November Monthly Market Commentary

THE MONTH IN BRIEF
November brought a dizzying plunge in oil prices, confirmation of a recession in Japan and distinct hints of one in the euro area, and declines in the pace of manufacturing activity in America, Europe and China. Even so, the month was remarkably placid on Wall Street – unlike October, we didn’t see a lot of days marked by triple-digit Dow swings. The Dow, in fact, rose 2.52% on the month; many overseas benchmarks posted nice gains as well. Losses plagued the commodities sector. The latest GDP estimates out of Washington suggested our economy was in better shape than some analysts thought.¹

Key index performance is shown in the table below. 

 

DOMESTIC ECONOMIC HEALTH

By the estimate of the federal government, the second and third quarter of 2014 amounted to the best six months for the U.S. economy since 2003. The Commerce Department revised Q3 output up to 3.9%, complementing 4.6% growth for Q2.² 

Another key economic indicator improved further. The jobless rate had ticked down to 5.8% in October, with the U-6 rate (encompassing part-time workers, jobseekers and those out of the job hunt) falling 0.3% to 11.5%. Labor Department data showed companies adding 214,000 new hires to their payrolls in that month.^3,4    

While economists certainly found this encouraging, households weren’t feeling so upbeat. The Conference Board’s consumer confidence index fell to 88.7 from its October reading of 94.5; the University of Michigan’s consumer sentiment index did better, finishing November 1.9 points higher at 88.8.⁵

The Consumer Price Index was flat in October, and up just 1.7% year-over-year. Still, the tenth month of the year brought only modest gains for consumer spending (0.2%) and retail sales (0.3%). Total Black Friday sales were down 11% from 2013 levels, according to National Retail Federation estimates; this could have reflected online sales growth and more stores having deep discounts on Thanksgiving Day.^5,6

Declining gas prices across the month effectively put more money in consumers’ pockets, a factor that may lead to greater personal spending for November. By December 1, AAA’s Daily Fuel Gauge Report showed regular unleaded averaging just $2.77 a gallon.⁷

U.S. manufacturing activity cooled a bit in November, but our factory sector was still hotter than many others worldwide. The Institute for Supply Management’s November manufacturing PMI came in with a reading of 58.7, down from 59.0 in October. (ISM’s service sector PMI had slipped 1.5 points to 57.1 in October.) Overall durable goods orders rose 0.4% in October, but core durable orders fell 0.9%. The headline Producer Price Index was up 0.2% for October, but only 1.5% annually.^5,8,9

GLOBAL ECONOMIC HEALTH

Unexpectedly, Japan fell into a recession in Q3. Analysts surveyed by Reuters thought its economy would expand 2.1%; instead, there was a 1.6% contraction following a 7.3% reversal in Q2. This affirmed and underscored the Bank of Japan’s decision to ease for the foreseeable future.¹⁰

The euro area hadn’t slipped back into recession yet, but it was coming perilously close in the eyes of many economists. Its yearly inflation measured just 0.3% last month and its jobless rate was at 11.5%. European Central Bank President Mario Draghi said that ECB leaders would consider exceptional moves (such as buying sovereign debt) to ward off deflation. The Markit manufacturing PMI for the eurozone barely showed expansion for November with a 50.1 mark.^10,11,12

Word came that China’s economy had grown 7.3% in Q3, putting it on pace for its worst year since 1990. China’s official factory PMI came in a half-point lower in November at 50.3, and the HSBC/Markit PMI for the PRC showed no expansion for the sector at all with a reading of 50.0 that represented a 6-month low. Markit manufacturing PMIs in Indonesia and Japan also fell, but India’s rose to a 21-month high in November.^12,13

WORLD MARKETS
Generally speaking, November was a good month with many consequential indices advancing. Some of the gains in the Asia Pacific region: Sensex, 2.97%; KOSPI, 0.83%; Shanghai Composite, 10.85%; Nikkei 225, 6.37%; KSE 100, 2.70%. The Hang Seng was flat (-0.04% to be precise) while Australia's ASX 200 suffered a 3.86% retreat. Elsewhere in the Americas, the Bovespa had a flat month (+0.07%) while the TSX Composite rose 0.90% and the IPC All-Share lost 1.86%.¹

