Kevin Kroskey's Market Commentary

Market Commentary for the Week of June 6, 2016

What Did the May Jobs Report Show Us?

Stocks closed the holiday-shortened week mixed, with some sectors losing ground while others gained after a disappointing May jobs report signaled that the economy may not be strong enough for the Federal Reserve to raise rates this month. For the week, the S&P 500 ended flat, the Dow lost 0.37%, the NASDAQ increased 0.18%, and the MSCI EAFE added 0.13%.[1]

On Friday, we got a look at how the labor market did in May. Analysts looked to the report to see whether the labor market would give the Fed the ammunition it needed to move at the June meeting. Here are a few things we took away:

Job growth disappoints…but it has happened before

The economy created just 38,000 new jobs last month, the worst showing since September 2010. The number of new jobs sharply missed expectations, which called for around 160,000 new jobs.[2] However, seasonal factors, like a massive Verizon worker strike, which took 34,000 workers out of the count, were at play and may have affected hiring numbers.[3]

The labor market has suffered temporary setbacks before. For example, in December 2013, the economy added a paltry 45,000 jobs; four months later, the economy gained 310,000 jobs. In March 2015, the labor market added just 84,000 jobs; in July, 277,000 new jobs were created.[4]

Labor market trends may slow job creation

The jobs report showed that the unemployment rate fell to 4.7%, the lowest since November 2007. However, much of the decrease occurred when jobseekers dropped out of the job search. As we approach full employment (some may argue that we’re already there), the effects of having fewer jobseekers begin to be felt by employers.

Employers who are hiring may struggle to find qualified candidates due to skill mismatches, a problem that’s likely to continue to affect certain industries.[5] These issues affect job creation in a “mature” labor market recovery.

Can the slower pace of hiring support the consumer spending the economy needs to grow? Perhaps, if wages continue to grow. Wages were up 2.5% in May as compared to a year ago, which is a better pace of growth than we have seen.[8] Another measure of wage growth favored by economists, the Employment Cost Index (ECI), shows that wages were up 2.4% (year-over-year) in the first quarter.[9] A third measure calculated by the Atlanta Fed shows a rosier 3.4% annual increase in hourly wages in April.[10] You can bet that the Fed will be looking at all three measures when deciding if wage growth is strong enough to support consumer spending this year.

The Fed may not raise rates in June

The weak report also may have reduced the odds of a June interest hike by the Federal Reserve, though some analysts think that other positive economic indicators might give the Fed the confidence to act. Right now, the market is pretty convinced the Fed won’t raise rates in June; one measure shows that the current market probability of a June hike is just 3.8%, while the probability of a July hike is 31.3%.[11]

Our view

Overall, does the weak May jobs report signal weakness in the U.S. economy?

Perhaps, though it’s far to soon to sound the alarm. Since other economic indicators like Gross Domestic Product growth, housing market activity, and personal spending all point to positive growth, it’s not likely that one weak report spells disaster for the economy.[12] Rather than fixate on a single piece of data, it’s more important to look at overall economic trends.

Looking ahead, we’re expecting investors to take stock of the dismal jobs report and perhaps hit the brakes on the three-month rally we’ve experienced. Summer tends to be a slow season for markets as many traders take time off and stocks can overreact to headlines. A small pullback in the weeks to come wouldn’t surprise us, though traders could also shrug off the report. While weak data always sidelines some investors, long-term investors should focus more on their goals and less on short-term market swings. As always, we’ll keep you
updated.

ECONOMIC CALENDAR:

Monday: Janet Yellen Speaks 12:30 PM ET, Janet Yellen Speaks 2:00 PM ET
Tuesday: Productivity and Costs
Wednesday: JOLTS, EIA Petroleum Status Report
Thursday: Jobless Claims
Friday: Consumer Sentiment, Treasury Budget

HEADLINES:

Motor vehicle sales slump in May. The latest data shows that fewer selling days and lower foot traffic hurt U.S. auto sales last month.[13]

Construction spending falls in April. Spending by construction firms on residential, government, and nonresidential projects declined, surprising economists who had expected a slight overall increase.[14]

