August 2014
August 29, 2014 11:00 a.m.
Your Retirement Finance Week in Review
I’m closing this week’s review a little early because of the holiday week. I hope each of you have a great Labor Day weekend.
Thanks to all of you who joined us at last week’s San Francisco MoneyShow. I appreciate the positive feedback about my presentations and enjoyed talking with the many people who came to our booth. For those who couldn’t attend or want to see it again, my presenatation “Overcoming the Six Critical Threats to Lifetime Income Security” is available for viewing on the MoneyShow web site for a limited time here. You also can see a few photos from the conference on our Facebook page.
The economy’s clearly in the sweet spot. Most recent data has been positive and better than expectations. Growth clearly is at the highest rate since 2008.
There are several things that are good about this stage of the cycle. The Fed can reduce its stimulation, as it has been doing, without putting stress on the economy. In other words, the economy has achieved a level of sustainable growth. Yet, there still is enough unused capacity in the economy, thanks to the steepness of the previous decline, that there isn’t a need for the Fed to tighten soon. Inflation is at or below target levels. Measures of economic capacity, such as employment, continue to improve but aren’t near levels that would indicate capacity is stretched. There isn’t much pressure on the Fed to change policy, though Fed officials are having a public debate about when the next tightening should occur and what it should be.
What does this say about the markets? While economic growth influences markets, they don’t move in lock step. Markets tend to anticipate changes in the economy. The anticipation might not be accurate, and markets might have to change course. But in general markets are forward looking. The strong stock market returns of 2013 in particular and since early 2009 in general indicate investors anticipated the growth improvement.
Options and futures markets also give an indication of what investors anticipate. These markets have been showing that investors don’t expect much change for a while.
The most vulnerable markets now probably are stocks. Investors anticipate smooth sailing as far as interest rates, inflation, and growth. Any shocks to the system or major disappointments could change things. I believe the most likely negative surprises are the Fed tightening too quickly (a low probability event, I think) and geopolitical events (a higher probability event, such as this week’s escalation of events in Ukraine). It’s also possible that a rapid improvement in the labor market could pinch corporate margins through higher wages.
Unlike many other observers, I don’t try to predict the future. None of us can anticipate the order in which events will unfold and how markets will react to them. Instead, I follow the indicators markets care about and monitor how markets are behaving. For now, there’s no reason to change our portfolio recommendations, but we are keeping a close eye on positions.
The Data
We have two weeks of data to review, but almost all of it points to positive, increasing growth.
Let’s start with housing, which dominated the last couple of weeks. The data here continues to be mixed. There’s clearly a decline from 2013’s hot pace, which should be expected.
Existing home sales continue to do better than new homes sales. This is in contrast to the Housing Market Index, which is a survey of home builders. It remains positive and this month rose to its highest level since January. New homes sales have been hurt by low inventory and last year’s rapid price increases. The strongest region for new home sales by far is in the south. Pending home sales, which are reflected in existing home sales in a couple of months, rose well above expectations.
Home price appreciation continues to slow according to both the S&P Case-Shiller Home Price Index and the FHFA House Price Index. The Case-Shiller Index actually showed a decline on a seasonally-adjusted basis. We should expect price increases to slow from last year’s rate, especially in light of the potential for rising mortgage rates and the continuing modest growth in incomes.
There were several manufacturing reports, almost all of which indicate an acceleration in growth. Reports with steady or higher growth were the PMI Manufacturing Index Flash, Philadelphia Fed Survey, Durable Goods Orders, Richmond Fed Manufacturing Index, and the Chicago Purchasing Managers Index. Slight outliers were the Dallas Fed Manufacturing Survey and Kansas City Fed Manufacturing Index. But both indicated continuing growth, but at slower rates than last month. The Dallas Fed regions has been outpacing the rest of the country for a while, so a month of slower growth isn’t a concern. In the Kansas City Fed report, expectations for future growth were solid.
The second estimate of second quarter GDP came in even higher than last month’s first estimate of 4.0%, recording a 4.2% annualized gain. A strength in the report was nonresidential fixed investment, indicating expansion plans by businesses. Importantly, inflation remained in the Fed’s target range with a GDP Price Index of 2.1%.