Major European indices saw the following November gains: CAC 40, 3.71%; DAX, 7.01%; IBEX, 2.80%; FTSE MIB, 1.17%; FTSE 100, 2.69%. Russia's RTS was the big November loser, retreating 10.74%.¹

As for multinational and regional benchmarks, the Global Dow rose 1.72% in November, the Europe Dow 2.71% and the Dow Jones Americas 1.91%; the Asia Dow lost 0.53%. Europe’s STOXX 600 bourse advanced 3.10% for the month. The MSCI World Index gained 1.84%, but MSCI’s Emerging Markets Index lost 1.12%.^1,14

COMMODITIES MARKETS
On November 28, OPEC ministers made no move to reduce oil output from their respective nations. That cemented an awful monthly loss for NYMEX crude – prices fell 18.23% for November to a settlement of $66.15 a barrel. Heating oil (-12.60%) and RBOB gasoline (-12.54%) were also crushed last month. The same couldn’t be said for natural gas; it rose 5.72% in November. Cold weather was not only a boon to natgas futures, but also an aid to wheat futures: they rose 8.74% for November, standing out in a field of losses among crops. Corn did advance 0.27%, but coffee dipped 0.90%, cocoa 0.69%, cotton 5.16%, sugar 2.87% and soybeans 2.59%.¹⁵

Gold didn’t fare too badly in November, losing only 0.54% and settling at a COMEX price of $1.175.20 an ounce at month’s end. Copper fell 6.43% on the month, platinum 1.35% and silver 3.24% (it wrapped up the month at $15.49 an ounce). The U.S. Dollar Index tacked on another 1.43% to its YTD gain and ended November at 88.16.^15,16

REAL ESTATE
The month’s last Freddie Mac Primary Mortgage Market survey (November 26) found the average interest rate for a 30-year FRM at 3.97%, down 0.01% from the October 30 survey. Rates on other types of home loans moved appreciably during the month. On November 26, the mean rates for the 15-year FRM, 5/1-year ARM and 1-year ARM were respectively at 3.17%, 3.01% and 2.44%; compare that with 3.13%, 2.94% and 2.43% on October 30.¹⁷

Home sales (new and existing) again improved to minor degree. The National Association of Realtors found resales up 1.5% in October – but most importantly, October brought the first year-over-year gain in sales (2.5%) seen in 12 months. Across a year of data, distressed sales had fallen to 9% of the market from 14%. (Not all the news from NAR was good; its pending home sales index fell 1.1% for October.) New home purchases increased in October as well – the Census Bureau measured a 0.7% gain, marking a third straight month of increasing sales volume.^5,18

NAR stated that the median existing-home price was $208,300 in October, down from $209,700 in September. September’s S&P/Case-Shiller Home Price Index showed only a 4.9% annualized gain (this was across the full 20-city index).^5,18

As for new projects, the Census Bureau also noted a 4.8% gain in building permits in November, with the indicator reaching a 6-year peak. A drop in multi-family projects sent overall housing starts down 2.8% in October, though single-family starts rose 4.2%.¹⁹

LOOKING BACK…LOOKING FORWARD
While the Russell 2000 had a flat month (actually losing 0.02% to 1,173.23), other major U.S. indices fared well in November, with the S&P 500 rising 2.45% to 2,067.56, the NASDAQ gaining 3.47% to 4,791.63 and the DJIA advancing 2.52% to 17,828.24. The CBOE VIX ended November at 13.33, sliding 4.99% for the month.¹

The fall earnings season, the waning fears about Ebola invading the U.S. and the ease with which Wall Street accepted the end of QE3 were factors in a very positive November. Will stocks continue to rally in December as energy investors wait for a point of capitulation? One view says cheap oil is good for the consumer, the broad economy and the stock market. Another view sees an extended lack of demand not only hurting energy shares, but also breeding unemployment and deflation. Eyes will also be on the Fed – as we are on the cusp of 2015, its December policy meeting might be a moment at which some clues emerge about the timing of an interest rate hike. Still, stocks don’t seem too beset by obstacles as we head toward the New Year, and with any luck, the December 31 close for the S&P 500 just might be a record one.  

