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Economic Update April 9, 2014

While the major market indices like the Dow Jones Industrials and the S&P 500 Index remain near their all-time highs, some of the market highflyers have recently been humbled. Though a narrow sector of the overall stock market, these include the popular social media and biotechnology companies.

Index

Weekly Return %

thru Apr 4, 2014

YTD Return %

Dec 31, 2013 – Apr 4, 2014

DJIA1

+0.6

-1.0

NASDAQ Composite2

-0.7

-1.2

S&P 500 Index3

+0.4

+0.9

Bond   Yields

Apr 4   Yield & Weekly Change

Yield - % a/o Dec 31, 2013

3-month T-bill

0.03             -0.01

0.07

2-year Treasury

0.43             -0.02

0.38

10-year Treasury

2.74             +0.01

3.04

30-year Treasury

3.59             +0.04

3.96

Commodities

Apr 4 Price & Weekly Change

Year end 2013

Oil per barrel4

         $101.06             -0.61

    $98.42

Gold per ounce5

     $1,297.25           +2.50

$1,201.50

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

 

The gradual upward grind in the market has taken a toll on the big winners, as short-term speculators back away from equities that have posted huge gains over the last year, according to the Wall Street Journal.

 

The Federal Reserve’s decision to start winding down quantitative easing (QE), which is the popular term for its monthly bond-buying program, may also be playing a role.

 

Interest rates remain low – a plus for stocks, but the hefty injections of cash by the Fed have also played a part in boosting shares, especially the more growth-oriented speculative shares. If the Fed remains on its current path, those bond buys will cease by year-end.

 

Still, the parts of the market known for steadier returns and regular dividends, such as telecommunications and utilities, have held up quite well over the last month (StockCharts).

 

Earnings season kicked off yesterday with Alcoa (AA) releasing their first quarter earnings after the closing bell.

 

Latest Federal Reserve Commentary

 

Fed Chief Janet Yellen gave a speech last Monday on the current state of the labor market. Among many of its functions, the Federal Reserve is probably best known for setting and influencing interest rates.

 

Yellen spent a considerable amount of time discussing why she believes there are still plenty of problems in the labor market, and why keeping interest rates low for an extended period can help to boost economic activity and job growth.

 

Put another way, it’s reassuring to those who are struggling to find employment, but it works against those who are counting the days when rates on safe, short-term investments begin an upward march.

 

Yellen cited 5 reasons why she believes labor market woes are cyclical (due to the Great Recession) and can be remedied, in part, by a Fed policy of low interest rates.

 

1. There are nearly 7 million people who work part-time but want full-time work.

 

2.  The drop in the unemployment rate has failed to “raise wages for workers as in past recoveries.” It’s a supply/demand issue. With a few exceptions, businesses have an ample pool of labor to choose from and aren’t feeling compelled to lift salaries.

 

3.  The “extraordinarily large share of the unemployed who have been out of work for six months or more.” Note we’re still well above the peak level seen in prior recessions such as 1982, 1991 and 2001. Yet the last recession officially ended in June 2009 (NBER).

 

4.  Quit rates are “noticeably below levels before the recession.” Workers are more reluctant to leave jobs if they fear they may not find a suitable replacement.

 

5.  The drop in the Labor Force Participation Rate from 66% to 63%. Some of the decline is due to baby boomers that are beginning to retire, but Yellen believes “a significant amount of the decline” can be traced to the slow economic recovery.

 

Quarterly Update

Quarter 1 Goes Out Like a Lamb – sort of

 

It’s been an interesting quarter. We experienced a modest interruption in the bull market in late January when emerging market instabilities created the perfect excuse for some to book profits following 2013’s big rally.

 

Index

Weekly Return %

thru Mar 28, 2014

YTD Return %

Dec 31, 2013 – Mar 28, 2014

DJIA1

+0.1

-1.5

NASDAQ Composite2

-2.8

-0.5

S&P 500 Index3

-0.5

+0.5

Bond   Yields

Mar 28   Yield & Weekly Change

Yield - % a/o Dec 31, 2013

3-month T-bill

0.04         -0.02

0.07

2-year Treasury

0.45          Unch

0.38

10-year Treasury

2.73           -0.02

3.04

30-year Treasury

3.55         -0.06

3.96

Commodities

Mar 28 Price & Weekly Change

Year end 2013

Oil per barrel4

   $101.51            +1.96

   $98.42

Gold per ounce5

 $1,294.75             -41.25

$1,201.50

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

 

The economy ran up against a very rough winter in much of the country, putting the brakes on an already unimpressive economic recovery.

 

Following a hiccup in the S&P 500 Index, which amounted to 5.2% between Dec 31st and Feb 5th (St. Louis Federal Reserve data), investors side-stepped subsiding emerging market concerns and came to the conclusion that any slowdown in economic activity would be temporary.

 

Thus far, February’s data (out mostly in March) are suggesting we are making positive economic headway – nothing overly impressive, but still constructive (U.S. Commerce Dept, Federal Reserve).

