Market Commentary for the Week of August 3, 2015

Stocks snapped their losing streak and regained steam last week despite some soft data, posting weekly and monthly gains. For the week, the S&P 500 gained 1.16%, the Dow rose 0.69%, and the NASDAQ grew 0.78%.¹
 

July was a volatile month, with a tug-of-war between overseas and domestic data and concerns about a Greek exit from the Eurozone. Despite all the downward pressure, stocks managed to record a respectable gain for the week.

Earnings season continued, and we have results from over 350 S&P 500 companies. So far, overall earnings were down 2.5% year-over-year on 4.4% lower revenues. The Energy sector is dragging on overall earnings growth because of low oil prices. Taking Energy companies out, analysts expect overall S&P 500 earnings to be up 5.4% year-over-year on 1.4% higher revenues.²

Now that the overall earnings picture is firming up, analysts are turning their attention to third-quarter expectations. Unfortunately, it looks like U.S. companies are even more cautious about the rest of the year and earnings estimates for Q3 and Q4 are coming down across the board. The chart below shows that overall earnings growth is expected to be negative in the third and fourth quarters before picking up early next year.³

Will these estimates hold? It’s hard to say. Many corporate managers prefer to “under-promise and over-deliver” on estimates, artificially lowering them so as to be able to beat their own expectations. We’ll know more as the quarter progresses.

The Federal Reserve met again in July, and though no interest rate changes were announced, the central bank reiterated its intentions to raise rates this year – possibly as soon as September.⁴ Are higher rates already baked into stock and bond prices? We don’t know for certain, but the Fed has been telegraphing its rates play for months now, so we hope that markets won’t overreact when rates finally start to go up. Though we don’t know how quickly the Fed will start hiking up rates, we expect the process to be slow and gradual, giving the economy time to adapt.

We also got our first look at second quarter Gross Domestic Product, which showed that the economy grew at 2.3% in the second quarter. While economists had predicted higher growth, it’s still a vast improvement on the 0.6% growth the economy saw in the wintery first quarter.⁵

The week ahead is packed with economic data, including motor vehicle sales, factory orders, and the July employment situation report. Analysts will be highlighting Friday’s July jobs report to see whether it supports or detracts from the Fed’s case for raising rates. If hiring remains strong and wage growth improves, the Fed may still be on target for a September rate hike. If wage growth is soft, it could push the timeline out.⁶

ECONOMIC CALENDAR:
Monday: Motor Vehicle Sales, Personal Income and Outlays, PMI Manufacturing Index, ISM Mfg. Index, Construction Spending
Tuesday: Factory Orders
Wednesday: ADP Employment Report, International Trade, ISM Non-Mfg. Index, EIA Petroleum Status Report
Thursday: Jobless Claims
Friday: Employment Situation

HEADLINES:

Consumer sentiment drops in July. Two measures of how American consumers feel about their economic prospects dropped in July, partly because of concerns about economic growth as well as worries about Greece and China.⁷

 

Big cities drive rental prices high. U.S. home rental prices rose much faster than incomes in June. Unsurprisingly, major cities like San Jose, San Francisco, and Denver experienced double-digit year-over-year increases as demand pushed rental prices higher.⁸

Weekly jobless claims rise slightly. Though weekly claims for new unemployment benefits edged higher last week, the four-week average dipped lower, indicating that the labor market continues to improve.⁹

Oil prices drop as producers keep pumping. Crude oil experienced its biggest monthly drop since 2008 on signs that Middle East producers were continuing to pump at record levels despite concerns about a supply glut.¹⁰

 

Best Regards,

 

Kevin Kroskey

 

This article adapted with permission from Platinum Advisor Marketing Strategies, LLC

 

1 https://finance.yahoo.com/q/hp?s=%5EGSPC&a=06&b=1&c=2015&d=07&e=2&f=2015&g=d

http://finance.yahoo.com/q/hp?s=%5EDJI&a=06&b=1&c=2015&d=07&e=2&f=2015&g=d

https://finance.yahoo.com/q/hp?a=06&b=1&c=2015&d=07&e=2&f=2015&g=d&s=%5EIXIC%2C+&ql=1