UPCOMING ECONOMIC RELEASES: Here is a roll call of the important stateside reports and releases in the year’s final month: November’s ISM services PMI, a new Federal Reserve Beige Book and the November ADP employment report (12/3), November’s Challenger job-cut report (12/4), the November jobs report from the Labor Department and October factory orders (12/5), October wholesale inventories (12/9), November retail sales and October business inventories (12/11), the preliminary December consumer sentiment index from the University of Michigan plus the November PPI (12/11), November industrial production (12/15), November housing starts and building permits (12/16), a Fed policy statement and November’s CPI (12/17), the Conference Board’s leading indicator index for November (12/18), November existing home sales (12/22), the final estimate of Q3 GDP, the final December consumer sentiment index from the University of Michigan, and November new home sales, personal spending and hard goods orders (12/23), October’s Case-Shiller home price index and 2014’s last Conference Board consumer confidence index (12/30), and then finally NAR’s report on November pending home sales (12/31).

To Your Prosperity,

Kevin Kroskey, CFP®, MBA 

This article adapted with permission from MarketingLibrary.net.

Citations.

1 - online.wsj.com/mdc/public/page/2_3023-monthly_gblstkidx.html [11/30/14]
2 - nasdaq.com/article/us-thirdquarter-gdp-revised-up-to-39-advance-20141125-00467 [11/25/14]
3 - ncsl.org/research/labor-and-employment/national-employment-monthly-update.aspx [11/7/14]
4 - portalseven.com/employment/unemployment_rate_u6.jsp [11/26/14]
5 - investing.com/economic-calendar/ [11/26/14]
6 - tinyurl.com/p9lj9f4 [12/1/14]
7 - fuelgaugereport.aaa.com [12/1/14]
8 - ism.ws/ismreport/NonMfgROB.cfm [12/1/14] 
9 - ism.ws/ismreport/NonMfgROB.cfm [11/5/14]
10 - tinyurl.com/pxyju2p [11/17/14]
11 - epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ [12/1/14]
12 - reuters.com/article/2014/12/01/us-global-economy-idUSKCN0JF1AN20141201 [12/1/14]
13 - reuters.com/article/2014/11/20/us-global-economy-idUSKCN0J407V20141120 [11/20/14] 

14 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [11/30/14]

15 - money.cnn.com/data/commodities/ [11/30/14]16 - online.wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [11/30/14]
17 - freddiemac.com/pmms/archive.html [12/1/14]
18 - forbes.com/sites/erincarlyle/2014/11/20/existing-home-sales-rise-1-5-in-october-hit-fastest-pace-in-more-than-year-says-nar/ [11/20/14]
19 - bloomberg.com/news/2014-11-19/housing-starts-in-u-s-fall-on-multifamily-as-permits-climb.html [11/19/14]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=11%2F29%2F13&x=0&y=0 [11/28/14]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=11%2F29%2F13&x=0&y=0 [11/28/14]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=11%2F29%2F13&x=0&y=0 [11/28/14]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=11%2F27%2F09&x=0&y=0 [11/28/14]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=11%2F27%2F09&x=0&y=0 [11/28/14]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=11%2F27%2F09&x=0&y=0 [11/28/14]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=11%2F29%2F04&x=0&y=0 [11/28/14]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=11%2F29%2F04&x=0&y=0 [11/28/14]
20 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=11%2F29%2F04&x=0&y=0 [11/28/14]    
21 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [11/3/14]

October Monthly Market Commentary

THE MONTH IN BRIEF
Wall Street had a dramatic October, as investors grew anxious about the big Es: Ebola, Europe and easing (specifically, the end of QE3). Ultimately, stocks climbed higher with help from another big E: earnings. The S&P 500 advanced 2.32% for the month, pushing into record territory again. Many Asia Pacific stock indices posted solid gains; many European indices racked up October losses. It was a rough month for gold, silver, oil and many crop futures. Domestic indicators were mostly positive and made the U.S. look like a bright spot in the global economy. Sales picked up slightly in the housing market, and the stock market seemed to take the wrap-up of the Federal Reserve’s historic stimulus program in stride.¹

Key index performance is shown in the table below.