Factory orders beat expectations. April orders for U.S. manufactured goods grew by the largest amount in six months, though much of the growth came from volatile commercial aircraft orders.[15]

Personal spending surges in April. Spending by American consumers grew more than expected while personal income increased in line with expectations, showing that consumer spending is off to a good start in the second quarter.[16]

To Your Prosperity,

Kevin Kroskey, CFP®, MBA

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

[i] http://www.foxbusiness.com/markets/2016/06/01/u-s-auto-sales-slumped-in-may.html
[2] http://www.foxnews.com/us/2016/06/01/us-construction-spending-tumbled-in-april.html
[3] http://www.foxcarolina.com/story/32132329/us-factory-orders-up-19-percent-in-april-best-in-6-months
[4] http://www.businessinsider.com/personal-income-and-spending-april-2016-5 [5] https://www.frbatlanta.org/cqer/research/gdpnow.aspx?panel=1 http://money.cnn.com/2016/05/25/investing/housing-market-economy-stocks/ http://www.cnbc.com/2016/05/31/us-personal-income-april-2016.html
[6] http://www.usatoday.com/story/money/business/2016/06/04/dismal-jobs-report-blamed-weather-trump-and-more/85364144/
[7] http://www.usatoday.com/story/money/business/2016/06/04/dismal-jobs-report-blamed-weather-trump-and-more/85364144/
[8] https://research.stlouisfed.org/fred2/graph/?g=4Dic
[9] http://www.businessinsider.com/average-hourly-earnings-growth-may-2016-2016-6
[10] https://research.stlouisfed.org/fred2/graph/?g=4DsD
[11] https://www.frbatlanta.org/chcs/wage-growth-tracker.aspx?panel=1 [Accessed June 4, 2016]
[12] http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
[13] http://finance.yahoo.com/q/hp?s=%5EGSPC&a=04&b=31&c=2016&d=05&e=3&f=2016&g=d
http://finance.yahoo.com/q/hp?a=04&b=31&c=2016&d=05&e=3&f=2016&g=d&s=%5EDJI%2C+&ql=1 http://finance.yahoo.com/q/hp?a=04&b=31&c=2016&d=05&e=3&f=2016&g=d&s=%5EIXIC%2C+&ql=1 https://www.msci.com/end-of-day-data-search
[14] http://www.cnbc.com/2016/06/03/the-us-may-have-actually-lost-jobs-in-may-economist-says.html
[15] http://www.businessinsider.com/verizon-strike-jobs-report-2016-6
[16] https://research.stlouisfed.org/fred2/graph/?g=4Dic

Market Commentary for the Week of May 2, 2016

As of Friday, the S&P 500 is on the second-longest bull market run in history, surpassing the 1949-1956 bull market that lasted 2,607 days. The longest bull market in history ran between 1987 and 2000, lasting nearly 4,500 days.[1]

After months of volatility and challenges on the horizon, can the bulls keep running?

In the pro-bull column, we have a few major points to consider:

Bull markets don’t just die of old age. History shows us that bull markets ended because of a variety of shocks like oil price spikes, recessions, bursting asset bubbles, geopolitical issues, and extreme leveraging.[2] While the past doesn’t predict the future, we should evaluate threats to market performance instead of worrying about birthdays.

Economic indicators support growth. Recessions have accompanied or presaged many previous bear markets. Currently, economic indicators like a growing job market, low gas prices, and a healthy housing market point to sustainable—though moderate—economic growth. Even when recession risks are higher this year, most economists don’t see an economic downturn in the short-term future.[3]

We have experienced healthy pullbacks. One of the markers of a bull market top is elevated investor optimism and unsustainably high stock valuations. Since the last S&P 500 market high in May of 2015, markets have retrenched several times as investors have taken stock of global risks to growth. We haven’t seen the irrational exuberance that often foreshadows a bear market turn.

In the pro-bear column, we also have some points to weigh in our thinking:

Threats to economic growth from China and Europe may prove too much for markets. We don’t know that we have seen the worst out of China, and a hard landing of the world’s second-largest economy would send ripples throughout the global economy that could threaten markets. Europe is grappling with political, economic, and security issues that could threaten the EU.

