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Market Update - October 6, 2014

Firming Economy Keeps Job Growth Intact

 

Before we review September’s employment report released on Friday, I wanted to spend a brief moment discussing some of the recent volatility we’ve seen in stocks, particularly the Dow Jones Industrials.

 

Index

Weekly Return %

thru Oct 3, 2014

YTD Return %

Dec 31, 2013 – Oct 3, 2014

DJIA1

-0.60

+2.61

NASDAQ Composite2

-0.81

+7.16

S&P 500 Index3

-0.75

+6.47

Bond Yields

Oct 3 Yield & Weekly Change

Yield - % a/o Dec 31, 2013

3-month T-bill

0.01           Unch

0.07

2-year Treasury

               0.57           -0.02

0.38

10-year Treasury

2.45           -0.09

3.04

30-year Treasury

3.13           -0.09

3.96

Commodities

Oct 3 Price & Weekly Change

Year end 2013

Oil per barrel4

       $89.71             -3.64

    $98.42

Gold per ounce5

$1,195.00           -18.75

$1,201.50

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

 

It’s the best known and oldest of the major market indexes, and its gets the most attention even though it covers only 30 stocks. Yes, they are 30 well-known firms, but still, it’s just 30 companies.

 

We’ve witnessed 100+ point moves in seven of the last ten trading days. Four were negative and three were positive (St. Louis Federal Reserve data).

 

With the Dow residing near 17,000, a triple-digit move means much less than when the Dow was at a level of 5,000 or 6,000. For example, a 150-point change in the Dow at 17,000 amounts to 0.88%, versus 2.50% at 6,000. It is a good idea to keep that in perspective when you see the headlines.

 

Separately, Friday’s employment report strongly suggested the economy continues to firm, and the upward revisions to August helped alleviate worries that growth might be poised to slow.

 

Nonfarm payrolls grew by 248,000 in September, while August’s lackluster reading was revised to 180,000 from the initial report of 142,000 (BLS). July was revised to 243,000 from 212,000.

 

Including the upward revisions, September’s better-than-forecast increase of 248,000 beat the Bloomberg consensus of 215,000 by an impressive 102,000.

 

If you take a step back and filter out some of the monthly volatility, you’ll note in the chart below that momentum has been building. It’s not that the labor market has completely recovered from the deep wounds inflicted by the Great Recession. It hasn’t. But there has been notable progress.

 

 

Payroll growth signals stronger economy

 

In general, companies increase payrolls when they have a need for employees, and that usually doesn’t occur unless business is improving. In addition, increased employment helps to support overall demand for goods and services, which helps fuel economic growth.

 

It doesn’t stop there. From an investor’s viewpoint, stronger economic growth aids corporate profits, which creates a stronger tailwind for stock prices.

 

The missing ingredient – wage growth

 

We always feel better when we’ve received news that an unemployed family member, colleague, or friend lands a new position that fits their respective skillset. The same holds true when we see an increased number of job openings in the industry we work.

 

But one thing that has been holding back the economy and limiting gains in consumer confidence has been the lack of wage growth. Yes, we can always find anecdotal examples of rising wages in high-demand fields, but overall, salaries aren’t rising very quickly.

 

Included in Friday’s nonfarm payroll report, the Bureau of Labor Statistics reported that average hourly earnings in September was unchanged from the month before.

 

Year-over-year, growth slowed from 2.1% in August to 2.0% in September.

 

Eventually, increased job growth and a falling unemployment rate (down to 5.9% in September from August’s reading of 6.1% - BLS) should encourage faster wage growth, which in turn would likely provide added support for consumer spending.

 

Nonetheless, much of the recent data, including faster employment growth, is good sign the economy has probably exited the low-growth orbit it’s been stuck in since the start of the decade.

Market Update - September 29, 2014

Recently, the dollar has been surging against a number of major currencies. As the week came to a close, the Dollar Index6, which is a weighted average of the currencies of major U.S. trading partners, rose to its highest level since July 2010 – see chart below.

 

 

Unlike the 2009 surge in the dollar, which was aided by the global financial implosion and the dollar’s status as a safe-haven currency, the recent strength is tied more closely to the economic fundamentals.

 

For the most part, U.S. economic data have firmed and commentary coming out of the Federal Reserve suggests the long-awaited series of rate hikes may finally begin sometime next year.

 

An improving U.S. economy can be a magnet for foreign cash because profitable opportunities to invest expand.

 

Moreover, rising interest rates relative to other currencies may also attract funds, as foreign investors seek out higher returns. The Fed has yet to lift the fed funds rate, but the difference between the 10-year Treasury yield and its German counterpart is at its highest level in 15 years (Reuters).

