areas mark recessions Last Date: Q3 2014


Of course, all is not rosy with the U.S. economy, as many of us continue to grapple with the impact from the worst recession in over 70 years. The latest data on housing from the National Association of Realtors and the Commerce Department – existing home sales and new homes sales – are far from impressive.


U.S. exports may slow amid the latest recession in Japan, lackluster growth in Europe, and the slowdown in China. Wage growth may finally be showing signs of picking up, but it has been weak since the economy fell into the Great Recession.


Yet, even as the global outlook sours, the U.S. economy is bucking the trend.


Nowhere is this more evident than in the historically low level of weekly initial jobless claims (U.S. Dept of Labor) and ten-consecutive monthly increases in nonfarm payrolls above 200,000, the longest such streak since the mid-1990s (U.S. Bureau of Labor Statistics).


Shaded areas mark recessions  Last Date: Dec 2014


In turn, consumer confidence has been improving (Figure 2), which tends to lead to higher consumer outlays. You can see how a virtuous cycle can set in, as stronger spending supports economic activity and leads to more hiring.


The GDP number has plenty of moving parts, which makes it difficult to accurately predict. But the latest data from the BEA suggest consumer spending is accelerating and the latest figures on industrial production (Federal Reserve) were robust.

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