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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.

Market Update - August 5, 2014

Last Friday, the Bureau of Labor Statistics reported that nonfarm payrolls grew by 209,000 in July, the sixth-consecutive increase north of 200,000. That hasn’t happened since 1997 (BLS).

 

Included in the release is what’s called average hourly earnings; it was unchanged in July and is up a muted 2.0% versus one year ago.

 

 

As Figure 1 indicates, wage growth has been weak, and the rate is showing no signs of accelerating. If that’s the case, we still have plenty of slack in the labor force, and the Fed can be patient with its low-rate policy.

 

On the other hand, a more comprehensive gauge of labor costs released last Thursday may be suggesting otherwise. The Employment Cost Index, which takes into account benefits, jumped 0.7% in Q2, its biggest one-quarter rise since 2008 – see Figure 2.

 

 

Now it’s possible that Q2’s more robust increase is simply payback from Q1’s anemic 0.3% rise, but worries about increases in employee compensation leads us to the weakness in stocks last week.

Market Update - July 31, 2014

The markets are facing some serious headwinds today as the Chicago PMI number came in lower than the consensus estimate, and Argentina has again defaulted on some of its debt.

The Chicago PMI number is one of many indicators and can occasionally be a volatile report that does not always reflect national sentiment.   The U.S. Services PMI which is produced by Markit and is a much broader measure, releases July results on August 5th and is forecasting a more positive outlook . Coupled with the positive GDP number from yesterday, it may not be as “doom & gloom” as the naysayers predict on television.

Global markets showed some weakness mostly due to Argentina and the worry that harsher U.S & European sanctions may hit Russia.

It is natural that certain geo-political events or updated financial reports may cause the markets to take a breather from time to time. Factors such as these reiterate the importance of having a well-diversified portfolio that reflects growth over time.

Market Update - July 30, 2014

The Fed has just announced that they are easing their bond buyback program by $10 billion to $25 billion per month, sighting an improved labor market and decline in unemployment. The markets have reacted to the news with slight improvement. We are seeing some overall lower numbers on the DJIA & the S&P; while the NASDAQ is showing some strength, partially due to Twitter’s better-than-expected earnings. The irony of the market’s weakness today is that the Q2 GDP numbers were revealed to be stronger than expected… which one would think may push the markets higher. However, coupled with the GDP numbers comes the looming fear that the stabilizing & improving economy may in turn cause the Fed to speed up the raising of the Federal Funds Rate.

GDP surged 4% in the second quarter after a less-than-stellar first quarter, which was hindered by the harsh winter conditions. Employment growth, as well as strong indicators from the factory and services sectors, has helped increase overall confidence. Consumer spending, which plays a huge role in measurable economic activity, has also been moving forward at a pace of 2.5%

In local economic activity, on any given day on any given street, one can see home & roof repair being done as home owners finalize repairs from the hail storm in May. It is always important to get a minimum of 3 estimates for any major repair job, and do your homework before hiring any contractors. Recommendations from friends or neighbors are always a good place to start, in order ensure the most reliable and fully licensed contractor is entrusted to the task.

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