 

In the meantime, economic growth in Europe has languished (Bloomberg, Eurostat, Wall Street Journal), adding to the divergence in economic activity and the relative attractiveness of the dollar. That has led to an increasingly accommodative stance from the European Central Bank, as it hopes to stave off deflation and support growth – another plus for the dollar.

 

We’re also seeing uneven economic activity in Japan, which has led to increased talk from economists that the Bank of Japan could expand its massive stimulus program (Wall Street Journal). That would be an added headwind for Japan’s currency, the yen. All in all it supports the dollar.

Market Update - September 26,2014

The last three days have been very up and down in the markets with all three major indexes looking positive so far today. On Wednesday we saw some good news come from the latest existing home sales report. The Commerce Department said that in the month of August, the sales of new single–family homes were up more than 18%. Yesterday we saw the markets plunge, in part due to global economic concerns as well as news that Apple was dealing with glitches in its latest operating system. Today the markets seem to be reacting to the positive GDP news. The United States economy expanded by 4.6% in the second quarter-a bit higher than expected.

After seeing record setting temperatures yesterday here in Billings, (92 degrees was the official high), it looks as though autumn weather is in our forecast starting this weekend. Our local investment tip for this week? Invest in a few bottles of quality wasp spray….those buggers seem to be everywhere.

Market Update - September 23, 2014

Today we are seeing markets retreat a bit with all three indexes lagging. There are many factors which could point to this downturn such as profit taking as we edge towards the last quarter of the year, as well as uncertainty stemming from the U.S. airstrikes in Syria.

Later this week we will see the latest economic reports on new home sales (Wednesday), weekly jobless claims & durable goods (Thursday), as well as consumer sentiment (Friday).

The Federal Reserve concluded its two-day meeting last Wednesday with few substantive changes. The dovish stance from the Fed helped push the Dow Jones Industrial Average and the S&P 500 Index to record highs late in the week (St. Louis Federal Reserve data). Yet, the bond market is still trying to sniff out the day when the Fed begins a long-awaited series of rate hikes.

 

Index

Weekly Return %

thru Sep 19, 2014

YTD Return   %

Dec 31, 2013 – Sep 19, 2014

DJIA1

+1.7

+4.2

NASDAQ Composite2

+0.3

+9.7

S&P 500 Index3

+1.3

+8.8

Bond Yields

Sep 19 Yield & Weekly Change

Yield - % a/o Dec 31, 2013

3-month T-bill

0.02       Unch

0.07

2-year Treasury

0.59     +0.01

0.38

10-year Treasury

2.59       -0.03

3.04

30-year Treasury

3.29       -0.06

3.96

Commodities

Sep 19 Price & Weekly Change

Year end 2013

Oil per barrel4

       $92.45           +0.30

   $98.42

Gold per ounce5

  $1,219.75         -21.50

$1,201.50

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

 

There were two things investors were looking for that would have signaled a more aggressive Fed: one that might be set to hike rates sooner rather than later.

First, there were expectations the Fed would remove its language that stated there would be a “considerable time” between the end of its bond-buying program (set to end in October) and the first increase in the fed funds rate. It didn’t (Federal Reserve – Fed statement).

Fed Chief Janet Yellen did not define what “considerable time” means, but she insisted in her press conference that it depends on how the economic data play out. If it’s stronger than expected, than we could see sooner and more aggressive rate hikes. If it’s weaker, than rate hikes could be delayed (Federal Reserve – transcript of press conference).

Currently, most analysts anticipate the first rate increase will probably occur in the middle of 2015 (CNBC Fed survey).

Second, would the Fed remove the phrase, “…there remains significant underutilization of labor resources?” Again, it didn’t.

As Yellen highlighted in her press conference, “There are still too many people who want jobs but cannotfind them, too many who are working part time but would prefer full-time work, and too manywho are not searching for a job but would be if the labor market were stronger.

Market Update - September 18, 2014

With the latest round of news from the Federal Reserve on interest rates, the stock market is reacting favorably today. The Fed said on Wednesday that it intends to keep interest rates low for a “considerable time”, as it plans on ending its bond buying program next month. All three indexes are positive today with the DJIA moving beyond 17,200 and the NASDAQ turning positive for the week.

 

The world is also keeping an eye on Scotland today as they head to the polls to vote on whether or not they will become an independent country, or remain part of the United Kingdom (England, Scotland, Wales and Northern Ireland.) Officials are predicting that over 4 million Scottish voters will take part.

 

Locally, the Billings Farmers Market will be running downtown for only 3 more Saturdays (8:00 a.m. – 12:00 noon.) It is a great time of year to head outdoors and support our local farmers as they wrap up the harvest season with lots of fresh and locally grown choices. This year, we have also seen some new vendors selling breakfast & lunch fare, which are a welcome addition to keep you full while shopping.

 

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