July Monthly Market Commentary

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

 

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

   

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

  

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

 

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

 

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

 

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

   

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

    

COMMODITIES MARKETS

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

   

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

 

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

        

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

   

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

 

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

MONTHLY QUOTE

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

To Your Prosperity,

Kevin Kroskey

This article prepared in conjunction with Peter Montoya.

Citations.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2012 First Half Market Commentary

For those who watch the investment markets, the first half of 2012 was a strange and somewhat harrowing experience.  The first four months of the year saw American stocks zoom upward by almost 10 percentage points, building on one of the best January performances in history.  Then came May, when the Wilshire 5000--the broadest index of U.S. stocks--gave back 6.22% of its value.  June was a muddle--until the final day of the month, when The Wilshire 5000 gained back 2.53% in a single trading day and essentially saved the quarter from being considered a total disaster.  On the same day, the S&P 500 gained 2.49% and the Nasdaq exchange was up 3.00%.

If there is a lesson here--and the markets are always teaching us new ones--it is that the drops, and the rises, take us by surprise, and are almost impossible to predict.

Let's take stock of the past quarter, and look at where we are after the first half of 2012.  Overall, the Wilshire 5000 fell 3.13% for the second quarter, but it's still up 9.22% for the year.  The comparable Russell 3000 index fell 3.15% during the second quarter, but rose 3.92% in June, and is up 9.32% for the year.

The other stock market sectors moved in a very similar pattern.  Large cap stocks, represented by the Wilshire U.S. Large Cap index, fell 3.11% for the quarter, but are posting a 9.15% overall gain in the first half of 2012.  The Russell 1000 large-cap index fell 3.12% for the second quarter, but is up 9.38% for the first half of the year.  The widely-quoted S&P 500 lost 3.29% in the same time period, but is up 8.31% this year.

The Wilshire U.S. Mid-Cap index was the biggest quarterly loser, down 5.71% in the second three months of the year, but it, too, has posted an overall gain so far this year, at 5.93%.  The Russell midcap index dropped 4.40% in the recent quarter, but is up 7.97% so far this year.

The Wilshire U.S. Small-Cap index dropped 3.33% in the three months ending June 30, but ended the first half up 9.54%.  The Russell 2000 small-cap index lost 3.47% in the three months ending January 30, but is up 8.53% for the first six months of 2012.  The technology-heavy Nasdaq Composite Index lost 5.06% in the second quarter, but was up 3.81% in June, and has a 12.66% gain for the year.

Although energy stocks are down 3.37% for the year, as a result of falling oil prices, other sectors are posting significant gains.  Telecommunication services stocks are up 13.34% for the year, while information technology stocks have posted a 12.71% gain, even though they fell 6.96% during the second quarter.  Financial stocks are up 12.63% and Consumer Discretionary stocks have gained 12.06%.

Internationally, the broad-based EAFE index of developed economies fell 8.37% for the quarter despite a 6.79% gain in the past month.  For the year, the index is up a scant 0.77%.  Not surprisingly, the weakest component is EAFE's Europe index, down 9.11% for the second quarter, down 0.12% so far this year.

The EAFE Emerging Markets index of lesser-developed economies fell 10.00% in the second quarter, but is up 2.29% for the year.  The bloodiest quarter was experienced by the Eastern European EM countries, down 15.03% in the three months ending June 30, but still up 0.38% for the year.

Commodities are generally down for the year, with the S&P GSCI index falling 12.38% in the second quarter, down 7.23% so far this year.  The hardest-hit: energy (mostly oil) down 17.05% for the quarter, down 10.98% so far in 2012.

On the bond side, U.S. Treasuries remained at rock-bottom yields.  The 12-month T-Bond yields just 0.20%.  Locking up your money for three years gets you 0.39% a year.  Ten-year issues yield 1.64%, and 30-year Treasuries bring a 2.75% annual coupon yield.  Muni bonds are even lower, with yields of 0.211% (1-year), 0.343% (2-year), 0.808% (5-year) and 1.922% (10-year), while the aggregate of all AAA corporate bonds is yielding 1.14% for bonds with a five-year maturity. 

It is worth looking at what led to the sudden jump in investor enthusiasm for stocks on the very last day of the quarter, and see whether we should be feeling the same exuberance as the general public.  The market jumped on preliminary news that a late night round of negotiations among the Eurozone leaders had led to a "breakthrough" (as the news reports called it).  Over the weekend following these news reports, we have learned more details: the European leaders have decided that instead of lending more money to the Spanish government, and possibly eroding its already shaky creditor status, they will inject bailout funds directly into Spanish banks.  In addition, the leaders agreed to use the bailout funds set aside in the European Financial Stability Facility and the European Central Bank "in a more flexible manner" in order to stabilize the Eurozone markets.  Finally, the leaders announced plans to create a 120 billion euro fund to stimulate growth across Europe and create jobs.

