September Monthly Market Commentary

THE MONTH IN BRIEF
September 2011 was a difficult time for many investors; the best thing about it may be that it’s over. Stocks and commodities were battered during the month - the S&P 500 retreated 7.18% and the Thomson Reuters/Jefferies CRB Commodity Index sank 12.97%. Investor anxiety about the European Union’s debt problems increased, and Wall Street was unimpressed by some of the stateside economic statistics. Would stocks struggle for the balance of the year? Had we entered a new recession? Investors could only hope for market performance and economic signals in future months that would put both questions to rest.^1,2

DOMESTIC ECONOMIC HEALTH
Consumer spending increased by 0.2% in August, down from a revised 0.7% gain in July. Consumer incomes declined by 0.1% in August for the first time in almost two years. Consumer confidence – which seemingly had nowhere to go but up in light of the July figures – did improve somewhat. The University of Michigan’s final September survey rose to 59.4 from the final August 55.7 reading, 1.6 points better than the consensus forecast of economists polled by Bloomberg News; the survey’s index of current conditions went up to 74.9 from August’s final 68.7 mark. The Conference Board’s consumer confidence index edged north 0.2% to 44.7. Consumer prices grew 0.4% in August, with core CPI up 0.2% and 2.0% year-over-year, the biggest annualized core inflation number in almost three years. Producer prices were flat in August, and so were U.S. retail sales. The jobless rate was 9.1% in August – the 25th time in the past 27 months it had been above 9%.^3,4,5

The manufacturing and service sectors saw improved growth, at least by the gauge of the most recent Institute for Supply Management manufacturing and service sector indices. ISM’s service sector index rose to 53.3 in August from July’s 52.7 mark – an improvement few analysts were expecting. Its September manufacturing index rose a full percentage point to 51.6. Durable goods orders diminished in August, but not by much – just 0.1% overall. Core capital goods orders were up 1.1% and core capital goods shipments were up 2.8%.^6,7,8

In Washington, there were two big news items. President Obama unveiled the American Jobs Act – a bill that would cut the payroll tax for workers and businesses to 3.1% in 2012, offer tax credits as large as $4,000 to companies hiring the long-term unemployed, and devote about $80 billion into infrastructure projects. To pay for it, the President proposed $1.6 trillion in tax increases for upper-income Americans and corporations as a component of a $4.4 trillion reduction of the federal deficit by fiscal year 2021. Republicans dismissed any direct link between taxes on the wealthy and future job creation, and it remains to be seen if the AJA will pass in anything like its entirety.^9,10

GLOBAL ECONOMIC HEALTH
Fears of sovereign contagion grew on rumors that Greece would soon default on its debt. At mid-month, European finance ministers and central bank governors (and even Treasury Secretary Timothy Geithner) conferred to try and figure out the least disruptive resolution to the crisis. The G-20 issued a statement promising a “strong and coordinated international response to address the renewed challenges facing the global economy”. That aside, both the Federal Reserve Open Market Committee and International Monetary Fund managing director Christine LaGarde saw appreciable “downside risks” for the U.S. and world economies.¹¹

When investors weren’t worried about Greek banks going belly-up or Greece ditching the euro for the drachma, they had concerns about China. Its central bank was trying to arrange a soft landing for its slowing economy. Data showed China’s consumer prices up 6.2% in August from a year earlier; the People’s Bank of China has raised interest rates five times in the last 12 months. China’s official PMI improved a bit to 51.2 in September, but looking long-term, 59% of analysts and traders recently surveyed in Bloomberg’s Global Poll of Investors think that its economy will see growth of less than 5% by 2016. Meanwhile, key PMIs in Australia (42.3) and India (50.4) went lower.^12,13 

WORLD MARKETS
Losses abounded. Data from Morningstar tells the tale, with all of this measured in U.S. dollar terms. India’s Sensex lost but 1.34% last month. The Nikkei 225 only lost 2.85%; Germany’s DAX retreated 4.89% and England’s FTSE 100 lost 4.93%. Now the greater descents: All Ordinaries, -6.86%; CAC 40, -8.44%; Hang Seng, -14.33%; TSX Composite, -8.97%; Shanghai Composite, -8.11%. After September, all of these indices were in the red by 10% or more YTD. The biggest loser among them? The DAX, -23.99% YTD. The MSCI World and Emerging Market indices respectively lost 8.85% and 14.78% in September.^14,15

COMMODITIES MARKETS
The U.S. Dollar Index rose 6.0% in September. That alone might tell you what kind of month it was. Gold lost 11.38% last month. Other precious metals also saw major selloffs last month – platinum, -17.9%; palladium, 22.3%; silver, 28.0%. Oil futures slipped 10.82% in September. At month’s end, the price of COMEX gold was $1620.40 per ounce; NYMEX crude settled at $79.20 a barrel. The 19-commodity Thomson Reuters-Jefferies CRB Index posted a 12.97% loss on the month, and just three crops in the 24-commodity Standard & Poor’s GSCI Total Return Index of raw materials advanced – live cattle (+7.6%), feeder cattle (+7.7%) and lean hogs (+5.9%). The real yield of the 10-year note was but 0.17% on September 30, hardly changed from the 0.18% yield on August 31.^{2,16,17,18,19,20}

REAL ESTATE
The housing market appeared healthier than a year ago. Perhaps that isn’t saying much, but the progress was tangible. Existing home sales improved 7.7% in August, putting them + 18.6% from a year earlier. There were 3.2% more housing starts in August, and that indicator registered 7.8% annual improvement. August data also showed 12-month gains in new home sales (6.1%) and pending home sales (7.7%). The S&P/Case-Shiller Home Price Index rose again in July (0.9%); the index was still 4.1% below July 2010 levels.^{21,22,23,24,25}

How low could mortgage rates go? In September, the short answer was “even lower”. Homeowners who could manage a refi were looking at a 3.28% average rate for the 15-year fixed on September 29 according to Freddie Mac’s Primary Mortgage Market Survey. That was down from 3.39% on September 1. The average rate on the 30-year FRM was a milestone 4.01% on September 29; it had been 4.22% on September 1. In the same interval, the average rates on the 5/1-year ARM actually rose to 3.02% from 2.96%; rates on the 1-year ARM went from 2.89% to 2.83%.²⁶ 

LOOKING BACK…LOOKING FORWARD
Appetite for risk truly waned in September, a month in which the dollar seemingly beat every asset class.