 

DOMESTIC ECONOMIC HEALTH
The initial Q3 GDP reading suggested that the economy was now on solid footing. The Bureau of Economic Analysis reported 3.5% expansion in Q3; that and the 4.6% growth of Q2 represented the best six months for the economy in more than a decade. Consumer spending was the question mark: it grew just 1.8% in Q3, and it actually retreated 0.2% in September, a month which also brought a 0.3% decline in retail sales. Some of the Q3 personal spending slowdown could be attributed to limited wage growth; personal incomes had grown by an unspectacular 2.0% in 12 months.^2,3  

 

Consumer confidence, on the other hand, kept improving. The Conference Board’s October index hit 94.5, and the University of Michigan’s consumer sentiment gauge had a final October reading of 86.9.^2,3

 

Thanks to 248,000 new hires, the U.S. jobless rate fell to 5.9% in September. America hadn’t seen such low unemployment since July 2008. The U-6 rate (unemployed + underemployed) dipped to a 71-month low of 11.8%.⁴

 

September saw no real pickup in consumer prices – just another 0.1% gain in both the headline and core Consumer Price Index. The annualized advance for both was just 1.7%. (Food prices, however, had risen 3.0% in 12 months.) Producer prices dipped 0.1% in September after being unchanged for August.^2,5

 

Speaking of production, September brought a 1.0% gain in factory output, although hard goods orders tailed off 1.3%. The 59.0 reading on the Institute for Supply Management’s October manufacturing PMI defied the forecast of analysts polled by MarketWatch, who had predicted a 0.1% decline from September to a mark of 56.5. (ISM’s non-manufacturing PMI fell a whole percentage point in September to 58.6.)^2,6 

 

Lastly, the month ended with the American Automobile Association forecasting the average U.S. gas price to dip under $3 a gallon in early November, a prediction that came true. On November 3, AAA had a mean nationwide price of $2.98 for regular unleaded, which had become 36¢ cheaper over a year.^7,8

 

GLOBAL ECONOMIC HEALTH

Just as the Fed halted its monetary stimulus, the Bank of Japan increased its asset purchase program. On Halloween, the BofJ said that it would boost its quantitative easing to 80 trillion yen a year from the current 50 trillion yen. The announcement gave a boost to global stocks and poised Japan’s currency for depreciation.⁷

 

Not all the news out of the Asia Pacific region was so encouraging. China’s economy was coming off its poorest quarter since 2008: its official GDP reading for Q3 was 7.3%, down from 7.5% in Q2 and the poorest measurement taken since Q1 2009. The country’s industrial output rose to 8.0% in September from 6.9% in August, perhaps a sign of a better number for Q4. The Chinese government’s manufacturing PMI declined 0.3 points to 50.8 for October, while the HSBC/Markit PMI for the nation came in at a slightly improved 50.4.^9,10

 

Was a recession imminent for the euro area? At month’s end, the European Central Bank had refrained from easing, even with the risk of deflation. Germany’s manufacturing sector grew slightly in October, but there was contraction in Italy and France and the overall Markit factory PMI for the eurozone was a tepid 50.6.¹⁰

 

WORLD MARKETS
European stock market investors lacked confidence in October: the month saw the Europe Dow lose 2.98%, the STOXX 600 1.83%, the FTSE MIB 5.30%, the CAC 40 4.15%, the DAX 1.56%, the RTS 2.87% and the FTSE 100 1.15%.¹

 

In Asia, key indices turned in much better performances. While Korea’s KOSPI retreated 2.76%, the Shanghai Composite gained 2.38%, the Nikkei 225 1.49%, the ASX 200 4.42%, and the Asia Dow 1.98%; the Sensex and Hang Seng both advanced 4.64%. In the Americas, the Bovespa gained 0.95%, the IPC All-Share 0.09% and the DJ Americas 1.98%. Up north, the TSX Composite slipped 2.32% for October.¹

 

Finally, the Global Dow lost 0.26% last month; the MSCI Emerging Markets Index rose 1.07% and the MSCI World Index advanced 0.57%.^1,11

 

COMMODITIES MARKETS

For the second straight month, big losses characterized this sector (select crops aside). Supply again outweighed demand for NYMEX crude: oil prices dropped 11.63% to $80.54 a barrel by Halloween. Other energy commodities were hit hard, too: heating oil slipped 5.11%, natural gas 6.35% and unleaded gasoline a whopping 16.94%. While copper moved 1.30% north on the month, silver retreated 5.44% and gold fell 2.94%; platinum futures lost 5.38%. Silver ended October at $16.11 an ounce, gold at $1,171.60 an ounce. The U.S. Dollar Index gained a little more in October. On September 30, it had settled at 85.94; on Halloween, it closed at 86.92 to go +1.14% for the month.^12,13  

