July 2015
July 31, 2015 04:25 p.m.
Your Retirement Finance Week in Review
Two events captured most of the attention this week.
The first was China’s stock market indexes. The indexes peaked in mid-June after a year of gains around 100%. They quickly lost 30% from their peaks and attracted global attention. China’s authorities quickly took measures to shore up the indexes, and they stabilized toward the end of last week. But they started this week with a decline of 8.5% on Monday, the largest one-day drop in years. That led to fears of an unstoppable decline, but the indexes rose the next day and were up and down within a range the rest of the week. China’s markets retreated from the headlines but they’ll reappear anytime there’s another decline.
The second news was the announcement following the Fed’s Open Market Committee meeting this week. The committee took no action on interest rates and Chairman Yellen didn’t have a media conference, but analysts studied carefully the written announcement.
Some analysts said the announcement offered no news or clues. Others insisted that the announcement focused on only the positive aspects of the economy without the usual mentions of weak spots and risks from events outside the U.S. These analysts say this was a firm indication that the Fed will raise the Fed Funds rate at its September meeting unless the economic data, especially the labor market data, turn decided worse in the next two months.
While Fed watching is entertaining, investors shouldn’t pay much attention to these details. What matters is not what the Fed does. What matters is what the Fed does that markets weren’t expecting. Currently, markets expect a modest increase in interest rates soon. Should the Fed actually increase rates in September, that should be close to a non-event in most markets. I’ve said for a while not that the greatest risk to the economy is that the Fed raises rates too far, too fast. As long as the Fed raises rates only modestly and doesn’t embark on a path to restore rates to historic averages, it shouldn’t be much of a factor. But the economy is fragile. If the Fed becomes too concerned about inflation or simply wants to move away from its zero interest rate policy, there will be risks to both the economy and equity markets.
The Data
There was a small amount of data this week, but some of the more widely-watched data was released this week.
Manufacturing was a key focus. This week’s data continues to indicate that manufacturing is finding a bottom. Sharp reductions in manufacturing resulted from last year’s drop in energy prices. Data from recent months indicate the worst of that drop is behind us. Manufacturing also declined due to the strength of the dollar and global economic weakness. Those two forces still are with us, but they aren’t as strong. They will continue to weigh steadily on manufacturing.
We saw those factors at work in the Durable Goods Orders. The headline number was up sharply, but after excluding the volatile transportation sector the rise was more modest. Also, last month’s data were revised downward. Likewise, the Dallas Fed Manufacturing Survey was negative but not as negative as in recent months. The Dallas Fed region has been the area hit hardest by the energy price decline and shows how that is developing.
The Richmond Fed Manufacturing Survey, on the other hand, was strong. It was the strongest of the Fed surveys for the month and was well above expectations and last month’s report.
Also strong was the Chicago Purchasing Manager’s Index. It shot up to 54.7 after being below 50 in four of the last five months. A reading of below 50 indicates contraction in the economy while a reading above 50 indicates expansion.
The GDP report for the second quarter released on Thursday supports this view of manufacturing. Business investment, which is a component of manufacturing, declined 0.6% compared to a 1.6% increase in the first quarter. This was the first time since the third quarter of 2012 that business investment was negative in the GDP report.
The rest of the GDP indicated as we expected modest growth but faster than in the first quarter. The final estimate of first quarter GDP was revised higher, turning a negative growth rate into a modestly positive 0.6% annual rate. The second quarter first estimate was 2.3% growth, which was lower than most expectations. Housing made a strongly positive contribution to growth in the second quarter, and consumer spending also contributed to growth.
An interesting part of the report was the GDP Price Index, which rose at an annual 2% rate, well above last quarter’s flat level. It’s unlikely that inflation rose so far so quickly, but we’ll be watching other inflation data for signs of a pick up.
Housing has been slowing from its strong pace last year and early this year, and that showed again this week. The S&P Case-Shiller Home Price Index reported a slightly decline in overall home prices through May, and the 12-month price change stayed at an increase of 4.9%. Initial conclusions from the report were that existing home sales were strong early in the summer because of price concessions by sellers.
Yet, pending home sales declined 1.8% in the latest month. This brought the 12-month growth rate down to 8.2%. The latest month was well below expectations and shows that housing slowed recently. The good news is that the latest number was close to May’s, and May’s level was the highest in more than nine years.