Uncertainty defines the market at this point. Could this next earnings season be powerful enough to send stocks north in October? Could anything divert enough attention from the risks in Europe? (Don’t forget the pressure from a stronger dollar.) This is a market given to rapid sentiment shifts, and its present level of volatility might be with us for months. If it is any encouragement, October has been a decent month for Wall Street since 2000; in fact, it has been the DJIA’s fifth-best month of the year since then with an average monthly performance of +1.16%.³¹ 

UPCOMING ECONOMIC RELEASES: Here’s what we have for the rest of October: the August ISM service sector PMI (10/5), the September jobs report and a report on August wholesale inventories (10/7), the initial University of Michigan October consumer sentiment survey, September retail sales figures and August business inventories (10/14), September industrial output (10/17), the September PPI (10/18), the September CPI, a new Fed Beige Book and data on September housing starts and building permits (10/19), September’s existing home sales and the Conference Board’s September Leading Economic Indicators index (10/20), the August Case-Shiller home price index and the Conference Board’s October consumer confidence poll (10/25), September new home sales and durable goods orders (10/26), the initial BEA estimate of 3Q GDP and September’s pending home sales (10/27), and then September consumer spending and the final University of Michigan October consumer sentiment survey (10/28). 

MONTHLY QUOTE 
“It takes a long time to grow an old friend.”

 – John Leonard 

To Your Prosperity,

Kevin Kroskey

Citations.

1 - cnbc.com/id/44729786 [9/30/11]

2 - bloomberg.com/apps/quote?ticker=CRY:IND [9/30/11]

3 - businessweek.com/news/2011-09-30/consumer-sentiment-in-u-s-increases-more-than-forecast.html [9/30/11]

4 - businessweek.com/ap/financialnews/D9PP5NB00.htm [9/15/11]

5 - nytimes.com/2011/09/15/business/economy/retail-sales-and-producer-prices-unchanged-in-august.html [9/14/11]

6 - bloomberg.com/news/2011-09-06/u-s-ism-services-index-increased-in-august.html [9/6/11]

7 - ism.ws/ISMReport/MfgROB.cfm [10/3/11]

8 - marketwatch.com/story/us-durable-goods-orders-drop-01-in-august-2011-09-28?reflink=MW_news_stmp [9/28/11]

9 - money.msn.com/business-news/article.aspx?feed=AP&date=20110909&id=14243169 [9/9/11]
10 - usatoday.com/news/washington/story/2011-09-19/Obama-deficit-reduction-plan/50470916/1 [9/19/11]
11 - sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/09/22/bloomberg_articlesLRXZ2L0D9L35.DTL [9/22/11]

12 - businessweek.com/news/2011-10-03/asian-economies-weaken-as-european-crisis-crushes-confidence.html [10/3/11]

13 -.businessweek.com/news/2011-10-03/china-s-expansion-in-services-may-ease-slowdown-concerns.html [10/3/11]

14 - news.morningstar.com/index/indexreturn.html [9/30/11]

15 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [9/30/11]

16 - blogs.wsj.com/marketbeat/2011/09/30/data-points-energy-metals-525/ [9/30/11]

17 - bullionpricestoday.com/bullion-prices-mixed-in-third-quarter-2011/ [9/30/11]

18 - online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_curr_dtabnk&symb=DXY [10/3/11]

19 - bloomberg.com/news/2011-10-02/dollar-beating-all-assets-in-september-undermines-s-p-downgrade.html [10/2/11]

20 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2011 [10/3/11]

21 - realtor.org/press_room/news_releases/2011/09/ehs_aug [9/21/11]

22 - census.gov/const/newresconst.pdf/ [9/20/11]

23 - census.gov/const/newressales.pdf [9/26/11]

24 - realtor.org/press_room/news_releases/2011/09/phs_august [9/29/11]

25 - articles.latimes.com/2011/sep/28/business/la-fi-home-prices-20110928 [9/28/11]

26 - freddiemac.com/pmms/ [10/3/11]

27 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [10/3/11]

28 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=9%2F30%2F10&x=0&y=0 [9/30/11]

28 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=9%2F30F2%2F10&x=10&y=18 [9/30/11]

28 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=9%2F30%2F10&x=0&y=0 [9/30/11]

28 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F1%2F01&x=0&y=0 [9/30/11]

28 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=10%2F1%2F01&x=0&y=0 [9/30/11]

28 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=10%2F1%2F01&x=0&y=0 [9/30/11]

29 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [10/5/11]

30 - treasurydirect.gov/instit/annceresult/press/preanre/2001/ofm71101.pdf [7/11/01]

31 - cnbc.com/id/44758022 [10/3/11]

This article prepared by Peter Montoya.