With winter coming to northern climes, certain ag commodities had a great month. Wheat futures rose 10.04%, soybean futures 14.31% and corn futures 16.33%. Sugar advanced 3.36%. The major losses came in warm-weather crops: cocoa fell 11.96%, coffee 3.01%.¹²

REAL ESTATE
September saw a minor acceleration in purchases of both new and existing homes: the National Association of Realtors reported resales up 2.4% and the Census Bureau found a 0.2% monthly advance in sales of new residences. Year-over-year, new home sales had improved 17.0%. NAR’s pending home sale index rose 0.3% for September after falling 1.0% for August. As for home prices, the yearly gain in the S&P/Case-Shiller Home Price Index continued to moderate, lessening 1.1% to 5.6% in the August edition.^2,14

Markedly declining mortgage rates may have promoted an increase in home buying for October. On October 30, Freddie Mac had the average interest rate on a conventional home loan at 3.98%. In Freddie’s September 25 Primary Mortgage Market Survey, it was up at 4.20%. While the mean rate that Freddie measured for the 1-year ARM was 2.43% in both surveys, the 15-year fixed became cheaper in October with average interest rates falling to 3.13% from 3.36%, and so did 5/1-year ARMs with mean rates falling from 3.08% to 2.94%.¹⁵

As the housing industry said goodbye to another summer, the yearly rate of housing starts topped the 1 million mark again thanks to a 6.3% September rise in groundbreaking. The Census Bureau also noted a 1.5% gain in building permits for that month.¹⁶

To Your Prosperity,

Kevin Kroskey, CFP®, MBA 

This article adapted with permission from MarketingLibrary.net.

Citations.
1 - online.wsj.com/mdc/public/page/2_3023-monthly_gblstkidx.html [10/31/14]
2 - marketwatch.com/economy-politics/calendars/economic [10/31/14]
3 - bloomberg.com/news/2014-10-31/michigan-u-s-consumer-sentiment-index-rises-to-86-9-from-84-6.html [10/31/14]
4 - tinyurl.com/lynbsnf [10/3/14]
5 - 247wallst.com/economy/2014/10/22/september-cpi-avoids-deflation-fears/ [10/22/14]
6 - ism.ws/ismreport/NonMfgROB.cfm [10/3/14]
7 - foxbusiness.com/markets/2014/10/31/bank-japan-delivers-halloween-treat-for-wall-street/ [10/31/14]
8 - fuelgaugereport.com/ [11/3/14]
9 - forbes.com/sites/kenrapoza/2014/10/21/china-growth-party-over-but-large-investors-soldier-on/ [10/21/14]
10 - reuters.com/article/2014/11/03/us-global-economy-idUSKBN0IN0VF20141103 [11/3/14]
11 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [10/31/14]
12 - money.cnn.com/data/commodities/ [10/31/14]
13 - online.wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [11/3/14]
14 - csmonitor.com/Business/new-economy/2014/1024/New-home-sales-inch-up-to-a-six-year-high-in-September [10/24/14]
15 - freddiemac.com/pmms/archive.html [11/3/14]
16 - nasdaq.com/article/dollar-gains-ground-on-upbeat-consumer-sentiment-data-cm403255 [10/17/14]
17 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F31%2F13&x=0&y=0 [10/31/14]
17 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=10%2F31%2F13&x=0&y=0 [10/31/14]
17 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=10%2F31%2F13&x=0&y=0 [10/31/14]
17 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F30%2F09&x=0&y=0 [10/31/14]
17 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=10%2F30%2F09&x=0&y=0 [10/31/14]
17 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=10%2F30%2F09&x=0&y=0 [10/31/14]
17 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=11%2F1%2F04&x=0&y=0 [10/31/14]
17 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=11%2F1%2F04&x=0&y=0 [10/31/14]
17 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=11%2F1%2F04&x=0&y=0 [10/31/14]       
18 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [11/3/14]
19 - tinyurl.com/p7stlxc [10/31/14]

2014 Third Quarter Market Review

You could say that the markets took a breather in the third quarter of 2014, but you would come to that conclusion only if you looked at the overall returns and ignored the drama of the past 30 days.  The markets experienced a difficult month of September, giving up some of the gains from the prior eight months and causing investors to worry that we’re about to experience more of the same.  The end of the month was especially difficult, with a general market slide starting September 22, and some indices dropping more than 1% on the final day. 