New unemployment claims increased a smallish 12,000. This keeps the weekly total at an historically low level and the four-week average also is well below 300,000. The report shows that the labor market continues to steadily improve.
The non-manufacturing portion of the economy continues to improve. The PMI Services Flash Index showed a small increase over the end of June number, and it was slightly above expectations.
Consumer confidence took a dive, as measured by The Conference Board, from 99.8 to 90.9. This was well below expectations. The biggest decline in the report was in expectations for the next six months. This could indicate a reduction in consumer spending and the economy later in the year.
Also, consumer sentiment as measured by the University of Michigan declined a bit. The reading still is near the recovery highs recorded earlier in 2015, but it still is softer than earlier in the year.
The Markets
This was a positive week for most assets.
Stocks had a good week. The Dow Jones Industrial Average was the laggard, returning just below 1.5% for the week. The All-Country World Index did slightly better. Emerging market stocks, the Russell 2000 U.S. Smaller Companies Index, and the S&P 500 all returned around 1.75%, with the emerging markets having a slight edge.
This also was a good week for bonds. High-yield bonds did best, following stocks as they usually do. They gained just over 1% for the week. Long-term treasuries gained about 0.5%. Both investment-grade bonds and Treasury Inflation-Protected Securities (TIPS) gained about 0.2%.
The dollar was volatile but gained about 0.8%.
Commodities didn’t do well as the global commodity deflation continued. Broad-based commodities and energy-based commodities followed each other closely this week and both lost about 1.2%. Gold did a little better, losing only 0.2%.
Some Reading for You
The 50th Anniversary of Medicare occurred this week and was greeted with the book, Medicare’s Victim’s. Here’s an interview with the author.
This article says South Florida, especially the east coast, is the fraud capital of the U.S. by a wide margin.
A writer for The New Yorker followed the Greek finance minister around during key points of the crisis and filed this report.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
July 24, 2015 04:15 p.m.
Your Retirement Finance Week in Review
Thanks to all of you who attended the San Francisco MoneyShow or watched the online eShow version. Elaine and I enjoyed meeting the many Retirement Watch members who stopped by our booth to talk as well as the many new people who wanted to learn more about us. For those who missed the conference or want to see part of it again, the sessions that were web cast still are available online for a limited time. For information, click here.
It’s always interesting how people look at data and decide which data they’re going to let determine their decisions. For example, many analysts say the current bull market is very old and due for at least a significant correction. They point out that it began at the lows of March 2009. Of course, there’s been a lot of volatility since then and some strong declines. But thanks to the Fed’s monetary policy, the declines didn’t last long.
Morningstar Markets Observer argues that there’s a better way to look at the data. A bull market shouldn’t be dated from the market low. Instead, the clock should start running only when the market has returned to its previous peak. All that time spent recovering the previous losses doesn’t count. By that measure, the rally is only 39 months old and is much shorter than significant rallies in the 1950s, 1990s and 2000s. This rally also has returned only a fraction of those other extended bull markets.
While the analysis is interesting, I wouldn’t weight it heavily in making investment decisions. I’ve learned there are two types of investors. One group tries to forecast where a market is going and adjust their portfolios early. They invest based on predictions. The other group primarily lets the economy and markets tell them how to invest. They observe trends and learn which data really matter to the markets.
The second group is far more successful. Investing based on predictions is a risky business, even when you are highly confident of the forecast. In recent years, readers have asked me to comment on a number of predictions, most of them being extreme and negative. Just a year ago there was a widespread prediction that the dollar would collapse “overnight.” Investors were advised to buy gold, among other assets. In the rare case when such forecasts are correct, you’ll make a lot of money. But first you need to have some capital left after losing so much from the predictions that are wrong.
The Data
There wasn’t much data this week, and a good bit of it was about housing.
The housing market seems to be rebounding from the slowdown it experienced in late 2014 and early 2015. The FHFA Home Price Index rose 0.4% for the month, and last month’s index was revised slightly higher, also to 0.4%. That makes for a 5.7% price gain over the last 12 months. This isn’t the double-digit rate of a couple of years ago, but it is a solid, sustainable rate. One factor helping prices is a shortage of homes available for sale in some areas.