August Monthly Market Commentary

THE MONTH IN BRIEF
In August, Wall Street waited for a debt deal, reeled from Standard & Poor’s downgrade of the U.S. credit rating, contended with mounting anxieties over mediocre domestic indicators and troubles in Europe, felt an earthquake and braced itself against an oncoming hurricane. No wonder the S&P 500 slipped 5.68% during the month – a month that most investors would rather forget.¹

DOMESTIC ECONOMIC HEALTH
Congress finally passed a bill lifting the nation’s debt ceiling, meeting the August 2 deadline set by the Treasury Department. However, Standard and Poor’s dropped the hammer on August 5, cutting America’s credit rating from AAA to AA+. Moody’s and Fitch Ratings did not follow suit.²

Consumer confidence really plummeted: the University of Michigan’s final August poll presented a 55.7 mark, way down from 63.7 to end July. The Conference Board’s consumer confidence index dived nearly 15 points last month, coming in at 44.5. Unemployment stayed at 9.1% in August, and for the first time since September 2010, the economy added no new jobs.^3,4,5

There was some good news: consumers were still spending, and not just on the basics. The Commerce Department said that consumer spending soared 0.8% in July, and 0.5% in inflation-adjusted terms (the best such advance in 20 months). Overall retail sales were up 0.5%, with August increases in clothing store sales (0.5%), electronics and appliance sales (1.4%), online retail purchases (0.9%), auto and auto parts sales (0.4%) and furniture sales (0.5%). In another encouraging sign, durable goods orders soared by 4.0% in June; economists polled by Bloomberg News had forecast a 2.0% gain.^6,7,8

The Consumer Price Index rose 0.5% in July with core CPI up 0.2%. The Federal Reserve’s PCE gauge rose 0.4%; the Labor Department’s Producer Price Index rose 0.2%, with core PPI rising 0.4%.^9,10

As for the Institute for Supply Management’s key manufacturing and service sector indices … the August manufacturing index looked shaky, descending to 50.6 (indicating just a small expansion) … and in early August, the July service sector PMI came in at 52.7. Yet the Commerce Department said that factory orders rose 2.4% in July thanks to both a boost in aircraft orders and the biggest one-month demand for autos in eight years.^11,12,13

GLOBAL ECONOMIC HEALTH
At mid-month, German chancellor Angela Merkel and French president Nicolas Sarkozy appeared together to reaffirm the European Union’s support for the euro and to announce three new responses to the EU debt crisis: a new EU economic forum/leadership panel that would meet every six months, a tax on financial transactions, and (shades of the Tea Party) a proposal for all EU countries to adopt constitutional balanced budget amendments. To Wall Street, this was little better than rhetoric. There was no decision to bolster the €440 billion euro stability fund or to create a “Eurobond”, a move that many analysts feel could help to stabilize bond yields across the EU’s 17 nations and aid its most indebted countries.^14,15

In the Asia-Pacific region, factories seemed to be slowing down their pace of production. The much-watched official PMI of China did show some growth, rising 0.2% to return to the 50.9 level it had been at in June. Purchasing manufacturers indexes in Taiwan and South Korea flashed contraction. Consumer price indexes in Thailand and South Korea also climbed more than analysts had forecast, with inflation in South Korea surpassing the government’s target for the eighth month in a row. Industrial output fell far short of forecasts in Japan – economists had expected a 1.5% improvement in August, but there was only a 0.6% gain. On the bright side, analysts surveyed by Reuters felt that Japan’s economy would expand by 1.2% in 3Q 2011, outpacing all other major industrialized economies.^16,17

WORLD MARKETS
While Wall Street had a trying month, other benchmarks had it worse, as these Morningstar numbers for August indicate: Canada’s TSX Composite, -2.40%; Australia’s All Ordinaries, -2.90%; China’s Shanghai Composite, -4.97%; England’s FTSE 100, -7.23%; India’s Sensex, -8.36%; Japan’s Nikkei 225, -8.93%; Hong Kong’s Hang Seng, -9.16%. The truly severe losses came in Europe: France’s CAC 40 plunged 11.29% on the month and Germany’s DAX dove 19.19%. Some of the YTD numbers were also pretty remarkable on August 31: the Sensex and DAX were respectively - 18.69% and -20.08% YTD.¹⁸

The Dow was just about the only major stock index that was not in the red at the end of August. The MSCI World Index and MSCI Emerging Markets Index also took big hits during the month, respectively sinking 7.26% and 9.19%.¹⁹

COMMODITIES MARKETS
The flight to gold was dramatic in August. Gold futures gained $200.20 (12.3%) last month. The precious metal wrapped up August at $1,828.50 an ounce and +28.67% YTD. How did other metals do? Silver went +4.1% for August, platinum +4.0%, palladium -4.5% and copper -6.3%. Oil slid 7.2% in August, with futures settling at $88.81 per barrel on the NYMEX on August 31. The 19-commodity Reuters-Jefferies CRB Index posted a 0.33% loss on the month and the U.S. Dollar Index realized a 0.30% gain. The real yield of the 10-year note was just 0.18% on August 31 (and it was briefly negative earlier in the month).^{20,21,22,23,24}

REAL ESTATE
New home sales (-0.7%) and existing home sales (-3.5%) declined in July, along with housing starts (-1.5%) and building permits (-3.2%). Pending home sales diminished by 1.3% in July, according to the National Association of Realtors. One relative bright spot: June’s S&P/Case-Shiller Home Price Index revealed a 3.6% quarterly gain in home sale prices, although the YOY price retreat deepened to 5.9%.^6,25,26

Comparing Freddie Mac’s July 28 and September 1 Primary Mortgage Market Surveys, we see that mortgages became even cheaper last month. The average rate on the 30-year FRM fell 0.33% in this period to 4.22%, and rates on 15-year FRMs fell 0.27% to 3.39%. The average rate on the 5/1-year ARM shrank 0.29% to go to 2.96% and the average rate on the 1-year ARM went 0.06% lower to 2.89%.²⁷

LOOKING BACK…LOOKING FORWARD
August 2011 was the poorest August since 2001 for America’s three major stock indices. All three had their worst month since May.¹ 

After a wild and vexing August, we are now in September - traditionally a lousy month for stocks. Of course, Wall Street has not exactly behaved according to tradition these past few years. On the hopeful side, the latest consumer spending data indicates that America’s economic engine has not stalled – and the August unemployment figures were affected by the fact that 45,000 Verizon workers went on strike (i.e., were technically jobless) during the week in which the Labor Department compiled its data. Factor in the recent demand for durable goods, the nice numbers on discretionary spending and the descent in oil prices and the economy may be in better shape than the bears presume. Perhaps we will also see a better September for stocks than analysts expect.⁵

UPCOMING ECONOMIC RELEASES: Looking at the balance of September, here is what is on tap: the August ISM service sector PMI (9/5), the Federal Reserve’s newest Beige Book (9/7), a look at July wholesale inventories (9/9), the August PPI, August retail sales figures, and July business inventories (9/14), the August CPI and August industrial output (9/15), the initial University of Michigan September consumer sentiment survey (9/16), a much-anticipated Federal Reserve meeting (9/19-9/20), August housing starts and building permits (9/20), August existing home sales (9/21), the Conference Board’s August LEI index (9/22), August new home sales (9/26), the July Case-Shiller home price index and the Conference Board’s September consumer confidence poll (9/27), August durable goods orders (9/28), August pending home sales plus the final estimate of 2Q GDP (9/29), and August consumer spending and the final University of Michigan September consumer sentiment survey (9/30).