The Federal Reserve may bungle monetary policy. The Fed is performing a very delicate dance to bring interest rates closer to historic levels. Raise rates too fast and the economy could stumble; raise them too slowly and the Fed could leave itself unable to fight off another economic slowdown. A monetary policy misstep could trigger a market downturn.

Corporate profits may continue to fall. U.S. companies are struggling to find growth amid challenging global conditions; earnings declined year-over-year for the fifth quarter in a row last quarter, and continued weakness could cause investors to become bearish about U.S. stocks.[4]

Our view

The simple truth is that no one can predict market tops or bottoms; plenty of people say they can, but it’s all a matter of educated (or uneducated) guesswork. Instead of trying to call markets, what we do is take a look at expected returns for a multitude of asset classes and create portfolio strategies that align with our clients’ goals. We can assume that the current bull market will come to an end someday; to reach the #1 spot it would have to continue through 2021, and that’s a pretty big stretch.[5] Rather than worrying about when the end might come, we’ll adjust portfolio strategies as needed and prudently position our clients to meet the cash flows they need to meet their while managing risk.

If you have any questions about market strategies for volatile times, please give our office a call. We’d be happy to speak to you.

ECONOMIC CALENDAR:

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

HEADLINES:

Durable goods orders rise. March orders for long-lasting factory goods like airplanes, appliances, and electronics rebounded but grew less than expected, indicating the manufacturing slump isn’t over.[6]

Economy grew 0.5% in first quarter. Gross Domestic Product (GDP), the primary measure of overall economic growth, grew just 0.5% on an inflation-adjusted basis, showing that the economy slowed after the fourth quarter of 2015. GDP growth estimates will be adjusted as new data arrives.[7]

Consumer sentiment falls in April. One measure of consumer sentiment shows that Americans were less optimistic about their financial prospects last month. Falling sentiment could mean less consumer spending this quarter.[8]

Federal Reserve holds interest rates steady. The Fed’s Open Market Committee voted to keep rates where they are out of concern about slowing economic growth. Though rates could increase this summer, some think that the Fed will wait until December to hike.[9]

To Your Prosperity,

Kevin Kroskey, CFP®, MBA

This article adapted with permission from Platinum Advisor Marketing Strategies, LLC [1] http://money.cnn.com/2016/04/29/investing/stocks-2nd-longest-bull-market-ever/
[2] http://www.bloombergview.com/articles/2015-10-08/some-perspective-on-bear-markets
[3] http://money.cnn.com/2016/04/29/investing/stocks-2nd-longest-bull-market-ever/
[4] http://www.cnbc.com/2016/03/30/get-ready-for-a-rough-corporate-earnings-season.html
[5] http://money.cnn.com/2016/04/29/investing/stocks-2nd-longest-bull-market-ever/

[6] http://www.foxbusiness.com/markets/2016/04/26/march-durable-goods-orders-rise-less-than-expected.html
[7] http://www.foxnews.com/us/2016/04/28/us-gdp-growth-slowed-to-05-percent-rate-in-first-quarter.html
[8] http://www.foxnews.com/us/2016/04/29/us-consumer-sentiment-slips-in-april.html
[9] http://www.cnbc.com/2016/04/27/federal-reserve-rate-decision-latest-news.html

2016 First Quarter Report: The Bear That Was Not

The first quarter of the New Year has brought us small positive returns in many of the U.S. market indices, which means that investors survived the worst 10-day start to a calendar year ever for the U.S. stock market.

The easy call at the beginning of the year would have been to bail out when the markets were declining and sit out the widely predicted start of a painful bear market. However, 10% market declines are simply a part of normal market volatility, and anyone who lacks discipline and panic-sells is likely to miss the subsequent gains in addition to having a bad investing experience.

Since hitting their 2016 lows on February 11, the S&P 500 has gained roughly 10% in value while Emerging Markets nearly 17%. See below for total returns of widely used market indices.