2 http://www.zacks.com/commentary/52427/what39s-clouding-the-earnings-picture

3 http://www.zacks.com/commentary/52427/what39s-clouding-the-earnings-picture

4 http://www.reuters.com/article/2015/07/29/us-usa-fed-idUSKCN0Q30B420150729

5 http://www.cnbc.com/2015/07/30/first-reading-on-q2-us-gdp.html

6 http://www.foxbusiness.com/economy-policy/2015/07/31/week-ahead-july-jobs-report/?intcmp=bigtopmarketfeatures

7 http://www.foxbusiness.com/economy-policy/2015/07/31/consumer-sentiment-gauge-ticks-lower-in-july/

8 http://www.cnbc.com/2015/07/30/us-home-rental-prices-climb-again-in-june.html

9 http://www.foxbusiness.com/economy-policy/2015/07/30/weekly-jobless-claims-rise-less-than-views/

10 http://www.cnbc.com/2015/07/30/us-crude-slips-on-mixed-economic-data.html

 

2015 Second Quarter Report

Markets lost ground again last week after Greece technically defaulted on loan payments and edged closer to an exit from the Euro. For the week, the S&P 500 dropped 1.29%, the Dow lost 1.24%, and the NASDAQ fell 1.92%.¹  Despite the turmoil in Greece, international markets are still up more positively than the US market so far this year.  

 

What contributed to market performance last quarter?

 

Ongoing issues in Greece occupied a lot of headlines last quarter. Greece, which has struggled with debt and recession for years, has been in a standoff with its European creditors for weeks with no resolution in sight.

Direct exposure to Greece is not generally a concern. Greek exposure of other European Union countries amounts to approximately 3.5% of the euro-area GPD. European banks have limited exposure to Greece's debt, which is mostly to the European Central Bank (ECB) and Internationality Monetary Fund (IMF).

Yet markets do not like uncertainty. U.S. investors responded to the Eurozone turmoil with nervousness, worried about the possibility of financial contagion spreading from Europe to the U.S. Though Greece has technically defaulted on its debt obligations, we believe that financial markets are prepared for additional Greek drama and reactions will hopefully be short-lived.

 

Continued improvement in the labor market was a source of more positive investor sentiment last quarter. The June jobs report showed that the unemployment rate declined again to 5.3% and that the economy added 223,000 new jobs last month, bringing the total number of jobs created in the first half of the year to just over 1 million. ²

 

While the labor market is clearly making strides, it’s becoming clear that this is not your father’s recovery. Many available jobs are part-time only, wages are sluggish, and the workforce is smaller than it used to be, partly because of the vast numbers of Boomers heading into retirement. ³

 

On the positive side, the tepid report probably doesn’t give Fed chair Janet Yellen the “decisive evidence” of a jobs recovery she says she wants to see before raising interest rates this year. ⁴ The Fed spent most of the first half of 2015 emphasizing that it’s going to eventually have to raise interest rates to fight off inflation. Fortunately, Fed statements have repeatedly stressed the central bank’s intention to take a slow, cautious approach to rate hikes. Will we see a rate increase this year? Possibly. Most Wall Street experts seem to think that a September hike is in store. ⁵

 

What can we expect in the weeks ahead?

 

Greece will be on investors’ minds in the coming weeks as European leaders seek a resolution to the debt-ridden country’s financial crisis. However, some analysts don’t believe that a default will necessarily lead to an exit from the Euro.⁶

 

Investors will also be eagerly waiting for the first estimate of last quarter’s economic growth. After the dismal first quarter, in which economic growth ground to a halt, investors have pinned their hopes on a second quarter resurgence. Estimates of Q2 Gross Domestic Product growth are ranging between 2.0%-3.3%, showing that there are a lot of opinions out there on how the economy is doing. ⁷

 

What will earnings season bring?
 

