May 2014
May 30, 2014 05:10 p.m.
Your Retirement Finance Week in Review
Before diving into this week’s review, I want to remind active members of Retirement Watch that they can set the privacy preferences for the email addresses. From time to time I send out emails on behalf of third parties, such as other newsletter publishers. If you don’t want to receive such emails, on the members’ home page of the web site, down the right column click on “Change Address.” On the next page click “Change Address.” On the next page, click “Privacy Preferences.” The next page will let you set your preferences. It could take a few weeks for your preferences to be updated.
A fair amount of economic data was packed into the four-day week, but none of it changed the picture we have of the economy. Investors seemed comfortable with the data. Most assets rose, and stock indexes reached or neared new record highs. Volatility also was low, indicating generally complacent investors.
There are a lot of things that could go wrong in the next few years in the U.S. and globally. But investors shouldn’t sell assets now in anticipation of those events. There might not be trouble for several years or even longer. It’s better to be invested in a diversified portfolio and ride market trends. Most investors should have minimum and maximum ranges they will invest in different assets, depending on market conditions. I don’t recommend that you have your maximum percentage invested in stocks or other risky assets at this point, but you should be above your minimum.
The big question is whether the economy is on a growth path that can be sustained as the Fed reduces its quantitative easing. I suspect it is, and growth will continue at a 2% to 3% annualized rate. It will be some time, however, before the Fed raises short-term interest rates to near their historic averages or tries to slow the economy.
I could be wrong, or events could intervene to slow growth. I don’t think it’s a good idea to assume such things will happen and adjust your portfolio in advance. Instead, stay invested with current market trends and be prepared to make portfolio changes if changes in the economy and markets become apparent.
The Data
The economic data this week was mixed but mostly positive. That indicates the economy continues to recover from the slowing in the first quarter but is doing so at an uneven pace.
GDP excites the media, but you shouldn’t pay much attention to it. The second reading of the first quarter GDP is that the economy went from barely growing in the first quarter to declining 1%. There will be one more revision in the number next month. This is a backward looking number, and we already knew that growth was slow in the first quarter due to the weather and other factors. We also know that growth is improving in the second quarter. Also, business inventories are a big influence on GDP but are volatile from quarter to quarter and don’t reflect real growth changes. There was good news in the personal spending component of the report. All the economy really needs is for business investment to increase.
The quarterly Corporate Profits report showed the first quarter’s profits were about 5% less than the fourth quarter’s on an annualized basis. They still are up 5.3% over 12 months.
Let’s move to manufacturing. This week’s data was mostly positive. Durable goods orders were much higher than expected, and last month’s extremely positive number was revised higher. Even after excluding the volatile transportation sector, the picture is the same. This month’s numbers were well below last month’s big bounce from the slow winter, but were still positive and well above expectations.
The Manufacturing Surveys from the Richmond and Dallas Fed banks also were positive. The Dallas survey cooled a bit from the previous month, indicating still strong growth but not as strong. The Richmond Fed showed growth at the same rate as last month, but the employment picture was particularly strong in that survey.
The Chicago Purchasing Manager’s Index was very strong, indicating a good manufacturing sector in the middle of the country.
A trio of housing surveys confirm the housing trends of the last few months. Prices continue to increase, though at a slower rate than in 2013. Sales aren’t as strong because of the combination of higher prices, higher mortgages rates, and not a lot of homes available for sale.
Consumer attitudes haven’t changed much in the last month, whether measured by the Consumer Confidence Survey of the Conference Board or Consumer Sentiment of the University of Michigan. Both surveys still are below their peaks of a couple of months ago. Both surveys show a bit less optimism about current conditions for consumers.
New unemployment claims registered another sharp drop, bringing the total down to 300,000 for the week. It’s another sign of a steadily, slowly improving labor market.
Personal Income and Outlays were a bit below expectations. Income growth slowed from last month’s surprising high rate and was below expectations. Even so, it was a decent growth rate. Consumer spending, on the other hand, declined slightly after last month’s bit increase (which was revised higher to 1%). Spending declined across the board. This could be a one-month event, with consumers taking a pause after the spending surge of the previous month. Other spending data recently have been positive. We’ll have to keep an eye on this number.
The Markets
Stock markets had a good week. The S&P 500 set a new closing high with a gain of 1.2% for the week. The Dow gained 0.7% while the Russell 2000 Index of smaller U.S. companies rose 2.1%. International stocks didn’t do as well. The All-Country World Index had a gain of just over 1%, but emerging market equities lost over 1.5%.
