February 2016
February 26, 2016 05:15 p.m.
Your Retirement Finance Week in Review
Next week I’ll be at the MoneyShow Orlando. So, we might not have a Bob’s Journal or it might be issued at something other than the usual time. We’ll have a booth at the MoneyShow where I can meet with members, and I’ll be making several presentations. It’s March 2-5 at Disney’s Contemporary Resort. Your registration is free, and you’ll receive a free special report Solid Income Picks for the Long Haul, when you register. Make your free registration here.
U.S. stocks markets registered their second consecutive week of gains despite some losses on Friday. Many global markets also have improved. Even commodities are improving, with oil prices above their recent lows. The flight to safety seems to have ended. Gold peaked back on February 11, as did U.S. Treasury Bond prices.
Investors were scared of several things to start 2016.
Foremost among the fears was China. Excess debt was leading to slower growth. China also had a stock market bubble that was badly mismanaged by the government. The currency’s been devalued, and there were widespread fears that it would be devalued further. Some feared the devaluation would spin out of control and cause a global crisis. Of course, all these events are deflationary. The size of China’s economy leads to the deflation being exported to other countries.
Slower growth in the U.S. also became apparent and raised concerns about the potential for a recession sometime in 2016.
Economies in Europe and Japan continue to struggle despite a lot of stimulation from central banks.
Also on the worry agenda were the knock-on effects of the collapse of the price of oil. While the initial effects generally are positive, a continuing price collapse has negative effects. Expectations are that a number of the leveraged energy companies won’t be able to service their debt at current energy prices. Eventually they’ll have to default or restructure the debt, and that will lead to problems for the lenders.
Each of these problems is real, and cumulatively they could cause global problems.
Yet, there’s also a reasonable probability that we’ll muddle along. Remember the fears at the peak of the European debt crisis just a few years ago. Many analysts believed that the European Union couldn’t continue and that several countries would have to abandon the euro. That still could happen. But policymakers were able to put together a program that managed the problems and at least deferred them.
We could have the same result with today’s issues. Already, the talk about China spinning out of control is far less frequent. Forecasts of a U.S. recession this year are toned down.
We potential calamities and crises dominate the headlines, you need to adhere to a strong process. There’s never a 100% probability of these things happening. Instead, study the issues and estimate the probability of the bad things actually happening. Use that estimate to adjust your portfolio, perhaps making it less risky but not completely abandoning stocks and other risky assets. Choose your portfolio using the factors that matter to the markets, such as valuations, momentum, and the state of the economy.
That’s what we do at Retirement Watch. We’ve had a low U.S. stock allocation but no exposure to foreign stocks. While most markets were declining, we find profitable opportunities in long-term treasury bonds and utility stocks. We earned modest returns with DoubleLine Total Return Bond and preferred stocks. We also lost a relatively small percentage with emerging market bonds.
Balance and diversification pay off most of the time. During periods such as the first six weeks of this year there’s a lot of negative talk. That’s all market noise. Focus on the fundamentals and stay with your long-term plan and process.
The Data
A lot of data was released this week, and it was decidedly mixed. It shows again that the economy is growing, but it is growing at a slower rate than in late 2015. Manufacturing continues to be in a deep recession, and the rest of the economy is struggling against some headwinds.
We’ll start with manufacturing. The PMI Manufacturing Index Flash has been stronger than other manufacturing measures during this downturn. The latest release, at 51.0, still indicates manufacturing is expanding. But the number is a decided and unexpected decline from the month earlier 52.5.
The Richmond Fed Manufacturing joined the New York and Philadelphia in revealing a downturn in February. The index came in at minus 4 after being a positive 2 last month. It’s no surprise that the Kansas City Fed Manufacturing Index was decidedly negative at minus 12. This region is hurt second-most (after Dallas) by falling energy prices, and this is the 12th consecutive month of contractions. The only good news is that the bad news wasn’t as bad as last month.
On the other hand, Durable Goods Orders show up by 4.9% after being down almost the same amount last month. This supported the higher Industrial Production number earlier in the month. Even after subtracting the volatile transportation sector, orders increased 1.8% and core capital goods increased 3.9%. This is a bit of a lagged number. It represents January’s activity. The regional Fed bank reports and other timely measures of February activity have been negative.