By the trickle of earnings that we’ve seen so far, we can see that investors are being very unforgiving of low performers. Their attitude makes sense in light of how high markets have been running.
 

Could we see a pullback in the days and weeks ahead? Possibly. Is it the end of the world? Absolutely not. While it’s impossible to predict how markets are going to react to earnings season, Greece, or any other potential headwind, we want to emphasize that market corrections are a natural and expected phenomenon for any investor.

HEADLINES:

 

Greeks vote “No” on bailout. Greek voters rejected the historic bailout referendum, refusing to given in to pressure to accept further austerity cuts. The result paves the way for negotiators to try and get a better deal from European creditors. ¹⁰

 

China slips into bear market. The Shanghai Composite Index closed over 20% lower than its June 12 high, officially putting Chinese stocks in a bear market. Some analysts believe that China’s correction is unremarkable given the country’s economic struggles. ¹¹

 

Pending home sales reach multi-year high. The number of houses under contract rose to the highest level in over nine years in May, indicating that homebuyers may be taking advantage of a reprieve on higher interest rates. ¹²

 

Consumer confidence rises more than expected in June. A gauge of how optimistic Americans feel about their economic prospects soared last month, stoking hopes that spending may boost economic growth. ¹³

Best Regards,

 

Kevin Kroskey

 

This article adapted with permission from Platinum Advisor Marketing Strategies, LLC

[1] http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#{"range":"5d","allowChartStacking":true}
[2] Analysis of Bureau of Labor Statistics Data January 2015-June 2015 https://research.stlouisfed.org/fred2/series/PAYEMS/#
[3] http://www.foxbusiness.com/markets/2015/07/03/smaller-workforce-more-part-timers-job-market-unlikely-to-return-to-former/
[4] http://www.businessinsider.com/r-analysis-for-fed-a-muddled-jobs-report-even-as-us-employment-continues-to-expand-2015-7
[5] http://projects.wsj.com/econforecast/#qa=20150601000 (Accessed July 5, 2015)
[6] http://www.businessinsider.com/closing-bell-june-29-2015-6
[7] https://www.frbatlanta.org/cqer/research/gdpnow.aspx (Accessed July 5, 2015)
[8] http://www.zacks.com/commentary/49027/handicapping-the-q2-earnings-season
[9] http://www.zacks.com/commentary/49027/handicapping-the-q2-earnings-season
[10] http://www.foxnews.com/world/2015/07/06/greece-enters-uncharted-territory-after-referendum-no-vote/
[11] http://www.businessinsider.com/closing-bell-june-29-2015-6
[12] http://www.foxbusiness.com/markets/2015/06/29/pending-home-sales-rise-to-over-nine-year-high-in-may/
[13] http://www.foxbusiness.com/economy-policy/2015/06/30/consumer-confidence-jumps-past-expectations-in-june/

Market Commentary for the Week of May 25, 2015

What's the Big Deal Now in Greece?

U.S. markets ended the week on a down note as investors struggled with weak economic data and concerns about Greek debt negotiations. However, markets were able to end the month of May in the black. For the week, the S&P 500 lost 0.88%, the Dow dropped 1.34%, and the NASDAQ fell 0.38%. ¹

On Friday, we got a look at revised first-quarter gross domestic product (GDP) growth numbers, and we found out that the economy actually shrank 0.7 percent last quarter instead of growing.² The news wasn’t unexpected, as economists knew that the economy struggled with issues like a harsh winter, a port shutdown, and a strong dollar that ate away at U.S. exports. However, it’s unwelcome because it means that the economy still hasn’t reached escape velocity and the recovery may still be fragile.