Bonds also generally had a good week. Long-term treasuries led the way with a gain of over 1.2%. Investment-grade bonds gained about 0.5%, while Treasury Inflation-Protected Securities (TIPS) and high-yield bonds each gained about 0.4%.
The dollar was about even for the week.
Commodities didn’t fare well. The big loser was gold, losing almost 3.5%, though it was down close to 4% at one point. Broader-based commodities lost about 1.6%, while energy-based commodities lost just over 1%.
Some Reading for You
I’ve pointed out in the past that the Fed doesn’t have a good economic forecasting record. Here’s a chart to back that up.
Historic profit margins concern a number of investors. This post has a link to a long article explaining why you shouldn’t worry about that.
This article has some candid comments about the pessimistic forecasts you read.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
May 23, 2014 04:30 p.m.
Your Retirement Finance Week in Review
It was a very quiet week in economic data, the markets, and most other news sources. I’ll simply wish all of you a good Memorial Day weekend and hope you take a few moments to appreciate those we are remembering and honoring for their sacrifices.
The Data
It was a fairly quiet week for data, with most of the reports packed into Thursday.
There was surprisingly positive news about housing. After a few months of steadily declining housing data, existing home sales increased by 1.3% over last month. The headline number wasn’t the only good news. Prices increased 2.5%, and the supply of homes for sale also increased. A lack of homes available for sale has held back sales total for a while. Over the last year, however, sales of existing homes are down almost 7%.
Likewise, new home sales surged much higher than March’s total, and March’s disappointing number was revised upward. Sales increased despite little change in the tight supply picture. But selling prices did decline, which probably helped sales. Selling prices now have declined 1.3% over 12 months, which is only the second time there’s been a negative 12-month price number since July 2012.
There were two reports on manufacturing, and both were positive. The Kansas City Fed Manufacturing Index was the third positive survey this month, following Empire State and the Philadelphia Fed. The Kansas City report showed solid gains and more optimism. The PMI Manufacturing Index Flash midmonth report had a nice increase, and the previous month-end report was revised higher. The only negative in the report was lagging exports.
The Leading Economic Indicators from the Conference Board were mixed. The LEI was positive and in line with expectations. But they were well below last month’s numbers, which were revised higher. The components of the index generally were mixed. The strongest components were related to the Fed’s zero interest rate policy.
The Markets
It generally was a quiet week in the markets, because of little news. But stocks declined the first few days only to recover enough at the end of the week to generate positive returns.
The Russell 2000 U.S. Smaller Companies Index led the pack with a gain of almost 2%. This is a bounce back from fairly steady declines the last couple of months. Emerging market equities were the laggards, gaining only about 0.6%. Bunched with gains around 1% were the S&P 500, Dow 30, and All-Country World Index.
Bonds didn’t do as well. Long-term treasuries were down all week but had a partial recovery on Friday. They closed down 0.8% for the week. Investment-grade bonds also were down, losing about 0.5%. High-yield bonds and Treasury Inflation-Protected Securities (TIPS) both gained 0.2%.
The dollar had a good week, gaining almost 0.6%.
Commodities had a mixed week. Energy-based commodities did best, gaining about 0.3%. Broader-based commodities declined slightly, losing 0.1%. Gold was down all week and closed with about a 0.5% loss.
Some Reading for You
Walt Disney’s estate plan has gone awry for his grandchildren. Read here.
Here’s how to improve at almost anything, according to research data.
This is one of the better review of Thomas Pinketty’s book about capital.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
May 15, 2014 07:15 p.m.
Your Retirement Finance Week in Review
There was a fairly strong response to last week’s message about finding someone to help manage your investments. So, I’m going to take a moment here to repeat that there is quality help available for investors who believe they should be doing better with their investments. Many investors are realizing that the complexity of today’s markets makes managing their assets a difficult proposition and they now need hands-on help meeting their investment goals. As many of you are aware I have an arrangement with TJT Capital Group Inc., LLC, and they are the only investment management firm associated with me. The staff has over 60 years’ experience in the investment industry and they are currently offering a Free Portfolio Review to my subscribers. In today’s environment aligning your goals and objectives with your risk tolerance can be daunting, why not have a professional review how you have been doing. For more information on TJT and for your Free Portfolio Review click here. When I discuss TJT Capital, I do so in my role as Managing Member of Carlson Wealth Advisors, L.L.C.