Existing home sales also had another increase, exceeding expectations and recording an annual rate that is the best since February 2007. This follows another strong month and puts the annual sales increase at 9.6%. The sales came despite another 3.3% average price increase, which puts the median price at a record $236,400. Another bit of good news that is helping the market generally is that distress sales are down to 8% of the total, which is a record low. Home sales also are helped by a small number of houses for sale in many areas, causing potential buyers to snap up what’s available.
But on Friday the new home sales report indicated a 6.8% decrease after a few months of strong gains. Revisions of the previous two months also reduced them by 40,000 units. Over 12 months new home sales are up over 18%. But prices are down 1.8%, indicating discounts are used to generate sales. Inventory of homes for sale is higher, which generally is a good sign. New home sales data are volatile, so we can’t draw conclusions from one month.
There were two manufacturing reports this week. The Kansas City Fed Manufacturing Index was negative again, though slightly less negative than last month. The Kansas City Fed covers much of the nation that is hurt by lower oil prices and the drop in production and exploration that accompanies it, along with the Dallas Fed. The report was negative across the board, indicating manufacturing weakness in this region will continue.
The PMI Manufacturing Index mid-month flash report indicating manufacturing is holding steady overall. The index rose slightly from the end of month figure and was a little above expectations. Parts of the report were weak, and it indicates continued softness in that sector.
Leading Economic Indicators issued by The Conference Board increased well above expectations, and last month’s number was revised slightly higher. The month’s surge in housing permits was a major factor in the rise, along with low interest rates.
New unemployment claims declined sharply, by 26,000. The four-week average is around 278,000, about where it was a month ago. The claims have been volatile week to week recently but the four-week average has been around 280,000 since mid-March, a sign that the labor market continues to recover.
The Markets
It was a fairly steady week of declines for stocks around the globe. Emerging market equities fared the worst. After rising 1% to start the week, they closed with a loss of about 3.3%. U.S. Smaller Company stocks as measured by the Russell 2000 lost about 2.75%, and the Dow Jones Industrial Average lost a little less. The S&P 500 and All-Country World Index each lost about 2%.
Bonds had a better week. Except high yield bonds, which tend to follow stocks. The high-yield bonds lost about 1.5%. Long-term treasuries led the week with a 2.5% gain and closed near their high for the week. Investment-grade bonds and Treasury Inflation-Protected Securities (TIPS) each gained about 0.5%.
The dollar lost just under 1%.
Commodities also had a bad week. Gold did best because of a rally on Friday that gave it only a 1% loss for the week. Both energy-based commodities and broader-based commodities lost over 3.5%.
Some Reading for You
Here’s another good interview with Daniel Kahneman, author of Thinking, Fast and Slow.
Here’s a collection of many failed, and extreme, predictions since the financial crisis.
Is productivity declining, or is it simply mis-measured?
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
July 17, 2015 12:40 p.m.
Your Retirement Finance Week in Review
We’re at the San Francisco MoneyShow this week. I’ll be making two presentations tomorrow. One of them will be shown live on the web, and that will be available for viewing through early August. For more information on the webcast, click here.
This week we saw another example of how important it is not to panic and get wrapped up in short-term headlines. The last few weeks were filled with worry about Greece, Europe, China, Puerto Rico, and more. There were many forecasts about the effects of Greece leaving the Euro, an intensifying bear market in China, and a default by Puerto Rico.
So far, things have worked out so that we’re muddling through. Greece made a deal with its lenders, and the parliament approved the proposed reform measures. The European Central Bank increased the aid it is providing to Greek banks. China managed to arrest the decline in its stock indexes. Puerto Rico also found a way to avoid the worse.
None of these problems is resolved, but they haven’t resulted in the catastrophic consequences many were hyping. That’s usually the way it works. It is rare that policy makers commit as many mistakes as they did in the 2008 period and allow such calamitous events to occur.
The concern left from recent headlines is the Fed. The bond market seems to want the Fed to increase rates at least a bit. The stock market and businesses don’t want rates to rise. Deflation remains more of a risk than inflation at this point, and the main risk to markets and the economy is that the Fed raises rates too far, too fast. Fed officials seem to be aware of this, and that is why they haven’t raised rates yet despite repeated statements that they were about to. Markets expect a gradual increase to begin at some point later this year. As long as the Fed doesn’t raise rates higher than the markets currently anticipate, the markets and economy should remain on recent paths.