The Consumer Price Index also indicated moderate inflation with a headline number of 2%, and a 1.9% rate after excluding food and energy.
The Leading Economic Indicators from the Conference Board showed a very strong jump, and last month’s number was revised upward. New unemployment claims declined sharply, to fall under 300,000 again. That’s another sign of continuing improvement in the labor market.
Consumer Sentiment as measured by the University of Michigan had a solid jump, though there was a decline in expectations for six months in the future.
The Personal Income and Outlays report was mixed. Incomes rose but at a slower rate than the rapid rates of the last two months. In a surprise, consumer spending actually declined by 0.1% for the month. This is due largely to a drop in durable goods, especially automobiles. Consumer spending and retail sales can be volatile from month to month. Consumer sentiment surveys generally are good indicators of household spending over several months, and the latest surveys have been very positive. So, it would be a surprise if this month’s spending numbers indicate a trend. Also in this report, inflation as measured by the PCE Price index remains below the Fed’s target at 1.6%.
I usually don’t cover European economic data in these reports, but they warrant a mention this week. Annual inflation in the Euro-Zone declined again in Friday’s report, raising the dangers again of a spiral into deflationary depression. Pressure should be on the European Central Bank to take strong actions similar to what the Fed and Bank of England did a few years ago, but the politics of Europe could prevent it.
The Markets
We’re going to take a two-week perspective on the markets since we missed last week’s report.
Stock markets generally were positive until the reports of increased confrontation in Ukraine late this week. Most major indexes managed gains over two weeks, though they generally lost ground this week. Top returns were from the Dow 30 with just under a 1% gain, while the S&P 500 was a fraction behind. The All-Country World Index and Russell 2000 U.S. Smaller Companies Index both managed fractional gains. Emerging market stocks were the most volatile and lost about 0.5% after being up 1% by Wednesday’s close.
Bonds did better for investors. Long-term treasury bonds benefitted from a flight to safety, closing with gains over two weeks of over 2.5%. Most of those gains came after Tuesday’s close. High-yield bonds, as they usually do, followed stocks more than bonds. They lost about 0.2% over two weeks. Investment-grade bonds gained about 0.9%, while Treasury Inflation-Protected Securities (TIPS) rose about 0.2%.
The dollar also benefited from a flight to safety, gaining about 0.7%.
Commodities were mixed. Gold, in a surprise to many, didn’t act as a safe haven and lost ground. It dropped over 0.5%. Energy-related commodities rose over 1.5%, and broader-based commodities were fractionally behind.
Some Reading for You
There have been some interesting discussions about active vs. passive investing. Take a look at this and this.
Wondering where in the U.S. your dollar buys the most? Read this.
Medicare Advantage plans are looking more and more like a good deal for everyone, according to this.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
August 15, 2014 04:20 p.m.
Your Retirement Finance Week in Review
Before we begin this week’s review, let’s briefly discuss a couple of other items.
Recently as a trial I sent you several advertising emails on behalf of other publishers. After this trial I’ve concluded we won’t be doing this again at least for a while. Going forward I plan to send you only emails directly related to Retirement Watch and activities in which I participate, such as the MoneyShows.
If you can’t in San Francisco for the MoneyShow next week, you still can benefit from most of the presentations, including one of mine. You can watch, free, online on the eMoneyShow. You can register free here. And see details about the eMoneyShow here. Please use the first link if you register.
Since I’ll be traveling next week, I probably won’t send a weekly review or will send a brief one.
This week, let’s take a step back for a big picture look at the economy and markets.
Recent economic data has been positive and indicate that the economy is growing at or around its fastest rate since the bottom in 2009. Though the Fed has been pulling back by reducing its asset purchases, the economy is strong enough to continue growing without this support. In fact, removing the quantitative easing probably is having positive psychological and economic effects. The psychological effect is showing that the economy can continue growing without the extraordinary measures. The economic effect is to reduce the distortion caused by quantitative easing.