All of these moves represent at least a quarter-degree turn from previous policies.  Giving money directly to the Spanish banking system avoids a negative feedback loop where lending to the government simply burdens it with more debt and causes investors to demand cripplingly high interest rates on Spanish government bonds.  Making the bailout funds more flexible seems to be a concession by German government leaders, who wanted any bailouts to be accompanied by austerity measures in the receiving country, which has, so far, weakened every economy that agreed to it.  The growth funds seem to be a step in the same direction, away from austerity toward promoting growth and employment--which avoids the negative feedback loop of austerity causing economic hardship, leading to declines in GDP, leading to lower tax revenues, leading to deeper fiscal deficits, which is what the bailouts were intended to alleviate.

However, as investors read the fine print, they will notice that the newly-flexible bailout funds amount to about 500 billion euros, compared with roughly $2 trillion in potentially distressed government debt.  It is possible that some of the enthusiasm generated on the last day of the first quarter will have evaporated within the week, following a well-worn path of enthusiasm followed by panic that investors who are paying attention will have already grown tired of.

Meanwhile, there is some cause for concern in the U.S. economy, which has recently seen the kind of good news that should be put into better perspective.  The number of Americans filing for first-time unemployment benefits fell to 386,000 for the week ending June 23, down from 392,000 the previous week.  But the four-week average fell by just 750, meaning that if you look past the headlines, an economist would have trouble discerning a trend in the data.  Similarly, home prices in the 20 largest U.S. cities rose 1.3% in value in April, based on the S&P/Case-Shiller Home Price indices.  But this, too, calls for some perspective: the rise only brings home prices to levels seen in early 2003.

Is there a pattern here?  Investors have been led to believe that the global situation, and the U.S. economic trends, were worse than an objective view might indicate, and then, in one day, they were suddenly seeing unexpected positive news that may have been overhyped.  The truth is that Europe is still working its way out of a crisis, and many analysts are still predicting a recession in the Eurozone this year.  The U.S. has been on a slow recovery path, and it is not easy to predict its progress beyond feeling grateful that the situation is not as dire as we see in Greece, or as unsettling as what we're seeing in Spain.

The most truthful thing one can say is that these sharp turns in the market--in May, on the last day of June--are not driven by any change in the intrinsic value of stocks, or any interruption in the actions of millions of workers who are daily building stronger, more profitable franchises throughout the global economy.  The lurches of the roller coaster represent emotional responses by skittish investors who want to jump into or out of the markets based on headlines that usually seem to overstate the case on the upside and the downside.

So far, 2012 has been a very bumpy ride, and has certainly been scary at times.  But from a real investor's point of view, behind all the sturm and drang, the first half of the year has seen unusually positive growth in the markets.  We cannot predict what the second half will bring, any more than we can predict what the weather will be at a certain date in October or December.  Remaining steadily invested and paying as little attention as possible to the shrill voices of our increasingly frantic news outlets has been a solid strategy so far this year, and has generally worked out well for investors over time. 

2012's second half will undoubtedly bring us more surprises.  It will force us to remember that we are not investing in current events, but in the far more boring, far more significant daily work and effort of the people who get up each morning and contribute to the growth of our global economy and the growth of the businesses they work for--the companies that we, together, are invested in.

To Your Prosperity,

Kevin Kroskey

This article prepared in conjunction with Bob Veres.

Wilshire index data: http://www.wilshire.com/Indexes/calculator/
Russell index data: http://www.russell.com/indexes/data/daily_total_returns_us.asp
S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--
Nasdaq index data: http://quicktake.morningstar.com/Index/IndexCharts.aspx?Symbol=COMP
International indices: http://www.mscibarra.com/products/indices/international_equity_indices/performance.html
Commodities index data: http://www.standardandpoors.com/indices/sp-gsci/en/us/?indexId=spgscirg--usd----sp------
Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/
Aggregate corporate bond rates: http://finance.yahoo.com/bonds/composite_bond_rates
Euro pact analysis:  http://money.cnn.com/2012/06/29/investing/european-union-summit/index.htm 

May Monthly Market Commentary

By just about any measure, May was an awful month for investment performance, which is another way of saying that the past 31 days have made stock indices 5% to 10% more affordable than they were in April.  However, after the dramatic (and largely unexpected) runup through the first five months of the year, most of the major indices were still in positive territory after the decline.  The Wilshire 5000 index, which is the broadest measure of all categories of U.S. stocks, lost 6.22% last month, but remains up 5.08% with 30 days to go before 2012's halfway mark.  The comparable Russell 3000 index fell 6.18% in May, but is still in positive territory so far this year, up 5.20%.