Key index performance is shown in the table below.

The Wilshire 5000--the broadest measure of U.S. stocks and bonds--rose a meager 0.37% for the third quarter even as it lost 1.71% in September.  But the index is hanging on to a 7.26% gain for the year. 

 

Large cap stocks were the market leaders over the past three months, but the gains were modest.  The news was less happy for smaller stocks.  Small company stocks, as measured by the Russell 2000 Index fell 7.60% in the third quarter, representing its worst quarter in three years. 

 

The rest of the world put a drag on diversified investment portfolios.  The broad-based EAFE index of companies in developed economies fell 3.84% in dollar terms during the third quarter of the year, and is now down 1.38% so far in 2014.  The stocks across the Eurozone economies contributed to the foreign stock slide, but the red ink spilled over to most of the foreign indices in Asia as well.  
 

Looking over the other investment categories, real estate investments, as measured by the Wilshire REIT index, fell 2.54% for the quarter, but the index is standing at a robust 15.08% gain for the first three quarters of the year.  Commodities, as measured by the S&P GSCI index, fell 12.46% this past quarter, and now sit at a loss of 7.46% for the year.

 

The expected rise in bond rates never materialized, confounding the experts yet again.  The Barclays aggregate bond index has return 4.10% year-to-date. The Bloomberg U.S. Corporate Bond Index now has an effective yield of 3.07%, while Treasury rates held steady.  30-year Treasuries are yielding 3.20%, and 10-year Treasuries currently yield 2.50%.  At the low end, 3-month T-bills are still yielding a miniscule 0.02%; 6-month bills are only slightly more generous, at 0.04%.

 

Nobody seems to have a convincing explanation for the recent stock market slump.  The economy still seems to be pushing along in a long slow, steady growth process, and corporate earnings are well-above historical averages.  Oil prices are at their lowest level since November 2012, consumer spending has rebounded, and although the Fed will cease its bond purchases this month, there is no indication that it is going to sell its inventory back on the market, and its policymakers are projecting low interest rates well into 2015.  Corporate cash at larger corporations is near an all-time high.

 

But pullbacks don’t always reflect reality.  They are also affected by the sentiment of investors--in other words, human emotions and a crowd (or herd) mentality.  Investors seem to be worried that stocks are overdue for a correction, and if these things operated on a schedule, they would be right.  We are in the fourth-longest bull market since 1928, without having experienced even a small 10% correction since 2011.  The Conference Board reported that U.S. Consumer Confidence slipped dramatically, and unexpectedly, in September, lending some credibility to the surmise that the investing herd has been startled--and their expectations appear to be creating market reality.

 

Does that mean we should take action?  Unfortunately, nobody knows whether the markets are poised to act on the good economic news and move up, or are ready for another fearful selloff that would finally deliver that long-delayed correction.  History tells us that it’s a fool’s game to try to anticipate market corrections, and that investors usually get rewarded for sailing through choppy waters, rather than jumping off the ship when the waves get higher.

 

You can’t know in which direction the markets will experience their next 10%, 20% or 30% move.  But unless you believe the world is about to end, you do know, with some degree of certainty, in which direction it will make its next 100% move. 

Now is a good time to re-examine your expectations for investment returns and always be mindful of your planning and when you'll need money. The purpose of your investment portfolio is to make your financial life plan work and meet the cash flows you and your advisor define.

If you have a plan in place, you're much more likely to behave rationally and proactively than react in an unprudent manner to bad news.

 

 

To Your Prosperity,

 

Kevin Kroskey, CFP®, MBA 

 

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://money.cnn.com/2014/09/30/investing/stocks-market-september-slump/index.html
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://blogs.marketwatch.com/thetell/2014/06/30/one-chart-explains-the-unexpected-first-half-treasury-rally/
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/

August Monthly Market Commentary

THE MONTH IN BRIEF

August was a good month for stocks. The S&P 500 surpassed 2,000 while logging a 3.77% monthly advance. Even with ISIS controlling parts of Iraq and Syria and Russia possibly conducting a stealth invasion of Ukraine, Wall Street retained its optimism. The rally in stocks wasn’t matched by gains for oil and gold and the housing market was cooler than it was last summer. Most U.S. indicators signaled a healthier economy, perhaps one strong enough to motivate the Federal Reserve to raise interest rates a bit sooner than forecast.