In recent data we’ve seen strong manufacturing growth throughout the country. Business investment is starting to increase. Businesses in some industries and regions report having enough trouble hiring and keeping qualified employees that they feel pressure to raise wages. Household demand, which businesses use to determine hiring and investment plans, seems solid. Consumer sentiment surveys have been strong. The steady improvement in the labor market is increasing household income.
The housing market has cooled considerably from its rapid growth of 2013, but that’s not an indicator of a downturn coming. Housing had to decline from 2013’s rate. Also, the higher prices and other improvements are causing a positive shift away from a lot of distress sales and purchases by all-cash investors. More and more buyers now are people who plan to live in the homes.
The picture probably will become less bright sometime in 2015. The economy will have improved enough that the Fed will be actively considering interest rate increases to control the economy and inflation. The risk will be that the Fed acts too soon or too aggressively. But that’s not something to worry about soon.
There always are risks from outside the economy, such as geopolitical events or a financial crisis in Europe. For now, it appears that the economy made it through the summer in good shape and should support current market prices.
The Data
There was a small amount of data this week, but it was useful data.
The disappointment of the week was retail sales. They were unchanged from last month and well below expectations and last month’s strong numbers. Many analysts made a big deal about this, but I recommend downplaying it. Retail sales are volatile month to month. It’s better to read them in context of other data that are informative about household incomes and demand. Those other data points have been better than this retail sales number. Measures of consumer sentiment have been strong the last few months. Household income continues to grow steadily as unemployment declines and the improving job market starts to put pressure on wages. So, I don’t see this as a warning sign.
The NFIB Small Business Optimism Index continued to deliver positive news. The index rose a bit and was in line with expectations. More importantly, the details of the survey reveal that a high percentage of small business owners are feeling pressure to hire and raise wages. That’s good news for household demand.
The JOLTS (Job Openings and Labor Turnover Survey) is a detailed look at the labor market that lags by about one month the more widely-followed monthly Employment Situation reports. The latest JOLTS continues to show steady improvement in the labor market. Importantly, job openings and hires continue to raise. Also, there’s a steady increase in the number of people leaving jobs. This is important, because it shows that people are optimistic enough about the labor market to leave jobs either for or in search of other jobs.
New unemployment claims rose a bit but they are remaining in the same range they’ve been in recently at around 300,000 per week. That’s well below the levels of a year ago and an improvement from early in 2014.
There were a couple of reports on manufacturing. The Empire State Manufacturing Survey indicated that growth in that sector remains strong, though it slowed a bit from last month’s rate. An interesting facet of the report is the six-month outlook, which had a significant increase.
Industrial Production also increased. Last month’s number was revised higher, and this month’s initial number was slightly higher than expectations. The manufacturing component of the report was significantly higher, and the increase was across the board.
Producer Price inflation declined a bit. We suspected last month’s higher number was due largely to temporary increases in energy, and that seems to be the case.
The mid-month Consumer Sentiment report as measured by the University of Michigan was mixed. The headline number declined a bit. But within that number, the current conditions sentiment had a considerable increase. The overall number declined because of a fall in expectations to its lowest level since the last government shutdown. There isn’t much in the economic data to explain this decline, so it likely is due to the recent geopolitical problems, primarily in Ukraine and the Middle East.
The Markets
Markets continue to hold up well despite all the recent bad news and seem to be bouncing back from the recent adjustments. Here’s one reason why: Earnings seem to be better than expected.
It was a good week for stocks and bonds until news early Friday of combat between Ukraine and some Russian troops. Even so, the declines were modest, and most indexes staged a good recovery by the end of the trading day. This news followed a speech Thursday in which Russia’s Putin said the conflict with Ukraine wouldn’t escalate to the point of poisoning Russia’s relationships with other countries.
Emerging markets had the best week in stocks, gaining about 1%. The S&P 500 and All-Country World Index were next with gains of about 0.8%. The Dow 30 and smaller company stocks did worst, each losing about 0.2%. Before Friday’s news, most stock indexes were up 1% or more for the week.