The stock market is fundamentally a gauge of optimism or pessimism for investors.  If we think the future is bright, as most shareholders apparently believed until the end of April, there is more demand for more shares and prices go up.  So we have to ask: why did sentiment turn around so dramatically, and does the herd of investors know something important about the future?

The headlines have suggested two reasons for gloom.  The first is jobs.  The latest employment report from the Labor Department shows the first increase in U.S. unemployment in 11 months, as the jobless rate ticked up from 8.1% to 8.2%.  In the simplest possible terms, these numbers are interpreted as meaning that companies aren't hiring new workers as quickly as new workers are coming on the market.  However, buried in the Labor Department report is a statistic on "labor force participation" that shows that more than 600,000 people got off their couches rejoined the work force in May.  Somebody, somewhere, is feeling more optimistic about the jobs picture.

The report also said that the overall economy had added just 69,000 new jobs.  However, a survey from the payrolls processing company Automatic Data Processing (ADP) showed that the American private sector added 133,000 new jobs in May, meaning that much of the job loss was in government and public sector payrolls.

Is this true?  If you look at the chart below, the trend is very different from what you are likely hearing in the news reports.  The red line, which is trending depressingly downward after a brief stimulus-related spike in 2010, is federal government employment, which corresponds with the numbers on the right-hand side.  As you can see, Washington's payroll is declining dramatically, as the country works to restore its fiscal balance.  Since the beginning of 2009, over half a million government jobs have been slashed or eliminated altogether.

The blue line looks a bit more hopeful.  That represents the total number of private sector jobs in the U.S., corresponding with the numbers on the right-hand side.  The Great Recession caused a dramatic freefall in total private employment that bottomed out around January of 2010.  Since then, you can see a steady (and largely unreported) improvement in the jobs picture exactly where we would want it: in the private sector, in the for-profit companies that most of us invest in.

The other reason why investors have become allergic to stocks, according to the press, is the continuing fiscal problems in Europe.  Overall Eurozone unemployment has reached 11%, and economists believe that a recession has either begun or is imminent.  There are worries that Spain and Ireland could fall into the same economic precipice as Greece.  Spain's 10-year bonds are now trading at a 6.7% yield, their highest level since November.

You can see, in the map below, a kind of "cheat-sheet" on where the sovereign debt problems are most acute.  Purple countries are not in danger, the orange countries are facing worrisome conditions, and the bonds issued by countries painted in red are basically downgraded to junk bond status. 

The recent selloff suggests that many investors are expecting widespread defaults in Europe that will spread (the word "contagion is often used) to the U.S. banking system, and from there into the U.S. economy, not unlike the way the collapse of U.S. investment banks caused the Great Recession.

However, if you read the news reports closely, you see that the European governments have a solution at hand, which some are reluctant to put into place.  The new French government has proposed that the European Central Bank be authorized to issue its own bonds.  This would make Europe function more like the U.S. fiscal system, where the states (comparable to the individual European countries) issue bonds, and our government (comparable to the ECB) also has borrowing power to sell Treasuries.  The money raised by those Eurobonds would be used to contain the crisis, and the interest rate to Eurobond investors would be dramatically lower than what the countries in orange and red are currently paying in the open markets. 

Presto!  The ECB would step in as their surrogate borrower, swap their high rates for its lower rates, and eliminate the threat of contagion.  Of course, this would also expose the purple countries to the credit risks of the orange and red ones (this is why Germany is dragging its feet on the idea), but presumably any deal would come with guarantees about future fiscal discipline, and would remove the crushing borrowing costs from countries as they dig out of their debt.  That, in turn, would allow these countries to begin re-growing their economies, which might reduce the size and extent of the expected Eurozone recession.

Armed with this information, pessimistic stock investors might want to take another look at their European fears, and ask themselves: will European leaders eventually accept this way out of the crisis?  Or will they allow the economic crisis to spiral out of control?

Meanwhile, it might be helpful to ask: where, in all the world, do investors feel the safest?  Recently, German government 2-year bonds were issued at auction, where investors were willing to accept a negative yield for the first time in the country's history.  That means that investors, today, are willing to pay the German government for the privilege of lending to it.  This follows a record-setting Treasury Inflation Protected Securities (TIPS) auction issued by the U.S. government, which was also priced at a negative yield.  These are unprecedented events, and suggest that you and I are fortunate to be living in a nation whose debt is regarded by investors as one of the safest havens in the history of finance.