I wrote this week’s review a day early, because I’m traveling all day Friday. So, this report won’t include Friday’s market action or the latest Housing Starts and Consumer Sentiment report.
Overall it was a quiet week in data and markets. It’s worth a couple of minutes to look at a longer-term trend. While stock indexes overall have modest gains for the year, that’s not the case for the leaders of the last few years. Small U.S. company stocks led the market rally the last few years. But while the S&P 500 is slightly positive for 2014, the Russell 2000 U.S. Smaller Companies Index is down about 6% and dropped sharply in the last week.
At a minimum, investors are rotating and rebalancing their portfolios. They’re selling the recent winners and buying the laggards. Thursday’s market action was broader-based, with all major indexes declining about 1%. But that’s only one day. For weeks now investors have been selling assets with high valuations and buying those with better valuations. Unless there are signs the economy is stalling, that’s likely to continue.
The Data
Retail sales disappointed many analysts this week, barely increasing and coming in well below expectations. But don’t overreact to the report. Month-to-month retail sales numbers are volatile but trends are worth examining. The previous two months were strong, and last month’s report was revised significantly higher. Also, recent consumer surveys generally are positive, and the surveys are decent indicators of future consumer demand. So, it’s too soon to panic about slowing household demand.
Small businesses are more optimistic. The NFIB Small Business Optimism Index had a sizeable increase and now is at its highest level since 2007. Importantly, hiring is higher as are unfilled jobs. That’s all good news for the labor market and the prospects for higher wages.
We received our first whiff of post-crisis inflation this week. Both Producer Prices and Consumer Prices had what counts as sizeable increases in the post-crisis period. Headline consumer price inflation finally hit the Fed’s 2% target over the last 12 months. After excluding food and energy the increase is 1.8%. Again, one month’s numbers don’t make a trend but it is something the Fed will be watching and we should be, too.
Related to that, the Atlanta Fed’s Business Inflation Expectations Survey showed overall steady expectations. But 64% said they expect wage increases will put moderate to strong upward pressure on prices over the next year.
The Housing Price Index of the homebuilders declined again and we below expectations. Though homebuilders reported several months of declining sales, they remain optimistic about future sales, though it isn’t clear why. This is another sign that housing is cooling from its rapid recovery of 2012 and 2013.
Several manufacturing reports were mixed. Industrial Production was down after a strong previous month. That data was for April. But two surveys for May are brighter. Both the Empire State Manufacturing Survey and Philadelphia Fed Survey were very strong. Both surveys also indicated likely future improvements in wages and hiring.
Another good sign for the labor market was in new unemployment claims. They fell by 24,000 and are now at the lowest level since May 2007.
The Markets
It’s not clear why, but this week investors decided to lower the prices on riskier assets and bid more for safe assets such as treasury bonds.
We saw that in the stock markets. Most major indexes were flat to down for five days as of Thursday’s close. The only clear winner was emerging market equities with an almost 2% gain. The All-Country world Index was next with a 0.5% gain. The Dow 30 and S&P 500 were close to even, while the Russell 2000 lost less than 0.5%.
Bonds had a good week, which they shouldn’t have if investors were concerned that the Fed would tighten policy because of stronger-than-expected growth. Long-term treasury bonds increased over 2%. Treasury Inflation-Protected Securities (TIPS) rose 1%. Investment-grade bonds increased 0.8%, and high-yield bonds managed a 0.2% gain.
The dollar rose 0.4% for the week.
Commodities had a mixed week again. Broad-based commodities declined 0.4%. Gold rose about 0.3%, and energy-based commodities rose 0.4%.
Some Reading for You
Momentum investing is a strategy that works as part of an overall discipline. Read more here.
Here’s a study that argues financial services firms and others are making the “retirement crisis” appear worse than it is.
Here’s a web site to consider whenever someone is using statistics to make a point.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
May 9, 2014 04:20 p.m.
Your Retirement Finance Week in Review
Before we dive into this week’s main discussion, let me address a few questions I hear from more and more readers. Are you finding it more difficult to manage your own investments? Are you wondering if your current advisor has your best interest in mind? Many investors are realizing that the complexity of today’s markets makes managing their assets a difficult proposition and they now need hands-on help meeting their investment goals. As many of you are aware I have an arrangement with TJT Capital Group Inc., LLC, and they are the only investment management firm associated with me. The staff has over 60 years’ experience in the investment industry and they are currently offering a Free Portfolio Review to my subscribers. In today’s environment aligning your goals and objectives with your risk tolerance can be daunting, why not have a professional review how you have been doing. For more information on TJT and for your Free Portfolio Review click here. When I discuss TJT Capital, I do so in my role as Managing Member of Carlson Wealth Advisors, L.L.C.