MONTHLY QUOTE
“If you want to go somewhere, it is best to find someone who has already been there.”
 – Robert Kiyosaki

To Your Prosperity,

Kevin Kroskey

Citations.

1 - cnbc.com/id/44340676 [8/31/11]
2 - ncsha.org/blog/sp-downgrades-rating-us-long-term-debt-housing-feels-domino-effect#comment-form [8/11/11]        
3 - businessweek.com/news/2011-08-26/u-s-michigan-consumer-sentiment-index-slumped-in-august.html [8/25/11]
4 - freep.com/article/20110831/BUSINESS07/108310413/Consumer-confidence-plummets-shoppers-keep-spending [8/31/11]
5 - latimes.com/business/la-fiw-jobs-20110903,0,2844276.story [9/2/11]
6 - online.wsj.com/article/SB10001424053111904332804576538164016048034.html [8/30/11]
7 - zacks.com/stock/news/58936/Reports+of+the+Consumer%27s+Death+Are+Greatly+Exaggerated [8/12/11]
8 - bloomberg.com/news/2011-08-24/orders-for-durable-goods-in-u-s-increase-4-twice-as-much-as-estimated.html [8/24/11]
9 - forbes.com/sites/afontevecchia/2011/08/18/cpi-jumps-stoking-fears-of-stagflation/ [8/18/11]        
10 - blogs.wsj.com/economics/2011/08/17/vital-signs-producer-price-index/ [8/17/11]
11 - ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942 [9/1/11]
12 - ism.ws/ISMReport/NonMfgROB.cfm?navItemNumber=12943 [8/3/11]
13 - businessweek.com/ap/financialnews/D9PF4EQ01.htm [8/31/11]
14 - money.cnn.com/2011/08/19/news/international/european_union_debt_crisis/index.htm [8/19/11]            
15 - reuters.com/article/2011/08/16/eurozone-francogerman-idUSLDE77F12B20110816 [8/16/11]        
16 - reuters.com/article/2011/09/01/global-economy-idUSL4E7K10CA20110901 [9/1/11]         
17 - reuters.com/article/2011/08/31/japan-economy-output-idUSL4E7JV00V20110831 [8/31/11]
18 - news.morningstar.com/index/indexreturn.html [8/31/11]
19 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [8/31/11]
20 - blogs.wsj.com/marketbeat/2011/08/31/data-points-energy-metals-517/ [8/31/11]
21 - marketwatch.com/story/gold-steady-after-retaking-1800-2011-08-31 [8/31/11] 
22 - bloomberg.com/apps/quote?ticker=CRY:IND [8/31/11]
23 - online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_curr_dtabnk&symb=DXY [9/2/11]
24 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2011 [9/2/11]
25 - blogs.wsj.com/developments/2011/08/23/behind-the-numbers-perilous-time-in-home-building/ [8/23/11]
26 - dailyfinance.com/2011/09/01/5-reasons-why-your-home-will-be-worth-less-in-3-years/ [9/1/11]
27 - freddiemac.com/pmms/ [9/2/11]
28 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=8%2F31%2F01&x=0&y=0 [8/31/11]
29 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [8/31/11]
30 - treasurydirect.gov/instit/annceresult/press/preanre/2001/ofm71101.pdf [7/11/01]
31 - montoyaregistry.com/Financial-Market.aspx?financial-market=is-your-ira-slipping-away&category=1 [5/2/11]

The above commentary was produced by PeterMontoya.com.

Living With Volatility

Market volatility is here to stay--at least a while. Academic research labels times such as these in the markets as having 'volatility clustering.' This means that quick and severe bursts of volatility are exhibited. It's important to remember that there is both downside volatility as well as upside volatility.


The academic research clearly shows that periods of downside volatility are followed by periods of upside volatility. This can also be described by a phenomenon called 'reversion to the mean.' Essentially, this means that while markets are very noisy and can be quite volatile in the short run, prices do get back to some level of normalcy. This begets a very elusive question of timing: 'When will markets return to normal?'


Relatively speaking, stocks still look cheap next to bonds and cash. As the dust settles from these big market drops, markets will weigh their collective direction. On the one hand, you have rampant anxiety; on the other hand, you have attractive valuations. Patience will prove to be a virtue as the saga plays out and we eventually return to market fundamentals. 


Unfortunately you cannot predict these volatile movements with any reliability. While this immutable fact is unsatisfying to many, ignoring it most often causes the unsatisfied (and unsophisticated) investor to make emotional decisions and miss the upside of the volatility and the reversion to the mean. Leaving investment decisions to emotions and pure chance is simply not a sound philosophy.


For more information, below is a good article from Jim Parker of Dimensional Fund Advisors that puts the current market volatility in perspective. It's a good, quick read.


Hang in there.


Kevin Kroskey, CFP, MBA


----


"Living With Volatility"
Jim Parker, VP, Dimensional Fund Advisors


The current renewed volatility in financial markets is reviving unwelcome feelings among many investors—feelings of anxiety, fear, and a sense of powerlessness. These are completely natural responses. Acting on those emotions, though, can end up doing us more harm than good.


At base, the increase in market volatility is an expression of uncertainty. The sovereign debt strains in the US and Europe, together with renewed worries over financial institutions and fears of another recession, are leading market participants to apply a higher discount to risky assets.