Housing had several key reports. The S&P Case-Shiller Home Price Index increased 0.8% for the month for a 5.7% 12-month increase. Remember this is a lagged index, so the numbers are for December. The FHFA Home Price Index, which also is for December, showed a lower price gain of 0.4% for the month, compared with 0.6% for the previous month. The 12-month gain also slowed to 5.7%. The numbers show home price appreciation slowed as 2015 progressed and are well below the peaks of 2013. Even so, home prices continue to increase faster than wages in most regions.
Existing home sales increased 0.4%, which is good considering that the previous month’s sales increased 12.1%. There was concern that the large one-month gain would take sales from the following month. Over 12 months, existing home sales increased 11%.
New home sales, however, declined 9.2%. That isn’t entirely unexpected, because the previous month had a sharp increase in sales. The bulk of the weakness was in the West, which had a sharp drop in sales. In addition, prices were cut and now are 4.5% lower than 12 months ago.
The service sector of the economy is slowing. In fact, the PMI Services Flash Index mid-month reading came in at 49.8. A reading below 50.0 is supposed to signal a contraction. This is the first negative reading in service sector data for a while. We’ll have to see if it is an anomaly or the beginning of a trend.
Consumer attitudes are mixed. Consumer Confidence as measured by The Conference Board took a sharp dive. The details show that overall consumers still are relatively confident, but less so than in past months. This is the first big drop in a consumer measure. We’ll wait to see if it shows a turn. Consumer Sentiment as measured by the University of Michigan rose slightly. It still is below the cycle peaks of early 2015 but above the lows of August and September of 2015.
Personal income took a healthy jump of 0.5%. Consumer spending rose by the same amount. Despite the higher spending, the savings rate remains at 5.2%. The report also didn’t show signs of deflation. The Core PCE Price Index rose 0.3% for the month and is up 1.7% for 12 months. That’s getting close to the Fed’s target rate.
New unemployment claims rose 10,000 but still are near historic lows.
The second estimate of GDP for the fourth quarter of 2015 was released. It revised growth from 0.7% to 1%. At this point the report is history and shouldn’t affect decision making.
The Markets
As mentioned above, it was another good week for many risky assets.
The Russell 2000 led the way with a 2.59% gain. The S&P 500 gained 1.8%. The Dow Jones Industrial Average was closed behind with a 1.79% gain. The All-Country World Index was a bit behind with a 0.96% gain. Emerging markets continue to struggle, losing 0.07%.
High-yield bonds followed stocks higher with a 1.56% return. Treasury Inflation-Protected Securities (TIPS) were closed behind with a 1.27% gain. Investment-grade bonds returned 0.99%. Long-term treasuries inched ahead with a 0.60% gain.
The dollar had a good week, most of it on Friday, gaining 1.4%.
Energy-based commodities gained about 0.93%. Broad-based commodities gained 0.1%. Gold lost 0.25%.
Some Reading for You
Here’s a profile of a psychologist who says money changes people for the worse.
This post documents major mistakes made by supposedly efficient markets.
The author of the Dilbert comic has said from the beginning that Donald Trump is likely to be successful. Here’s a collection of his arguments.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
February 19, 2016 04:40 p.m.
Your Retirement Finance Week in Review
This is the last call to register for the upcoming MoneyShow Orlando. We’ll have a booth where I can meet with members, and I’ll be making several presentations. It’s March 2-5 at Disney’s Contemporary Resort. This is the 35th anniversary of the show, so they’re planning some special events. Your registration is free, and you’ll receive a free special report Solid Income Picks for the Long Haul, when you register. Make your free registration here.
It was a relatively quiet and, for a change, generally positive week in the markets. The economic data for the week wasn’t so positive.
Nothing’s really changed. The U.S. economy continues to grow, but the growth rate is slowing. I think the retail sales report we discussed last week is one of the factors indicating that U.S. households remain in good financial condition. Their spending is supporting the U.S. economy. The support won’t be as strong as over the last year. Also, businesses are pulling back their investments. Combine those factors with the continuing weakness overseas and the strong dollar, and you have the reasons why economic growth is likely to decline despite the positives in the service sector and households.
The main difference between this week and last week is that some of the recent panics subsided. Investors stopped selling banks, especially European banks, hand over fist. The decline in energy-related investments also seems to have abated, at least for a while.
I see no reason to change investment positions. This likely is a pause in bear markets. If energy and other battered investments are reaching bottoms, there’s no rush to buy. It should take a while for them to recover unless there is dramatic news from the oil-producing countries about a deal to seriously limit production.
The Data
Manufacturing and housing were this week’s key data.
