October Monthly Market Commentary

As you probably know, October has the reputation of being a “wild card” month for stocks – the big U.S. indices have performed very well in some Octobers and quite poorly in others.

Stocks pulled back in October: the S&P 500 had its poorest month since May, retreating 1.98%. The Q3 earnings season proved disappointing, just as many analysts had warned. Elsewhere, the unemployment rate fell and home values continued to rebound. Our service and manufacturing sectors seemed to be expanding again. Oil prices dropped along with gas prices. Finally, “superstorm” Sandy closed trading at the NYSE for two days and left flooding and destruction throughout the Tri-State Area.¹

DOMESTIC ECONOMIC HEALTH
The unemployment rate ticked up to 7.9% in October, having dipped to 7.8% in September. That was because more Americans returned to the job hunt. Labor Department revisions showed the economy adding an average of 173,000 jobs per month in August, September and October; the October gain was 171,000; a better showing than the five-figure monthly payroll expansions seen earlier in the year.²

The nation’s two most-watched consumer polls showed confidence rising: the Conference Board’s October survey improved 3.8 to a mark of 72.2 (the highest since February 2008) and the University of Michigan’s final October survey rose to 82.6, a 61-month peak. Consumers were in a buying mood, and they weren’t just spending more of their incomes on gasoline. Households increased spending by 0.8% in October, with incomes rising 0.4% and the savings rate heading to an 11-month low of 3.3%. The Commerce Department also said that consumer spending had increased 2.0% in the third.^3,4,5

America’s service and manufacturing sectors seemed to have gotten out of mid-year doldrums. The Institute for Supply Management’s October manufacturing PMI rose to 51.7, a 0.2% increase from September; its September service sector PMI showed a 1.4% increase to 55.1.^6,7

Gas prices jumped 7% in September (after a 9% leap in August), so the Consumer Price Index advanced 0.6% in September. Still, the overall and core CPI only showed yearly increases of 2.0%, right at the Federal Reserve’s target. The Producer Price Index jumped 1.1% in September as energy prices climbed 4.7% for the month; core PPI remained flat, however. Annualized wholesale inflation hit 2.1% in September, the highest rate since March. Inflation did not hurt retail sales; they rose 1.1% in September, and they were up 0.9% even with gas, auto and home improvement purchases factored out.^8,9,10

A “superstorm” named Sandy, a ferocious product of a tropical hurricane meeting a winter jet stream, forced a two-day closure of the stock market toward the end of the month. IHS Global Insight says Sandy may cause as much as an 0.6% drag on U.S. GDP in the fourth quarter; it estimates the storm did $20 billion in real estate damage and will result in $30 billion in lost business.¹¹

GLOBAL ECONOMIC HEALTH

In the eyes of many economists, Europe was the region poised to impede global growth in 2013. The latest available data showed the overall unemployment rate for the European Union rising for a 17th consecutive month in September, hitting 11.6%; in Spain and Greece, unemployment was above 25%. The eurozone’s manufacturing sector shrank for a 15th straight month in September, with its overall PMI dropping to 45.4; of 17 EU nations, only Ireland had a manufacturing PMI above 50 for the month.^12,13

In contrast, activity in China’s manufacturing sector showed improvement. The PRC’s official PMI indicated sector growth again, moving to 50.2 last month from 49.8 in September. HSBC’s private-sector PMI for China rose to 49.5 in October – up considerably from the previous 47.9 reading to the highest mark recorded in eight months. China’s growth rate had been 7.4% in Q3 2012, the lowest GDP reading in three years – but estimates of 4Q GDP ranged from 7.8-8.4%. Manufacturing activity in Taiwan, India and South Korea also improved in October, with Taiwan’s PMI hitting a 4-month peak.¹⁴

WORLD MARKETS

Performances ran the gamut last month. Some indices fell: Argentina’s MERVAL (5.35%), Russia’s MICEX (2.39%), Korea’s KOSPI (4.22%), China’s Shanghai Composite (0.83%), Brazil’s Bovespa (3.56%), India’s BSE Sensex (1.37%) and Taiwan’s TWSE 50 (5.69%). Others posted minor or major gains for October: Australia’s All Ordinaries (2.93%), Canada’s TSX Composite (0.86%), France’s CAC 40 (2.22%), the U.K.’s FTSE 100 (0.71%), Mexico’s Bolsa (1.84%), Germany’s DAX (0.62%), Japan’s Nikkei 225 (0.66%), Hong Kong’s Hang Seng (3.85%) and Malaysia’s KLCE Index (2.22%). Among regional and multinational indices, the FTSE Eurofirst 300 rose 0.66% while the MSCI World Index and MSCI Emerging Markets Index respectively fell 0.76% and 0.95% in U.S. dollar terms.^15,16

COMMODITIES MARKETS
Gold ended October at $1,719.10, with prices falling 3.1%; it remained up 9.7% YTD. Silver slipped 6.5% in October, copper 6.4%, platinum 5.5% and palladium 4.8%. Natural gas gained 11.2%, but oil fell 6.5% and wrapped up last month at just $86.24 a barrel. Heating oil lost 3.1%, RBOB gasoline fell 9.9% on the month, and retail gasoline prices also descended 7.0%. Some key crops were also among the October losers: corn, -0.2%; cotton, -0.8%; wheat, -3.5%; coffee, -10.9%.^17,18