To Your Prosperity,

Kevin Kroskey

This article prepared in conjunction with 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
Jobs data:
http://www.csmonitor.com/Business/Latest-News-Wires/2012/0601/US-economy-weakens-unemployment-rate-rises-to-8.2-percent-video
http://news.xinhuanet.com/english/world/2012-06/02/c_131626282.htm
Government and private sector jobs:
http://thinkprogress.org/economy/2012/03/09/441327/public-sector-2011-gop-candidates/
Drop in oil prices: http://www.bloomberg.com/news/2012-05-30/crude-poised-for-biggest-monthly-decline-since-december-2008.html 
Spain's borrowing costs:  http://money.cnn.com/2012/05/30/investing/world-markets/index.htm
European debt ratings and the Eurobonds proposal: http://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/2012/05/30/Simple_explanation_to_Euro_Crisis.html

April Monthly Market Commentary

THE MONTH IN BRIEF
The Dow gained 0.01% in April – a month in which the impressive bull run of the first quarter moderated and more pessimism crept onto Wall Street. Some domestic indicators were tepid – but others did provide nice surprises. Signals out of Europe flashed hints (or confirmations) of recession. Some key overseas indices suffered notable April losses. Our Q1 GDP was unimpressive, but U.S. consumer spending improved for March. Oil futures rose while gasoline and crop futures retreated. Analysts wondered (again) if the real estate market had at last bottomed out.¹

DOMESTIC ECONOMIC HEALTH
Consumer spending advanced 0.3% in March, with wages rising 0.4%. The wage increase doubled the gain forecast by a consensus of economists polled by Briefing.com; that was the good news. The bad news: those analysts expected a personal spending gain of 0.5% in light of the (revised) 0.9% advance in February. Consumer sentiment was holding up reasonably well even with soaring fuel prices. From March to April, the Conference Board’s poll wavered from 69.5 to 69.2; the University of Michigan’s consumer sentiment survey went from a final March reading of 75.7 to a final April mark of 76.4.^2,3

The initial estimate of Q1 GDP arrived in late April, and it underwhelmed the bulk of economists and Wall Street analysts, who were hoping for something more in line with the 3.0% growth of the preceding quarter. The economy’s 2.2% Q1 growth was by no means horrible; investors just hoped to further justify the winter rally. What kind of inflation was America experiencing? The Consumer Price Index rose 0.3 in March following gains of 0.4% in February and 0.2% in January. Annualized consumer inflation was at 2.7% in March, down from 2.9% in February. The Producer Price Index was flat in March, although core PPI advanced 0.3%.^3,4,5

One big positive that surprised nearly everybody emerged. According to the Institute for Supply Management, April 2012 was the hottest month for U.S. manufacturing since June 2011. ISM’s manufacturing PMI jumped 1.4% for April to 54.8. Weeks earlier, ISM’s service sector PMI had read 56.0 for March, down 1.3% from the February mark. Something else that declined in March: durable goods orders. They fell 4.2%, with core hard goods orders down 1.1%. March retail sales rose by 0.8%, far surpassing the 0.3% gain projected by economists surveyed by Bloomberg.^3,6,7,8

April also saw solid corporate earnings. The buzz was that this earnings season would disappoint, but as Bloomberg noted, 74% of S&P 500 firms reporting results between April 10 and May 1 beat forecasts. At the start of May, the S&P 500 was trading at 14.3x reported earnings, notably below the average of 16.4 recorded since 1954. The takeaway: stocks were still pretty cheap.⁹  

The jobless rate ticked down to 8.2% in March. The economy added merely 120,000 jobs during that month, but that brought the net gain in hiring since December to 635,000. While the Federal Reserve indicated it would hold off on further quantitative easing measures, it did state its commitment to keeping the federal funds rate at the current lows through the end of 2014.^8,10   

GLOBAL ECONOMIC HEALTH
Was Spain the next Greece? Global investors hoped not, given its comparative magnitude and influence on the European and global economies. April ended with Standard & Poor’s downgrading Spain’s debt from A to BBB with a negative outlook. Spain’s jobless rate had hit 24.4% in the first quarter. Beyond Spain, the EU jobless rate was 10.9% in March with inflation at 2.6% in April. The key Markit purchasing manager index for the EU dipped down to 45.9 last month, marking the ninth straight month of sector contraction. Word also arrived that Great Britain had slipped back into a recession in the first quarter; its last downturn had ended at the start of 2010. In April, a total of 12 European economies were in recession; besides the U.K., the list also included Spain, Italy, Ireland and the Netherlands.^10,11,12,13

The Asia-Pacific region offered a different story. China’s official PMI hit 53.3 for April, a 13-month peak. The HSBC China PMI (which tracks mostly private firms) also rose 1.0% to 49.3. Other key PMIs in April: India, 54.9; Indonesia, 50.5; South Korea, 51.9; Taiwan, 51.2; Australia, 43.9. In other news, exports fell in India for the first time since 2009 in April and the Bank of Japan announced a stimulus.^12,14,15