Bonds were having an okay week but jumped on Friday’s news. Long-term treasuries were up about 2%, after being up 2.5% early Friday. High-yield bonds rose about 0.8%, and investment-grade bonds rose 0.7%. Treasury Inflation-Protected Securities (TIPS) rose 0.4%.
The dollar was flat for the week but had a slight gain before Friday’s news.
Commodities didn’t have a good week. Gold actually fell on Friday’s news after being flat most of the week. It closed with a small loss. Energy-based commodities and broader commodities each lost more than 1.5% and were down all week. They rose a little after Friday’s news.
Some Reading for You
This article explains why some wealthy and well off people say they aren’t leaving their fortunes to their children, but how they’re still leaving their children comfortable.
Take a look at the math of being happy.
Why do women pay more for some things? Here are some explanations.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
August 8, 2014 04:50 p.m.
Your Retirement Finance Week in Review
Before we begin this week’s review, let’s briefly discuss a couple of other items.
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This is the last call to take advantage of your free registration for the San Francisco MoneyShow. So far, I plan to make two presentations, appear at our Retirement Watch booth, have a book signing session, and more. For you, registration is free. We’ll be in the Union Square section of San Francisco from August 21-23. Reserve your place today here.
Now, on to this week’s review.
This week was a classic example of how markets can diverge from recent economic data. The data was positive, indicating that growth will be the strongest of the recovery for a while. The response wasn’t positive from the markets, and there are a couple of reasons for that.
One reason is that markets are forward-looking for the most part. Investors generally realize that what’s known already is in market prices. They’re trying to anticipate what is next and position their portfolios for that before others do. Last year investors anticipated strong growth and bid up stock prices to an extent that prices surged ahead of the economic fundamentals. Perhaps now investors are taking those profits and becoming concerned that the Fed might raise rates and try to slow the economy.
Another reason is that events outside the markets, exogenous events, can influence market prices. There’s a range of geopolitical events that unnerve investors and could over time damage the global economy.
That’s why it is important to ignore the day-to-day noise in the markets and the media. Instead, focus on the things that matter to the markets over meaningful periods. You have to put up with temporary ups and downs in order to capture the bulk of the long-term returns delivered by the markets.
The Data
There wasn’t a lot of data released this week, but some of it was important.
The ISM Non-Manufacturing Index tries to measure activity in many sectors of the economy other than manufacturing. Last month’s number was revised slightly higher, and this month’s number came in at the highest level of the recovery. Even better, the survey indicates the growth still isn’t triggering cost inflation.
Likewise, the PMI Services Index reported a slight dip in growth from last month. That still leaves the index at a solid growth level, and the survey also found that inflation isn’t yet a problem.
These surveys, combined with recent data on the manufacturing sector, indicate that economic growth is fairly strong, broad-based, and perhaps accelerating.
Continuing the string of mostly strong manufacturing reports, Factors Orders rose sharply higher after a dip last month. The strength was broad-based, except for motor vehicles.
Consumer credit continues to rise. As has been the case for some time, most of the growth is in student loans and auto loans. Growth in revolving debt (including credit cards) and mortgages still isn’t rising much.
New unemployment claims dropped sharply after last year’s surprise increase. This indicates continuing steady improvement in the labor market.
Productivity increased in the second quarter more than expectations after a weather-induced decline in the first quarter. In addition, the growth in unit labor costs dropped sharply to 0.6%, well below expectations. This is after a sharp increase in the first quarter.
The Markets
Many markets had strong recoveries Friday after being down for most of the last couple of weeks. Even so, it was a negative week for many risky assets.
In stock indices, The leader was small company stocks. The Russell 2000 U.S. Smaller Companies Index was up most of the week, unlike other stock indices, and it closed with just over a 1% return. The Dow 30 eked out a marginal gain while the S&P 500 broke even after being down 1% at Thursday’s close. Overseas stocks didn’t recover as well. The All-Country World Index lost about 0.6%, and emerging market equities lost about 1.3%.