Though we don’t have data on the spring quarter yet, many economists expect a significant rebound in economic growth. We’ve seen estimates ranging from 1.0 percent to 3.2 percent, so it’s clear that there’s a lot of room for debate.³ Markets also took a hit from stalled Greek debt negotiations. Greece is currently deadlocked in talks with creditors for a new round of loans needed to service its debt and make government payments. To give you a brief bit of history: Greece was at the center of the European debt crisis after financial markets imploded in 2008.⁴

To ward off a sovereign debt default, which might have touched off another European crisis, Greece accepted loans from European and international lenders in 2010. In exchange for the money, Greece agreed to institute austerity measures, massive cuts to government spending, designed to bring the national debt under control.

However, the cuts were deeply unpopular with Greek citizens, and a new leftwing Greek government elected in January rose to power on a wave of anger at the effects of austerity – rampant unemployment, brain drain, and low economic growth.⁵

What’s the big deal now? New Greek leaders refuse to reinstate austerity measures, and their creditors don’t want to extend more loans unless they meet their economic terms. If Greece doesn’t get another infusion of cash by its next debt deadline on June 5, the country will default on debt payments, which may trigger a banking crisis and possible exit from the European Union.⁶ Though the long-term effects of a “Grexit” (Greek exit) can’t be predicted, investors are likely to worry that where Greece goes, other countries may follow.

If Greece fails to reach an 11th-hour deal with its creditors this week, it’s likely that European and U.S. markets would react badly to the news. Let’s hope that this latest round of brinksmanship can be resolved; as always, we’ll keep you informed. The week ahead is also filled with domestic economic data, including the May employment report, which investors hope will show that the labor market continued its upward trend after a March blip.

ECONOMIC CALENDAR:

Monday: Personal Income and Outlays, PMI Manufacturing Index, ISM Mfg. Index, Construction Spending

Tuesday: Motor Vehicle Sales, Factory Orders

Wednesday: ADP Employment Report, International Trade, ISM Non-Mfg. Index, EIA Petroleum Status Report, Beige Book

Thursday: Jobless Claims, Productivity and Costs

Friday: Employment Situation

 

HEADLINES:

Consumer sentiment beats expectations though still weak. U.S. consumers remain cautious about the current state of the economy, leading some analysts to worry about consumer spending this quarter. ⁷

Durable goods orders fall. Orders for long-lasting factory goods fell in April, but the underlying data indicates that business spending is slowly picking up. Excluding volatile transportation orders, orders climbed 0.5%. ⁸

New home sales rise more than expected in April. Sales of newly constructed single-family homes surged in April, indicating that a housing sector resurgence may be underway. Hopefully, the strengthening job market will support sales activity. ⁹

Pending home sales looking up. A forward-looking indicator of U.S. home purchases rose in April for the fourth straight month in a very positive sign for the housing sector. The gauge rose 14% over April 2014, the highest level since May 2006. ¹⁰

 

 

Best Regards,

 

Kevin Kroskey

 

This article adapted with permission from Platinum Advisor Marketing Strategies, LLC

 

[1] http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#{"comparisons":"^DJI,^IXIC,^GSPC","comparisonsColors":"#cc0000,#009999,#ff00ff","comparisonsWidths":"1,1,1","comparisonsGhosting":"0,0,0","range":"ytd","showPrePost":false}

[2] http://www.marketwatch.com/story/us-gdp-turns-negative-in-first-quarter-again-2015-05-29

[3] http://www.marketwatch.com/story/us-gdp-turns-negative-in-first-quarter-again-2015-05-29

[4] http://www.nytimes.com/2015/04/09/business/international/explaining-the-greek-debt-crisis.html

[5] http://www.theguardian.com/world/2015/jan/25/greece-election-vote-austerity-leftwing-syriza-eu

[6] http://www.bloomberg.com/news/articles/2015-05-25/greece-points-to-june-imf-payment-as-next-cliffhanger

[7] http://www.foxbusiness.com/economy-policy/2015/05/29/consumer-sentiment-picks-up-in-may/

[8] http://www.foxbusiness.com/economy-policy/2015/05/26/durable-goods-orders-slip-match-views-in-april/

[9] http://www.foxbusiness.com/economy-policy/2015/05/26/new-home-sales-prices-rise-strongly-in-april/