So, developed world equities, oil and industrial commodities, emerging markets, and commodity-related currencies like the Australian dollar are weakening as risk aversion drives investors to the perceived safe havens of government bonds, gold, and Swiss francs.


It is all reminiscent of the events of 2008, when the collapse of Lehman Brothers and the sub-prime mortgage crisis triggered a global market correction. This time, however, the focus of concern has turned from private-sector to public-sector balance sheets.


As to what happens next, no one knows for sure. That is the nature of risk. But there are a few points individual investors can keep in mind to make living with this volatility more bearable.

• Remember that markets are unpredictable and do not always react the way the experts predict they will. The recent downgrade by Standard & Poor's of the US government's credit rating, following protracted and painful negotiations on extending its debt ceiling, actually led to a strengthening in Treasury bonds.
• Quitting the equity market at a time like this is like running away from a sale. While prices have been discounted to reflect higher risk, that's another way of saying expected returns are higher. And while the media headlines proclaim that "investors are dumping stocks," remember someone is buying them. Those people are often the long-term investors.
• Market recoveries can come just as quickly and just as violently as the prior correction. For instance, in March 2009—when market sentiment was last this bad—the S&P 500 turned and put in seven consecutive months of gains totaling almost 80 percent. This is not to predict that a similarly vertically shaped recovery is in the cards this time, but it is a reminder of the dangers for long-term investors of turning paper losses into real ones and paying for the risk without waiting around for the recovery.
• Never forget the power of diversification. While equity markets have had a rocky time in 2011, fixed income markets have flourished—making the overall losses to balanced fund investors a little more bearable. Diversification spreads risk and can lessen the bumps in the road.
• Markets and economies are different things. The world economy is forever changing, and new forces are replacing old ones. As the IMF noted recently, while advanced economies seek to repair public and financial balance sheets, emerging market economies are thriving.¹ A globally diversified portfolio takes account of these shifts.
• Nothing lasts forever. Just as smart investors temper their enthusiasm in booms, they keep a reserve of optimism during busts. And just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the turn when it comes. As always in life, moderation is a good policy.

The market volatility is worrisome, no doubt. The feelings being generated are completely understandable. But through discipline, diversification, and understanding how markets work, the ride can be made bearable. At some point, value will re-emerge, risk appetites will re-awaken, and for those who acknowledged their emotions without acting on them, relief will replace anxiety.

Recent Market Declines: Another Great Recession Ahead?

The markets have been volatile. Very volatile. I'm watching the nightly news with Brian Williams and the headline "Markets In Turmoil" led the broadcast. NBC is even so kind to have a special program tonight at 8pm with the same title. Great.

I wrote the paragraph below to conclude my last Saturday morning post about the debt ceiling uncertainty going into the weekend. While I was right in interpreting the events that were transpiring, I certainly didn't think the market would sell off as much as it did. I doubt any honest person would say that they did either.

"What is most likely to move markets is how the likely compromise to the debt ceiling is perceived by the market. Markets will assimilate this new information to establish a new equilibrium price, based on the compromise's effects on the US and global economy near and longer term. For instance, severe spending restraints could represent a short-term reduction in demand that can slow economic growth. This could negatively impact equities and be a boon for bonds."

Don't confuse the debt ceiling with what's transpiring here. They're distinctly different. In my opinion, the market has over-reacted to the coming decrease of economic stimulus by the government, some ho-hum economic indicators, and resurfacing concern about European banks and sovereign debt.

The market is down slightly more than 10% from the recent peak. It may go down some more, who knows. But it's not another great recession like 2008 and 2009. In looking at the 10-year treasury note, it's less than 2.5%--similar to October 2008 levels. Think the bond market is concerned about the loss of a AAA rating? No way. Rates would be much higher. Economic slow down is the concern or perhaps more apt: the panic.

Markets will likely exhibit continued volatility and the economy and job outlook will likely be marginal at best. These problems will take a long time to work through. Meanwhile, real people living and working in the real economy need real, after-tax returns to make their financial plans work and live their lifestyles. And rates being earned on savings simply will not cut it for the vast majority.

So what to do now? Even though I'm espousing opinions above and consider the likely hood of economic scenarios and their impact on markets when making portfolio management decisions for clients, you simply cannot time this stuff. Look at the chart of monthly returns for the S&P 500 and Russell 2000 indices below. (Click on the image to enlarge it.)

Last May and June we had larger declines than what we've had recently. In fact May, June, and August of last year saw the Russell 2000 sell off by more than 7% each month. Then look at the positive returns that followed. Trying to time these ups and downs is like playing Russian Roulette.

What I said last week is repeated below.

Care will need to be taken in investing new cash or when transferring funds between accounts. Averaging into the market in this case is a sound approach. Rebalancing your account to move equity gains over the last year into bonds is also a sound move.

In general, now is not the time to sell unless you portfolio is poorly constructed, under-diversified, high cost, or you are taking too much risk to begin with. Now could be a good time to harvest tax losses if you have some, but be careful not to be out of the market in doing so.

Be prudent and rational. Work your plan and hang in there.

Gotta run for the 8pm special. Thanks NBC.

Kevin Kroskey, CFP, MBA


"If you don't read the newspaper, you're uninformed. If you read the newspaper, you're mis-informed."   — Mark Twain

The U.S. Debt Ceiling and Possible U.S. Rating Downgrade: What Should Investors Do Now?

As the wrangling continues on Capitol Hill, increasingly  the thought is that the Treasury can manage well through roughly August 10 without a debt-ceiling increase, and even after that time, they can go on for a considerable period without technically defaulting on the debt.


Financial markets are now beginning to price in the likelihood of a U.S. government debt downgrade from AAA to AA+ in the near future, although relatively few think the government will technically default. The credit rating downgrade, however, is believed to be probable. The chances of a ‘grand bargain’ sufficiently large to satisfy Standard and Poor’s appears to be practically negligible.Not only would the federal government’s rating be impacted, but Moody’s has warned that five states are in danger of losing their triple-A ratings as well: Maryland and Virginia (both home to a large number of federal employees) and New Mexico, Tennessee and South Carolina face downgrades because of their heavy reliance on federal revenue.