Long-term treasury bonds had a volatile week. They were down 0.8% early Tuesday, were up 1.4% early Friday, and closed with a 0.8% return. High-yield bonds had a good week, despite significant redemptions from mutual funds, gaining 0.8%. Investment-grade bonds and Treasury Inflation-Protected Securities (TIPS) both gained about 0.2%.
The dollar had a marginal gain.
Gold had a good week, thanks mostly to geopolitical events. Based mostly on surges late Tuesday and early Wednesday, gold closed with a 1.5% gain for the week. Energy-based commodities lost 0.4%, and broad-based commodities lost 0.6%.
Some Reading for You
Don’t expect much service from the Social Security Administration, says this report.
I like this discussion in which two of the most bearish forecasters cast aspersions at each other.
This report makes an argument that a steep stock correction isn’t likely at this point.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
August 1, 2014 04:25 p.m.
Your Retirement Finance Week in Review
Before we begin this week’s review, let’s briefly discuss a couple of other items.
First, a quick reminder to Retirement Watch members that you don’t have to receive occasional advertising emails from other businesses if you don’t want to. You can set your Privacy Preferences on the members’ web site at www.RetirementWatch.com. Click on “Member Login” near the top right of the page. On the next page, log in using your customer number or click on “click here” under the headline “Don’t have a Login yet or forgot your Login information?” On the member home page, scroll down and click on “Change Address” on the right side. On the next page, click “Change Address.” On the next page, click “Preferences” under “Privacy Preferences.” On the next page you can set your preferences.
On another note, I’m making final plans for the San Francisco MoneyShow, and there’s still time for you to join us. So far, I plan to make two presentations, appear at our Retirement Watch booth, have a book signing session, and more. For you, registration is free. We’ll be in the Union Square section of San Francisco from August 21-23. Reserve your place today here.
Now, on to this week’s review.
A quiet time in the markets suddenly turned into a volatile, negative week after Argentina defaulted on some of its debt. We’ll have more about the markets below. For now, let’s look at the big picture.
A lot of the most-watched economic data was released this week. Longtime readers know that I don’t put a lot of stock in two of the most-watched reports: GDP and the Employment Situation. Those reports are based on estimates and often significantly-revised in the following months. They also are backward-looking, telling us what happened in the past.
Even so, this week’s reports are consistent with what we’ve seen in other data the last few months. After stalling in the first quarter of 2014, the economy recovered and more recently is picking up speed. The exception is residential housing, which continues to slow from 2013’s hot pace. Even so, housing continues to improve from its depressed levels.
There also weren’t any surprises in the Fed’s meeting announcement this week. The Fed will continue to reduce its asset buying on a schedule that will terminate the program in October. Despite the fears expressed by many last year when this program was announced, it hasn’t slowed the economy or raised interest rates. That’s because the economy and private lending market are healthy enough to replace the stimulus provided by the Fed.
My expectation is that barring some shock the economy will continue at a growth rate around 3%, give or take a little, for a while. Sometime in the next 12 months or so the economy will be healthy enough that we’ll have to worry about inflation. Then, the Fed will consider whether to raise interest rates or take other measures to restrain inflation growth.
That will be the most treacherous time for the Fed and the economy. While household balance sheets will be improved, they won’t be in great shape or even average condition. Unlike normal times, it will be difficult to slow the economy enough to restrain inflation and deflate some bubbles without tipping it into a sharp spiral.
But that’s the future. For now, the economy is doing well and the markets remain rather resilient in the face of all the global political problems of recent weeks. For now, there’s no reason to alter portfolios.
The Data
There were reports on almost all sectors of the economy this week.
Let’s start with housing. It continues to slow from 2013’s in many respects. Pending Home Sales Index declined 1.1%, which was below expectations and down 7.3% from 12 months ago. But the index number still indicates solid sales, an average level according to the National Association of Realtors.
The S&P Case-Shiller Home Price Index shows more of the same. Home prices nationally declined slightly for the month (amid expectations of a small increase) but are up 9.3% over 12 months.
Taken together with other recent data we conclude the housing market isn’t as active as in 2013 but it still is healthy in most areas. We should expect that h