WORLD MARKETS
Looking at Morningstar data measured in U.S. dollar terms, we see a mixed month. The Hang Seng (+2.50%), Shanghai Composite (+5.90%) and S&P/ASX All Ordinaries (+ 1.07%) fared better than the FTSE 100 (-0.53%), the CAC 40 (-6.16%), the Nikkei 225 (-5.58%), the TSX Composite (-2.19%), the DAX (-4.05%) and the Sensex (-0.71%). The MSCI World Index (-1.37%) and MSCI Emerging Markets Index (-1.48%) both posted April losses.^16,17

COMMODITIES MARKETS

Gold’s allure dimmed just a bit in April. At the close on April 30, the COMEX price was $1,664.20 an ounce (-0.46% on the month). Silver lost 4.52% in April, but copper managed a monthly gain of 0.12%. Oil futures rose 1.80% for the month on the NYMEX to $104.87 per barrel. Heating oil went +0.44% for the month while natural gas went +7.48%. Gasoline futures pulled back: RBOB gasoline lost -5.55% in April. Retail gas prices fell 2.72% as well. It was also a poor month for crop futures, with wheat going -0.95%, corn -1.51%, coffee -2.95% and cotton -4.81%.¹³

REAL ESTATE
According to the National Association of Realtors, pending home sales rose 4.1% in March. Economists polled by Briefing.com expected a 1.0% gain. That was a bright spot, and others could be found in data that for the short term was mostly negative. The February S&P/Case-Shiller Home Price Index showed that overall prices actually rose 0.2% - the first advance since the April 2011 edition. (Zillow reported that the median U.S. home value rose 0.5% in March, the best monthly gain since 2006.) As for new and existing home sales, both retreated: the Census Bureau said that the pace of new home sales fell 7.1% in March and NAR noted a 2.6% slip in residential resales. The bright side in existing home sales: NAR also said the median price had risen 2.5% in the past 12 months.^18,19,20    

Looking at Freddie Mac’s March 29 and April 26 Primary Mortgage Market Surveys, average interest rates on home loans moved lower as follows: 30-year FRMs, 3.99% to 3.88%; 15-year FRMs, 3.23% to 3.12%; 5/1-year ARMs, 2.90% to 2.85%; 1-year ARMs, 2.78% to 2.74%.²¹

LOOKING BACK…LOOKING FORWARD
NASDAQ and S&P 500 winning streaks ended in April, but the Dow’s winning streak extended to seven months. At the close on April 30, the Dow was at 13,213.63, the S&P 500 at 1,397.91 and the NASDAQ at 3,046.36.^1,13,22

Will May be a decent month for stocks? Looking past the old warning to “sell in May and go away”, we see that the fifth month of the year has been a pretty good month in recent market history. The S&P 500 logged a May gain 71% of the time from 1988-2011; the average monthly gain was 1.22%. The MSCI Emerging Markets index advanced in 58% of Mays in the same window of time, with the average May gain being 1.28%. Also, many U.S. economic indicators have really improved in the past 12 months. ISM surveys have manufacturing up 2% year-over year and nonfarm payrolls have expanded by 29% in that time frame. Our 2.2% Q1 growth is a big improvement over the 0.4% GDP advance of Q1 2011. Our housing sector seems poised for improvement, and maybe it is on the way back already – Credit Suisse analysts note that U.S. building permits are up 35% from a year ago, while housing starts and existing home sales are respectively 3% and 5% improved. Auto sales are at a four-year peak. So while spring and summer have historically brought stock market doldrums, it appears we have some compelling reasons to disregard history again, at least for this month.²⁷   

UPCOMING ECONOMIC RELEASES: The schedule for the balance of May looks like this ... the April jobs report (5/4), March wholesale inventories (5/9), the April PPI and the initial University of Michigan consumer sentiment survey for April (5/11), April’s CPI and retail sales plus March business inventories (5/15), April industrial output, housing starts and building permits and the minutes of the 4/25 Fed policy meeting (5/16), the April Conference Board Leading Economic Indicators index (5/17), April existing home sales (5/22), April new home sales (5/23), April durable goods orders (5/24), the final April University of Michigan consumer sentiment survey (5/25), the March Case-Shiller home price index and the Conference Board’s May consumer confidence poll (5/29), April pending home sales (5/30) and the second estimate of Q1 GDP (5/31). The April personal spending report won’t be released until June 1 – coincidentally, the same day as the May unemployment report and the May ISM services index.

MONTHLY QUOTE 

“You make a living by what you get. You make a life by what you give.”  
 – Winston Churchill

To Your Prosperity,

Kevin Kroskey

This article prepared in conjunction with Peter Montoya.