Moody's added that other institutions would be affected by a U.S. credit rating downgrade, including Fannie Mae, Freddie Mac, the Federal Home Loan Banks and the Federal Farm Credit Banks. As many as 7,000 states and municipalities could feel the impact, as well as foreign bonds that are guaranteed by the U.S. government, such as those of Israel and Egypt.

The Impact of a US Credit Downgrade

While the US may at least temporarily lose it's AAA status, this may be more of a headline the media runs with rather than a great concern to investors. Other countries that in the past have lost their AAA and dropped to AA, such as Canada, Australia and Japan seem to have been only marginally impacted. More importantly, Canada and Australia were able to regain their AAA rating after several years of fiscal discipline.


A key question in many investors’ minds is what impact will a downgrade have on interest rates. Taking Japan as an example, the answer is that a downgrade may have no impact on rates. Indeed, Japan was downgraded by S&P from AAA to AA+ on February 22, 2001 and the 10-yr rate moved 24bps lower the following week.


Similarly when both S&P and Fitch lowered Japan’s credit rating to a AA in November of 2001 the 10-year rate traded relatively flat to lower in the weeks following the downgrades (Chart 2). Ten years have passed since Japan lost its AAA rating and while its 10-year yield still remains close to 1% its currency has not been negatively impacted, but rather it is near the strongest levels of the decade.


Therefore while a credit downgrade would create a long period of uncertainty before all the implications became clear, there is precedent to suggest that rates may be not spike higher as some market participants are expecting and the world’s reserve currency may remain unaffected.

So What Should Investors Do Now?

Uncertainty is never good for markets, business, and thus for the economy. Businesses have reduced spending to maintain high levels of cash. Hiring and capital spending plans are at risk of postponement or cancellation. Consumers and investors are behaving more cautiously as well.

It's important to note that the volatility in the market is for significantly different reasons than that seen in 2008-2009. At that time, global, systemic risk was pervasive and highly uncertain. This time the risk is predominantly because of our political system, often called geopolitical risk. This type of risk is more commonly associated with emerging economies, but sadly it's now forefront in our own back yard.

Yet, while we will likely see continuing high levels of volatility until the issue is resolved for at least some period of time (aka until the next political go-round), this risk is known by market participants and is not global nor systemic to the market.


What is most likely to move markets is how the likely compromise to the debt ceiling is perceived by the market. Markets will assimilate this new information to establish a new equilibrium price, based on the comprise's effects on the US and global economy near and longer term. For instance, severe spending restraints could represent a short-term reduction in demand that can slow economic growth. This could negatively impact equities and be a boon for bonds. 


Care will need to be taken in investing new cash or when transferring funds between accounts. Averaging into the market in this case is a sound approach. Rebalancing your account to move equity gains over the last year into bonds is also a good move. However, for any remaining portion of your assets currently invested in the equity markets, leave it there. Trying to time the volatility and predicting what our politicians will ultimately agree to is a loser's game.


In the words of George Costanza...Serenity Now.


Kevin Kroskey, CFP, MBA

July Monthly Market Commentary

June was looking pretty bleak … but then economic indicators turned surprisingly positive and Greece passed austerity measures that could help it avoid default. The month concluded with a powerful Wall Street rally. Still, the S&P 500 lost 1.83% for June. Most of the month’s data substantiated that we were seeing a soft patch. While politicians butted heads over the debt ceiling, the real estate market flashed weakness and the commodities sector suffered a collective hit. Even so, Wall Street’s mood has improved as we head into the next earnings season.¹  

DOMESTIC ECONOMIC HEALTH Consumers weren’t spending very much, and they weren’t feeling too confident either. Personal spending was flat in May (after ten straight months of gains) and actually decreased 0.1% in inflation-adjusted terms. Both of the major consumer confidence polls went south for June: the Conference Board’s survey dipped 3.2 points to 58.5, and the University of Michigan’s final June consumer sentiment survey retreated to 71.5 from May’s 74.3 mark.^2,3,4

Consumer inflation moderated and unemployment increased. The May edition of the Consumer Price Index rose 0.2%; core CPI was up 0.3%. Food prices were up 0.4% and energy prices were up 0.6%, but even so this was the smallest monthly increase in inflation in seven months. Year over year through May, consumer inflation was 3.6% (and core inflation was 1.5%). The Producer Price Index advanced 0.2% in May; the preceding two months had seen increases of 0.7% and 0.8%. Annualized wholesale inflation was 7.3% - the highest wholesale inflation rate since the summer of 2008. The nation’s jobless rate ticked up to 9.1% in May.^5,6,7

On the bright side, the Institute for Supply Management’s twin PMI indices signaled that the pace of expansion had accelerated in both the service and manufacturing sectors. ISM’s May service sector index increased 1.8% to 54.6, with a 4.1% boost in new orders. The recently released June manufacturing index was a pleasant surprise: defying expectations of analysts, it rose from 53.5 to 55.3. The Conference Board’s index of leading indicators bounced back from an -0.4& showing in May to go +0.8% in June as eight of ten indicators improved. Durable goods orders had increased by 1.9% during May, and May’s 0.2% dip in retail sales was shallower than analysts had expected.^2,8,9,10,11

In Washington, there was much argument over the federal debt ceiling but little agreement. While hiking the debt cap is all but inevitable, Congress elected to take the NFL/NBA approach and sustain the dispute. Meanwhile, Standard & Poor’s warned that it would cut the U.S. debt rating from AAA to D if the debt cap wasn’t raised by August 2; Moody’s threatened a cut to somewhere in its Aa category.¹²

GLOBAL ECONOMIC HEALTH The International Energy Agency surprised the futures markets in late June when it announced a plan to release 60 million barrels worth of crude from global reserves. In the big picture, the move has a chance to tame inflation pressures (especially in Europe) and aid the dollar.¹³