 

From an equity standpoint, it’s noteworthy that the lack of any major upside in the Q1 market averages coincides with the Fed’s decision to begin reducing its bond buys. Meanwhile, longer-term Treasury bond prices are up (yields have slipped) since the Fed started trimming its bond purchases.

 

Let’s get back on the road we were eventually heading in this week’s summary – Friday’s labor report, which includes March nonfarm payrolls and the unemployment rate.

 

Recently, we’ve seen an encouraging improvement in weekly initial jobless claims (jobless benefits).

 

In the latest week, those filing first-time jobless claims fell by 10,000 to 311,000 (U.S. Labor Dept.). Yes, it’s a very volatile measure, as highlighted by the chart below. Still, the 12-week moving average, which smooths away much of the volatility, fell to a 5-month low.

 

                       

 graph image Page 2

 

Just because we’re back below the pre-recession average doesn’t mean the labor market has completely healed from the considerable damage inflicted by the Great Recession; far from it.

 

But it does mean layoffs are down, and fewer layoffs can be taken as a sign the economy is growing. Think about it. On the whole, companies large and small don’t reduce layoffs if business is waning.

 

Moreover, the fall in jobless claims coincides with the timing of the monthly labor market surveys (Bureau of Labor Statistics). It’s not a guarantee we will get an upbeat number for March, but some cautious optimism may be in order. Analysts per Bloomberg see a 206,000 rise in nonfarm payrolls in March, up from February’s modest 175,000.

 

But let’s not grow complacent either. Just as the winter months likely understated the underlying strength of the recovery, the spring may overstate it. Think of a coiled spring. Hence, we may have to wait a couple more months before the real economy surfaces.

 

A more permanent acceleration would likely hasten the day when the Fed begins hiking the fed funds rate.

Federal Reserve Update

Last week the new chair of the Federal Reserve, Janet Yellen, appeared in her first post-Fed meeting press conference. It was supposed to be a fairly uneventful gathering given that another $10 billion reduction in monthly Fed bond buys was pretty much baked in. And yes, the Fed trimmed its monthly bond purchases from $65 billion to $55 billion, as it continues to wind down what is popularly called quantitative easing, or QE.

 

Index

Weekly Return %

thru Mar 21, 2014

YTD Return %

Dec 31, 2013 – Mar 21, 2014

DJIA1

+1.5

-1.7

NASDAQ Composite2

+0.7

+2.4

S&P 500 Index3

+1.4

+1.0

Bond   Yields

Mar 21   Yield & Weekly Change

Yield - % a/o Dec 31, 2013

3-month T-bill

0.06             +0.01

0.07

2-year Treasury

0.45             +0.09

0.38

10-year Treasury

2.75             +0.10

3.04

30-year Treasury

3.61             +0.02

3.96

Commodities

Mar 21 Price & Weekly Change

Year end 2013

Oil per barrel4

       $99.55             +0.95

    $98.42

Gold per ounce5

$1,336.00           -49.00

$1,201.50

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

 

Economists were mostly interested in how the Fed might adjust what’s called “forward guidance,” which is its way of communicating what economic benchmarks might trigger a hike in the fed funds rate (currently near zero).

 

Quarterly projections released by the Fed (available on its website) revealed that 10 of 16 Fed officials believe it would be appropriate for the fed funds rate to be at 1% or higher by the end of 2015.

 

Given the current trajectory in the bond-buying program, a late spring/early summer rate hike in 2015 isn’t far-fetched.

 

While savers eagerly await any rate increases, a fed funds rate in the neighborhood of around 1% is still historically low, and investors quickly brushed aside worries.

 

Spring Cleaning

With spring (finally) just around the corner and the tax filing deadline about a month away, it is important to remember to do a ‘spring cleaning” of your personal financial documents. Below, please find some guidelines for what records to keep, how long you should hold on to them for, and what you can get rid of. It is important to remember, that with the increased threat of identity theft, you must shred any documents with your personal information. Home shredding machines have improved technologically over the past few years and are still relatively affordable.

        

  

How Long to    Keep Documents

  
  

Document

  
  

How Long to Keep It

  

Bank statements

1 year, unless   needed to support tax filings

Birth certificates, marriage licenses,   divorce decrees, passports, education records, military service records

Forever

Contracts

Until updated

Credit card records

Until paid,   unless needed to support tax filings

Home purchase and improvement records

As long as you   own the property

Household inventory

Forever; update   as needed

Insurance, life

Forever

Insurance, car, home, etc.

Until you renew   the policy

Investment statements

Shred your   monthly statements; keep annual statements until you sell the investments

Investment certificates

Until you cash   or sell the item

Loan documents

Until you sell   the item the loan was originally for

Real estate deeds

As long as you   own the property

Receipts for large purchases

Until you sell   or discard the item

Service contracts and warranties

Until you sell   or discard the item

Social Security card

Forever

Social Security statement

When you get   your new statement online, shred the old one

Tax Records

7 years from   the filing date

Vehicle titles

Until you sell   or dispose of the car

Will

Until updated

It is important to remember that each individual feels a different level of comfort when it comes to document preservation / retention. Keeping your documents organized, labeled and accessible is always important, regardless of the amount you choose to retain.

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