REAL ESTATE

Shrinking inventory, especially at the low end of the market, contributed to a 1.7% reduction in existing home sales in September; still, the National Association of Realtors did note an 11.0% year-over-year increase in sales levels, and a 0.3% September gain in pending home sales. The Census Bureau said new home buying increased 5.7% in September, while the Commerce Department reported a 15.0% jump in housing starts. September’s 20-city S&P/Case-Shiller Home Price Index showed an overall yearly gain of 2.0%, up from 1.2% in August.^19,20

Comparing Freddie Mac’s October 4 and November 1 Primary Mortgage Market Surveys, we see small increases in mortgage rates. The average on the 30-year fixed rose from 3.36% to 3.39% in that period; the average rate on the 15-year FRM ticked up from 2.69% to 2.70%. Average rates on 5/1-year ARMs went from 2.72% to 2.74% and average rates on 1-year ARMs edged up to 2.58% from 2.57%.²¹

LOOKING BACK … LOOKING FORWARD

The S&P, NASDAQ and Dow all slipped in October and so did the Russell 2000, which fell 2.24% to a month-ending close of 818.73.²²

So much is up in the air as we enter November. Who will win the presidency, and what will happen with health care reforms, the debt ceiling and the Bush-era tax cuts? Will the present lame-duck Congress punt the issue of the fiscal cliff to the incoming one, arriving at a compromise for the short term? Or will the scheduled tax hikes and spending cuts be allowed to happen in full? Will Wall Street turn merely cautious in the face of all this, or bearish? There is still a surprising amount of bullish momentum, aided by recent employment, manufacturing, housing and retail data. This data stream was not quite positive enough to overcome the letdown leveled by the Q3 earnings season; indicators will need to show additional strength to ease Wall Street’s collective anxiety this month.

UPCOMING ECONOMIC RELEASES

The news feed for November continues with ISM’s October non-manufacturing index (11/5), September wholesale inventories and the University of Michigan’s initial consumer sentiment survey for the month (11/9), October’s PPI and retail sales, September business inventories and FOMC  minutes from October 24 (11/14), the October CPI (11/15), October industrial output (11/16), October’s existing home sales and the November NAHB housing market index (11/19), October housing starts and building permits (11/20), the University of Michigan’s final consumer sentiment survey for the month and the Conference Board’s October Leading Economic Indicators index (11/21), October durable goods orders, the Conference Board’s October consumer confidence survey, the September Case-Shiller home price index and the November FHFA housing price index (11/27), October new home sales and a new Federal Reserve Beige Book (11/28), October pending home sales and the second estimate of Q3 GDP (11/29) and then October consumer spending (11/30).

 

To Your Prosperity,

Kevin Kroskey

This article prepared in conjunction with Peter Montoya.

 

Citations.
1 - money.cnn.com/data/markets/sandp/ [10/31/12]

2 - www.latimes.com/business/money/la-fi-mo-jobs-unemployment-20121102,0,642852.story 6 [11/2/12]

3 - articles.marketwatch.com/2012-11-01/economy/34847281_1_lynn-franco-director-of-economic-indicators-confidence-readings [11/1/12]

4 - www.bloomberg.com/news/2012-10-26/michigan-consumer-sentiment-index-increased-to-82-6-in-october.html [10/26/12]

5 - www.bloomberg.com/news/2012-10-29/consumer-spending-in-u-s-increases-0-8-as-incomes-climb-0-4-.html [10/29/12]

6 - www.ism.ws/ISMReport/MfgROB.cfm [11/1/12]

7 - www.ism.ws/ISMReport/NonMfgROB.cfm [10/3/12]

8 - articles.latimes.com/2012/oct/17/business/la-fi-inflation-20121017 [10/17/12]

9 - www.nasdaq.com/article/us-producer-prices-rise-11-core-ppi-flat-20121012-00342#.UHh9YaCMLHp [10/12/12]

10 - www.reuters.com/article/2012/10/15/us-usa-economy-idUSBRE89E0RI20121015 [10/15/12]

11 - abcnews.go.com/blogs/business/2012/10/business-winners-losers-from-sandy/ [11/2/12]

12 - www.guardian.co.uk/business/economics-blog/2012/oct/31/europe-leaders-unemployment-economic-disaster/print [10/31/12]

13 - www.reuters.com/article/2012/11/02/us-pmi-manufacturing-eurozone-idUSBRE8A10F520121102 [11/2/12]

14 - www.businessweek.com/news/2012-10-31/china-oct-dot-manufacturing-pmi-50-dot-2-vs-50-dot-2-economists-estimate [10/31/12]

15 - markets.on.nytimes.com/research/markets/worldmarkets/worldmarkets.asp [10/31/12]

16 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [10/31/12]

17 - www.coinnews.net/2012/10/31/gold-silver-prices-dive-in-october-us-bullion-coins-firm/ [10/31/12]

18 - money.msn.com/market-news/post.aspx?post=144836a9-4549-4019-9bfb-6419b9dfe935 [10/31/12]

19 - www.foxbusiness.com/news/2012/10/25/us-pending-home-sales-rise-03/ [10/25/12]

20 - briefing.com/investor/calendars/economic/2012/10/29-02 [11/2/12]