Key index performance is shown in the table below.

 

 

DOMESTIC ECONOMIC HEALTH

Commerce Department data showed consumer spending unexpectedly ticking down 0.1% in July, even with personal wages rising 0.2% - and seasonally adjusted retail sales were also flat. If households were retaining more of their incomes than expected, they were also more confident in August than they had been the previous month. The Conference Board’s August consumer confidence index hit 92.4 (blowing past the Briefing.com forecast of a descent to 88.0) and the University of Michigan’s consumer sentiment index ended August with a climb to 82.5.^2,3

The latest Consumer Price Index showed inflation running right at the Fed’s target: an annual increase of 2.0%, with a July gain of 0.1%. (The core CPI was up 1.9% in a year and 0.1% in July.) Wholesale prices also rose 0.1% in July, putting the year-over-year increase at just 1.7%.^4,5

American manufacturing was clearly very healthy this summer. The Federal Reserve announced a 1.0% July increase in factory production (the best month for the indicator since February) with an impressive 10.1% July jump in car manufacturing (a 5-year peak). Thanks to a huge request for new planes at Boeing, overall hard goods orders improved 22.6% in July.^5,6 

Indeed, the Institute for Supply Management’s August factory PMI affirmed the Fed’s findings: it reached 59.0, the best reading since March 2011. Weeks prior, ISM’s service sector PMI had come in at 56.0, up 1.6 points from June.^7,8

Perhaps the best news of all was the pace of hiring. In July, U.S. employers added more than 200,000 jobs for a sixth straight month. That hadn’t happened in 17 years. Another good thing about July’s 209,000 new hires: according to Labor Department data, 47,000 entered business and professional positions.⁹

Finally, second quarter growth was judged even better than previously thought. Toward the end of August, the Commerce Department revised Q2 GDP from 4.0% to 4.2%. Capital spending was up 8.4% during the quarter.¹⁰

GLOBAL ECONOMIC HEALTH

Had Russia invaded Ukraine under the pretense of offering humanitarian aid? If so, the economic reaction to that incursion was still relatively localized. At the end of the month, NATO reported it had footage of Russian combat units operating within Ukraine’s borders – and still, U.S. stocks seemed unaffected. Sanctions imposed on Russia did perhaps affect the eurozone Markit PMI, which ticked down to 50.7 in August.^11,12 

China’s HSBC factory PMI flirted with contraction at 50.2 – not exactly encouraging news from the globe’s top market for commodities. The PRC’s official PMI was at 51.1 last month, underneath July's 51.7 mark. Japan’s PMI increased 1.7 points last month to 52.2.¹²

Markets also took the threats posed by ISIS in stride in August. Fears of oil output being presently disrupted in Iraq were muted. Even though the largest exporter of energy supplies outside the Middle East – Russia – was in a conflict of its own, there was no leap in energy prices. In part, that can be attributed to record output from the U.S. and reduced demand given the eurozone’s lingering recession and China’s economic engines revving down slightly this year.¹³

WORLD MARKETS

In terms of indices, some of the best August performances occurred in the Americas. Brazil’s Bovespa jumped 9.78% and Argentina’s MERVAL soared 19.90%. Mexico’s IPC All-Share rose 4.13% while Canada’s S&P/TSX Composite gained a mere 1.92%. The major European national bourses also recorded advances – 0.67% for the DAX, 3.18% for the CAC 40, 1.33% for the FTSE 100. In the Asia Pacific region, benchmarks were up and down in August – losses of 1.26% for the Nikkei 225 and 0.37% for the Kospi, gains of 2.87% for the Sensex, 2.71% for the PSE and 0.71% for the Shanghai Composite. Vietnam’s VN-Index notably advanced 6.81% last month. The Hang Seng and S&P/ASX 200 respectively posted tiny August losses (0.06% for the former, 0.12% for the latter).¹

