December 19, 2014 04:28 p.m.
Your Retirement Finance Week in Review
I wish each of you a Merry Christmas. Since next week is shortened by the holiday and not much economic data will be released, I probably won’t be sending an e-mail next Friday.
Central bankers gave investors an early Christmas present this week.
The big news was from the Fed. Many analysts had been convinced that the Fed was going to take tangible steps this work towards raising interest rates. The consensus seemed to be betting that the Fed would hint an interest rate increase was imminent, and then would raise rates by mid-2015. In its statement, the Fed did change its language somewhat. But it also indicated it was likely to keep rates low for some time.
This caused dramatic moves in the markets. In the January 2015 issue of Retirement Watch, which was posted on the web site this week, I said the last month was two distinct periods. The first featured rising markets, and the second was a couple weeks of declining markets leading up to the Fed announcement. The Fed statement initiated a third phase, which was two days of dramatic gains. It was the largest two-day percentage gain in three years for the major indexes.
Though it didn’t receive as much attention, a European Central Bank member indicated that the ECB was likely to begin a quantitative easing type of program, whether or not Germany wanted to go along.
Investors in my Invest with the Winners-ETF strategy might want to make a change. The January 2015 issue was put produced before the Fed’s announcement. Based on the data to that point, the recommendation is to sell iShares-Dow Jones Transportation Average (IYT) and PowerShares QQQ (QQQ) and replace them with iShares BarCap 20+ Year Treasury (TLT) and iShares Cohen & Steers Realty Majors (ICF).
Given how the markets have changed in the last two days, I would ignore that advice if you haven’t implemented it. Hold IYT and QQQ.
The U.S. economy and markets are doing well. If the ECB follows through on a new policy, I expect things will pick up in Europe. Low commodity prices will continue global deflationary pressures. That gives central banks a lot of room for easy monetary policies.
The Data
With a couple of exceptions, the week’s data was very positive.
The Consumer Price Index shows the effect of falling energy prices. The headline number showed deflation, with a general price decline of 0.3% for the month. Excluding food and energy, price rose a modest 0.1%. For 12 months, the numbers were 1.3% and 1.7% respectively.
This gives the Fed a lot of room to keep money easy without worrying about consumer inflation. It takes about six to nine months for falling energy prices to work their way through to the core inflation index (CPI minus food and energy). In addition, because of the way housing prices are computed for the CPI, they’re probably overstating the inflation rate at this point. Excluding housing, the core CPI is near its lows. Also, lower price increases for medical care and education are keeping the CPI low.
The Leading Economic Indicators from The Conference Board had another strong month, indicating good growth for coming months.
Several manufacturing reports were generally positive. The exception was the Empire State Manufacturing Survey, which declined for the month. This survey lagged the rest of the country most of the last two years, then had strongly positive movement the last few months. Now, it inexplicably tumbled. The only explanation is that these regional surveys are anecdotal rather than data driven, so they can be less accurate and more volatile than the data reports.
Industrial Production had a sharp increase, following a slight increase last month. The manufacturing segment of the report also had a sharp increase after a modest rise last week. The increases were broad-based.
The Philadelphia Fed Survey was about half last month’s number, but last month was unusually strong. This month’s number still indicates strong growth. The Kansas City Fed Manufacturing Index, the last regional manufacturing report of the month, indicated moderate growth and was roughly the same as last month’s number.
The PMI Manufacturing Index mid-month flash report was a little less than the end-of-month number for last month. I find the mid-month flashes to be more volatile than the month-end numbers, so I don’t give them much consideration. Likewise, the mid-month flash for the PMI Services also declined from the month-end numbers. Taken together both flashes indicate growth is slowing in December from strong levels in November.
New unemployment claims declined a small amount again, keeping the four-week average under 300,000.
Two housing reports show that the housing market still is waiting for its next growth period. The Housing Market Index from the home builders declined slightly but still indicates growth and was the sixth consecutive month of solid growth. Housing starts declined 1.7%, but that was after last month’s report was revised significantly higher. Here’s an on-point comment from Bill McBride of Calculated Risk blog: “This year total starts in November were reported at 1.028 million SAAR, down 7.0% from a year ago. That sounds weak, but actually starts in the 2nd half of 2014 have averaged 1.032 million, up 10.1% from the 937 thousand during the same period last year – including that strong November in 2013! In early 2014, housing starts were very weak – down year-over-year in Q1 – but starts have picked up in the 2nd half.
The Markets
Stocks were down early in the week but sharply recovered after Wednesday’s release of the Fed statement. The Russell 2000 U.S. Smaller Companies Index led the way with a 3.5% gain for the week. The Dow Jones Industrial Index and S&P 500 each gained 2.5%. The All-Country World Index rose almost 2%, and emerging market stocks were a fraction behind it.
Bonds had very different experiences. Long-term treasury bonds were up 1.5% early in the week but declined after the Fed announcement to close with a fractional loss. Treasury Inflation-Protected Securities (TIPS) closed with about the same loss. High-yield bonds, on the other hand, rose almost 3.5%. Investment-grade bonds had a gain of less than 0.5%.
The dollar rose about 1.25%.
