Monday, February 6, 2017

January Monthly Market Commentary

Despite political headlines dominating the news, the markets -- most notably international markets -- continued to provide positive returns in January.

The January Jobs Report

Depending on which survey you look at, economic experts predicted the economy would add an average of between 175,000 and 180,000 jobs in January.5 Instead, on Friday, the Bureau of Labor Statistics’ report showed the economy added 227,000 jobs last month—far higher than predicted.6 This increase means job growth has continued for 76 months in a row.7

You gain a much clearer picture, however, when you look beyond the big headlines and see what other data tells us. Here’s a quick rundown of what we found:

Hourly Earnings Increased, but by a Very Small Margin

Average hourly earnings grew by only 3 cents in January—and showed a 2.5% increase over last year.8 This monthly growth is less than a third of what we saw in December 2016.9 However, one industry in particular may have caused these slower gains, as a 1% decrease in financial industry earnings depressed overall wage growth.10

Unemployment Increased, but for a Potentially Positive Reason
When you hear that unemployment increased from 4.7% in December to 4.8% in January, this may sound like bad news.11 However, a major reason for this increase is that labor force participation grew by 0.2% in January, the first increase in months.12 In other words, after sitting on the sidelines, more people are now rejoining the labor force and creating additional opportunities for economic growth.13

Jobs Are Available, but Workers May Need Training or Relocation

While labor force participation increased last month, its 62.9% rate is still near the lowest level in decades.14According to Glassdoor Chief Economist Andrew Chamberlain, approximately 5.5 million jobs remain open in the U.S.—close to a record number.15  Some of these jobs, such as retail and food service, don’t require much training, but they aren’t always located near where unemployed workers live. Other jobs in the hot fields of healthcare and technology require training and skills that many workers simply do not have right now.16  As a result, closing the gap between open jobs and willing workers is a complex challenge for employers and job-searchers alike.

The Bottom Line

The labor market is continuing to improve, but the pace remains slower than what most people would prefer. Nonetheless, the Bureau of Labor Statistics’ latest revisions show that private-sector payrolls have increased for 83 straight months, the longest growth streak since the 1920s.17

To Your Prosperity,
Kevin Kroskey, CFP®, MBA
This article adapted with permission from Platinum Strategies.

Thursday, January 5, 2017

2016 Investment Market Review

You know you are deep into a longstanding bull market when “Dow 20,000” is a regular story on the evening news. (Read why the Dow is a terrible benchmark index for U.S. stocks.) Who would have imagined record market highs when 2016 got off to such a rocky start, tumbling 10% in the first two weeks—the worst start to a year since 1930?
The markets eventually bottomed in mid-February and began a long, slow recovery. Markets turning positive by the end of March but suffered a sharp but short setback when the U.K. decided to leave the Eurozone in June. Markets were sharply positive for July forward until enduring a pull back leading up to the elections, after which they resumed a strong climb.
The S&P 500 index finished up a respectable 11.96% in 2016. However, this was a year to remember for investors in small company and value-oriented stocks – both science-based factors that historically have added to investment returns.
  • The Russell 1000 Large Cap Value index returned 17.34%.
    • Russell 1000 Large Cap Growth index 7.08%.
    • Large Value – Large Growth = 10.26% Large Value outperformance
  • The Russell 2000 Small Cap index returned 21.31%.
    • Small – Large = 3.94% Small Cap outperformance
  • The Russell 2000 Small Cap Value index returned 31.74%.
    • Russell 2000 Small Cap Growth index 11.32%.
    • Small Value – Small Growth = 20.42% Small Value outperformance
International investments contributed mixed results to a diversified portfolio’s returns. The broad-based EAFE index (EAFE = Europe, Australasia and Far East) of companies in developed foreign economies posted a paltry 1% return in U.S. dollar terms. Yet, emerging markets stocks of less developed countries, as represented by the EAFE EM index, gained 11.19% for the year. Small and value portfolio tilts added value here as well. For example, the MSCI Emerging Market Valued Index returned 14.9%.
In the bond markets, it is possible that the decades-long bond bull market (since the 1980s) has ended, which means declining interest rates no more. The fixed-income world is experiencing rate rises. The U.S. 10-year rate fell dramatically following BREXIT (June 2016) to record lows at ~1.3% and a few months later quickly increased and doubling to ~2.6%.
So any yield-based investment – bonds, real estate, and utility stocks for examples -- shined in the first half of the year and gave back in the second half. Recall: inverse relationship between increasing rates and prices of existing yield-based assets; think teeter-totter.
For commodities, in 2015 investors were wondering why they owned commodities in their portfolios, when the S&P GSCI index delivered a whopping 32.86% loss. In 2016, they may be wondering why they were not more committed to the asset class, as the index gained 27.77%. This was fueled largely by a 45.03% rise in the S&P crude oil index. Gold prices shot up 8.63% for the year and silver gained 15.84%.
As always, there were many unpredictable anomalies in the investment world. Anyone lucky enough to have speculated on the Brazilian Bovespa index—comparable to the U.S. S&P 500—would have reaped a gain of 68.9% this year despite all the headline drama around the Zika virus and political turmoil. Russian stocks were up 51% for the year despite Russia being Russia, Putin being Putin, recent sanctions from the U.S. government, and lingering international sanctions related to the invasion of the Crimean peninsula.
What is going to happen in 2017? Short-term market traders seem to be expecting a robust economic stimulus combined with lower taxes and deregulatory policies that would boost the short-term profits of American corporations. However, it is helpful to remember that:
  • We are entering the ninth year of economic expansion--the fourth longest since 1900.
  • Over the expansion since 2009 stock prices have risen dramatically. They are arguably expensive (but have been for some time).
  • We have seen six consecutive quarters of negative earnings growth through much of 2015 and 2016 before turning slightly positive in the second half of 2016.
  • If U.S. markets are going to continue to do well and justify their higher prices, we need even more earnings growth. It is difficult to see where else within the equity return building blocks strongly positive returns will come from.
It is clear that the new President-elect wants to accelerate America’s economic growth, but actual policy is very different from election cycle rhetoric. At the same time, there are many unknowns around the globe (and there always will be).
With the January downturn and so much uncertainty at this time last year, nobody could have predicted double-digit returns on U.S. stocks at year-end. Next year could bring more of the same or not. In either case, “Dow 20,000” is essentially meaningless.
What investors should have learned over the past few years is that the markets have a way of surprising us. Trying to time the market and get out in anticipation of a downturn is a loser’s game. The history of the markets has been a general upward trend that benefits long-term investors. Looking out over the long-term and planning for a few hard bumps along the way is probably the best outcome to expect. Constructing your financial life plan to deal with both of these – long-term growth and short-term bumps – is necessary.
Focus on what you can control and ignore the rest.
To Your Prosperity,
Kevin Kroskey, CFP®, MBA
This article adapted with permission from Bob Veres.