[10] http://www.foxbusiness.com/economy-policy/2015/05/28/pending-home-sales-jump-more-than-expected-in-april/

April Monthly Market Commentary

THE MONTH IN BRIEF
U.S. stocks wavered in April but the S&P 500 ultimately finished up 0.96%. Yet international holdings outshone the U.S. and were up markedly with emerging markets racking returns of  7.69% and international developed equities 4.08%. Interest-rate sensitive markets were down for the month with global real estate losing 2.96% and fixed income losing 0.36% as interest rates went higher. (Note: there is a general inverse relationship between the movement of interest rates and the return on interest-rate sensitive markets.)

See below for a table of various index performance.

DOMESTIC ECONOMIC HEALTH
Was the economy doing well? Or not as well as commonly believed? Last month, two headlines emerged that affected investor perceptions.

 

For the first time in a year, the economy added less than 200,000 jobs in a month: payrolls grew by 126,000 in March according to the Labor Department. In addition, 69,000 hires were retrospectively subtracted from January and February hiring totals. The headline unemployment rate stayed at 5.5% in March, with “total” unemployment (the U-6 rate including the underemployed) at 10.9%.²

 

The federal government’s first estimate of Q1 GDP was just 0.1%. Analysts polled by MarketWatch had forecast 1.1% expansion. In Q4 2014, the economy grew 2.2%.³

 

Countering these news items, personal spending improved 0.4% in March while retail sales rose 0.9%. Although the Commerce Department reported no personal wage growth in March, word came that the federal government’s employer cost index rose 0.7% in Q1 (those costs include wages). Both the headline and core Consumer Price Index were up 0.2% for March.^3,4

 

News of rising oil prices and reduced hiring may have impacted consumer outlooks. While the University of Michigan’s consumer sentiment index rose 2.9 points in April to a mark of 95.9, the Conference Board’s consumer confidence index fell 6.2 points to 95.2.³

        

With energy costs rising, producer prices increased 0.2% for March, as opposed to the 0.5% retreat seen in February. After going negative for four straight months, headline durable goods orders increased by 4.0% in March.^4,6

 

The latest Federal Reserve policy statement acknowledged paltry Q1 growth and the disappointing March jobs report, yet Fed officials maintained their view that “economic activity will expand at a moderate pace” in the near term. In other words, an interest rate hike in mid-2015 was improbable but not impossible.⁷

            

GLOBAL ECONOMIC HEALTH
The odds of Greece making its upcoming €200 million payment to the International Monetary Fund seemed to lengthen, even with the IMF extending the deadline to May 6. The Syriza party announced it would stick to its commitment to fully fund Greek social welfare programs and termed the austerity measures implemented as part of the IMF bailout “crimes”. A Grexit could happen in May and the Greek economy – which has already endured the worst recession recorded in any country since the Great Depression – could sink further. As for the broad euro area, its jobless rate remained at 11.3% with consumer prices expected to be unchanged for April after a 0.1% dip for March.^8,9

   

In China, securities regulators discouraged margin lending in mid-April as small investors were borrowing dangerous amounts of money to buy stocks in a runaway bull market. New rules permitted fund managers to lend shares for short-selling, and investors were allowed to short a greater number of stocks. These developments prompted a brief global selloff on April 17.¹⁰

       

HSBC’s final April factory PMI for China showed contraction at 48.9, pointing to a distinct slowdown and perhaps a need for added stimulus. Markit’s April factory PMI for the euro area declined 0.2 points from its March level to 52.0.¹¹     

 

          

COMMODITIES MARKETS

Oil was the big story here. WTI crude ascended 25.86% during April, finishing the month at $59.63 on the NYMEX. Heating oil and unleaded gasoline saw respective gains of 15.62% and 15.60%. Additionally, April saw a 3.25% improvement in natural gas futures.¹³

 

      