21 - www.freddiemac.com/pmms/ [11/2/12]

22 - money.cnn.com/data/markets/russell/ [10/31/12]

23 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [10/31/12]

24 - money.cnn.com/data/markets/dow/ [10/31/12]

25 - money.cnn.com/data/markets/nasdaq/ [10/31/12]

26 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F31%2F11&x=0&y=0 [10/31/12]

26 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=10%2F31%2F11&x=0&y=0 [10/31/12]

26 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=10%2F31%2F11&x=0&y=0 [10/31/12]

26 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F31%2F02&x=0&y=0 [10/31/12]

26 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=10%2F31%2F02&x=0&y=0 [10/31/12]

26 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=10%2F31%2F02&x=0&y=0 [10/31/12]

27 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [10/31/12]

27 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [10/31/12]

28 - treasurydirect.gov/instit/annceresult/press/preanre/2002/ofm71002.pdf [7/10/02

 

2012 Third Quarter Market Commentary

Third Quarter In Review: Climbing the Wall of Worry

It seems like every quarter we find ourselves saying the same thing: what a difference a quarter makes!  In the first two months of 2012, the U.S. stock market was recording excitingly positive returns.  The U.S. economy seemed to be back on track and there was talk that the Eurocrisis was finally behind us.  Even the pullback in March left the markets in positive territory.  Then came a difficult second quarter where the indices fell across the board, nearly wiping out the first quarter gains.  Now, in the last three months, while many investors were still anxious about Europe, deficits, paralysis in Washington, elections and unemployment, the markets have delivered an unexpected gift: a steady, gradual rise in stock prices that seemed, week by week, contrary to the mood expressed in the financial press. 

Here at the end of the third quarter, entering the home stretch for the year,  the returns on many of the broad stock indices are, surprisingly, well into double-digit territory.  Market historians will look back on the past three months as a bullish quarter, and probably conclude that investors in the first three quarters of 2012 must have been feeling ebullient bordering on giddy.

Overall, the Wilshire 5000--the broadest measure of U.S. stocks and bonds--was up 6.15% for the third quarter, and is returning a robust 15.85% so far this year.  The comparable Russell 3000 index rose 6.23% during the third quarter, and is now up 16.13% for the year.

The other stock market sectors moved in a very similar pattern.  Large cap stocks, represented by the Wilshire U.S. Large Cap index, were up 6.25% for the quarter, and now stand at a 15.97% overall gain so far in 2012.  The Russell 1000 large-cap index gained 6.31% for the third quarter, putting it up 16.28% for the first nine months of the year.  The widely-quoted S&P 500 index of large company stocks gained 5.76% in the same time period, and is up 14.56% so far this year.

The Wilshire U.S. Mid-Cap index index rose 5.59% in the three months ending September 30, up 11.86% for the year.  The Russell midcap index was also up 5.59% in the recent quarter, with a 14.00% gain so far this year.

Small company stocks have posted returns nearly identical to the large multinationals.  The Wilshire U.S. Small-Cap gained 5.16% in the third quarter, up 15.19% in the first nine months of 2012.  The Russell 2000 small-cap index gained 5.25% in the three months ending September 30, and has returned 14.23% for the year so far.  The technology-heavy Nasdaq Composite Index was up 6.17% in the third quarter, up 19.62% year to date.  Twelve years after the "tech wreck" disaster in this sector, tech stocks appear to be market leaders again.

The next time you read gloomy headlines about the economy, remember that every single industry sector in the S&P 500 is posting gains so far this year, led by telecommunication stocks (up 21.04%), information technology (up 20.64%), consumer discretionary goods manufacturers (up 19.99%), and financial stocks (19.88% gains so far this year).

Global stocks have not been as robust as American shares, but they, too, are in positive territory.  The broad-based EAFE index of developed economies rose 6.14% for the third quarter, and is now in firmly positive territory, with a gain of 6.95% so far this year.  For the first time this year, European stocks are showing gains for their investors, in dollar terms, up 8.13% for the recent quarter, now up 8.00% for the year.

The EAFE Emerging Markets index of lesser-developed economies rose 6.97% in the third quarter, and is now up 9.41% for the year.  Interestingly, the highest returns of any global index came from emerging African nations (minus Zimbabwe, which is one of the ways that EAFE calculates its indices), which are up an aggregate 34.70% so far this year.  Second place goes to an index made up of the Jordanian, Egyptian and Moroccan stock markets, up 32.81% in the first three quarters of 2012.

Commodities have also moved into positive territory, with the S&P GSCI index rising 11.54% for the quarter, now up 3.47% this year.  Energy and petroleum prices are up very modestly (0.55% and 0.93% on the year respectively); the biggest mover is agriculture (up 18.44% so far this year), with grain prices rising 31.05% due to the Midwestern drought.

On the bond side, those of us who could not imagine how U.S. Treasuries could possibly offer lower yields are watching it happen.  The 12-month T-Bonds are now yielding just 0.15%, as investors seem to be happy to essentially lend the government money with a promise that they will get it back again 12 months later.  Locking up your money for three years gets you 0.31% a year.  Ten-year issues yield 1.63%, and 30-year Treasuries bring a 2.82% annual coupon yield.  Muni bonds are also down from where they were last quarter, with aggregate yields of 0.203% (1-year), 0.286% (2-year), 0.624% (5-year) and 1.742% (10-year).  The aggregate of all AAA corporate bonds is yielding 0.76% for bonds with a five-year maturity. 