Manufacturing continues to struggle. The Empire State Manufacturing Survey has been strongly negative since last August, and that continued in the latest report. Though the report was a little less negative than the previous month, it still was a major negative reading and was significantly below expectations. The Philadelphia Fed Business Outlook Survey was a similar story, though the numbers weren’t as negative. It was the sixth negative monthly report in a row, and there wasn’t much positive in it.
Industrial Production, on the other hand, was positive and above expectations after being negative last month. An increase in auto production was a major factor in the increase. Also, utility output increased because the warm December transitioned into a cold January. The manufacturing component of Industrial Production also improved, which contrasts with other reports on manufacturing.
Housing appears to have softened a bit. The Housing Market Index from NAHB declined to its lowest reading since May. It still is in positive territory and indicates builders are positive, but the current sales component declined.
Housing starts declined 3.8% and permits declined only 0.2%. The real strength in housing permits and starts has been in multifamily housing. The permits for single-family homes declined 1.6% while for multifamily homes they rose 2.1%.
The Leading Economic Indicators compiled by The Conference Board declined again, and last month’s decline was revised down a little. The main drags in the index were declining stock prices and the manufacturing data.
Inflation remains in check but continues the increase that’s been going on for several months. Producer prices rose a tenth of a percent, but after excluding food and energy rose 0.4%. But the 12-month change is only 0.6%. The Consumer Price Index was flat but after excluding food and energy rose 0.3%. The 12-month increase is 2.2%. That puts the CPI in the Fed’s target zone for the first time in a while. Services, especially medical care, generally are rising while prices of commodities decline. Housing costs continue to increase in the CPI, but the way housing is included in the CPI probably distorts their real increases.
New unemployment claims declined again, this time by 7,000. This brings the figure down to the lowest level since November and back near the record lows.
The Markets
Despite modest declines to close out the week, stocks had strong positive returns for the week. The Russell 2000 led the way with a 5.25% gain. Returning around 4.5% were the emerging market equities and All-Country World Index. The S&P 500 gained 4%, while the Dow Jones Industrial Average gained 3.55.
Bonds reversed their recent patterns. High-yield followed stocks, gaining about 2.75%. Investment-grade bonds gained a fraction. Treasury Inflation-Protected Securities (TIPS) lost about 0.5%. Long-term treasuries were the laggards, losing 1.5%.
The dollar had a good week, gaining 1%.
Energy-based commodities gained over 2%, and they were about 4.5% higher in midweek. Broad-based commodities gained about 1%. Gold reversed its recent pattern, losing almost 1%.
Some Reading for You
This article lays out how bad things are at European banks.
Here’s a detailed review of why value stocks aren’t outperforming the way they used to and whether the value stock premium is dead.
A couple of articles explain why oil prices aren’t likely to rise soon.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
February 12, 2016 04:10 p.m.
Your Retirement Finance Week in Review
There’s still time to register for upcoming MoneyShow Orlando. I’m scheduled to make four presentations on March 2-5 at Disney’s Contemporary Resort. This is the 35th anniversary of the show, so they’re planning some special events. Your registration is free, and you’ll receive a free special report Solid Income Picks for the Long Haul, when you register. Make your free registration here.
Three factors are causing the recent panic and selling in global markets.
The first factor, of course, is the prospect of a sharp devaluation in China’s currency. That was a major cause of the sell off that started the year.
More recently, investors have been concerned about the potential for a recession in the U.S. The recent data make clear that the growth rate slowed in the last few months. Manufacturing and commodity-related businesses, of course, have been in a recession for at least a year. The rest of the U.S. economy’s been healthy. But the nonmanufacturing sector of the economy clearly lost a little steam. Lower asset prices make people feel less wealthy, so they spend less. Also, the windfall from lower gas prices is coming to an end as the big decline in those prices is over. Also, businesses aren’t investing in the future, such as by buying capital equipment. We can see from the recent decline in most consumer confidence measures that all the negative financial headlines are causing households to be more cautious. The data don’t indicate we’re headed for a recession, but I expect growth will continue to slow through 2016.
Concerns about banks, both in the U.S. and Europe, are the latest drag on the markets. There are two issues about banks worrying some investors.
One issue is the continued decline of commodity prices. In the financial crisis many banks went bankrupt or were in deep distress because of high losses from real estate debt. Some investors fear the same thing could happen with commodity-related loans. While some banks will have problems, I think fears of a 2008-like situation are overblown. The commodity loans aren’t concentrated in banks. They’re dispersed among mutual funds, hedge funds, and other investors.