Citations.

1 - thestockmarketwatch.com/stock-market-news/market-updates/stocks-end-lower-sp-500-and-nasdaq-post-losses-for-april/26012 [4/30/12]

2 - briefing.com/investor/calendars/economic/2012/04/30-04 [5/1/12]
3 - briefing.com/investor/calendars/economic/2012/04/23-27 [4/27/12]
4 - www.nytimes.com/2012/04/14/business/economy/consumer-inflation-up-modestly.html [4/13/12]
5 - www.cnbc.com/id/47027476 [4/12/12]
6 - www.ism.ws/ISMReport/MfgROB.cfm [5/1/12]
7 - www.ism.ws/ISMReport/NonMfgROB.cfm [4/4/12]
8 - www.bloomberg.com/news/print/2012-04-16/retail-sales-in-u-s-increased-more-than-forecast-in-march.html  [4/16/12]
9 - www.bloomberg.com/news/2012-05-01/u-s-stock-futures-are-little-changed-before-factory-data.html [5/1/12]
10 - https://www.mfs.com/wps/portal/mfs/us-advisor-pub/market-outlooks/week-in-review [4/27/12]
11 - epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ [5/2/12]
12 - www.reuters.com/article/2012/05/02/global-economy-wrapup-idUSL5E8G223R20120502 [5/2/12]
13 - money.msn.com/market-news/post.aspx?post=0552b6eb-e56b-40c6-ad22-0751394ee803 [4/30/12]
14 - blogs.ft.com/beyond-brics/2012/05/02/asia-pmis-mixed-signals [5/2/12]
15 - blogs.ft.com/beyond-brics/2012/05/02/indian-manufacturing-inches-up [5/1/12]
16 - news.morningstar.com/index/indexReturn.html [4/30/12]
17 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [4/30/12]
18 - www.nydailynews.com/life-style/real-estate/rebuilding-home-resales-highest-2010-article-1.1068578 [4/27/12]
19 - briefing.com/Investor/Calendars/Economic/Releases/newhom.htm [4/27/12]
20 - blogs.wsj.com/developments/2012/04/19/behind-the-numbers-existing-home-sales-fall/ [4/19/12]
21 - www.freddiemac.com/pmms/ [4/2/12]
22 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [4/2/12]
23 - www.usatoday.com/money/index [4/30/12]
24 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=4%2F29%2F11&x=0&y=0 [4/30/12]
24 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=4%2F29%2F11&x=0&y=0 [4/30/12]
24 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=4%2F29%2F11&x=0&y=0 [4/30/12]
24 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=4%2F29%2F02&x=0&y=0 [4/30/12]
24 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=4%2F29%2F02&x=0&y=0 [4/30/12]
24 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=4%2F29%2F02&x=0&y=0 [4/30/12]
25 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [5/2/12]
26 - treasurydirect.gov/instit/annceresult/press/preanre/2002/ofm10902.pdf [1/9/02]
27 - www.marketoracle.co.uk/Article34414.html [5/1/12] 

March Monthly Market Commentary

THE MONTH IN BRIEF
March brought gains and milestones. The NASDAQ ended the month above 3,000, which it hadn’t done in nearly 12 years. The Dow pulled off its sixth straight monthly advance, and the S&P 500 and Russell 2000 rose as well. Gas prices continued their march upward, but consumer spending did not fall. The real estate sector flashed some negative signals. Investors and economists alike mulled the effect that potentially decelerating economies in Europe and Asia might have on Wall Street. The U.S. economy, on the other hand, seemed to show further improvement.¹

DOMESTIC ECONOMIC HEALTH
Gas prices were putting the clamps on the consumer, right? Wrong. It seemed consumer spending was rising, perhaps partly in response to increased fuel costs. In fact, the Commerce Department said personal spending rose 0.8% in February (the biggest gain in seven months) even as incomes rose just 0.2%. As for that other really important statistic affecting consumers, the nation’s jobless rate had remained at 8.3% for February, although job growth was impressive once again (227,000 positions added to non-farm payrolls).^2,3

Consumer sentiment was the proverbial mixed bag. The Conference Board’s survey slipped from February’s revised mark of 71.6 to 70.2. The University of Michigan’s final March survey came in at 76.2, up from the 74.3 reading of late February.⁴

Consumer prices moved in a pronounced direction – and that direction was up. The federal government’s Consumer Price Index rose 0.4% in February, the biggest monthly gain since April. Producer prices matched that increase. Annualized CPI was running at 2.9%, annualized core CPI at 2.2%. What role did gasoline costs play in all this? A major one. A 6% February rise in retail gas prices represented a significant portion of the advance in the overall CPI. Pump prices have climbed close to 20% since December, and a gallon of unleaded cost $3.93 at the end of the month, up 2o cents from the end of February. Even with this price pressure on consumers, the Census Bureau said retail sales were 1.1% better in February. It also revised January’s gain up to 0.6%. Durable goods orders also rose 2.2% in February.^4,5,6,7