This does not guarantee that there will be gains going forward, however. Half of the S&P 500 sectors are reporting declines in earnings per share this quarter over the same period last year, and a poll by the FactSet analysts suggests that seven out of the ten sectors will end the earnings season reporting declining earnings.

Meanwhile, interest rates have continued their volatility but have drifted downward over the quarter, leading to gains in bond portfolios. The 10-year U.S. treasury began the year at 2.28%, reached a low of 1.57% on February 11th, and stands at 1.79% as of quarter-end.

Part of the wind at the backs of stocks has come, yet again, from the U.S. Federal Reserve Board, which had originally signaled that it planned to raise interest rates four times this year. After its most recent meeting, the Fed is projecting just two interest rate hikes this year, and Fed Chairwoman Janet Yellen has clearly indicated that the Fed will remain cautious about disrupting the markets or the economy as it unwinds its various easing initiatives.

Another tailwind was provided by the falling dollar. In the first three months of the year, the dollar’s value against a basket of six major currencies fell 4.2% — a boon to international investments. (A weaker dollar has a positive currency impact for US-based investors holding international equities.)

In the U.S., employment growth has remained strong, with 215,000 new jobs added in March, above predictions of 199,000. Overall, the economy has added millions of jobs in the last two years. Wage growth continues to be low—up 2.3% today over a year earlier—but while that is discouraging for workers, companies and their stock values have been benefiting from relatively cheap labor.

Will the market go up or down from here? I once heard someone say the market always goes up except for short albeit sometimes extreme downturns. This certainly has been true of the history of the U.S. market.

We cannot predict the future; indeed, even the present is hard to understand. Our mission as investors is to hang on and allow the millions of workers who get up every morning and go to work to do what they do best: incrementally, hour by hour, day by day, week by week, grow the value of the companies we own with their efforts. Investors will spook and sometimes flee stocks, driving their prices down, but for the long-term, the returns on your investments are invisibly, inexorably driven by the underlying value that is created in the offices, cubicles and factory floors all over the world.

To Your Prosperity,

Kevin Kroskey, CFP®, MBA

Adapted with permission from BobVeres.com.

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--
International indices: http://www.mscibarra.com/products/indices/international_equity_indices/performance.html
Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/
http://www.marketwatch.com/story/most-stocks-rose-during-the-first-quarter-surprised-2016-03-31 http://www.marketwatch.com/story/2016s-first-quarter-was-a-curious-case-of-mr-hyde-dr-jekyll-2016-03-31?siteid=rss&rss=1
http://money.cnn.com/2016/04/01/news/economy/us-jobs-report-march/index.html?section=money_topstories

Market Commentary for the Week of February 29, 2016

Stocks End Higher for Second Week but Lower for February

Markets closed out another solid week of gains on the back of higher oil prices and some positive economic data. However, the month of February ended slightly negative with the S&P 500 at -0.13% and international markets also slightly negative. This marks three months in a row for the S&P 500 to finish negative.¹

Investors got their second look at fourth-quarter 2015 Gross Domestic Product (GDP) last week. The latest data shows that the economy grew 1.0% last quarter versus the 0.7% originally reported. Economists had forecast a drop in GDP growth to 0.4%, so the increase was a welcome surprise and helped tamp down recession worries.²

In another positive sign, consumer spending rose steadily in January and inflation increased closer to the Federal Reserve target of 2.0%. These encouraging indicators could support another rate hike since they bolster the growth picture for this year.³Though the Fed could technically raise rates at the next meeting in March, most economists don’t expect to see higher rates until June at the earliest.⁴

Though we expect volatility to continue over the next weeks and months, one contributor to volatility may be losing its grip. Over the last few months, U.S. equities have followed Chinese stocks over the edge, responding to worries about the health of the world’s second-largest economy. However, last week, though Chinese equities tumbled again, American stocks closed out the week positive. The divergence is a relief because it could indicate that the short-term connection between U.S. and Chinese markets is breaking down as investors return to fundamentals.⁵

Does this mean that what happens in China will cease to affect American investors? Probably not, but we can hope that investors stop worrying about every little twitch in China’s markets.