Nasdaq index data:
Aggregate corporate bond rates:

Monday, December 5, 2016

November Monthly Market Commentary

After a three-week run following the election where major U.S. indexes posted significant gains, we saw more mixed results last week. For the month of November, U.S. equities were positive – especially ‘small’ and ‘value’ oriented equities. International equities faired less well. Emerging markets now seem likely to have an overhang of uncertainty for some time, given trade threats made by President Elect Trump. We see it as unlikely these threats will become policy despite campaign trail promises. [i]
Perhaps the most interesting occurrence following the election was the rapid increase in interest rates with the 10 year U.S. Treasury note increasing about one-half percent. So when you hear the FED raises rates in December, remember the market has already moved before them.

Positive News This Week
Positive economic news for the U.S. continued to come in this week, including reports that:

  • Unemployment dropped again to 4.6%—hitting its lowest level since August 2007.[ii]
  • Manufacturing increased for the third straight month.[iii]
  • Personal income increased 0.6% in October.[iv]
  • Q3 GDP was 10% higher than previously thought.[v]  

Despite indications that our economy is doing well, everything of course isn’t perfect in the U.S. Growth remains positive but slow, and while unemployment is low, the measure of people who are underemployed is still high at 9.3%.[vi]
Overall, we continue to see signs that our plow-horse economy may be picking up speed and building greater strength in the process.
Italian Referendum 
On December 4, Italians voted against Prime Minister Matteo Renzi’s constitutional amendment that would have reduced their Senate’s size and power while limiting the regional governments’ strength. From Renzi’s party perspective, this move would stop the gridlock so common in Italy’s government while helping to stabilize the country, improve investor confidence, and speed economic recovery.[vii]
As 2016 has shown us with the unexpected victories of Brexit and Donald Trump, populist sentiments are on the rise worldwide -- even in developed countries where populism tends to be more commonly found in developing nations. The Italian “No” vote is another general pushback against the incumbent party and status quo.
No one knows what the long-term outcomes of this vote will be for Italy or Europe. Additional elections and referendum will be had in several other countries that may cause further instability, uncertainty, and market volatility. Yet, today the markets are up despite the outcome of this referendum.
Emotional Considerations
From January’s severely negative stock market to a number of surprising votes, this year has presented many opportunities for emotions to enter investing. Despite the turmoil, markets are up around the world so far this year. Let 2016 provide a good reminder demonstrating that emotions have no place in investing.  
Stay disciplined and remember to focus on only what you can control. Hint: it’s not the outcomes of elections or what the market is doing on any given day, week, month, or year. Rather, it's your spending, saving, and selecting a proper investment allocation to meet your goals.
To Your Prosperity,

Kevin Kroskey, CFP®, MBA
President & Sr. Wealth Advisor
This article adapted with permission from Platinum Marketing.  