The U.S. manufacturing and service sectors were holding up well. The Institute for Supply Management’s March manufacturing PMI rose a full percentage point to 53.4, and its non-manufacturing index read 57.3 in February, an 0.5% gain.^8,9

The Federal Reserve conducted its annual stress test of 19 big banks in March, and 15 lenders held up under the “doomsday” scenario (Dow losing half of its value, home prices at 1996 levels, a 13% jobless rate). American Express, Bank of America, Bank of New York Mellon, BB&T, CapitalOne, Fifth Third, Goldman Sachs, JP Morgan Chase, Keycorp, Morgan Stanley, PNC, Regions, State Street, U.S. Bancorp and Wells Fargo each got a thumbs-up. The Fed felt that Citigroup, SunTrust, Ally and MetLife would lose enough assets under the scenario to pose systemic risk.¹⁰

GLOBAL ECONOMIC HEALTH
To what degree would the Eurozone economy slow down? Would Asian economies turn around their manufacturing bases? Looking to Europe, the signs were bleak. The Eurozone jobless rate ticked up to a post-euro high of 10.8% in March. In Spain, the unemployment rate was 23.6%; in France, it was 10.0%; in Italy, it was 9.3%; in Germany, it was just 5.7%. The key Markit purchasing managers index was below 50 for the eighth consecutive month in March, with analysts growing increasingly certain that the EU had slid into a recession.¹¹

As for the key economies of the Asia-Pacific region, factory output was looking better. For March, official PMIs were in reasonably good shape in China (53.1, best since last April), India (54.7), and South Korea (52.0, a one-year high). India’s inflation rate accelerated in March for the first time since October.¹²

WORLD MARKETS
Many major stock indices pulled back last month. That was not the case for the Nikkei 225, off to a roaring start in 2012 (+19.26% for Q1). The Japanese benchmark rose 3.71% last month. Germany’s DAX was up 1.30% in March and Australia’s All Ordinaries rose 0.73%. Several major indices retreated: the CAC 40 lost 0.83%, the FTSE 100 1.76%, the TSX Composite 2.41%, the Sensex 3.91%, the Hang Seng 5.57% and the Shanghai Composite 6.82%. Despite these losses, all of the above indices posted gains for the quarter. The MSCI World Index rose 1.02% in March and 10.94% for Q1 in USD terms. By the same measuring stick, the MSCI Emerging Markets Index fell 3.52% in March but rose 13.65% for the quarter.^13,14

COMMODITIES MARKETS
The hottest marquee commodity of March was (guess what) retail gasoline at +5.20%. Cotton went +3.85% last month. Most other key commodities lost their footing – most notably, natural gas. Those futures slid 18.73% in March, a descent helped by unseasonably warm weather. Oil futures lost 3.78% last month, settling at $103.02 per barrel on the NYMEX; for the quarter, prices rose 4.24%. Gold slipped 2.30% on the COMEX on the month and rose 6.71% on the quarter to wrap March at $1,671.90 on the COMEX. Copper (-1.40%) and silver (-6.23%) retreated after two strong monthly advances. RBOB gasoline futures rose 1.56% in March and the U.S. Dollar Index pulled off its first monthly gain for 2012 (+0.44%). Elsewhere, coffee futures sank 8.98%, corn lost 2.13% and wheat lost 1.09% for the month.⁶

REAL ESTATE
March didn’t bring much improvement. Interest rates on conventional mortgages did go back under 4% after topping that mark at mid-month. Looking at Freddie Mac’s March 1 and March 29 Primary Mortgage Market Surveys, we see that mortgage interest rates did increase last month: 30-year FRMs went from 3.90% to 3.99%; 15-year FRMs went from 3.17% to 3.23%; 5/1-year ARMs rose from 2.83% to 2.90%; 1-year ARMs went from 2.72% to 2.78%.¹⁵

Existing home sales fell 0.9% for the month, while new home sales pulled back 1.6%. Year-over-year, the pace of residential resales had increased 8.8% while new home buying rose 11.4%. The Census Bureau announced that the median new home sale price had risen 6.2% in a year to $233,700. The National Association of Realtors noted the first year-over-year increase in existing home prices since November 2010.   However, the January edition of the S&P/Case-Shiller Home Price Index revealed that existing home prices had essentially reset to early 2003 levels. The index posted its fifth straight monthly retreat and was down 3.8% from 12 months before. The NAR also reported a 0.5% decline in pending home sales for February.^16,17,18