Is there an explanation for this three-month bull market during what can only be described as trying economic times?  People who have long experience with the investment markets are fond of saying that rallies "climb a wall of worry;" that is, the markets go up most steadily when it requires courage to buy into them.  These past three months seem to be one of the best examples of this adage that you are likely to see.  Today, it requires a certain degree of courage to believe in the long-term future of the economy and the long-term return on investments, and yet the market rise is evidence that many investors are finding that courage amid the discouraging headlines.

Some economists think that the stock rally was a gift from the central banks.  For months, it was rumored that the U.S. Federal Reserve Board would engineer another stimulus package, which had already been dubbed "QE3"--and indeed Fed Chairman Ben Bernanke announced that the Fed would inject $40 billion a month into the market for securitized home mortgages, adding to the money supply, possibly driving down mortgage rates and (again possibly) stimulating the housing and homebuilding sectors of the economy into hiring again.

Meanwhile, the European Central Bank has finally announced that it would do what economists were calling for three years ago: purchase Eurozone government bonds to reduce the borrowing costs of countries that are restructuring their finances--notably Spain and Italy.  After two press conferences on different sides of the Atlantic, some of our worst-case economic scenarios (a 2008-like collapse of the Eurozone banking system; a U.S. recession) seem to have become less likely to occur.

The U.S. economy is certainly not in danger of breaking any speed records as it continues to climb out of the Great Recession; in the last week of September, the government announced that from April through June, GDP grew just 1.3%.  Economists remain wary of the "fiscal cliff"--the simultaneous expiration of lower tax rates and automatic federal budget cuts--that will take place, absent Congressional intervention, at the stroke of midnight, December 31.  Add in the discouraging 8.1% unemployment rate, and there is plenty of reason not to be bullish on stocks for the last three months of the year.

But of course that was also true before stocks went up the past three months.  Optimists can point to 96,000 new jobs added in August, and the fact that long-term, the unemployment rate has been trending downward from around 10% at this time three years ago.  A Bloomberg News survey recently forecast that the U.S. economy will grow 2.1% over the next three months, and the forecasts from the Federal Reserve Board anticipate 2.5% to 3% GDP growth in 2013.  At the upper end of that estimate, we are talking about a return to economic normalcy, and a chance to chip away at the jobless rate.

Who's right?  Who knows?  All we know for sure is that the global economy is in a slow-growth recovery, with little indication that growth will accelerate dramatically or that the U.S. will slide back into recession.  Buying stocks today is a bet that the hard work of millions of people still employed will produce positive results over the long term, which will ultimately reward the owners who hold their shares.  For as long as the markets have existed, staying invested has been a good long-term strategy--and in the face of so much short-term uncertainty, this is about all we have to go on.

To Your Prosperity,

Kevin Kroskey

This article prepared in conjunction with Bob Veres.

Wilshire index data: http://www.wilshire.com/Indexes/calculator/

Russell index data: http://www.russell.com/indexes/data/daily_total_returns_us.asp

S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--

Nasdaq index data: http://quicktake.morningstar.com/Index/IndexCharts.aspx?Symbol=COMP

International indices: http://www.mscibarra.com/products/indices/international_equity_indices/performance.html

Commodities index data: http://www.standardandpoors.com/indices/sp-gsci/en/us/?indexId=spgscirg--usd----sp------

Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

Aggregate corporate bond rates: http://finance.yahoo.com/bonds/composite_bond_rates

Employment rate: http://www.washingtonpost.com/business/economy/us-adds-96000-jobs-in-august-unemployment-rate-drops-to-81-percent/2012/09/07/30374bfa-f8e9-11e1-8398-0327ab83ab91_story.html

Economic data: http://www.usatoday.com/story/money/markets/2012/09/28/stocks-end-third-quarter/1600451/

http://www.bloomberg.com/news/2012-09-13/fed-officials-upgrade-economic-growth-outlook-in-2013-2014.html

August Monthly Market Commentary

THE MONTH IN BRIEF
Hazards remained on the horizon last month, but that didn’t stop stocks from advancing – the S&P 500 rose 1.98% in August. Anticipation of central bank action helped, and so did more good news from the housing sector. Headlines from Europe brought anxieties, but not alarms. Gold touched a five-month high and retail gas prices flirted with the $4 mark. Stock indices around the world logged monthly gains as bullish sentiment prevailed. Quite simply, August defied expectations – ending up as a pleasant surprise for an uneasy Wall Street.^1,2

DOMESTIC ECONOMIC HEALTH
It is widely noted that consumer spending accounts for about two-thirds of GDP. So the 0.4% rise in the category for July – the biggest leap in five months – was welcome after a flat June. Personal incomes also rose 0.3% for the second consecutive month. With the economy expanding 1.7% from April-June by the government’s revised estimate, analysts hoped that the July increase signaled a pickup in growth. Another hint that it might: retail sales had soared 0.8% in July after falling 0.7% for June. They hadn’t advanced since March.^3,4

