July Monthly Market Commentary

VARIOUS INDEX PERFORMANCE
July was a positive month across all equity asset classes with International Developed, denoted by the MSCI EAFE Index, slightly outpacing the S&P 500 at 5.28% versus a 5.09% return. Emerging Markets came in at 1.09% with bonds at 0.14%, denoted by the Barclays US Aggregate Bond Index.

Year-to-date returns for the indices are listed below. Note that even though the S&P 500 is up 19.62% on the year, a diversified 60/40 stock/bond index -- Morningstar Moderate Growth -- is up a more modest 7.95%. The MSCI All Country World Index, which is the most typical institutional benchmark for a globally diversified equity portfolio, is up 11.13%.

The disciplined investor will recall the benefits of diversification and the amount of risk they are willing to accept in their investment portfolio rather than looking at the S&P 500 100% equity returns in hindsight and saying, "I want that." Recall the 'Lost Decade', which was really only 'lost' for the S&P 500 Index-centric investor who lost -29.48% (-3.43% average annualized return over ten years) of their money from 03/1999 through 02/2009 over the ten-year period. Conversely the Dimensional Fund Advisor Balanced Strategy Index -- a 60/40 stock/bond index -- would have cumulatively returned +44.41% (+3.74% annualized) over the same period.

Index Performance		Total
01/01/2013 - 07/31/2013		Return
S&P 500		19.62
MSCI EAFE (net div.)		9.60
MSCI Emerging Markets (net div.)		-8.62
Barclays US Aggregate Bond		-2.31
MSCI All Country World (net div.)		11.13
Morningstar Moderate Growth 60/40		7.95

DOMESTIC ECONOMIC HEALTH
July offered both encouraging and discouraging economic statistics. The Institute for Supply Management’s July PMIs seemed to show an economy gaining traction. ISM’s manufacturing PMI leapt to 55.4 compared to 50.9 in June, and its service sector PMI jumped to 56.0 from the previous 52.2. The Commerce Department said that consumer spending was up 0.5% in June, corresponding to the projections of economists surveyed by Reuters; consumer incomes rose another 0.3 on the heels of a 0.4% improvement in May. Unemployment declined to 7.4% in July, but the pace of hiring also declined. Non-farm payrolls expanded by 162,000 jobs (compared to 188,000 in June), with retail, bar and restaurant positions representing much of the additions. Durable goods orders had increased 4.2% in June, but they were flat with the volatile transportation category removed. As the quarter ended, the federal government issued its first estimate of Q2 GDP: 1.7%, indicative of the economy’s slow comeback.^2,3,4,5,6

July also offered a mixed picture of consumer confidence. The Conference Board’s July poll came in at 80.3, 1.8 points lower than June’s reading and below the expectations of analysts surveyed by MarketWatch. The reading on the University of Michigan’s final July consumer sentiment index was better – 85.1, up a full point from June to its highest level since July 2007.^6,7  

Prices increased in June, but it seemed more an anomaly than a trend. The Consumer Price Index rose 0.5%, but a 6.3% leap in gas prices was a major factor; the core CPI was up just 0.2%, and annualized core inflation had increased just 1.6%, the smallest amount in two years. Wholesale prices jumped 0.8% in June, though the core Producer Price Index only advanced 0.2%. Retail sales were up 0.4% in June; there was a 1.8% gain in auto purchases and a 2.4% improvement in furniture sales.^8,9,10    

In early July, the Obama administration decided to postpone the Affordable Care Act’s employer health insurance mandate for a year. Businesses with 50 or more full-time employees won’t have to provide health insurance to workers until 2015; retail franchises and restaurant owners welcomed that decision. The move raised big-picture questions about whether all aspects of the ACA (such as the coming online health insurance exchanges) could be implemented on schedule. In mid-July, Federal Reserve chairman Ben Bernanke cited the need for a “highly accommodative monetary policy for the foreseeable future,” buoying financial markets. The central bank’s July 31 policy statement offered no hint as to when it would start to reduce its asset purchases, and it termed the current economic expansion “modest”, which seemed slightly less enthusiastic than its “moderate” assessment from June.^11,12,13

              
GLOBAL ECONOMIC HEALTH
Two closely-watched China manufacturing PMIs offered different estimates of the performance of the world’s biggest economic engine. The HSBC PMI came in at just 47.7 for July. The “official” PMI from China’s National Bureau of Statistics (which, incidentally, surveys a greater percentage of state-owned enterprises) rose 0.2 for July, showing a bit of expansion at 50.3. Still, this was nothing special. Neither was India’s July Markit manufacturing PMI reading of 50.1; Markit manufacturing PMIs for South Korea, Vietnam, Australia and Taiwan were all under 50 last month, with Australia’s dropping 7.6 points. HSBC and Markit service sector PMIs tracking Asian economies also moved lower in July; India’s showed contraction for the first time in 21 months at 47.9, and those for Japan (50.6) and China (51.3) showed slower growth.^14,15