Wednesday, November 2, 2016

October Monthly Market Commentary

At first glance, last week’s headlines may lead you to think that the markets are fluctuating more than they actually are. Major indexes stuck to similar range-bound performance we have seen for the past three months. For October, only emerging market equities were positive out of the broad indices shown below.

Recent Key Events 

FBI Announces Renewed Look at Hillary Clinton’s Emails 

On Friday, October 28, FBI Director James Comey sent a letter to Congress alerting them that the agency would be reviewing new Hillary Clinton emails discovered during their investigation of former Congressman Anthony Weiner.[1] When news of Comey’s letter broke, the major indexes responded quickly—and negatively. For example, the Dow, which had been up 75 points, reacted with a nearly 150-point swing before closing about 10 points lower.[2]

The announcement threw a wrench in an already contentious and exhausting presidential race. Recently, polls showed that Clinton held a solid lead over Trump, and the markets had priced in her win.[3] However, Friday’s news calls this assumption into question, creating greater uncertainty for the next two weeks. 

If there is one thing the markets hate, it is uncertainty. Moreover, while big headlines rarely affect long-term performance, the markets may react to them in the short run. Yet, you should not change your investments, speculating about short-term market moves.

Gross Domestic Product (GDP) Has Biggest Gain in Two Years

Last Friday, the government announced that GDP — essentially, the economy’s scorecard—had 2.9% growth, beating the expectations of 2.5%. Not only is this rate the best we’ve seen in two years, but it also shows far faster economic expansion than the first two quarters of 2016, when U.S. growth averaged just over 1%.[4]

With the economy is growing faster prior expectations, a December interest-rate increase seems more likely. On Friday, traders showed an 83% likelihood that the Federal Reserve would raise rates at their last meeting of the year.[5]

Keep in mind that if the Fed raises rates, they would not be doing so to temper the economy’s growth. Instead, they would be using this positive GDP report as further evidence that the economy is strong enough to handle a move toward more normal interest rates.

Eye on the Month Ahead

November should be an interesting month for the economy in general and the stock market in particular. Of course, the big news focuses on the results of the November 8 presidential election. Once the dust settles from the election, and presuming interest rates are not increased in November, equities markets may begin to focus on what is left of earnings season as well as the jobs and inflation data.

To Your Prosperity,

Kevin Kroskey, CFP®, MBA

Wednesday, October 5, 2016

2016 Third Quarter Market Review

About three months after the Brexit scare and nine months after the most recent Fed rate hike, the markets once again confounded the instincts of nervous investors. Markets have gone up instead of down with emerging market equities doing far better than any other asset class.  
See the table below for performance on common market indices.

On the bond side, the interest rate story is essentially unchanged: rates are still low and have trended downward over the last year. This again has been contrary to most ‘experts’ who have been expecting significant rate rises for more than half a decade now. 10-year U.S. government bonds are currently yielding 1.59%; 2.32% for a 30-year bond.
Commodities, as measured by the S&P GSCI index, lost 4.15% of their value in the third quarter, but are still sitting on gains of 5.30% for the year so far, largely due to the rebound in energy prices.  
A deeper look at the U.S. economy suggests that the economic picture is not nearly as gloomy as it is sometimes reported in the press.   
  • Economic growth for the second quarter has been revised upwards from 1.1% to 1.4%, due to higher corporate spending in general and increasing corporate investments in research and development specifically.  
  • Average hourly earnings for American workers have risen 2.4% so far this year.
  • Consumer spending, which makes up more than two-thirds of U.S. economic activity, rose a robust 4.3% for the quarter, perhaps partly due to higher take-home wages this year.
  • America’s trade deficit shrank in August. 
Economists at the Federal Reserve Bank of Cleveland have pegged the chances of a recession this time next year at a low 11.25%. They predict GDP growth of 1.5% for this election year, which, while below targets, is comfortably ahead of the negative numbers that would signal an economic downturn.
The U.S. returns have been so good for so long that many investors are wondering: why are we bothering with foreign stocks? A recent Forbes column suggested the answer: historically, since 1970, domestic stocks have outperformed international stocks almost exactly 50% of the time. The long trend we have become accustomed to could reverse itself at any time.
Nobody would dispute that the economic statistics are weak tea leaves for trying to predict the market’s next move, and it is certainly possible that the U.S. and global economy are weaker than they appear. Nevertheless, the slow, steady growth we have experienced since 2008 is showing no visible signs of ending, and it is hard to find the usual euphoria and reckless investing that normally accompanies a market top and subsequent collapse of share prices. At the current pace, we might look back on 2016 as another pretty good year to be invested, which is really all we ask for.
To Your Prosperity,
Kevin Kroskey, CFP®, MBA
True Wealth Design, LLC
This article adapted with permission from  
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