The week ahead holds more economic data, the highlight being the February jobs report that comes out on Friday. Based on the weekly gains reported so far, we’re expecting a solid showing and hoping for continued increases in wages, which could help boost consumer spending this year. Investors will be looking for signs that the domestic economy can withstand trouble abroad and hoping for signs of increased economic activity in the first quarter of 2016. Election-year politicking may add uncertainty when votes are tallied on Super Tuesday this year.

ECONOMIC CALENDAR:

Monday: Chicago PMI, Pending Home Sales Index, Dallas Fed Mfg. Survey
Tuesday: Motor Vehicle Sales, PMI Manufacturing Index, ISM Mfg. Index, Construction Spending
Wednesday: ADP Employment Report, EIA Petroleum Status Report, Beige Book
Thursday: Jobless Claims, Productivity and Costs, Factory Orders, ISM Non-Mfg. Index
Friday: Employment Situation, International Trade

HEADLINES:

New home sales fall sharply. Sales of newly built homes plummeted from a 10-month high in January. However, the fall seems to be largely because of unusually low activity in the West and the overall housing market appears to be healthy.⁶

Consumer confidence declines in February. A measure of how Americans feel about the economy fell last month as consumers grew more pessimistic about their financial prospects.⁷

Durable goods orders rise. New orders for long-lasting manufactured goods like electronics, appliances, and vehicles rose in January by the most in 10 months. The uptick in demand is a positive sign for the manufacturing sector this quarter.⁸

Jobless claims rise, but remain stable. The number of Americans filing claims for new unemployment benefits rose last week, but the overall trend remains positive. Continuing claims also fell, indicating that workers are finding jobs and moving off benefits.⁹

Best Regards,

Kevin Kroskey

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

1 http://finance.yahoo.com/q/hp?s=%5EGSPC&a=01&b=22&c=2016&d=01&e=26&f=2016&g=d

http://finance.yahoo.com/q/hp?a=01&b=22&c=2016&d=01&e=26&f=2016&g=d&s=%5EDJI%2C+&ql=1
http://finance.yahoo.com/q/hp?a=01&b=22&c=2016&d=01&e=26&f=2016&g=d&s=%5EIXIC%2C+&ql=1
2 http://www.cnbc.com/2016/02/26/us-q4-2015-revised-gdp.html
3 http://www.reuters.com/article/us-usa-economy-idUSKCN0VZ1RP
4 http://projects.wsj.com/econforecast/#qa=20160201001
5 http://www.cnbc.com/2016/02/25/are-chinese-stocks-losing-hold-over-us-markets.html
6 http://www.foxbusiness.com/markets/2016/02/24/new-home-sales-fell-sharply-in-january.html
7 http://www.foxbusiness.com/markets/2016/02/23/consumer-confidence-gauge-declines-in-february.html
8 http://www.foxbusiness.com/markets/2016/02/25/january-durable-goods-orders-rise-4-9.html
9 http://www.cnbc.com/2016/02/25/us-weekly-jobless-claims-feb-23-2016.html

Market Commentary

Fourth-quarter earnings season is in full swing and will continue to play a role in stock performance in the coming weeks. With reports in from 201 S&P 500 members, overall earnings are down 3.2% on 3.6% lower revenues from Q4 2014. The overall picture so far is one of growth challenges from a slowing global economy, a strong U.S. dollar, and weak commodity prices. However, despite the challenges, 72.5% of firms have been able to beat their earning targets, indicating that managers are doing a good job of managing expectations.²On the other hand, reports show that the headwinds that dogged earnings last year will affect performance in 2016 as well.

We also got our first look at fourth-quarter economic growth, which showed that the economy grew at a lukewarm 0.7% pace in the final months of 2015. Low consumer spending weighed on growth, suggesting that Americans are pocketing gasoline savings instead of spending them.³We certainly can’t fault folks for financially prudent behavior, but consumer spending accounts for 70% of economic activity. While we can attribute some of the slow economic growth to seasonal factors like an unusually warm winter, analysts will be closely watching data releases in the weeks ahead for signs of deeper weakness.