The week’s economic data is consistent with what we’ve seen. The U.S. economy is growing moderately. The worst effects of the commodity prices declines on manufacturing seem to be behind us, and manufacturing seems o be making a bottom. The rest of the economy is growing moderately. We’re somewhere around the middle of the economic cycle, perhaps past the midpoint. This point of the cycle often confuses people, because the data points aren’t uniformly good or bad. There’s a mix of data that have to be evaluated by looking at trends over months. I see the economy continuing a sustainable, moderate growth rate.
The Data
It was another week with a small amount of economic data. The Fed Beige Book was the major event of the week. It confirmed what we’ve seen in other data. The book doesn’t give the Fed much reason to raise interest rates. Overall the Fed districts report steady but modest growth and only modest inflation pressure from wages. It keeps the Fed on course to raise interest rates at some point but to engage in a slow, steady rate increase cycle.
In a surprise, the NFIB Small Business Optimism Index took a big tumble. The index lagged most other economic data from the 2009 bottom, but had been very strong for most of the last year. The survey is now below average levels and at its lowest level since March 2014. We’ll have to see if this is an anomaly or the start of a new trend. The recent employment reports and retail sales also were weaker than expected, so it could be that growth is ratcheting down a notch or so.
As mentioned, retail sales actually declined over the last month after a very strong gain last month. Last month’s number also was revised down a little. As I’ve said before, this number is volatile month to month, so we need to wait for several months to see a trend. Retail sales usually follow consumer confidence numbers but that hasn’t been the case for about a year now. The confidence numbers have been strong, but retail sales growth has been tepid.
Consumer Sentiment for the first half of the month as measured by the University of Michigan declined a bit and was below expectations. Consumer sentiment still is strong but it below the peak reached early this year and doesn’t seem likely to return there any time soon. Retail sales in the last couple of years never reflected the strong numbers in consumer sentiment, so it could be that in this cycle the traditional connection between sentiment and household demand is broken.
Producer prices showed an increase in inflation, and more than expected. After excluding food and energy, there still was an increase. The 12-month change for the headline number still is a negative 0.7%, but the 12-month change after excluding food and energy is 0.8%. That still is well below the Fed’s 2% target, but is an increase from the recent past.
Consumer prices also increased. The year of declines apparently is over now that oil prices have hit a bottom and rose above it. Inflation still is well below the Fed’s target, with the 12-month rate being only 0.1%, but when food and energy are excluded the 12-month rate is 1.8%. That shows the bifurcation in the economy. Commodity sectors have been doing poorly the last couple of years, while the rest of the economy has had decent growth and some price increases.
There was some positive housing news. The Housing Market Index from the NAHB shows that home builders still are optimistic about the new homes market. There was a slight increase in the index this month, and that made it the highest level since November 2005.
Housing starts also had another strong month, rising 9.8%. But there’s mixed news in the details. The increase was due to a very strong showing by apartments. Single family home starts actually declined slightly. This also is tied in to the Consumer Price Index. Rents have been rising rapidly since 2008, because fewer households qualify for mortgages or want to buy homes. Higher rents spur apartment building. Rents also are overemphasized in the CPI, causing it to appear higher than it really is for most people.
New unemployment claims dropped 15,000. That’s going to keep t
he four-week average well below 300,000 but still higher than a month ago because of the sharp increase last month.
There was some good news in manufacturing. The Empire State Manufacturing Survey crept into positive territory after several months of flat to down levels. The number this month still indicates very weak growth, and the new orders component was negative for the fourth month out of five.
Industrial Production rose this month and slightly more than expectations after being negative last month. The manufacturing component was flat after being negative last month. While not strong numbers, they show an improvement over recent months and are a little better than expectations.
The Markets
I’m traveling at the MoneyShow this week, so I’m doing this week’s Journal a little early. The market data are as of around noon eastern time Friday.
Stocks had a mixed week. The S&P 500 and All-Country World Index each gained over 1%. The Dow Jones Industrial Average and Russell 2000 U.S. Smaller Companies Index each gained around 0.5%. Emerging market stocks were volatile. They were flat the first two day sof the week, dropped 1% on Wednesday, and recovered to be around even at the close of the week.
Bonds had a good week. Long-term treasuries were up 2.4%. Investment-grade bonds gained about 0.6%, and Treasury Inflation-Protected Securities (TIPS) gained about 0.4%. High-yield bonds lost almost 0.4%.