Did growth return to the manufacturing sector in August? According to the Institute for Supply Management’s manufacturing PMI, no. Last month’s PMI was 49.6, down from July’s 49.8 mark. ISM’s service sector PMI continued to stay above contraction territory, having come in at 52.6 in July after a 52.1 June reading. July’s durable goods report was only mildly positive: orders were up 4.2% in the big picture, but down 0.4% with transportation orders subtracted.^5,6,7

Consumer inflation (as measured by the Consumer Price Index) was flat in July, as it had been in June. Core CPI did rise 0.1%. Annualized inflation was running at 1.4%, the smallest yearly gain recorded since November 2010. Producer prices, however, advanced by 0.3% in July, more than in any month since February.^8,9

The jobless rate had ticked up to 8.3% in July and gas prices had taken their toll on household budgets, so consumer confidence fell – the Conference Board’s August poll showed it at the lowest level since November (60.6). Consumer sentiment (a slightly different animal) improved, however – at least according to the University of Michigan’s August survey, which hit a 3-month peak of 74.3.^3,10

Wall Street watched and waited for some sort of clue from the Federal Reserve. Could QE3 be ahead? Did the Fed think the economy would be okay without it? A strong signal flashed on August 31, when Fed Chairman Ben Bernanke noted at the central bank’s annual Wyoming symposium that the state of the economy was “far from satisfactory” and that the Fed “should not rule out” easing. That comment led some investors to believe further action was coming in fall.¹¹

     
GLOBAL ECONOMIC HEALTH
The good news out of Europe in August? Yields on 10-year notes from Spain and Italy respectively fell below 7% and 6%, and Spain agreed to set up a “bad bank” to clean up toxic assets as a condition of its rescue loan. The bad news? It appeared Spain might need even more than €100 billion in rescue funds from the European Union, actual bond buying by the European Central Bank appeared no better than a fall prospect, and Greece asked the EU for more time to manage its austerity cuts with France and Germany firmly against an extension. The European Financial Stability Facility (the EU’s bailout fund) would presently expand into the permanent European Stability Mechanism – provided that Germany’s high court didn’t declare the ESM illegal. Some analysts felt that the ECB would lower its benchmark interest rate 25 basis points to 0.50% in early September. Euro area statistics showed inflation at 2.6% and unemployment at 11.3% in July.^{12,13,14,15,16,17}

A global manufacturing slump continued in August. China’s official PMI dropped below 50 for the first time in nine months; the nation’s Markit HSBC PMI was already under that figure. (China did not cut interest rates in August, as it had in June and July.) Taiwan’s PMI hit its lowest level since November, and South Korea’s manufacturing index was below 50 for a third straight month. On the other hand, the U.S., the EU and Great Britain saw PMIs rise – although while the Markit PMI for the eurozone rose 1.3% off a 3-year low of 44.0, it was still well into contraction territory. Manufacturing PMIs in Indonesia and India showed expansion (India’s benchmark PMI has been above 50 for more than three years).¹⁸

WORLD MARKETS
Spain’s IBEX 35 staged a 10.13% rebound in August, and the FTSE Italia All Share rose 8.03%. While the major European indices didn’t match those gains, they were also higher for the month – FTSE 100, +1.35%; CAC 40, +3.69%; DAX, +2.93%. In the Americas, Brazil’s Bovespa (+1.72%), Argentina’s MERVAL (+0.99%) and Canada’s TSX Composite (+2.44%) rallied. In the Asia Pacific region, the Hang Seng (-1.59%) and Shanghai Composite (-2.67%) were August losers, but other benchmarks were winners: Australia’s All Ordinaries (+1.16%) and Japan’s Nikkei 225 (+1.67%). While the MSCI World Index rose 2.29% in August, the MSCI Emerging Markets Index slipped 0.54%.^19,20

COMMODITIES MARKETS

Aside from two notable retreats (coffee at -5.53% and natural gas at -12.78%), most key commodities did well in August. NYMEX crude rose 9.55%, ending the month at $96.47 a barrel. RBOB gasoline climbed 7.15%. At the pump, August also brought a 9.40% jump in the price of regular unleaded ($3.83 on August 31). Heating oil rose 11.66%. Silver had a great month (+12.64%). Gold (+4.79%) and copper (+1.16%) also posted gains, gold rising to a 5-month peak on August 31 and settling at $1,687.60 an ounce. Cotton rose 8.30% while corn (+0.06%) and wheat (+0.79%) managed small advances. The U.S. Dollar Index pulled back 1.81% last month.²

REAL ESTATE
Existing home sales were up 2.3% last month, with the pace 10.4% better than a year ago; the National Association of Realtors also reported a 2.4% rise in pending home sales in August (they were 12.4% above year-ago levels). June’s S&P/Case-Shiller Home Price index showed an overall annual gain (+0.5%) for the first time in 20 months. New home sales rose 3.6% in August and were up 25.3% annually.^21,22,23 

Mortgage rates finished August higher. Freddie Mac noted the following movements in interest rate averages between its July 26 and August 30 surveys: 30-year FRMs, 3.49% to 3.59%; 15-year FRMs, 2.80% to 2.86%; 5/1-year ARMs, 2.74% to 2.78%. The exception: average rates on 1-year ARMs decreased from 2.71% to 2.63%.²⁴ 

LOOKING BACK…LOOKING FORWARD
When was the last time that the Dow, S&P and NASDAQ all gained in August? 2009. Speaking of gains and positivity, stocks advanced for the seventh month out of the past eight.^1,2,25

As September starts, there are analysts wondering if a correction might soon occur. At any indication of possible Fed or ECB bond buying (overt or subtle), stocks have moved north. The thinking is that the market may be heading for a disappointment: if signals of decisive action from the ECB or the Fed seem to wane and Spain’s debt crisis worsens, appetite for risk might swiftly decline. Throw in any complications with Greece and another round of indicators that might further confirm economic deceleration in China (its latest set of leading indicators was its weakest in 43 months) and you could see a hasty retreat for stocks. Historically, September has been the S&P 500’s poorest month, with an average 0.65% loss for the index since 1945. An exception occurred in 2010 when Ben Bernanke used the Jackson Hole Fed symposium to talk about what would become known as QE2 – that led to the best September for stocks in the post-WWII era. September could surprise us as long as our economy continues to make progress and headlines from China and Europe don’t startle us.¹⁵

UPCOMING ECONOMIC RELEASES: Across the rest of September, here is the data stream and schedule of notable events: a critical ECB policy meeting and the ISM service sector index for August (9/6), the August employment report (9/7), a German constitutional court ruling on the legality of the European Stability Mechanism and July wholesale inventories (9/12), a Fed policy announcement and the August PPI (9/13), August retail sales figures and industrial output, July business inventories, the University of Michigan’s preliminary September consumer sentiment survey and the August CPI (9/14), September’s NAHB housing market index (9/18), August existing home sales, housing starts and building permits (9/19), the August edition of the Conference Board Leading Economic Indicators index (9/20), the Conference Board’s September reading of consumer confidence, the July Case-Shiller home price index and July’s FHFA housing price index (9/25), August new home sales (9/26), August pending home sales and durable goods orders and the government’s final estimate of Q2 GDP (9/27), and then August personal spending and the University of Michigan’s final consumer sentiment survey for the month (9/28).

MONTHLY QUOTE

“Happy people always look for opportunities where others are seeing crisis.” – Deepak Chopra

To Your Prosperity,

Kevin Kroskey

 

This article prepared in conjunction with Peter Montoya.

 

Citations.

1 - www.cnbc.com/id/48858445 [8/31/12]

2 - money.msn.com/market-news/post.aspx?post=461e046e-bbfc-4426-8cdf-e3ae3e518d70 [8/31/12]

3 - www.reuters.com/article/2012/08/30/us-economy-idUSBRE87S0ID20120830 [8/30/12]

4 - articles.marketwatch.com/2012-08-14/economy/33191357_1_sales-at-gasoline-stations-furniture-store-sales-retail-sales [8/17/12]

5 - www.ism.ws/ISMReport/MfgROB.cfm [9/4/12]

6 - www.ism.ws/ISMReport/NonMfgROB.cfm [8/3/12]

7 - www.mysanantonio.com/news/article/Drop-in-key-US-durable-goods-orders-shows-weakness-3812413.php [8/24/12]

8 - www.reuters.com/article/2012/08/15/usa-economy-idINL2E8JF2C720120815 [8/15/12]

9 - www.fxstreet.com/news/forex-news/article.aspx?storyid=0f19ea54-c96b-44db-9fa7-eebeb7368190 [8/14/12]

10 - www.marketwatch.com/story/consumer-sentiment-rises-slightly-in-august-2012-08-31 [8/31/12]

11 - www.cbsnews.com/8301-505123_162-57504249/bernanke-from-jackson-hole-no-qe3...yet/ [8/31/12]

12 - www.nytimes.com/2012/09/03/business/global/03iht-ecb03.html [9/3/12]

13 - www.cnbc.com/id/48825430 [8/29/12]

14 - www.cnbc.com/id/48882795 [9/3/12]

15 - www.cnbc.com/id/48844733 [8/31/12]

16 - epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home [9/4/12]

17 - topics.nytimes.com/top/reference/timestopics/organizations/e/european_financial_stability_facility/index.html [7/20/12]

18 - www.independent.ie/business/european/worldwide-manufacturing-businesses-contract-in-august-3217618.html [9/3/12]

19 - markets.on.nytimes.com/research/markets/worldmarkets/worldmarkets.asp [8/31/12]

20 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [8/31/12]

21 - www.realtor.org/news-releases/2012/08/existing-home-sales-improve-in-july-prices-continue-to-rise [8/22/12]

22 - money.cnn.com/2012/08/23/real_estate/new-home-sales/index.html/ [8/23/12]

23 - blogs.wsj.com/economics/2012/08/29/u-s-pending-home-sales-highest-since-april-2010/ [8/29/12]

24 - www.freddiemac.com/pmms/ [8/31/12]

25 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [6/4/12]

26 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=8%2F31%2F11&x=0&y=0 [8/31/12]

26 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=8%2F31%2F11&x=0&y=0 [8/31/12]

26 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=8%2F31%2F11&x=0&y=0 [8/31/12]

26 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=8%2F30%2F02&x=0&y=0 [8/31/12]

26 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=8%2F30%2F02&x=0&y=0 [8/31/12]

26 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=8%2F30%2F02&x=0&y=0 [8/31/12]

27 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [8/31/12]

27 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [8/31/12]

28 - treasurydirect.gov/instit/annceresult/press/preanre/2002/ofm71002.pdf [7/10/02]

 

July Monthly Market Commentary

THE MONTH IN BRIEF
July brought a new twist on an old story: headlines from Europe actually helped foster an overall stock market advance. The S&P 500 rose 1.26% on the month, and much of the gain was linked to European Central Bank President Mario Draghi’s July 26 pledge that the ECB would do “whatever it takes” to save the euro. After that statement, Wall Street seemingly forgot about the wave of poor-to-mediocre domestic indicators that had held stocks down for most of the month.^1,2

 

DOMESTIC ECONOMIC HEALTH
There wasn’t much to cheer about in the June employment report. Unemployment remained at 8.2%, and the economy had added only 75,000 new jobs per month in Q2 2012 compared to 226,000 a month in the previous quarter. About a third of the 80,000 jobs added in June were temporary. There was one positive note: the ranks of the long-term unemployed had thinned to 5.4 million down from 6.3 million a year ago.^3,4

   

Consumer spending was flat for June, even as consumer incomes rose 0.5%. (The economy had grown 1.5% in Q2 compared to 2.0% in Q1.) Consumer confidence polls diverged: the University of Michigan’s July survey hit a 2012 low of 72.3, but the Conference Board’s July survey showed 3.2% improvement to 65.9, its first gain in five months. U.S. retail sales dropped for a third straight month in June (-0.5%), a phenomenon unseen since 2008.^2,5,6,7,8

  

There wasn’t much movement in consumer or producer prices. The Consumer Price Index was flat in June while the Producer Price Index rose just 0.1%; annualized consumer inflation was running at 1.7% in June, the same as in May.⁹

 

Had growth returned to the manufacturing sector? According to the Institute for Supply Management, no. Its July manufacturing PMI came in at 49.8, after a June mark of 49.7. The service sector had fared better in June; the ISM PMI for that sector had come in at 52.1. June’s durable goods orders topped forecasts, rising an impressive 1.6%.^6,10,11

 

GLOBAL ECONOMIC HEALTH
A day after he assured the world that the ECB would pull out all the stops to preserve the eurozone, Bloomberg reported that Mario Draghi was meeting with the head of Germany’s central bank to arrange a round of sovereign debt purchases. Yet even as markets waited for an ECB announcement at the start of August, a Bundesbank source commented to CNBC that “monetary policy should strictly focus on its primary mandate to preserve price stability” – a comment that dampened some enthusiasm. Still, it looked like the risk of a quick “Grexit” had passed – as July ebbed into August, Greece’s government agreed to accept the austerity measures required to qualify for the next installment of its EU/IMF rescue loan.^2,12,13

 

Across the euro area, inflation held steady at 2.4% in June, though joblessness had ticked up to 11.2%; eurozone sovereign debt had risen to 88.2% of GDP. Assorted purchasing manufacturer indices looked weak. China’s official PMI hit an 8-month low of 50.1% in July as HSBC’s China PMI rose slightly to 49.3. Taiwan’s PMI came in under 50 in July, and manufacturing gauges in India and South Korea respectively registered their biggest monthly drops since September and December. The eurozone Markit PMI dropped to a 37-month low of 44.0 in July.^14,15

   

WORLD MARKETS
The “Draghi rally” certainly helped indices in Europe, though its effect was less pronounced in other regions. Data from the New York Times tells the tale for July: FTSE 100, +1.15%; DAX, +5.55%; CAC 40, +2.97%; FTSEurofirst 300, +4.11%; Hang Seng, +1.83%; TSX Composite, +0.59%; Bovespa, +3.21%; S&P/ASX All Ordinaries, +3.58%; Shanghai Composite, -5.47%; Nikkei 225, -4.48%. The MSCI World Index rose 1.20% for July, while the MSCI Emerging Markets Index advanced 1.61%.^16,17

    

COMMODITIES MARKETS

Wheat futures soared 17.30% in July while corn futures gained 26.86%. Energy futures also did well on the NYMEX last month: natural gas went +13.63%, RBOB gasoline +5.41%, heating oil +5.10% and crude oil +3.65. Among metals, gold gained 0.39% and silver 1.09% while copper dipped 2.26%. Cotton prices were virtually flat in July (-0.01%). The U.S. Dollar Index was up 1.17% last month. On July 31, gold settled at $1,610.50 on the COMEX, oil at $88.06 on the NYMEX; at the pump, regular unleaded was averaging precisely $3.50 a gallon.¹⁸

   

REAL ESTATE
Housing sector analysts had gotten used to the S&P/Case-Shiller Home Price Index bringing depressing data and gloomy analysis, so the May edition was a real surprise – prices rose in all 20 metro markets with a 2.2% composite gain. (In fact, it was the best month the index had seen in over a decade.) Existing home sales, however, slipped badly in June (-5.4%) along with new home sales (-8.4%) and pending home sales (-1.4%). Housing starts were up 6.9% in June to a three-and-a-half-year peak, with single-family starts increasing 4.7%.^19,20,21

 

Mortgage rates reached historical lows - again. In Freddie Mac’s, July 26 survey, the average interest rate on the 30-year FRM was 3.49% compared to 3.66% on June 29. Those eyeing refinancing watched the 15-year FRM’s average rate dip to 2.80% on July 26, down from 2.94% in the final June survey. Between June 29 and July 26, average rates for 5/1-year ARMs moved from 2.79% to 2.74% and average rates on 1-year ARMs went from 2.74% to 2.71%.²²

        

LOOKING BACK…LOOKING FORWARD
The Dow ended July at 13,008.68, the S&P at 1,379.33 and the NASDAQ at 2,939.52. The gain in the blue chips is relatively impressive given the fact that the Dow had many more down days than up days last month.^1,12,23

   

As August began, Wall Street hoped for promising announcements from the Federal Reserve and European Central Bank – two entities not known for sudden bold moves. The Fed offered carefully placed hints of possible future action in its August 1 policy statement, noting that it “will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery.” That language is just a tiny bit stronger than that seen in prior FOMC statements, and bulls are taking it as a signal that the fall may bring a new stimulus of some sort. Meanwhile, it could be that August simply continues what we have seen in June and July: stocks persistently advancing in spite of the pressures on U.S. consumer spending, global manufacturing and the European banking sector and bond market.²⁸

 

UPCOMING ECONOMIC RELEASES: Coming up in August, we have: the July employment report and July’s ISM service sector index (8/3), June wholesale inventories (8/9), July’s retail sales and PPI and June business inventories (8/14), July’s CPI and industrial output data and the latest NAHB housing market index (8/15), July housing starts and building permits (8/16), the initial August consumer sentiment survey from the University of Michigan plus the July edition of the Conference Board’s Leading Economic Indicators index (8/17), the release of the July 31 FOMC minutes (8/21), July existing home sales (8/22), July new home sales and June’s FHFA housing price index (8/23), July’s durable goods orders (8/24), June’s Case-Shiller home price index and the Conference Board’s August consumer confidence poll (8/28), July’s pending home sales, another estimate of Q2 GDP and a new Fed Beige Book (8/29), July consumer spending data (8/30), and a report on July factory orders along with the month’s final University of Michigan consumer sentiment survey (8/31).

MONTHLY QUOTE

“The art of teaching is the art of assisting discovery.”  – Mark Van Doren

To Your Prosperity,

Kevin Kroskey

This article prepared in conjunction with Peter Montoya.

Citations.

1 - www.bloomberg.com/markets/stocks/ [7/31/12]        

2 - cnbc.com/id/48352210 [7/27/12]

3 - www.ncsl.org/issues-research/labor/national-employment-monthly-update.aspx [7/31/12]

4 - www.nj.com/news/index.ssf/2012/07/us_unemployment_rate_stays_at.html [7/6/12]

5 - business.time.com/2012/07/31/us-consumer-spending-flat-income-up-0-5-in-june/ [7/31/12]

6 - briefing.com/investor/calendars/economic/2012/07/23-27 [7/27/12]

7 - www.latimes.com/business/la-fi-consumer-confidence-20120801,0,543957.story [8/1/12]

8 - www.forexpros.com/news/economic-indicators/u.s.-retail-sales-drop-0.5-in-june;-core-retail-sales-fall-0.4-235976 [7/16/12]

9 - www.businessweek.com/news/2012-07-17/u-dot-s-dot-consumer-price-index-was-unchanged-in-june-core-up-0-dot-2-percent [7/17/12]

10 - www.ism.ws/ISMReport/MfgROB.cfm [8/1/12]

11 - www.ism.ws/ISMReport/NonMfgROB.cfm [7/5/12]

12 - www.cnbc.com/id/48415895 [7/31/12]

13 - www.bbc.co.uk/news/world-europe-19085236 [8/1/12]

14 - epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ [8/1/12]

15 - in.reuters.com/article/2012/08/01/economy-global-idINL6E8J13A920120801 [8/1/12]

16 - markets.on.nytimes.com/research/markets/worldmarkets/worldmarkets.asp [7/31/12]

17 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [7/31/12]

18 - money.msn.com/market-news/post.aspx?post=69561ea6-6d00-4e34-8db8-b8dcd17ee72e [7/31/12]

19 - www.latimes.com/business/money/la-fi-mo-home-prices-20120731,0,1786807.story [7/31/12]

20 - www.cnbc.com/id/48335711 [7/26/12]

21 - www.usatoday.com/money/economy/housing/story/2012-07-18/housing-starts-june/56297966/1 [7/18/12]

22 - www.freddiemac.com/pmms/ [8/1/12]

23 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [7/2/12]

24 - www.usatoday.com/money/index [7/31/12]

25 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=8%2F1%2F11&x=0&y=0 [7/31/12]

25 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=8%2F1%2F11&x=0&y=0 [7/31/12]

25 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=8%2F1%2F11&x=0&y=0 [7/31/12]

25 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=7%2F31%2F02&x=0&y=0 [7/31/12]

25 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=7%2F31%2F02&x=0&y=0 [7/31/12]

25 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=7%2F31%2F02&x=0&y=0 [7/31/12]

26 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2012 [7/31/12]

26 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [7/31/12]

27 - treasurydirect.gov/instit/annceresult/press/preanre/2002/ofm71002.pdf [7/10/02]

28 - money.cnn.com/2012/08/01/news/economy/federal-reserve-stimulus/index.htm [8/1/12]