After meeting for the first time in 2016, the Federal Reserve declined to raise interest rates last week but gave no indication that it intends to abandon rate hikes later this year. Predictably, talking heads exploded on all sides. Some believe that the Fed made a mistake by not raising rates and giving markets more confidence in the economy. Others believe that the Fed is being appropriately cautious given the market turmoil and concerns about economic growth. What’s clear is that the Fed is telling investors: “We’re aware of the uncertainty and we’re keeping an eye on many indicators.”⁴

Bottom line: In our view, market volatility will remain with us for the foreseeable future.

Best Regards,

Kevin Kroskey

This article adapted with permission from Platinum Advisor Marketing Strategies, LLC
¹ http://finance.yahoo.com/q/hp?a=00&b=25&c=2016&d=00&e=29&f=2016&g=d&s=%5EGSPC%2C+&ql=1 http://finance.yahoo.com/q/hp?a=00&b=25&c=2016&d=00&e=29&f=2016&g=d&s=%5EDJI%2C+&ql=1 http://finance.yahoo.com/q/hp?a=00&b=25&c=2016&d=00&e=29&f=2016&g=d&s=%5EIXIC%2C+&ql=1
²http://www.zacks.com/commentary/69841/q4-earnings-season-all-around-growth-challenges
³ http://www.foxbusiness.com/markets/2016/01/29/weak-4q-gdp-temporary-dip-or-is-u-s-recession-bound.html
⁴ http://www.cnbc.com/2016/01/27/the-fed-holds-rates-unchanged.html
⁵ http://www.foxbusiness.com/markets/2016/01/26/consumer-confidence-edges-up-in-january.html
⁶ http://www.cnbc.com/2016/01/28/market-reacts-to-sharp-decline-in-durable-goods-orders.html
⁷ http://www.foxbusiness.com/markets/2016/01/28/weekly-jobless-claims-fall-by-16000.html

⁸ http://www.cnbc.com/2016/01/29/china-set-to-adopt-65-7-percent-growth-target-range-for-2016-sources.html

2015 In Review

Now that 2015 is in the rear-view mirror, let’s take a look at some of the factors that influenced markets last year. And while the S&P 500 was barely positive at 1.38%, many segments of the US market were negative in 2015 and a diversified 60/40 stock/bond investor ended up slightly negative as well at -0.98%.

See table below for performance of commonly used benchmarks. Recall benchmarks are hypothetical and have no investment fees considered.

The Federal Reserve Raised Interest Rates

After months of anticipation, the Fed finally pulled the trigger and raised interest rates in mid-December for the first time since 2006.² After years of near-zero rates to stimulate business spending and economic activity, the Fed is finally confident enough to raise rates to keep prices from rising too fast.

How will the Fed’s move affect bond yields? Short-term rates will likely start inching up, which we will hopefully see reflected in higher bond and CD rates, but long-term bonds are much harder to predict. Overall, bond yields should head higher if the Fed continues its stable, predictable process of raising rates.

Oil Plummeted to Historic Lows

2015 was another volatile year for oil prices and continued weakness highlighted concerns about global growth. At the end of December, Brent Crude closed at $37.08, down nearly 70% from a high of $115.19 in mid-June 2014.³ Weak global demand and high supply volume battered oil prices, even as the total number of oil rigs fell.

Cheap oil is a mixed bag for the market. On the one hand, it’s a win for consumers who benefit from low gasoline prices and cheaper goods; on the other hand, oil-producing countries, energy companies, and ancillary industries have been hard hit by prolonged lows in oil prices. Weak demand for oil is also seen as another sign of the global economic slowdown.

Global Jitters Contributed to Volatility & Pullbacks

As the U.S. continued to improve economically in 2015, markets were dogged by the realization that much of the rest of the world isn’t faring so well. It has become very clear that Europe, China, and many emerging markets are struggling with protracted economic weakness.