Speaking of Europe, reassuring news emerged from the EU as the Greek government embarked on actions to service its debts and stay in the euro. Yet Greece is not out of the woods by any means – the possibility of default still looms, and Standard & Poor’s said it would regard a proposed rollover of privately held Greek debt led by French banks as a “selective default”.¹⁴

New manufacturing index data indicated that Asia’s economies were muddling through a soft patch as well. In June, India’s benchmark PMI had its biggest one-month fall since November 2008, reaching a nine-month low of 55.3. Taiwan’s PMI went below 50 for the first time in nine months (meaning sector contraction), and South Korea’s PMI slipped to its lowest level in seven months. China’s official PMI fell to 50.9 for June – a 28-month low.¹⁵

WORLD MARKETS Some benchmarks went positive in June, others negative. According to Morningstar calculations in U.S. dollar terms, major Asian benchmarks did okay - Sensex, +2.34%; Nikkei 225, +1.26%; Shanghai Composite, +0.68% (yet Australia’s All Ordinaries went -2.70%). In Europe, the big indices mostly retreated: DAX, +1.11%; CAC 40, -0.62%; FTSE 100, -0.74%; STOXX 600, -2.92%. To our north, Canada’s TSX Composite went -4.41%. The key MSCI indices also lost ground in June (World, -1.73%; Emerging Markets, -1.86%).^16,17,18

COMMODITIES MARKETS It was another rough month for the majority of commodities investors. Oil slipped 7.1% in June, a drop aided by the IEA’s surprise call for nations to tap into petroleum reserves. Gold had its second down month in a row (its May-June performance was -3.5%) but remained +5.71% on the year despite a -2.19% month that left prices settling at $1,502.30 on June 30. When the Department of Agriculture said that America had greater inventories and acreage of corn (and other key crops) than estimated, ag futures took a big hit. Wheat lost 21.0%, corn 17.0%, soybeans 6.0% and rice 1.4% in June. Even the dollar lost some ground: the U.S. Dollar Index went -0.21% last month, wrapping up June at 74.54.^19,20,21

REAL ESTATE What can you say about a real estate market which features reduced sales activity during the prime homebuying season? There isn’t much positive to report when assessing the May data: existing home sales were down 3.8% while new home sales were down 2.1%. In annual terms, new home sales had improved by 13.5% with the average price better by $1,400;existing home sales were down 15.3% year-over-year with the median price retreating 4.6%.^22,23

Speaking of home prices, the April edition of the Case-Shiller/S&P home price index actually showed a 0.7% overall price gain across 20 metro markets – but there was a 4.0% annualized dip in prices to take any celebration out of that small monthly advance. The good news is that pending home sales really rebounded in May: the National Association of Realtors said home sale contracts were up 8.2% from April’s seven-month low and up 17.0% from the June 2010 trough.^24,25

Freddie Mac’s June 30 Primary Mortgage Market Survey showed descents in average interest rates on the four common mortgage types compared with its June 2 survey: 30-year FRMs, -0.04% to 4.51%; 15-year FRMs, -0.05% to 3.69%; 5/1-year ARMs, -0.19% to 3.22%; 1-year ARMs, -0.16% to 2.97%.²⁶

LOOKING BACK…LOOKING FORWARD Early in June, bears were groaning. By the end of the month, the bulls were back in charge. In fact, June 27-July 1 represented the best week for the Dow and S&P 500 since mid-July 2010. Still, it was a negative month for stocks.²⁷

So with this newfound momentum or at least interest in equities, we find ourselves in July – traditionally a pretty good month on Wall Street, powered by anticipation of 2Q earnings. Since 2000, July has been a little less positive than in previous stock market cycles: the Stock Trader’s Almanac notes that the Dow and S&P have respectively averaged July gains of 1.24% and 0.16% in the last 11 years, with the NASDAQ averaging a 0.45% loss for the month. That is the recent history. The current reality is that we still have concerns about a flagging world economy, severe debt problems plaguing multiple EU countries and no agreement yet on the federal debt ceiling. Let’s hope that earnings season casts its spell on the collective mind of Wall Street, with 2Q results impressive enough to make stock market performance in July 2011 correspond to Julys of decades before.³²

UPCOMING ECONOMIC RELEASES: Looking at the balance of July, here is what’s ahead: the June ISM service sector index (7/6), the June jobs report and May wholesale inventories (7/8), June PPI and retail sales and May business inventories (7/14), June CPI and industrial output and the initial University of Michigan July consumer sentiment survey (7/15), June building permits and housing starts (7/19), June existing home sales (7/20), the Conference Board’s LEI index for June (7/21), June new home sales, May’s Case-Shiller home price index and the Conference Board’s July consumer confidence poll (7/26), June durable goods orders and a new Federal Reserve Beige Book (7/27), June pending home sales (7/28), and the first take on 2Q 2011 GDP and a final June consumer sentiment poll from the University of Michigan (7/29). The Commerce Department report on June consumer spending will be released on August 2.

MONTHLY QUOTE

“The large print giveth, but the small print taketh away.”
 – Tom Waits

MONTHLY TIP
How big is your rainy day fund? Ideally, you should build an emergency fund that should equal 6-12 months of current living expenses. It is a worthwhile goal to pursue.