Negative interest rates are another concern about banks. There are some negative rates around the globe, and Fed Chairman Janet Yellin said recently they are a possibility in the U.S. Here’s a good review with links about negative interest rates.
Negative rates and bad commodity-related loans will hurt bank earnings, and that will hold down the value of bank stocks. (Banks stocks are down about 25% in 2016.) But it shouldn’t raise concerns about the rest of the markets. Bank balance sheets are stronger than they were in 2007. Regulations and new policies greatly limit the amount of risk banks are taking. They’re not very good investments, but they also aren’t likely to be a crisis trigger as housing was in the last crisis.
I continue to expect low growth and low inflation in the U.S. Returns on stocks and other risky investments will be low or negative for a while yet. Investors have opportunities in bonds and a few other vehicles.
The Data
There wasn’t much data this week. The data issued continued the recent pattern of showing a reduction in overall growth.
The slowing of the U.S. economy was evident in the NFIB Small Business Optimism Index. After surging most of the last two years, it declined from its peak in recent months, and this week registered a sharp decline. It’s back at 2014 levels. The small business owners continued to have plans to increase capital investment and said jobs are hard to fill. But they reduced plans to increase employment and expectations for sales and growth.
There were a couple of employment reports. New unemployment claims declined 16,000 after several weeks of increases. New unemployment claims are back to levels of mid-December.
The JOLTS (Job Openings and Labor Turnover Survey) showed the labor market was healthy through December. There’s a lag in this report in order for it to have more detailed data. Job openings surged. Also, the quits rate increased a little while the layoffs rate decreased. The quits rate indicates how good the labor market is, because it shows how confident employees are about the market to look for new positions.
Consumer Sentiment as measured by the University of Michigan declined more than expected in the mid-month flash measure. The level still is consistent with the average for the last couple of quarters. But it shows that recent negative financial news is affecting the outlooks of consumers.
Retail sales increased in line with expectations after declining the previous month. When gasoline sales are excluded the increase is above expectations. Falling gas prices and import prices (because of the strong dollar) hold down the retail sales figure because it is based on nominal dollar sales. The one year gain for retail sales excluding gasoline is 4.5%.
The Markets
Stocks had an up-and-down week but had a strong finish to avoid having five negative days in a row. The S&P 500 led the way with almost a 1% gain for the week. The Russell 2000 U.S. Smaller Companies Index gained just over 0.5%. The Dow Jones Industrial Average gained about 0.2%. The All-Country World Index didn’t recover enough to register a positive return, losing a fraction. Emerging market equities also had a negative week, losing 1%.
There was a big divergence among bonds. Long-term treasuries again had the best week, gaining about 2%. But they were up over 5% around midweek. Investment-grade bonds and Treasury Inflation-Protected Securities (TIPS) gained a fraction. High-yield bonds lost about 0.5%
The dollar was down all week and lost just under 1%.
There also were divergences among commodities. Energy-based commodities were down around 5% at midweek but recovered late in the week to register a 1.6% loss for the week. Broad-based commodities weren’t down as much earlier in the week but closed with a 1.5% loss. Gold surged the last two days of the week, closing with a 4% gain.
Some Reading for You
Here’s a novel solution to dealing with unwanted telemarketers.
This article explains what’s been happening below the market indexes.
An article in Barron’s this week explained why it isn’t a good time yet to buy master limited partnerships.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
February 5, 2016 04:20 p.m.
Your Retirement Finance Week in Review
Here’s one more reminder about the upcoming MoneyShow Orlando. I’m scheduled to make four presentations at the MoneyShow Orlando on March 2-5 at Disney’s Contemporary Resort. This is the 35th anniversary of the show, so they’re planning some special events. Your registration is free, and you’ll receive a free special report Solid Income Picks for the Long Haul, when you register. Make your free registration here.
Stock market indexes and their fluctuations capture most of the headlines, and they certainly have done that so far in 2016. That does a disservice to many investors, because they tend to think their investment choices are stocks and cash. There’s a lot more in the investment world, and focusing only on stocks causes people to miss out on the benefits of a diversified portfolio. Let’s take a broader look at what’s transpired so far this year in the markets and mutual funds.
Stocks, of course, are down. Here’s how key Vanguard index funds have performed as of Wednesday’s close. Vanguard Index 500 is down 6.29%. Extended Stock (which includes most tradable stocks in the U.S.) is down 10.54%. Small company stocks, as measured by the Russell 2000 Index are down 10.97%. European Stock is down 7.13%. Pacific Stock is down 8.01%. Emerging Markets Select Stock is down 9%.