Emerging market economies like Brazil, Turkey, and South Africa benefited from years of low interest rates, during which investors flooded their markets looking for higher returns. Now that the easy money party is ending, these investors are pulling their money out. Emerging market countries are dealing with the one-two punch of higher interest rates (increasing their borrowing) and debts that are denominated in a strengthening dollar, making it harder to pay back existing loans.⁴

These global worries came to a head in August when the Chinese central bank shocked the world by devaluing the yuan.⁵ By making the Chinese currency cheaper against other currencies, central bankers hope to boost demand for Chinese goods. The move was widely viewed as an admission that the world’s second-largest economy is in trouble, and markets reacted by plummeting. Between August 10th and August 25th, the S&P 500 dropped over 11%, officially entering correction territory.⁶

However, markets didn’t stay there; investors quickly regained their optimism and bought the dip, sending the S&P 500 up nearly 9.5% by the end of the year.⁷ The lesson? Corrections are normal, healthy parts of the market cycle. While the sky can seem like it’s falling at times, taking a deep breath and looking at underlying fundamentals is key to avoiding emotional reactions.

The U.S. Economy Continued to Improve

Though the global economy struggled in 2015, the U.S. economy continued to do well, even after a rocky start to 2015. Though economic growth slowed, hampered by global headwinds, the economy turned out respectable second- and third-quarter growth. Though we don’t have fourth-quarter data yet, economists project that the economy grew 2.2% in the final three months of the year.⁸

The labor market also continued to make progress last year. Overall, the economy is projected to have gained 2.5 million new jobs in 2015 and trimmed the unemployment rate to 5.0%. After 2014’s 3.1 million new jobs, we can say that 2015 ends the best two-year period for the labor market since the dot-com boom days of 1998-1999. Though wage growth still isn’t spectacular, hourly earnings increased 2.3% over the year. ⁹

Comparing the jobs growth to the previous year’s total might suggest that the labor market growth slowed down in 2015. However, the rate of voluntary “quits” increased in 2015, indicating that people feel comfortable enough in their prospects to leave their jobs for greener pastures.¹⁰ All told, the labor market did a lot to boost the economy last year.

Headwinds and Tailwinds in 2016

While we have been largely optimistic about markets in past years, we’re shifting to a more guarded stance for 2016. Many of the headwinds that dragged on market performance last year are still with us; while the “plow horse” U.S. economy is projected to grow moderately this year, global challenges remain.¹¹

Overall, Wall Street is also cautious about stocks in 2016. A poll of top Wall Street analysts forecasted an average S&P 500 gain of 6.28% growth in 2016.¹² As always, it’s best to treat these predictions with caution as projections this early in the year are always nebulous. What we can do right now is take a look at fundamentals and think about how these factors might play out in market performance.

In the coming weeks, investors will be looking hard at fourth-quarter numbers to see how U.S. companies performed in the final months of the year. In the week ahead we’ll see the December jobs report and learn more about the Fed’s decision-making process around rates. We’ll also see whether higher interest rates affected demand for vehicle sales and other big-ticket items at the end of the year.¹³

As always, if you have any questions about markets or your personal situation, please give us a call. We are honored by the trust you place in us and look forward to serving you in 2016.

ECONOMIC CALENDAR:

Monday: PMI Manufacturing Index, ISM Mfg. Index, Construction Spending

Tuesday: Motor Vehicle Sales

Wednesday: ADP Employment Report, International Trade, Factory Orders, ISM Non-Mfg. Index, EIA Petroleum Status Report, FOMC Minutes
Thursday: Jobless Claims

Friday: Employment Situation

HEADLINES:

Consumer confidence rebounds in December. A measure of consumer optimism rose at the end of the year, indicating that the improving labor market is giving Americans more confidence in their prospects.¹⁴

Jobless claims jump sharply. The number of Americans filing new claims for unemployment benefits jumped by 20,000, likely because of seasonal holiday factors.¹⁵

Midwestern manufacturing slips. A measure of the manufacturing industry in the Midwest indicates that December activity fell to the lowest level since mid-2009. While seasonal factors could affect the data, it could indicate sustained weakness in the factory-heavy region.¹⁶

Puerto Rico makes bond payments. The U.S. territory, which has been struggling to make debt payments, will make full bond payments on its General Obligation (GO) bonds in January. ¹⁷

Best Regards, Kevin Kroskey