As mounting evidence of a slowdown came from Asia, another question emerged in Europe. Was the Eurozone recession coming to a close? The EU manufacturing sector grew in July for the first time since 2010 – the Markit PMI hit 50.5, up from 48.7 in June. Germany’s manufacturing PMI reached a 5-month peak of 52.1, France’s hit a 17-month high of 49.1, and Italy’s reached a 26-month high of 49.7. July also saw the fewest eurozone job losses in 16 months, and the German economy saw a net job gain.^14,15,16

               

WORLD MARKETS
Big gains were the order of the month, especially in Europe. The FTSE 100 climbed 6.53%, the DAX 3.98%, the CAC 40 6.79%, the RTSI 2.97% and the STOXX 600 5.11%. In the Asia Pacific region, some losses crept in among the gains: the Sensex slipped 0.26% and the Nikkei 225 0.07%, but that was overshadowed by advances for the KOSPI (2.72%), the KSE 100 (10.98%), the Hang Seng (5.19), the Shanghai Composite (0.74%) and the Asia Dow (1.17%). On our side of the pond, the TSX Composite rose 2.95%, the MERVAL 12.82% and the Bovespa 1.64%.The Global Dow advanced 5.87% in July, the MSCI World Index 5.19% and the MSCI Emerging Markets Index 0.77%.^1,17i COmposite : the TSX Composite (-2.30%), the  gan'

COMMODITIES MARKETS
The price of NYMEX crude soared 9.15% in July. That put oil at $105.03 a barrel at the end of the month. Natural gas prices, on the other hand, descended 3.25%. Gold settled at $1,313.00 at month’s end, the culmination of a 7.46% monthly ascent. Silver went +1.45%, platinum +6.77% and copper +2.40%. As for crops, coffee lost 1.37%, but cocoa rose 4.74%, wheat 2.71% and sugar 2.48%. The U.S. Dollar Index lost 1.76% for the month.^18,19 

REAL ESTATE
On August 1, Freddie Mac’s Primary Mortgage Market Survey had the average rate on a 30-year fixed home loan at 4.39%, up from 4.29% on July 3 and 3.81% on May 30.²⁰  

Existing home sales fell 1.2% in June, with tightening inventory being a factor; still, the National Association of Realtors reported a 13.5% yearly improvement in the median sale price. The May S&P/Case-Shiller Home Price Index recorded a 12.2% overall yearly rise in home prices across 20 cities. New home sales were up 8.3% in June, with a 38.1% year-over-year increase in the sales pace (the best on record since 1992).^6,21  

Not all the news was so impressive. Pending home sales dipped 0.4% for June, partly reflecting the shrinking inventory of existing properties on the market. As for building permits and housing starts, they both fell in June: building permits sagged 7.5% from May but were up 16.1% annually, while starts dipped 9.9% but were still up 10.4% in 12 months.^6,22               

The 0.58% rise in conventional mortgage rates across two months was mirrored by other types of home loans. Average rates for 15-year FRMs went from 2.98% to 3.43%; average rates for 5/1-year ARMs and 1-year ARMs were but 2.66% and 2.54% on May 30, yet respectively 3.18% and 2.64% by August 1.²⁰   

UPCOMING ECONOMIC RELEASES: For the rest of August, here is how the schedule of news items plays out: June wholesale inventories (8/10), July retail sales and June business inventories (8/13), July’s PPI (8/14), July’s CPI, July industrial output and the August NAHB housing market index (8/15), July’s housing starts and building permits plus the University of Michigan’s initial August consumer sentiment index (8/16), July existing home sales and the July 31 Fed policy meeting minutes (8/21), the Conference Board’s July index of leading indicators and the June FHFA housing price index (8/22), July new home sales (8/23), July hard goods orders (8/26), June’s Case-Shiller home price index and the Conference Board’s August consumer confidence survey (8/27), July pending home sales (8/28), the second estimate of Q2 GDP (8/29), and the final August University of Michigan consumer sentiment index and the July consumer spending report (8/30). The Labor Department issues the July jobs report on September 6.

Best Regards,

Kevin Kroskey

This article adapted with permission from MarketingLibrary.net.

Citations.

1 - online.wsj.com/mdc/public/page/2_3024-m_globalstockindexes.html [7/31/13]
2 - ism.ws/ISMReport/NonMfgROB.cfm [8/5/13]
3 - tinyurl.com/lh438e5 [8/2/13]
4 - chron.com/news/us/article/US-employers-add-162K-jobs-rate-falls-to-7-4-pct-4702834.php [8/2/13]
5 - briefing.com/investor/calendars/economic/2013/07/22-26 [7/26/13]
6 - marketwatch.com/Economy-Politics/Calendars/Economic [8/1/13]
7 - tinyurl.com/ke8ykkl [7/26/13]
8 - forbes.com/sites/afontevecchia/2013/07/16/spiking-gasoline-prices-push-cpi-inflation-higher-but-weak-core-fuels-taper-uncertainty/ [7/16/13]
9 - briefing.com/investor/calendars/economic/2013/07/08-12 [7/12/13]
10 - usatoday.com/story/money/business/2013/07/15/retail-sales-rise-in-june-on-autos/2517443/ [7/15/13]
11 - kansascity.com/2013/07/03/4328512/qa-on-impact-of-health-law-delay.html [7/3/13]
12 - tinyurl.com/msb38q6 [7/10/13]
13 - nasdaq.com/article/closing-update-us-stocks-end-mixed-after-fomc-meeting-minutes-cm263222 [7/31/13]
14 - tinyurl.com/knwt8rt [8/1/13]
15 - telegraph.co.uk/finance/economics/10223494/Eurozone-recession-will-end-this-quarter-as-businesses-return-to-growth.html [8/5/13]
16 - tinyurl.com/mwakh4v [8/5/13]
17 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [7/31/13]
18 - money.cnn.com/data/commodities/ [7/31/13]
19 - online.wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [8/5/13]
20 - freddiemac.com/pmms/ [8/5/13]
21 - bloomberg.com/news/2013-07-24/new-home-sales-in-u-s-rise-more-than-forecast-to-five-year-high.html [7/24/13]
22 - census.gov/construction/nrc/pdf/newresconst.pdf [7/17/13]
23 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=7%2F31%2F12&x=0&y=0 [7/31/13]
23 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=7%2F31%2F12&x=0&y=0 [7/31/13]
23 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=7%2F31%2F12&x=0&y=0 [7/31/13]
23 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=7%2F31%2F03&x=0&y=0 [7/31/13]
23 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=7%2F31%2F03&x=0&y=0 [7/31/13]
23 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=7%2F31%2F03&x=0&y=0 [7/31/13]
24 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [8/5/13]

First-Half Report Card: Net Gains and Diversification Blues

The recent turmoil in the investment markets might cause one to think that people have lost money this year in U.S. stocks.  But in fact, most of the U.S. indices are sitting on double-digit gains, and the second quarter actually added to those gains. However, for the prudent, diversified investor actual portfolio results may at first seem puzzling when looking at your statements and reconciling against the nightly news.

Despite a rocky last month, the Wilshire 5000--the broadest measure of U.S. stocks and bonds--rose 2.77% for the second quarter--and now stands at a 13.97% gain for the first half of the year.  The comparable Russell 3000 index gained 2.69% in the second three months of the year, posting a 14.06% gain in the first half of 2013.

The other U.S. market sectors experienced comparable gains.  Large cap stocks, represented by the Wilshire U.S. Large Cap index, gained 2.74% in the second quarter, and is now up 13.68% so far for the year.  The Russell 1000 large-cap index returned 2.65% for the quarter, up 13.91% for the year, while the widely-quoted S&P 500 index of large company stocks gained 2.36% for the quarter and is up 12.63% since January 1.

The Wilshire U.S. Mid-Cap index index rose 1.97% in the second three months of the year, and is up 15.75% at the year's midway point.  The Russell midcap index was up 2.21% for the quarter, and now stands at a 15.45% gain so far this year.

Small company stocks, as measured by the Wilshire U.S. Small-Cap, gained 2.80% in the second quarter; with the first quarter gains, the index is up 16.28% so far this year.  The comparable Russell 2000 small-cap index was up 3.08% in the second three months of the year, posting a 15.86% gain in the year's first half.  The technology-heavy Nasdaq Composite Index was up 4.15% for the quarter, and has gained 12.71% for its investors so far this year.

The rest of the world is not doing as well.   The broad-based EAFE index of larger foreign companies in developed economies fell 2.11% in dollar terms during the second quarter of the year, and is up just 2.18% so far this year.  The stocks across the Eurozone economies fell 0.20%, and are now down 1.48% for the first half of the year. 

The news was much worse for emerging markets stocks, which have been touted as the world's engine of growth.  The EAFE Emerging Markets index of lesser-developed economies plunged 9.14% for the quarter, and are now down 10.89% for the year.

Looking over the other investment categories, real estate investments, as measured by the Wilshire REIT index, fell 1.39% for the quarter, though it is still standing at a 5.94% gain for the year.  Commodities, as measured by the S&P GSCI index, fell 5.93% this past quarter, taking them down 5.41% for the year.  Gold recently hit its lowest settlement price since August of 2010.

Bonds experienced a very difficult first half of the year, with much of the damage coming in the past 30 days.  The Barclay's Global Aggregate bond index is down 4.83% so far this year, and the U.S. Aggregate index has lost 2.44% of its value in the same time period. 

Many investors have lost money in seemingly-safe Treasury bonds in the past month, but the damage was limited to bonds with longer maturities.  30-year Treasuries have seen their yields rise .75% in the past 12 months, to 2.875%, and 10-year Treasuries have actually gained more yield, 0.84%, including .37% in the past month alone, to stand at 1.75%. 

Higher yields, of course, means a decline in value for those holding the bonds; in aggregate, government bonds with maturities of 10 years or longer lost an average of 10.8% of their value since the beginning of May.  This was a shock for investors who saw Treasury market gains of 32.9% in 2011 and 11.7% in 2010.  The decline in bond values has caused investors to sell a record $76.5 billion worth of bond funds during the month of June.

Meanwhile, 3-month Treasuries have held their value, and have actually seen their yield go down, resting at 0.03%.  But rates are still remarkably low.  Lending the government a hundred dollars for a year (buying 12-month Treasuries) will now yield you a princely sum of 14 cents in returns.

Muni bonds are sporting aggregate yields of 0.19% (1-year), 0.50% (2-year), 1.40% (5-year) and 1.68% (10-year). 

The economic news has been mixed; Europe, particularly Southern Europe, is still mired in recession, and there has been turmoil in China as the country's leaders try to rein in the so-called "shadow banking system"--meaning lenders who are not officially sanctioned banks.  In the U.S., home prices experienced the largest price rise in the history of the S&P/Case-Shiller price index in April, and over the past year, the index tells us that home prices have risen 12.1%. 

This is the kind of market environment that many professional advisors least enjoy--for a variety of reasons.  First, the turmoil over the past month makes it clear that investors are making investment decisions--and moving market prices--based on emotions rather than logic.  The initial panic following Fed Chairman Ben Bernanke's comments about ending its QE3 stimulus program seems to have subsided.  But when market values drop precipitously based on a single speech about a hypothetical Fed action that would only be taken due to improved fundamentals, you know that investors are not thinking rationally. 

The other reason professional advisors dislike the current state of the markets is the way diversification looks right now. Whenever U.S. stocks are delivering positive returns while everything else--international stocks, bonds, real estate, commodities and all the other pieces of a prudently constructed portfolio--are going in the tank, investors will ask questions like: "The S&P 500 is up 14% so far this year, but my portfolio is only up 6%.  What are you doing wrong?"

The truth is, no professional can pick the one winning asset out of the myriad of options every year (or half year), and no prudent professional would ever try.  There will always be one asset that returns more than the others, and that winning asset will always be different.  Yet American investors hear about the S&P 500 (and the Dow, and other U.S. large stock indices) on the nightly news, so they are most likely to question the competence (or sanity) of their advisor when the U.S. stock markets are booming and everything else is lagging--exactly the situation we have today.

Eventually, some other investment will take the lead, diversified portfolios will look better relative to the U.S. stock indices, and professional advisors will look like geniuses.  That, too, will be a naive view of the situation, but it will be a more pleasant one for those of us who believe in the long-term value of diversification.

To Your Prosperity,

Kevin Kroskey

Adapted with permission from Bob Veres’ Inside Information.

Sources:

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
Bond rate data:  http://www.nytimes.com/2013/06/29/your-money/before-dumping-bonds-consider-why-you-have-them.html?pagewanted=all&_r=0
http://www.marketwatch.com/story/treasurys-hold-losses-after-mixed-data-2013-06-28
http://www.miamiherald.com/2013/06/27/3473722/mid-year-mutual-fund-review-bond.html#storylink=cpy

May Monthly Market Commentary & FED Accommodative Policy

THE MONTH IN BRIEF
May brought more record closes for the Dow, more affirmations of the housing comeback, more household confidence, and certainly more volatility as investors wondered if the Federal Reserve might soon do less. The major concern of the month was how quickly and dramatically the Fed might wind down its easing effort. Commodities struggled against a strengthening dollar; domestic indicators were a mixed bag. Still, there was enough optimism to send the S&P 500 2.08% higher for the month.¹

DOMESTIC ECONOMIC HEALTH
The May 1 Fed policy minutes (released May 22) stated that “a number” of Fed officials were open to reducing the scale of QE3 as soon as June. As easing has driven this bull market perhaps more than any other factor, this unnerved Wall Street. If economic indicators improved in spring, would the Fed stimulus diminish?²

As it happened, some key economic indicators faltered. Consumer spending slipped 0.2% in April (consumer incomes were flat in that month), and the closely watched Institute for Supply Management manufacturing PMI hit its lowest level in four years in May  – 49.0, indicating sector contraction. The Labor Department said the economy generated 165,000 new jobs in April, in line with the decent but unspectacular hiring growth seen in the past year (169,000 new jobs per month); unemployment ticked down to 7.5%.^3,4   

What really improved in May was consumer confidence. The Conference Board’s May poll rose to 76.2 from the 68.1 reading in April; the final May consumer sentiment survey from the University of Michigan came in at 84.5, improved from a preliminary May mark of 83.7. Ongoing headlines about new record highs for the Dow may have helped.⁵

    
Consumer prices declined in April, and that may have cheered households up as well. The Consumer Price Index fell 0.4%, the biggest monthly retreat since December 2008. (It had fallen 0.2% in March.) The take-home pay of Americans rose 0.5% in April, and retail sales edged up 0.1%. Annualized consumer inflation – as measured by the overall CPI – was a very weak 1.1% in April. (That was the tamest since September 2010.) Wholesale inflation also lessened in April – the Producer Price Index sank 0.7%, the most in three years. Durable goods orders rose 3.3% for April, 1.3% with the volatile transportation category factored out.^6,7,8
 
GLOBAL ECONOMIC HEALTH
Eurozone manufacturing rebounded strongly in May. The overall eurozone Markit PMI improved 1.6 points to 48.3, a 15-month peak; Germany’s PMI improved to 49.4, Spain’s to 48.1 (a 24-month high) and France’s to 46.4 (a 13-month high). Still, the big picture saw manufacturing contracting in the euro area for the 22nd straight month. Economists polled by Markit also projected the bloc’s GDP at -0.2% for Q2, which would match the retreat of Q1 and mark the seventh quarter in a row without economic growth in the region. The European Central Bank lowered its benchmark interest rate to 0.5% last month.^9,10
 
Manufacturing shrank in most of the key Asian economies as well. The exception? Japan. Markit’s PMI for that nation rose 0.4 points to 51.5 for May. China’s official PMI came in at 50.8, but the Markit PMI dropped 1.2 points to 49.2, the first contraction in seven months (a development which threw a shock into Japan’s stock market and weighed on other exchanges). Taiwan’s PMI descended to 47.1, India’s to 50.1 (poorest since March 2009), South Korea’s to 51.1, Vietnam’s to 48.8 and Indonesia’s to 51.6.^11,12  

WORLD MARKETS
European indices generally moved north in May; benchmarks in the Asia Pacific region (and elsewhere in the Americas) had a tougher time of it. In the plus column: KOSPI, +1.89%; Sensex, +1.31%; Shanghai Composite, +5.63%; TSE 50, +1.18%; TSX Composite, +1.56%; CAC 40, +2.38%; FTSE Eurofirst 300, +1.29%; DAX, +5.50%; FTSE 100, +2.38%. In the minus column: Bovespa, -4.30%; Bolsa, -1.60%; Nikkei 225, -0.62%; Hang Seng, -1.52%; All Ordinaries, -4.93%; Micex, -3.02%; MSCI Emerging Markets, -2.94%; MSCI World, -0.28%.i COmposite : the TSX Composite (-2.30%), the  gan'^13,14

COMMODITIES MARKETS

The U.S. Dollar Index rose 1.63% in May, so it was not exactly a banner month for the broad commodities market. May saw descents for gold (6.06%), silver (8.14%), platinum (2.98%), natural gas (8.33%), oil (1.63%), cocoa (5.64%), wheat (2.46%), corn (3.11%), coffee (5.79%) and sugar (5.32%). Copper did manage an advance of 2.40% in May.^15,16

REAL ESTATE
As has been the case of late, the best news out of the economy came from this sector. The March edition of the S&P/Case-Shiller Home Price Index showed a 10.9% overall yearly gain, compared with 9.3% in February. New home sales rose 2.3% in April, and existing home sales were up 0.6% in that month, with distressed properties accounting for only 18% of transactions compared to 28% in April 2012. The Census Bureau said that the pace of new home buying had improved 29.0% in a year, and the National Association of Realtors noted an 11.0% yearly increase in the median existing home price to $192,800. NAR had pending home sales improving by 0.3% in April. While housing starts fell 16.5% in April, building permits rose 14.3% (with apartment projects the major influence on both statistics).^3,17,18,19

     
May brought a significant jump in home loan rates. In Freddie Mac’s May 2 Primary Mortgage Market Survey, the average interest rate on the 30-year FRM was 3.35%; by the May 30 survey, it had hit 3.81%. This mirrored what happened to the 15-year FRM – interest rates on that loan type averaged 2.56% on May 2, 2.98% by May 30. Average interest rates for 5/1-year ARMs rose 0.1% to 2.66% in the same interval while rates on1-year ARMs actually descended a bit, going from 2.56 to 2.54%.²⁰
 
LOOKING BACK…LOOKING FORWARD
The small caps stood tall in May: the Russell 2000 surpassed the 1,000 mark for the first time. It gained 3.87% on the month, ending May at 984.15. As these numbers show, investors didn’t exactly sell and go away last month. Another notable development: the real yield of the 10-year note was nearly back in positive territory at the end of May.^1,21

Historically speaking, June has not been a good month for stocks – on average, the S&P 500 has gone -0.30% in June since 1945. As recently as late May, analysts were wondering if a pullback (or a correction) was in the offing, as even moderately good economic data might encourage Fed officials to taper off easing. How things changed in a week: the subpar ISM manufacturing index reading and retreat in personal spending were bad news, but encouraging developments for a stock market worried that the Fed might perceive the economy as stronger rather than weaker. One of the more ardent Wall Street bulls, S&P’s Sam Stovall, just noted that “the S&P 500’s performance in June could surprise to the upside,” referencing that since 1945, the index has averaged a 0.4% gain in the month following a 7-month winning streak. Even the much-respected “Dr. Doom”, economist Nouriel Roubini, believes Wall Street will see two more years of gains – he said so on CNBC at the start of this month. June may prove a wild card; it may bring more volatility than previous months as investors watch for any little hint of what the Fed might do, how the labor market is faring, how the service and manufacturing sectors are holding up this spring, and how freely consumers are spending and buying. For the record, the next Fed policy meeting wraps up on June 19.^23,24

UPCOMING ECONOMIC RELEASES: The data stream for the rest of the month is as follows ... the ISM May non-manufacturing index and a new Fed Beige Book (6/5), the Labor Department’s May jobs report (6/7), April wholesale inventories (6/11), May retail sales ad April business inventories (6/13), May’s PPI and industrial output and the University of Michigan’s initial June consumer sentiment survey (6/14), June’s NAHB housing market index (6/17), May’s CPI and data on May housing starts and building permits (6/18), a Federal Reserve policy announcement (6/19), May existing home sales (6/20), the Conference Board’s June consumer confidence survey, the April Case-Shiller home price index, April’s FHFA housing price index and the numbers on May new home sales and durable goods orders (6/25), the final estimate of Q1 GDP (6/26), the Commerce Department’s May consumer spending report and NAR’s pending home sales report for May (6/27), and then the final University of Michigan consumer sentiment survey for June (6/28).

Best Regards,

Kevin Kroskey

This article adapted with permission from MarketingLibrary.net.

Citations.

1 - cnbc.com/id/100779852 [5/31/13]
2 - reuters.com/article/2013/05/22/markets-usa-stocks-idUSL2N0E321R20130522 [5/22/13]
3 - marketwatch.com/Economy-Politics/Calendars/Economic [6/3/13] 
4 - ncsl.org/issues-research/labor/national-employment-monthly-update.aspx [5/3/13]
5 - briefing.com/investor/calendars/economic/2013/05/27-31 [5/31/13]
6 - businessweek.com/news/2013-05-16/consumer-prices-in-u-dot-s-dot-dropped-more-than-forecast-in-april [5/16/13]
7 - usatoday.com/story/money/business/2013/05/13/april-retail-sales/2154725/ [5/13/13]
8 - thestreet.com/story/11933260/1/sp-poised-for-three-day-losing-streak-amid-qe-wind-down-chatter.html [5/24/13]
9 - bbc.co.uk/news/business-22752897 [6/3/13]
10 - markit.com/assets/en/docs/commentary/markit-economics/2013/jun/EZ_Manufacturing_ENG_1306_PR.pdf [6/3/13]
11 - markit.com/assets/en/docs/commentary/markit-economics/2013/jun/Asia_trade_13_06_3.pdf [6/3/13]
12 - reuters.com/article/2013/06/01/us-china-economy-pmi-idUSBRE95001W20130601 [6/1/13]
13 - markets.on.nytimes.com/research/markets/worldmarkets/worldmarkets.asp [5/31/13]
14 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [5/31/13]
15 - online.wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [5/1/13]
16 - money.cnn.com/data/commodities/ [5/31/13]
17 - csmonitor.com/Business/new-economy/2013/0523/New-home-sales-rise-but-market-still-a-long-way-from-normal [5/23/13]
18 - realtor.org/news-releases/2013/05/april-existing-home-sales-up-but-constrained [5/22/13]
19 - latimes.com/business/money/la-fi-mo-housing-starts-construction-building-permits-economy-20130516,0,7678305.story [5/16/13]
20 - freddiemac.com/pmms/ [5/30/13]
21 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=5%2F31%2F12&x=0&y=0 [5/31/13]
21 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=5%2F31%2F12&x=0&y=0 [5/31/13]
21 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=5%2F31%2F12&x=0&y=0 [5/31/13]
21 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=5%2F30%2F03&x=0&y=0 [5/31/13]
21 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=5%2F30%2F03&x=0&y=0 [5/31/13]
21 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=5%2F30%2F03&x=0&y=0 [5/31/13]
22 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [6/3/13]
23 - businessweek.com/printer/articles/520656?type=bloomberg [6/3/13]
24 - cnbc.com/id/100785848 [6/3/13]  
 

April Monthly Market Commentary

THE MONTH IN BRIEF
Offhand, when was the last month in which stocks didn’t advance? That would be October, and if it seems like a distant memory, credit the Federal Reserve, a decent Q1 earnings season, and a prevalent optimism that is hard to dismiss. The S&P 500 pushed higher during the month to settle at a new record close of 1,597.57 on April 30 – even after an abysmal March jobs report and some soft indicators at home and abroad. It was a bad month for commodities investors, with the big headline being gold’s lapse into a bear market on April 12. There was better news out of Europe, if not out of China. The real estate market continued to improve, the usual monthly volatility in the pace of home sales aside.^1,2,3

DOMESTIC ECONOMIC HEALTH
The most stunning news of April came early in the month, when the Labor Department said that the economy had generated but 88,000 new jobs in March. Sure, the jobless rate fell to 7.6%, but that was only because fewer Americans were looking for work – the labor force participation rate hit a 34-year low of 63.3%. Of course, the Labor Department often greatly revises these monthly hiring figures.⁴

Was manufacturing growth tapering off? The Institute for Supply Management’s manufacturing PMI came in at 50.7 in April, below the disappointing March reading of 51.3. ISM’s March service sector PMI declined to a still-encouraging 54.4 in April from its 56.0 March reading. Construction spending was down 0.7% in March, while overall durable goods orders lessened by 5.7%. Retail sales dipped 0.4% in March (the poorest month since last June). Given indicators like these, perhaps it wasn’t surprising that the federal government’s initial estimate of Q1 GDP was 2.5% - not the 3.0% or better growth that many economists had assumed they would see.^5,6,7,8
 

Consumer spending beat expectations with a 0.2% gain in March, with colder weather being the biggest factor: inflation-adjusted spending on utilities rose by the largest monthly amount since October 2001. Gas prices had fallen 4.4% in March, and inflation also lessened: the overall Consumer Price Index went south 0.2% and the overall Producer Price Index retreated 0.6%; the core PPI rose 0.2%, the core CPI 0.1%.^8,9,10

The Conference Board’s April consumer confidence poll soared to a 5-month peak of 68.1 in April from its 61.9 mark for March. The University of Michigan’s final April consumer sentiment index reached 76.4, surprising to the upside – economists polled by Briefing.com had expected a final April reading of 72.4.^1,7,11

GLOBAL ECONOMIC HEALTH
Would China’s apparent economic recovery amount to an illusion? Its official GDP reading for Q1 was 7.7%, down from 7.9% in Q4. Additionally, its HSBC PMI reading fell to 50.5 in April, a two-month low. Economists worried that its GDP would be closer to 7% than 8% in coming quarters. This disappointment provided another hit to the global commodities market, signaling reduced demand for gold and other resources in the PRC.¹²

While the banking crisis in Cyprus had cooled, eurozone unemployment had hit 12.1% in March, and Germany’s manufacturing PMI showed contraction in April (49.2). However, these last two developments seemed to increase the odds of the European Central Bank lowering its benchmark interest rate (which was at 0.75% as April ended). Ten-year bond yields in Italy and Spain were respectively at 4.1% and 4.3% as the month wrapped up, a far cry from the danger zone they entered last summer; the yield on Spain’s 10-year note fell for an eighth straight month. Italy’s political stalemate ended after two months, with new prime minister Enrico Letta receiving a parliamentary vote of confidence.^11,13,14,15

WORLD MARKETS
Many marquee indices fared well in April. The gainers included the Global Dow (+3.27%), the MSCI World Index (+2.90%), the MSCI Emerging Markets Index (+0.44%), the Nikkei 225 (+11.80%), the Sensex (+3.55%), the S&P/ASX 200 (+4.52%), the FTSE 100 (+0.29%), the CAC 40 (+3.36%), the DAX (+1.52%) and the Euro STOXX 50 (+0.99%). In the loss column for April, we find the TSX Composite (-2.30%), the IPC All-Share (-4.11%), the Bovespa (-0.78%) and the Shanghai Composite (-2.62%).i COmposite : the TSX Composite (-2.30%), the  gan'^2,16

COMMODITIES MARKETS
It wasn’t all bad in April: natural gas futures rose 9.0%, cocoa futures gained 9.1%, and wheat futures rose 6.3%. Now for the bad news: gold fell 7.8% last month to an April 30 COMEX close of just $1,474.00. Silver cratered 14.6% in April; copper fell 6.4%, platinum 4.3% and palladium 9.2%. Corn (-6.5%) and soybeans (-0.4%) both lost ground for a third consecutive month. NYMEX crude dipped 3.9% in April to end the month at $93.46 a barrel while RBOB gasoline futures dropped 9.8%. The U.S. Dollar Index lost 1.52% in April, settling at 81.72 on April 30.^11,17,18,19

REAL ESTATE
The pace of existing home sales was 10.3% better in March 2013 than it was in March 2012, according to the National Association of Realtors; the Census Bureau reported an 18.5% year-over-year improvement in the pace of new home purchases.  The February S&P/Case-Shiller Home Price Index showed its best overall 12-month gain since May 2006 (+9.3%). NAR also noted pending home sales at a 3-year peak in March, with the annual gain at 7.0%. Existing home sales did decline 0.6% in March; new home sales rose 1.5%.^{11,20,t in the sales pace at 18.5%.3,21}

What happened to mortgage rates in April? We saw notable declines. Freddie Mac’s March 28 Primary Mortgage Market Survey had the average interest rate for the 30-year FRM at 3.57%; it was at 2.76% for the 15-year FRM, 2.68% for the 5/1-year ARMs and 2.62% for the 1-year ARM. In the last April survey (April 25), the numbers were as follows: 30-year FRM, 3.40%; 15-year FRM, 2.61%; 5/1-year ARM, 2.58%; 1-year ARM, 2.62%.²²

LOOKING BACK…LOOKING FORWARD
The NASDAQ and S&P are now on 6-month winning streaks – the longest win streaks they have realized in the current bull market. The DJIA advanced for a fifth straight month in April. Here are the settlement prices from April 30: DJIA, 14,839.80; S&P, 1,597.57, NASDAQ, 3,328.79; Russell 2000, 947.46. (The RUT actually lost 0.43% for April.)^1,2

Hopefully, we won’t see domestic economic indicators falter in May and June, as was the case in 2011 and 2012. Overseas indicators (growth and manufacturing in China, the lingering recession in Europe) may not promise much, however. On a positive note, the Fed is still printing plenty of money and sticking to its accommodative monetary policy, which has boosted stocks of late more than any other factor. The undeniable psychological lift from the Fed’s open-ended easing hasn’t worn off, and investor morale is still high. The market doesn’t seem to be facing headwinds comparable to spring 2011 or spring 2012, though they certainly could arise. If the S&P does top 1,600 in the first half of May and close above 1,600 at the end of the month, you can’t say that Wall Street would be shocked. “Sell in May, go away?” Maybe not. Many investors still see more upside in this bull market.
 
UPCOMING ECONOMIC RELEASES: For the balance of May, here is the schedule of consequential announcements ... the Labor Department’s April jobs report and the ISM April service sector index (5/3), March wholesale inventories (5/9), April retail sales (5/13), April’s PPI and industrial production and the May NAHB housing market index (5/15), the April CPI plus the report on April housing starts and building permits (5/16), the Conference Board’s April index of Leading Economic Indicators and the University of Michigan’s preliminary May consumer sentiment survey (5/17), April existing home sales and the release of the May 1 Fed minutes (5/22), April new home sales and March’s FHFA housing price index (5/23), April durable goods orders (5/24), the March Case-Shiller home price index and the Conference Board’s May consumer confidence poll (5/28), the second federal government estimate of Q1 GDP and NAR’s pending home sales report for April (5/30), and May’s final University of Michigan consumer sentiment survey plus the April consumer spending report (5/31).
 
Best Regards,
 
Kevin Kroskey

This article adapted with permission from MarketingLibrary.net.

Citations.
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