Commodities had a poor week. Energy commodities was down all week until a late Friday rally that brought them back to even. Broader-based commodities lost about 1.75%. Gold lost about 1.25%.
Some Reading for You
If fluctuations in commodities prices confuse you, read this.
Here’s an interview with Jeffrey Gundlach of DoubleLine funds, and it’s more interesting than most.
Here’s an analysis of a financial scam.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
December 12, 2014 04:15 p.m.
Your Retirement Finance Week in Review
Investors found many reasons to sell risky assets this week, though there wasn’t much economic data. Early in the week, stock prices sank on news from China about a revised bank policy that seemed intended to rein in credit markets. Also, Europe’s economic struggles is starting to have broader and longer-term consequences. This week, political instability increased in Greece, and reports this week and in prior weeks indicated that political parties that used to be considered on the fringes are gathering large followings.
After that, a report in The Wall Street Journal said that Federal Reserve officials were considering changing the wording of their policy statement at their next meeting to pave the way for interest rate increases sometime in 2015. The report seemed obvious and shouldn’t have surprised anyone, but it apparently did.
Finally, the collapse in oil prices accelerated this week. Analysts finally are realizing that while the short-term effects of lower oil prices are primarily positive for the U.S., there are some longer-term consequences that aren’t all positive. In particularly, a high percentage of high-yield bonds are issued by energy companies. Investors now worry that there could be defaults on these bonds because of lower energy prices. You can find an interesting article in The Wall Street Journal mapping the route to today’s low oil prices here.
The U.S. economy continues to perk along, and growth might have increased again in the last month. Sustained oil prices could create some problems sometime in 2015 or later. I believe, however, that Europe poses greater risks. Germany continues to prevent the majority of the European Central Bank and other policymakers from taking the actions they believe are necessary. At some point, some of the other countries (especially Greece) will leave the European Union or the majority will implement policies Germany opposes. On top of this, there are the political and cultural problems caused by the depression that exists in most of Europe. Of course, if policymakers in Europe announce some new measures, that could spur optimism and cause at least a short-term boost in markets. So, I wouldn’t sell assets in anticipation of problems in Europe. Instead, be aware of the risks and ready to act.
The Data
The small amount of data released this week was very positive.
Retail sales rose sharply and higher than expectations. Gasoline sales declined because of lower prices. But consumers spent the money, and more elsewhere. This shows the importance of ignoring reports of the Thanksgiving weekend and Black Friday sales. The media reports are incomplete, and the reports of initial sales have no relationship to sales for the holiday season. This retail sales report indicates it will be a good holiday season for retailers, and it is consistent with the recent high numbers for consumer confidence.
The NFIB’s Small Business Optimism Index took a big jump to reach its highest level of the economic recovery. The index rose sharply over the last year but declined a bit in recent months. The NFIB Index is important, because in the early phases of the recovery it remained near its lows. Large businesses benefited from the early efforts to spur economic growth. It wasn’t until well after the economy’s bottom that small businesses began to feel the recovery, and now they appear to be very confident and optimistic.
Another positive report was the JOLTS (Job Openings and Labor Turnover Survey) of the labor market. The JOLTS report gives more detail than the monthly employment situation reports but with a one month lag. In the latest JOLTS, the hiring rate and the quit rate are close to their pre-crisis normal levels. The quits rate is considered important, because a high quit rate indicates workers are optimistic about the job market and are looking around for other jobs. The quits rate plummeted in the financial crisis and only recently started to recover.
New unemployment claims were little-changed from last week, allowing the four-week moving average to remain below 300,000.
Consumer Sentiment as measured by the University of Michigan rose sharply in the mid-month measure. The measure already was strong, and this is the highest number since June 2007.
Producer Price Inflation actually was deflation for November, declining 0.2%. The 12-month change is 1.4%. The decline was due largely to energy prices. Excluding food and energy, the measure was flat.
The Markets
It was a tough week for stocks and commodities.
The best-performing index was the Russell 2000 U.S. Smaller Companies Index, which lost just over 2%. The S&P 500 lost 3%, and the Dow Jones Industrial Average declined about 3.5%. The All-Country World Index lost 3.7%. Emerging market stocks had the worst week, losing more than 5%.
Gold continues to diverge from other commodities, gaining over 2%. Broad-based commodities lost about 0.8%. Energy commodities lost more than 5%.
High-yield bonds had a rough week, as you’d expect after reading the comments above. They lost almost 3%. Investment-grade bonds and Treasury Inflation-Protected Securities (TIPS) both gained just over 0.5%. Long-term treasuries had another strong week, gaining 3%.
The dollar lost 1%.
Some Reading for You
Here are 10 great thoughts from 10 great investors.
Here’s a fascinating look at the little-known beginning of today’s global cyber wars.
You should know about the global asset portfolio, especially if you’re a passive investor or try to use benchmarks. Read about it here.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
December 5, 2014 04:55 p.m.
Your Retirement Finance Week in Review
The last week or so has been interesting in the markets and economy.
Dominating the news and investors’ attention is the oil price decline and its consequences. The consequences will be longer-lasting and a bit different than many people expect. Initially the effects of the oil price decline will be positive for the U.S. and many other countries. Countries that depend on oil exports and have little else going for them, such as Venezuela, Russia, and Iran, will face significant harm.
Reports late last week were that Saudi Arabia chose not to support an OPEC increase in production to reduce the price of oil because it wants to drive down the price of oil further. It expects lower oil prices to reduce production and exploration around the globe, eventually taking off the market the additional supplies that came onto the market in recent years. Oil expert Daniel Yergin wrote in The Wall Street Journal last week that the lower price isn’t going to have the effect on supply that many anticipate. He says many oil producers are slow to reduce supply and can maintain production at lower prices than most analysts believe.
For now, the oil price decline is a net benefit for the U.S. economy. But in time it will reduce the flow of capital that’s been going into oil and natural gas production in the U.S. It’s not clear where that capital will flow next.
There were a couple of other interesting developments recently that didn’t receive much attention.
First, in global stock market indexes, the U.S. increased to greater than 50% of the indexes for the first time in a while. I’m referring to the indexes that weigh stocks by capitalization. Another interesting development in major stock market indexes that are capitalization weighted is that for the first time in many years among major U.S. indexes, ExxonMobil was not among the two largest companies. That decline was the result of the fall in oil’s price, which brought down prices of the entire energy sector. Even master limited partnerships focused on pipelines and other services, which shouldn’t be affected much by a lower price of oil, saw their values decline significantly.
Overall, the economic data indicate the U.S. economy continues to grow at a 3% or higher annualized rate. The data isn’t been uniform, with a few outliers causing investors to worry on the days they are released. But when all the data are compared, the U.S. economy appears to be doing quite well despite slower growth outside the U.S.
We saw affirmation of that in this week’s release of the Fed’s Beige Book, which is an anecdotal summary of the economy region by region. Lower gasoline prices increased retail spending, and most businesses are optimistic about holiday spending. There also were hiring increases in some regions and difficulties filling positions in some sectors.
The Data
We’ll start with the week’s most-watched report, the Employment Situation report. This was far more positive than expected, with new jobs reaching 321,000 and private payrolls increasing 314,000. In addition, hourly earnings increased more than expected and more than in quite some time. The average workweek also increased a bit. I always caution about this report, because it is based on estimates and frequently is revised. But it was hard to find anything not to like in the report.
The robust Employment Situation report wasn’t fully consistent with the other labor reports for the week. The ADP Employment report had a nice increase in jobs of 208,000, but not nearly as large as in the Employment Situation report. Likewise, new unemployment claims declined but not by as much as last week’s large increase.
There also was a little conflict in two reports on the non-manufacturing sector of the economy. The PMI Service Index continued to report growth in the sector, but for the fifth month in a row the rate of growth declined. Despite the declines, the index level still is healthy. The ISM Nonmanufacturing Index, on the other hand, had a sharp increase that was above expectations. It was the second-highest level in the recovery.
Consumer credit increased again, but as has been the case for some time the increase was concentrated in student and auto loans. Credit card debt and mortgages continue to lag well below historic levels.
Productivity and labor costs for the third quarter were revised significantly from the initial report. Productivity increased, which is good for growth and business profits. Unit labor costs declined a full 1%, after an initial report of a 0.3% increase. Lower labor costs are a plus for profit margins, but could indicate low wage growth, which isn’t great for the economy.
Construction spending increased sharply. I usually don’t note that report because it is very volatile and often subject to weather. But it moved markets a bit this week because the increase was so sharp and unexpected.
Manufacturing also continues to do well. The PMI Manufacturing Index reported continued growth, though at a little slower rate then previously. The ISM Manufacturing Index, however, showed only a slight decline. The ISM report has been among the strongest reports about manufacturing for some time and continues to point to stronger manufacturing growth than the other data, though most of the other data do report strong growth.
Factory orders were down, but that could be due mostly to the effect of lower oil prices.
The Markets
Stocks started the week slowly but then resumed their recent record-setting run. U.S. Smaller Company Stocks represented by the Russell 2000 led the way with a gain of about 1.75%. The Dow Jones gained just under 1.5%, while the S&P 500 gained just over 1%. Overseas stocks remained weaker, partly as a result of the strong dollar and partly because of slower growth outside the U.S. The All-Country World Index rose 0.5%, while emerging market stocks managed a fractional gain.
Bonds didn’t do well at any point during the week. Long-term treasuries were down 2% at one point and closed with a 1.4% loss. Treasury Inflation-Protected Securities (TIPS) lost about 1.2%. Investment-grade bonds lost 1%. High-yield bonds managed to gain a fraction.
The dollar had another strong week, gaining 1.8%.
Gold did best among commodities, losing 0.5%. Broad-based commodities lost just over 1%, while energy-based commodities lost another 2.5%.
Some Reading for You
A report in The Wall Street Journal said that many things people believe about aging are wrong. Life actually gets better for most people as we age.
Bloomberg put out a report purporting to be behind-the-scenes events leading up to Bill Gross’s departure from PIMCO.
Most of what people believe about health, nutrition, and related subjects is wrong, according to this report.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
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