LOOKING BACK…LOOKING FORWARD
Fear seemed to take a holiday: the CBOE VIX was at 15.50 on March 30 after diving 15.90% for the month. The Dow ended March at 13,212.04, the S&P at 1,408.47, the NASDAQ at 3,091.57 and the Russell 2000 at 830.30.¹

It would be mind-blowing if the market put together consecutive quarters like this, and even the most bullish of analysts don’t expect a repeat. Then again, Wall Street has surprised us many times. Some analysts think the current bull market may be due to run out of steam given the apparent economic sluggishness in Europe and the tendency of investors to “sell in May, go away”. Others think that since the S&P 500 fell 19.4% in October 2011 from an April 2011 peak (actually more than 20%, if you factor in intraday numbers rather than just the market close), we are actually more or less in a new bull market that began last fall. So would that be a baby bull within a secular bear, or something more lasting? Whether you think the glass is half full or half empty on Wall Street, the fact remains that stocks surpassed expectations in the first quarter of the year – and April may bring further gains.²³

UPCOMING ECONOMIC RELEASES: Here is the slate of releases for the rest of April: the March ISM service sector index (4/4), the March unemployment report (4/6), February wholesale inventories (4/10), a new Federal Reserve Beige Book (4/11), the March PPI (4/12), the March CPI and the initial University of Michigan consumer sentiment survey for April (4/13), March retail sales and February business inventories (4/16), March industrial output, housing starts and building permits (4/17), the March Conference Board Leading Economic Indicators index and March existing home sales (4/19), March new home sales, the February Case-Shiller home price index and the Conference Board’s April consumer confidence poll (4/24), March durable goods orders and an FOMC policy announcement (4/25), March pending home sales (4/26), the federal government’s first estimate of Q1 GDP and the final April University of Michigan consumer sentiment survey (4/27), and finally the March consumer spending numbers (4/30).

MONTHLY QUOTE
“Humor is just another defense against the universe.”
 – Mel Brooks

To Your Prosperity,

Kevin Kroskey

This article prepared in conjunction with Peter Montoya.

Citations.

1 - money.msn.com/market-news/post.aspx?post=ba5dfb2a-4c91-4d39-aa5e-f3bfb0d9bb5e&_nwpt=1 [2/29/12]

2 - www.cnbc.com/id/46902933/ [3/30/12]

3 - articles.latimes.com/2012/mar/09/business/la-fi-us-jobs-20120310 [3/9/12]

4 - briefing.com/investor/calendars/economic/2012/03/26-30 [3/30/12]

5 - www.usatoday.com/money/economy/story/2012-03-16/February-inflation-consumer-price-index/53561880/1 [3/16/12]

6 - money.msn.com/market-news/post.aspx?post=087cac64-3d67-4737-b94a-31c3ff49ba16 [3/30/12]

7 - www.census.gov/retail/marts/www/marts_current.pdf [3/13/12]

8 - www.ism.ws/ISMReport/MfgROB.cfm [4/2/12]

9 - www.ism.ws/ISMReport/NonMfgROB.cfm [3/5/12]

10 - www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2012/03/16/investopedia77515.DTL [3/16/12]

11 - www.bbc.co.uk/news/business-17582051 [4/2/12]

12 - www.reuters.com/article/2012/04/02/us-global-economy-asia-idUSBRE83104P20120402 [4/2/12]

13 - news.morningstar.com/index/indexReturn.html [3/30/12]

14 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [3/30/12]

15 - www.freddiemac.com/pmms/ [4/2/12]

16 - www.bizjournals.com/washington/news/2012/03/23/new-home-sales-slow.html [3/23/12]             

17 - articles.marketwatch.com/2012-03-27/economy/31242975_1_david-m-blitzer-index-committee-index-records [3/27/12]

18 - www.latimes.com/business/money/la-fi-mo-pending-home-sales-20120326,0,3632145.story [3/26/12]

19 - montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [4/2/12]

20 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=3%2F30%2F11&x=0&y=0 [3/30/12]

20 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=3%2F30%2F11&x=0&y=0 [3/30/12]

20 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=3%2F30%2F11&x=0&y=0 [3/30/12]

20 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=3%2F28%2F02&x=0&y=0 [3/30/12]

20 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=3%2F28%2F02&x=0&y=0 [3/30/12]

20 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=3%2F28%2F02&x=0&y=0 [3/30/12]

21 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [3/30/12]

21 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [3/30/12]

22 - treasurydirect.gov/instit/annceresult/press/preanre/2002/ofm10902.pdf [1/9/02]

23 - articles.businessinsider.com/2012-03-07/markets/31131044_1_bull-market-new-bull-first-year-bull [3/7/12]