The dollar rebounded, gaining about 1.4%.
Commodities were flat early in the week, and then dropped sharply the rest of the week. Gold and broad-based commodities lost about 2%. Energy-based commodities lost a fraction more.
Some Reading for You
Here’s why China’s bearish stock market shouldn’t affect its economy the way a developed economy would be affected.
Here’s some important news about the lump sum pension buyout offers many large companies are making to their retirees.
This piece explains the economic problems in Latin America.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
July 10, 2015 04:15 p.m.
Your Retirement Finance Week in Review
There wasn’t much data this week, but there was a lot of market and political action to keep investors focused. Even people who generally don’t follow the markets were interested this week when the New York Stock Exchange had to shut down for several hours because of a computer problem. They later said the problem likely was the result of a glitch in a software upgrade. The stock exchange shutdown attracted a lot of extra attention because a few hours earlier United Airlines had to cancel many of its flights because of its own computer program, later attributed to a faulty router. The combination spawned worries of a coordinated terrorist attack on U.S. computer systems.
You are aware, of course, that last weekend the Greek electorate voted against the proposal from Europe’s leaders regarding Greece’s debts. That was followed (and preceded) by many stories and forecasts about the effects of a negative vote and what would happen next. So far, it looks to be close to a nonevent. Negotiations continue between leaders of Greece and the European institutions. The latest report is that they could be close to terms that are agreeable to both sides, though it appears they aren’t much different from the terms the electorate rejected.
China’s stock indexes captured more headlines than the other events as they continued to tumble, falling more than 30% from June 12 peaks. A bear market in China raises some unique concerns. The government has a lot of credibility invested in a rising stock market, and stock wealth is key to the government’s plans. Rules were changed about a year ago to encourage higher stock prices. Once the indexes peaked, the government began a series of extraordinary measures to prop up prices. Many people became concerned when prices continued to fall in the face of the extreme support measures. But prices finally perked up at the end of the week, so we’ll have to wait the weekend to see if another shoe drops.
These individual incidents are important in themselves, but they highlight some key concerns. The global financial system still has an insecure foundation some seven years after the financial crisis of 2008. The debt problems of a tiny economy such as Greece shouldn’t make much international headlines. That they do showed how insecure the system is and how uneasy people are. The events and others also show that policymakers have fewer options than they used to. The Fed, for example, hasn’t raised interest rates yet because it knows the big mistake would be to raise rates too soon. Having exhausted much of its monetary policy ammunition since 2008, there isn’t much left in the Fed’s arsenal if the economy would tumble into a recession. Also, despite all the monetary stimulation of recent years, the bigger risk these days still is deflation instead of inflation.
The rest of the summer could be an interesting time. I’m watching events for you and will keep you posted.
The Data
There were mixed signals about the non-manufacturing sector of the economy this week. The PMI Services Index still indicates growth but a slower rate of growth. In fact, the index came in at the lowest level since January. There were few positives in the report. But the ISM Non-Manufacturing Index showed slightly stronger growth than last month. Most of the report was positive.
This shows why it’s important not to look at only one piece of data. Taken together and looking at several months of data, the reports indicate that the economy continues to growth but likely didn’t accelerate to start the summer.
The JOLTS (Job Openings and Labor Turnover Survey) generally was a positive report on the labor market. Job openings rose again to a new record, though last month’s reported record was revised down. The hiring rate declined slightly, indicating that employers have a number of unfilled job openings because they can’t find the workers they want to fill the openings.
In other employment news, new unemployment claims popped higher. One-week fluctuations shouldn’t be given a lot of weight, especially since this was a report for a holiday week. The four-week average continues to hold steady at an historically low level.
Consumer Credit increased again. Through most of the recovery, student and auto loans accounted for much of the gains in consumer credit. That’s changed recently. Revolving credit (credit card use, mostly) rose moderately, which follows two strong months of gains. This shouldn’t be a surprise, given the high consumer confidence numbers we’ve seen in recent months. High confidence often leads to higher spending and credit use.
The Federal Reserve Open Market Committee released its minutes from its last meeting. They shouldn’t have surprised anyone. Most members would like to increase interest rates a bit in 2015, but they continue to hold back because of international events and general weakness in the global economy.
The Markets
It was a volatile week in the markets. In many cases indexes covered a lot of ground but ended near where they started.
Emerging mar