REAL ESTATE
The housing market approached its busiest season with momentum. Existing home sales rose 6.1% for March with the annualized pace hitting an 18-month peak, the National Association of Realtors reported. Existing home prices were up 5.1% year-over-year according to NAR; the 20-city S&P/Case-Shiller home price index measured their annualized improvement at 4.2%. NAR’s pending home sales index followed its 3.6% February advance with a 1.1% gain for March.^3,15

   

Three other housing indicators went negative in March, however. New home sales fell 11.4%, but they were still up 19.4% compared to a year ago. The Census Bureau also found housing starts down 2.0% in March, and building permits down 5.7%; in annualized terms, starts were down 2.5% but permits up 2.9%.^16,17

    

Freddie Mac’s April 30 Primary Mortgage Market Survey found the average interest rate on a conventional home loan down just 0.01% from March 26 at 3.68%. Rates on 15-year FRMs declined 0.03% to 2.94% and rates on 5/1-year ARMs dipped 0.07% to 2.85%; rates on 1-year ARMs rose 0.03% to 2.49%.¹⁸

          

 

Best Regards,

 

Kevin Kroskey

 

This article adapted with permission from MarketingLibrary.net.

Citations.

1 - wsj.com/mdc/public/page/2_3023-monthly_gblstkidx.html [4/30/15]

2 - cleveland.com/business/index.ssf/2015/04/us_adds_only_126000_jobs_in_ma.html [4/3/15]

3 - marketwatch.com/economy-politics/calendars/economic [5/1/15]

4 - marketwatch.com/economy-politics/calendars/economic [4/17/15]

5 - instituteforsupplymanagement.org/ISMReport/NonMfgROB.cfm [4/6/15]

6 - investing.com/economic-calendar/durable-goods-orders-86 [4/24/15]

7 - marketwatch.com/story/federal-reserve-leaves-open-chance-of-june-rate-hike-2015-04-29 [4/29/15]

8 - telegraph.co.uk/finance/economics/11573909/Defiant-Greeks-hold-firm-over-bail-out-red-lines.html [5/1/15]

9 - ec.europa.eu/eurostat [5/4/15]

10 - reuters.com/article/2015/04/17/us-markets-global-idUSKBN0N801H20150417 [4/17/15]

11 - news.investors.com/investing-stock-market-today/050415-750789-stock-market-to-open-higher-monday.htm [5/4/15]

12 - msci.com/end-of-day-data-search [4/30/15]

13 - money.cnn.com/data/commodities/ [4/30/15]

14 - online.wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [5/1/15]

15 - nytimes.com/2015/04/23/business/economy/home-sales-jump-to-highest-level-in-18-months.html [4/23/15]

16 - forbes.com/sites/erincarlyle/2015/04/23/new-home-sales-plunge-11-4-in-march-but-are-up-nearly-20-year-over-year/ [4/23/15]

17 - tradingeconomics.com/united-states/housing-starts [4/16/15]

18 - freddiemac.com/pmms/archive.html [5/3/15]

19 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=4%2F30%2F14&x=0&y=0 [4/30/15]

19 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=4%2F30%2F14&x=0&y=0 [4/30/15]

19 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=4%2F30%2F14&x=0&y=0 [4/30/15]

19 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=4%2F30%2F10&x=0&y=0 [4/30/15]

19 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=4%2F30%2F10&x=0&y=0 [4/30/15]

19 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=4%2F30%2F10&x=0&y=0 [4/30/15]

19 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=4%2F29%2F05&x=0&y=0 [4/30/15]

19 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=4%2F29%2F05&x=0&y=0 [4/30/15]

19 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=4%2F29%2F05&x=0&y=0 [4/30/15]        

20 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [5/2/15]

21 - tinyurl.com/kq62aqk [5/2/15]
 

2015 First Quarter Report

The first quarter of the new year has brought us small positive returns in many of the U.S. and global indices and more than the usual amount of anxiety along with them. See below for common market benchmark performance.