Best Regards,
Kevin Kroskey

Citations.
1 - blogs.wsj.com/marketbeat/2011/06/30/data-points-u-s-markets-27/ [6/30/11]
2 - cnbc.com/id/43546166/ [6/27/11] 
3 - blogs.wsj.com/marketbeat/2011/07/01/ism-much-better-than-expected/ [7/1/11]
4 - marketwatch.com/story/consumer-sentiment-declines-in-june-2011-07-01 [7/1/11]
5 - bls.gov/news.release/cpi.nr0.htm [6/15/11]               
6 - bls.gov/news.release/ppi.nr0.htm [6/14/11]
7 - latimes.com/business/la-fi-jobs-report-20110604,0,3594048.story [6/3/11]          
8 - ism.ws/ISMReport/NonMfgROB.cfm [6/3/11]
9 - bloomberg.com/news/2011-06-17/u-s-leading-economic-indicators-index-rises.html [6/17/11]
10 - marketwatch.com/story/us-durable-goods-orders-rise-19-for-may-2011-06-24 [6/24/11]
11 - marketwatch.com/story/retail-sales-fall-for-first-time-in-11-months-2011-06-14-919560 [6/17/11]
12 - bloomberg.com/news/2011-06-29/moody-s-would-likely-cut-u-s-debt-rating-to-aa-range-in-event-of-default.html [6/30/11]
13 - online.wsj.com/article/BT-CO-20110627-712832.html [6/27/11]            
14 - investors.com/NewsAndAnalysis/Article/577212/201107050905/Stock-Futures-Nose-Lower-Baidu-Adds-2.htm [7/5/11]            
15-  reuters.com/article/2011/07/01/economy-global-pmi-idUSL3E7I10O820110701 [7/1/11] 
16 - news.morningstar.com/index/indexReturn.html [6/30/11]
17 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [6/30/11]
18 - blogs.wsj.com/marketbeat/2011/06/30/data-points-europe-135/ [6/30/11]
19 - blogs.wsj.com/marketbeat/2011/06/30/data-points-energy-metals-494/ [6/30/11]
20 – online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_curr_dtabnk&symb=DXY [7/5/11]
21 - businessweek.com/news/2011-07-01/corn-extends-worst-monthly-loss-since-2008-on-acreage-increase.html [7/1/11]
22 - money.cnn.com/2011/06/23/real_estate/new_home_sales/?section=money_latest [6/23/11]         
23 - nytimes.com/2011/06/22/business/economy/22econ.html [6/22/11]
24 - blogs.forbes.com/morganbrennan/2011/06/29/what-can-homeowners-learn-from-case-shillers-home-price-index/ [6/29/11]
25 - usatoday.com/money/economy/housing/2011-06-29-pending-home-sales_n.htm [6/29/11]
26 - freddiemac.com/pmms/ [7/5/11]
27 - cnbc.com/id/43608555 [7/1/11]
28 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=6%2F30%2F10&x=0&y=0 [7/5/11]
28 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=6%2F30%2F10&x=10&y=18 [7/5/11]
28 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=6%2F30%2F10&x=0&y=0 [7/5/11]
29 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2011 [7/5/11]
30 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [7/5/11]
31 - treasurydirect.gov/instit/annceresult/press/preanre/2001/ofm11001.pdf [1/10/01]
32 - cnbc.com/id/43197003 [5/31/11]
33 - montoyaregistry.com/Financial-Market.aspx?financial-market=financial-planning-where-do-you-begin&category=5 [7/6/11]

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The S&P/ASX All Ordinaries Index represents the 500 largest companies in the Australian equities market. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The FTSE 100 Index is a share index of the 100 most highly capitalized companies listed on the London Stock Exchange. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not include emerging markets. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The US Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.

June Monthly Market Commentary

The month of May saw a barrage of disappointing economic reports one after the other. As the end of the second quarter approaches, long-term interest rates have fallen while international fears have risen. Earlier this month, Greece’s credit rating was downgraded once again because of ongoing concerns regarding austerity measures and debt rescheduling possibilities. Japanese auto production has also plunged 60% since the earthquake and tsunami—731,000 units were produced in April 2010, while only 292,000 units were produced in April 2011.

GDP: The first-quarter GDP remained unrevised at 1.8%, despite expectations of an upward revision because of strong retail sales growth in February. While several retail categories were revised upward, the combination of gasoline sales, auto sales, and utility usage being revised downwards roughly offsets the retail revisions. On a brighter note, falling gasoline and utility sales means consumers are driving less as a result of higher prices rather than cutting back on other categories. In the months ahead, this could mean lesser oil imports, which in turn could potentially aid GDP growth. National gasoline prices dropped to $3.78 a gallon recently, down from a high of $3.98 but still dangerously higher than last year’s $2.78 a gallon.

Employment: Employment data was disappointing for the month of May. Businesses performed worse than expected as consumers pulled back due to rising gas prices and commodity price increases. Employment grew by a mere 54,000 compared with 241,000 during April, representing an annualized employment growth of 0.5%. Retail and leisure payroll categories accounted for the majority of this significant decline; retail added 78,000 jobs in April but only a dismal 3,000 in May, while leisure went from 30,000 jobs in April to negative 6,000 in May.

Unemployment: The unemployment rate crawled up slightly to 9.1% from 9.0%. Initial jobless claims fell 6,000 during the last week in May to 422,000. The four-week average of 425,000 compared well to the month-ago level of 432,250.

Housing: Housing prices continued to erode as the national purchasing managers' reports for manufacturers showed a major decline. The pending home sales report was a disappointment. Contract signings in April fell by 12% compared with March and fell 27% from last year’s tax-credit-fueled period. One of the causes for this decline was severe weather conditions: The United States experienced the heaviest April precipitation level in 20 years. Tight lending remained another prevailing factor, dragging the numbers lower.

Manufacturing: The ISM Manufacturing Index dropped sharply, indicating that the manufacturing sector is still growing, but at a significantly slower pace compared with April. Morningstar’s economists do not think that this was something unexpected. The Chicago regional report (announced the day before the ISM numbers were released) also gave strong indication of slowing growth.

Retail sales: The International Council of Shopping Centers report revealed that monthly retail sales increased 5.3% as luxury goods stores continued to display stellar results. The “Tale of Two Recoveries” continued, as high-end retailers such as Saks and Tiffany raised price points and outperformed the market respectively while on the other end of the spectrum, companies like Gap and Wal-mart continued to struggle. Morningstar economists expect real wages, measured by the Personal Consumption Expenditure Price Index, to move into negative territory for May; the number has been steadily declining since February.



©2011 Morningstar, Inc., 22 W. Washington Street, Chicago, IL 60602.