COMMODITIES MARKETS

Last month, cotton went +8.87% to register the biggest gain among major commodities. Soybeans went -10.93% to rack up the largest August loss. As for the rest of the ag futures, the month played out like this: wheat, +3.40%; corn, +0.98%; cocoa, + 1.25%; coffee, -0.89%; sugar, -5.89%.¹⁵

As for metals, gold managed a 0.31% August gain, yet silver lost 5.76%, platinum 2.85% and copper 2.76%. Gold ended the market month at $1,287.40 on the COMEX, silver finishing at $19.49. Turning to the buck, the U.S. Dollar Index gained 1.58% to settle at 82.75 on August 29. Oil slid 1.85% for August; at the close on August 29, NYMEX crude was worth $95.96 per barrel. Heating oil retreated 0.95% last month while unleaded gasoline lost 1.40%; natural gas futures certainly looked good, rising 6.69%.^15,16

REAL ESTATE

Annual home price gains were clearly leveling off, with the 20-city Case-Shiller home price index showing an 8.1% yearly gain in its June edition compared to 9.4% a month earlier. The National Association of Realtors announced a 2.4% rise in residential resales for July plus a 3.3% increase in pending home sales. New home buying was down 2.4% for the month, according to the Census Bureau.^2,8

July brought a lot of groundbreaking. According to Census Bureau data, housing starts increased 15.7% for the month, and there was also an 8.1% rise for building permits.⁸

Conventional home loans got a touch cheaper during August, with Freddie Mac calculating the average interest rate on the 30-year FRM at 4.10% in its August 28 Primary Mortgage Market Survey. That compared to 4.12% on July 31. Interest rates for 5/1-year ARMs also declined from 3.01% to 2.97% in that period. Average interest rates on the 15-year FRM (3.23% to 3.25%) and 1-year ARM (2.38% to 2.39%) increased in that stretch.¹⁷

LOOKING BACK…LOOKING FORWARD

Though the headlines carried news of some fairly significant geopolitical crises in August, Wall Street wasn’t all that anxious about them. One telling sign is the S&P rising to an all-time record; another is the CBOE VIX, the so-called “fear index,” closing down at 11.98 on August 29 (the final market day of the month).¹

While the VIX sank 29.32% in August, the key U.S. stock indices all gained 3% or more. The Nasdaq rose 4.82%, the Russell 2000 4.85%, and the Dow 3.23%. At the close on August 29, the S&P settled at 2,003.37, the DJIA at 17,098.45, the NASDAQ at 4,580.27 and the RUT at 1,174.35.1

UPCOMING ECONOMIC RELEASES: The rest of September presents the following reports and announcements: ISM’s August services PMI, the August ADP employment report and the August Challenger job cuts report (9/4), the Labor Department’s August jobs report (9/5), July wholesale inventories (9/10), July business inventories, August retail sales and the University of Michigan’s initial September consumer sentiment index (9/12), August industrial production (9/15), the August PPI (9/16), the latest Federal Reserve policy statement and the August CPI (9/17), August housing starts and building permits (9/18), the Conference Board’s August leading indicator index (9/19), August existing home sales (9/22), August new home sales (9/24), August durable goods orders (9/25), the final estimate of Q2 GDP and the final September consumer sentiment index from the University of Michigan (9/26), August pending home sales and personal spending (9/29), and finally the July Case-Shiller home price index and the Conference Board’s September consumer confidence index (9/30).

 

 To Your Prosperity,
 

Kevin Kroskey, CFP®, MBA 

This article adapted with permission from MarketingLibrary.net.

Citations.
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3 - foxbusiness.com/economy-policy/2014/08/13/us-retail-sales-basically-flat-in-july-recent-job-growth-fails-to-boost/ [8/13/14]
4 - reuters.com/article/2014/08/19/us-usa-economy-inflation-idUSKBN0GJ15U20140819 [8/19/14]
5 - reuters.com/article/2014/08/15/us-usa-economy-prices-idUSKBN0GF11G20140815 [8/15/14]
6 - marketwatch.com/story/durable-goods-orders-jump-226-in-july-on-boeing-contracts-2014-08-26 [8/26/14]
7 - ism.ws/ismreport/mfgrob.cfm [9/2/14]
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18 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=8%2F30%2F04&x=0&y=0 [8/29/14]        
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20 - marketwatch.com/story/heres-what-history-says-about-the-stock-market-in-september-2014-08-29 [8/29/14]