 

 

If you were watching the markets day to day, you experienced a mild roller coaster, what trading professionals refer to as a sideways market.  One day it was up, the next down, each day (or week) seeming to erase the gains or losses of the previous ones.  The best explanation for this phenomenon is that investors are still looking over their shoulders at interest rates, waiting for bond yields to jump higher, making bonds more competitive with stocks and triggering an outflow from the stock market that could (so the reasoning goes) cause a bear market in U.S. equities. 

 

However, investors have been waiting for this shoe to drop for the better part of three years, and meanwhile, interest rates have drifted decidedly lower in the first quarter.  The Bloomberg U.S. Corporate Bond Index now has an effective yield of 2.93%.  30-year Treasuries are yielding 2.48%, roughly 0.3% lower than in December, and 10-year Treasuries currently yield 1.87%, down from 2.17% at the beginning of the year. 

 

This interest rate watch has created a peculiar dynamic where up is down and down is up in terms of how traders and stock market gamblers look at the future.  The generally positive economic news is greeted with dismay (The Fed will notice and start raising rates sooner rather than later!  Boo!) and any bad news sends the stock market back up again into mild euphoria (The Fed might hold off another quarter!  Yay!). 

 

The Fed’s future actions are inscrutable.  You will hear knowledgeable Fed-watchers say that the Fed will take action as early as June or as late as next year, and none of them really know.

 

We should all welcome the Fed pullback, not fear it.  A lot of the uncertainty among traders and even long-term investors is coming from anxiety over how this experiment is going to end.  The U.S. Central bank has directly intervened in the markets and in the economy, and is still doing so.  When that ends, normal market forces will take over, and we’ll all have a better handle on what “normal” means in this economic era.  Is there great demand for credit to fuel growth?  What would rational investors pay for Treasury and corporate bonds if they weren’t bidding against an 800-pound gorilla?  Would retirees prefer an absolutely certain 4.5% return on 30-year Treasury bonds or the less certain (but historically higher) returns they can get from the stock market?  These are questions that all of us would like to know the answer to, and we won’t until all the QE interventions have ended.

 

What DO we know?  Data shows that the U.S. economy is less dependent on foreign oil than at any time since 1987, and the trend is moving toward complete independence.  Oil—and energy generally—is cheaper now than it has been in several decades, which makes our lives, and the production of goods and services, less expensive.

 

Meanwhile, more Americans are working.  Figure 3 shows that the U.S. unemployment rate—at 5.5%—is trending dramatically lower and is now reaching levels that are actually below the long-term norms.  Unemployment today is lower than the rate for much of the booming ‘90s, and is approaching the lows of the early 1970s. 

 

And real GDP—the broadest measure of economic activity in the United States—increased 2.4% last year, after rising 2.2% the previous year.   America is growing.  Not rapidly, but slow growth might not be so terrible.  Rapid economic growth has, in the past, often preceded economic recessions, where excesses had to be corrected.  Slow, steady growth may be boring, but it’s certainly not bad news for the economy or the markets.

 

It has been said that people lose far more money in opportunity costs by trying to avoid future market downturns while the markets are still going up than by holding their ground during actual downturns.  And, in fact, in every case so far, the U.S. market has eventually made up the ground it lost in every bear market we’ve experienced.  The last trading day of the quarter looked bearish, as have many other gloomy trading days during this seven year bull market.  It seems like every week, somebody else has predicted an imminent decline that has not happened.  People who listened to the alarmists lost out on solid returns.  You filter out the good news at your peril.

To Your Prosperity,

Kevin Kroskey, CFP®, MBA
  

This article adapted with permission from Bob Veres.

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--
http://www.tradingeconomics.com/united-states/unemployment-rate
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://us.spindices.com/index-family/commodities/sp-gsci
Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/
http://www.bloomberg.com/news/articles/2015-04-01/u-s-oil-imports-from-opec-have-plunged-to-a-28-year-low
Aggregate corporate bond rates: https://indices.barcap.com/show?url=Benchmark_Indices/Aggregate/Bond_Indices
Aggregate corporate bond rates: http://www.bloomberg.com/markets/rates-bonds/corporate-bonds/
http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm