December 2015

December 28, 2015 11:30 a.m.
Your Retirement Finance Week in Review

I hope you had a Merry Christmas season and are looking forward to a happy New Year. We didn’t issue a review last week because of the holiday-shortened week. This week’s activities also will be truncated. So I’m issuing this review in the middle of the two weeks to cover the end-of-year data and activities. I’ll be back on January 8.

Since the Fed finally acted a couple of weeks ago, investors finally are able to focus on something else. They are looking at fundamentals of the economy and markets, both in the U.S. and elsewhere, global politics, and more. It’s hard to draw conclusions about recent activity. Market participation is low because of the holidays. Tax-loss selling and other year-end activities also are influencing markets in ways that won’t continue after December 31.

We can summarize most of the year. Stock market indexes in the U.S. have small gains or losses at this point. The S&P 500 is up about 2%. The Dow Jones Industrial Average is up less than 1%. And the Russell 2000 U.S. Smaller Companies Index is down almost 3%. The All-Country World Index is down over 1%. The exception is emerging market stocks, which are down over 14%. With the exception of emerging markets, there was a lot of volatility and emotion packed into the year, yet it resulted in almost no change in values.

Commodities as you know were hammered. Energy-based commodities almost 34%, and broader-based commodities lost over 28%. Gold lost over 9%.

Long-term treasuries also had a volatile year only to end with a modest loss of less than 1%. Investment-grade bonds also lost less than 1%, though they were less volatile. Treasury Inflation-Protected Securities (TIPS) lost almost 2%, also after a volatile year. High-yield bonds lost over 5%.

Looking forward into 2016, there are a few factors to monitor.

Liquidity will be key to markets. The Fed has tightened over the last couple of years, ending quantitative easing and now raising rates. That’s reduced liquidity. There’s also less liquidity coming from China because of changes in its economy and policies. Europe and Japan still have easy money policies, but they aren’t enough to fully offset U.S. and Chinese actions. Cash sloshing around the global economy boosted asset prices since 2009. We’ve already seen severe price drops in commodities, emerging markets assets, and some other sectors. Further reductions in liquidity, or changes in flows of existing liquidity, would affect prices of other assets.

Global instability is another important consideration. The Middle East probably is more unstable than it has been in decades. Several governments fell in recent years, and there could be more turnover. Russia, China, and Iran are wildcards, playing for sizeable international roles. Even China could have some instability. In recent years it’s made a tacit deal with its residents. The government would provide economic growth and increased wealth, increasing the middle class. The resident would continue to tolerate political repression and corruption. If the government continues to have trouble delivering on growth and a rising stock market, there could be political problems.

Of course, economic growth is a key factor for investors. The U.S. has been in a period of sustained, average growth. But fiscal tightening hampers the economy, and the growth could be derailed by any of a number of possible changes. Growth slowed in the last month or so. I’m still optimistic for the future, but we have to be alert for changes. China and Europe also have improved after earlier problems, but neither has a solid foundation at this point.

It’s important that investors not overreact to events in 2016. We saw in 2015 that markets are more volatile than when the Fed was actively involved in them. There also are fewer market stabilizers because of bank regulation and other factors. Investors need to focus on the things that really matter to markets and ignore the headlines and market noise.

The Data

The year is wrapping up with a small amount of data.

The third and final revision of third quarter GDP came in with little change and no surprises. The positives were upward revisions in investment residential and nonresidential assets.

Housing continues to have mixed reports, indicating that the sector is growing but at a modest and probably slower rate. The FHFA House Price Index increased but at a little slower rate than last month. The 12-month rate of increase is 6.1%. Existing home sales declined sharply, but that is said to be due to a change in new rules that delay closings. If that’s correct, next month’s number should be a healthy increase. The result is that 12-month existing home sales are down almost 4%.

New home sales rose 4.3% after last month’s number was revised down. But sales were below expectations by a small amount. New home sales have been better than existing home sales for a while, most likely due to the lack of foreclosure an distress sale bargains in the existing home market. Prices increased over 6% for the month and are down less than 1% over 12 months.

There will be two more housing reports later this week.

Personal Income and Consumer Spending both increased 0.3% for the month. Spending was higher than expectations, and income was slightly below. The numbers indicate households are in good financial shape. Incomes are rising at modest rates, and consumers benefit from lower gas and commodity prices. But households are saving some of that money. They’re spending, but not at rates similar to before the financial crisis. The healthy consumer should cause businesses to expand a bit more.

The PCE Price Index, the Fed’s preferred measure of inflation, increased modestly. Inflation isn’t putting any pressure on the Fed to raise interest rates.

New unemployment claims declined 5,000, keeping the four-week average near historic lows.

Manufacturing continues to look for a bottom. The Richmond Fed Manufacturing Index broke a recent pattern by reporting a solid gain for the month, the only Fed regional bank to do so. New orders were up strongly. Durable Goods Orders were flat, on the other hand, and declined slightly after excluding the volatile transportation sector.

The Dallas Fed Manufacturing Index took another sharp decline, indicating again how much the decline in energy prices has hurt that region and the manufacturing sector of the economy.

Consumer sentiment as measured by the University of Michigan increased and was above expectations. The current conditions component of the index was very positive, while expectations are flat. This reading plus the Personal Income report explain why Amazon.com reported a sharp increase in sales this Christmas over last Christmas and why FedEx was having trouble dealing with both the extreme weather and all the additional deliveries.

The Markets

Stock indexes rose before Christmas but have been declining since. The major stock market indexes retain gains between 1% and 1.5% since December 18. Emerging market stocks are the laggards with the All-Country World Index leading.

Bonds are a mixed picture. High-yield bonds are up about 0.8%. Treasury Inflation-Protected Securities (TIPS) are up a fraction. Investment-grade bonds are down about 0.2%. Long-term treasuries are down about 0.8% but were down over 1.4% before Christmas.

The dollar is down more than 0.5%.

Energy-based commodities are trying to have a year-end rally. They’re up about 1% but were up over 2% before Christmas. Broader-based commodities are up about 0.5%. Gold is down about 0.8%.

Some Reading for You

You might be interested in this review of the latest tax law Congress passed before its holiday break.

Also, this post analyzes which housing markets are hot and which aren’t.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.

December 6, 2013 04:55 p.m.
Your Retirement Finance Week in Review

This is the last call for my next webinar with TJT Capital. The focus will be on helping investors select a strategy and structure for their portfolio management. I’m looking forward to it and hope you are, too. There still are some spaces available, so act now if you’re interested. It will be on Dec. 10 at 3:30 p.m. eastern time. The title is “Challenges Investors Face: How TJT Capital Manages Portfolios to Participate in Bull Markets and Protect Capital in Bear Markets.” You can reserve your space today by clicking here. I discuss these webinars in my capacity as Managing Member of Carlson Wealth Advisors, L.L.C.

Stocks had their first negative week for a while this week, though they had a solid day on Friday. There were several reasons for the weakness. One reason, of course, is that U.S. stock indexes had eight positive weeks in a row. It was inevitable that would end.

There also were several negative reports from overseas early in the week. China plans to deliberately slow its growth rate. This would reduce global growth and especially harm commodity-based economies that depend on exports to China for growth. News from Brazil indicated that country continues to struggle with the fading of the commodity boom. Europe, after being under the radar for about a year, raised new concerns with investors. There are signs of deflation in the continent. Cyprus is likely to need a new bailout. The coming bank stress tests are likely to reveal problems that will need fixing in coming months.

The biggest problem for U.S. markets probably was the latest Beige Book from the Fed. Most recent economic data indicate that the economy slowed after interest rates rose in May and June. The question among most investors is whether this slowing is temporary. In their peculiar way of thinking, a majority of investors seem to believe that if the economy is strong, or too strong, the Fed will reduce its bond buying and that will be bad for markets. But if the economy is weak, the Fed will remain active at its current levels, and that will prop up markets.

That brings us to the Beige Book. The book portrays a stronger economy than most of the data. It repeated the statement from the previous book that the economy is growing at a moderate to modest pace, with most district banks reporting the higher moderate growth rate. There also were indications in the book that growth is improving in some areas. For example, the book reported more frequent pockets of shortages of skilled labor than in the past. It also reported a moderate increase in household spending in the last six weeks.

Households absorbed the tax increases and fiscal tightening of early this year by reducing savings. The economy slowed hardly at all. They didn’t adjust to higher interest rates quite as quickly. We saw clear slowing in housing and retail sales. But housing prices continued to appreciate, though at a slower rate, and stock prices rose. Plus, interest rates are lower than their peaks earlier in the year. I suspect barring any shocks this should be sufficient to cause growth in 2014 to rise to the 2.5% to 3% rate of early 2013.

As you’ll see below, investors seemed to change their views about the Fed and economic growth after positive employment and other reports were issued on Friday. Most seem to realize finally that if the Fed is less stimulative because the economy is strong, that’s a good thing.

The Data

There was a lot of data issued this week. Let’s start with the market-moving employment reports, though as I’ve said in the past I believe there is too much attention paid to these.

The preliminary reports of the week were positive. The ADP Employer Report showed much higher job growth than expected and than has occurred in recent months, 215,000. Also new unemployment claims declined below 300,000 for the first time since September and the second-lowest level of the recovery. But the Thanksgiving holiday might have distorted the numbers.

The two employment situation reports on Friday continued the generally positive news in the headline numbers. More jobs were created than expected at 205,000, and the two previous months generally positive numbers were increase in the revisions. Also, the unemployment rate declined to 7%, the lowest in five years.

Peering below the headline numbers the reports were as positive. The unemployment rate declined so much because a large number of people continue to drop out of the work force. Employment increased by only 83,000 from September through November. The question economists are debating is: Are people leaving the workforce because they’re getting older or because they’re giving up on finding decent jobs?

The numbers in the report I follow more closely are hours worked and average hourly earnings. These were both up very modestly and at expectations.

While media reports said investors would be concerned that the strong employment report would create worries that the Fed would reduce bond buying, stock indexes surged. That’s likely because investors finally realize that if the Fed reduces bond buying because of strong economic data, that’s good for stocks and economic growth. Investors also might have realized that despite the headline numbers the economy isn’t all that strong, so the Fed isn’t going to tighten monetary policy soon.

Let’s move to broader economic data.

Investors also might have liked Friday’s Personal Income and Outlays report which showed consumer spending continuing to increase in line with expectations. This occurred despite a decline in personal income. The decline might be the result of the partial government shutdown. Another positive in the report was a modest gain in prices as measured by the PCE index, indicating there is no reason for the Fed to worry about inflation.

The third major report issued on Friday also was positive. Consumer sentiment as measured by the University of Michigan rose sharply and was the best reading since the recovery peaks of May-July. Optimistic consumers usually are an indication of rising retail sales in the next few months.

The final GDP report for the third quarter was revised upward to a 3.6% annual growth rate. This is higher than the initial two estimates and much higher than expectations. But the increase was due mostly to an upward revision in inventory growth. This indicates sluggish demand and businesses producing more than can be sold. Also, inventory rises and falls tend to even out over time, so this likely will be washed out in the next report or two. This is consistent with the positive, but slowing growth seen in other data.

Likewise, the ISM Non-Manufacturing Index showed positive growth but was lower than the previous month’s number and below expectations. The good news in the report was strong growth in new orders.

Corporate after-tax profits, as reported by the Department of Labor, rose at a faster rate in the third quarter. On a 12-month basis they increased 5.8%.

The manufacturing reports for the week were generally positive. The PMI Manufacturing Index came in higher than the previous month and than expectations, indicating solid growth. Likewise, the ISM Manufacturing Index came in well above expectations and at its highest level in two and a half years. In both reports, new orders were strong. But Factory Orders were down, and after subtracting the volatile transportation sector were unchanged.

These reports continue a trend of mixed reports on the manufacturing sector. It clearly slowed in the face of lower household spending over the summer and early fall. Some data indicate manufacturing might be picking up, while others, such as factory orders, point to a continuing stall.

There also were several housing reports this week. Two months of reports on construction spending were issued and were mixed. The September report showed a good increase in single-family residential construction, while the October report showed a decline of 0.6%. There also were two months of reports on new home sales. New home sales declined in September but surged in October, rising 25.4%. New home prices actually declined 4.5% in October, perhaps helping sales.

I usually don’t report on the Mortgage Bankers Association weekly report on new mortgage applications. I’ve found it doesn’t seem to do a good job of forecasting other activity or data. Here’s a good explanation of why. Basically, the index is skewed toward the largest lenders, excluding smaller mortgage lenders. Recently, large banks cut back their mortgage lending while smaller lenders are taking about 60% of the market. A lot of that lending isn’t reflected in the report.

The Markets

It was a bad week for stocks around the globe, though Friday’s economic reports allowed them to recover a lot of their losses. Emerging market equities fared the worst, losing over 0.6%, though they were down almost 3% earlier in the week. The Russell 2000 U.S. Smaller Companies Index had a similar loss. The All-Country World Index lost 0.4% (down 1.7% earlier in the week), whiel the Dow 30 lost only 0.1%. The only winner was the S&P 500 with a 0.1% gain (down 1% at Thursday’s close).

Bonds and the dollar also fared poorly. The dollar lost 0.7%, though it was up until Thursday. High-yield bonds lost a fraction, while Treasury Inflation-Protected Securities (TIPS) lost 0.75%. Long-term treasuries did the worst, losing over 0.9%, recovering some ground on Friday.

Commodities were the only positive performers for the week, but not gold. It lost 0.5% and was down more early in the week. Energy-related commodities gained almost 2% while broad-based commodities returned almost 1.5%.

Some Reading for You

Here’s a good review of seven mistakes to avoid in the first year of retirement.

Ukraine might be the next global financial problem.

Are stocks overvalued? I like this review of the 10-year average of corporate earnings valuation method.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.