In U.S. sector, Energy Index is down 5.39%; health care (a market leader until this year) is down 9.74%, and REIT Index is down 3.47%.
Though global diversification often is a good idea, it hasn’t helped stock investors in 2016. A lack of diversification, such as by focusing on large U.S. stocks or REITs would have limited losses but still incurred losses.
Bonds are doing better. Also looking at Vanguard funds, Intermediate-term Bond, which tracks the most widely-quoted bond index, is up 2.12%. Investment-Grade Bond is up 1.10%. Inflation-Protected Securities are up 1.71%. High yield bonds tend to follow stocks more than bonds, and this year is no exception with High-Yield Corporate down 1.67%. GNMA is up 1.35%.
Treasury bonds are doing best, likely due to a flight to safety. Intermediate-Term Treasury is up 2.64%, and Long-Term Treasury is up 6%. The Inflation-Protected Securities fund is largely composed of inflation-indexed treasury bonds, but it is lagging the nominal treasury bond funds because investors are more concerned now about deflation than inflation.
Commodity returns are down, but not as much as most stocks. The Vanguard Precious Metals & Mining fund is up 2.36%, thanks to a recent recovery in gold. There aren’t many mutual funds that give broad commodity exposure, so we’ll look at ETFs. The iShares fund that tracks the Goldman Sachs Commodity Index (GSG), which is primarily energy-based, is down 6.82%. The broad-based commodity ETF (DJP) is down 3.21%.
We have some additional funds in our recommended portfolios, and these also show the value of diversification. Wasatch-Hoisington Government Bond is leading the pack because it owns primarily long-term treasury bonds. It is up 6.84%. Cohen & Steers Preferred Securities & Income is down 1.22%. DoubleLine Total Return Bond is up 1.51%. DoubleLine Emerging Market Fixed Income is down 1.58%. Vanguard Utilities Index-Admiral Shares is up 7.51%. Our only major loser is Nicholas, which is down 7.35%.
The Data
The economy clearly is slowing. The U.S. isn’t in or near a recession, bur growth definitely is lower than a year ago. In 2015 manufacturing declined steadily while the rest of the economy grew at a steady clip. The nonmanufacturing sector began to slow in late 2015, and that has continued so far in 2016.
The week’s manufacturing data generally were negative. The exception, as has been the case for a while, was the PMI Manufacturing Index. It has been more positive than other manufacturing indicators for at least a year. This month it increased to a 52.4 reading. This indicates growth and at a higher rate.
The ISM Manufacturing Index, to the contrary, remains below 50, indicating contraction in manufacturing. It increased fractionally from last month. Employment was the weakest segment of this report.
Factory Orders declined again and by a sharp 2.9%. Also, last month’s mild decline was revised downward to 0.7%. All segments of the report were weak, and some were very negative.
We also see lower growth in the broader economy. The PMI Services Index a bit, though it still indicates solid growth at 53.2. The ISM Non-Manufacturing Index was revised higher for last month but took a noticeable drop in the latest month. The report also indicates solid growth but growth clearly is slowing. Weak segments of both reports were employment.
The Personal Income and Outlays report was mixed. Personal Income increase right in line with expectations, but Consumer Spending didn’t increase. Instead, the savings rate increased to 5.5%. Wages and salaries increased modestly, but manufacturing wages declined while wages in the rest of the economy increased. The Fed’s preferred inflation measure, the PCE Price Index, continues to indicate inflation below the Fed’s 2% target.
The quarterly productivity and costs report doesn’t bode well for corporate profit margins. The report showed a 3% decline in productivity, compared to a 2.1% increase last quarter. In addition, unit labor costs rose 4.5%. But the rise in unit labor costs was due largely to an increase in hours worked while output was flat. Compensation rose only 1.3% for the quarter.
We are seeing signs of a weakening in employment. New unemployment claims have been rising, and now the four-week average is about 5,000 higher than a month ago. Likewise, the weekly Challenger Job-Cut Report showed a substantial increase in layoffs, which are attributed largely to Wal-Mart’s decision to close 154 stores in the U.S. The ADP Employment Report also showed a sharp decline in new jobs over the last month, though the actual number was about 15,000 about the consensus estimate.
The weakness became apparent in the monthly employment situation reports. There was a gain of 151,000 jobs. That was substantially lower than last month’s number and below expectations of about 188,000. The unemployment rate also declined to 4.9%. Despite the weak headline numbers, there were signs of strength in the report. The average w