Now, on to this week’s discussion.
It was a quiet week in both the markets and data releases. Most investments ended modestly lower for the week. But the headlines don’t tell the full story. There’s been both a correction and rotation in the stock markets. The stocks that lead the market indexes higher in 2013, primarily technology and biotechnology companies, are having sharp corrections in 2014. Smaller company stocks also were market leaders for several years and now are struggling. The Russell 2000, for example, has declined 9.3% since March 4, as of Thursday’s close. Twitter and Groupon, to take two examples, have declined more than 16% in five days.
But stock sectors that did poorly in 2013 are doing well in 2014. Big winners are utilities and real estate investment trusts.
So far, 2014 has been a year in which index investors struggled and growth investors suffered. But value investors and those that picked the right sectors are doing quite well.
Part of the changes are the result of earnings season, which is winding up. The numbers initially look good. Of the 451 of the S&P 500 companies that have reported, 76% beat profit estimates and 53% exceeded revenue estimates. But what those numbers don’t reveal is that the estimates steadily declined through the quarter. The economy clearly slowed in the first quarter, and it adversely affected company earnings for the quarter. Slower growth also made investors realize that the valuations of some companies can’t be supported, and those companies’ stock prices pushed too far ahead of fundamentals.
Of course, the big surprise to many investors is that interest rates declined so far in 2014, producing bond profits. The conventional wisdom was that the economy was strong, the Fed was tapering, so rates had to rise. As often happens, the conventional wisdom was wrong. The markets priced in interest rate increases that would have stalled the economy if they had occurred. Instead, rates declined. We’ve benefited from that in our portfolios, especially the Retirement Paycheck portfolio.
My most likely scenario is that a lot, but not all, of the slowdown was caused by weather. The economy should bounce back from a lot of that as pent-up or delayed demand occurs. We’ve already seen that in some of the data released in recent weeks. But there are other factors slowing the economy, such as Federal Reserve policy, so I expect positive growth but not a return to the top growth rate achieved in 2013.
There are two main risks for the economy. One is that the Fed is too optimistic about the economy and tightens policy too much. The other is a range of potential events outside the U.S. and the markets. These include slowing growth in China, a turndown in Europe, and geopolitical events such as the Russia-Ukraine crisis. I don’t think it is time to bet that any of these is more likely to occur than not. Instead, stay invested in our diversified portfolios but be alert for any changes in trends.
The Data
As I said, it was a very quiet week for data after the big week last week. The ISM Non-Manufacturing Index had a nice increase, indicating strong growth in the non-manufacturing sector in April. The downside is that despite the increased activity, the survey indicated employers still aren’t doing much hiring. The PMI Services Index reported similar conclusions.
The quarterly Productivity and Costs report wasn’t positive. It showed a sharp decline in productivity and a big increase in unit labor costs. But these numbers, especially productivity, were distorted by the weather. We’ll have to wait another quarter or two to see if these establish trends.
Consumer credit increased again, but the increase was almost all in student and auto loans. Revolving credit, such as credit card use, had a small increase. This is good for consumers’ net worth but isn’t helpful to retail stores.
New unemployment claims were the positive surprise of the week. They dropped sharply after several months of big unexpected increases. But the increase wasn’t enough to increase the closely-watched four-week moving average by much.
The JOLTS (Job Openings and Labor Turnover Survey) showed that hasn’t been much change in the labor market. There were slightly fewer jobs in March than February and also a small decline in the number of hires. The possible good news is that, because this survey is more detailed than the monthly employment conditions reports, its data is a month or two older. So, if the big increase in the number of new jobs reported last week is a new trend, the JOLTS report won’t capture that for a few months.
The Markets
Stock investors had widely divergent experiences this week. Lagging the rest of the indexes was the Russell 2000 Smaller U.S. Companies Index. It lost 1.5%. The S&P 500 and All-Country World Index did better, registering gains of about 0.3% for the week with the ACWI slightly ahead. The Dow was the leader, gaining 1%. Emerging market equities were ahead until a sell off late Friday and closed the week with about a 0.75% gain.
Long-term treasury bonds were trading in a narrow range until Thursday. They slid in the afternoon and closed the week with a loss of about 1.2%. Investment-grade bonds and Treasury Inflation-Protected Securities (TIPS) had marginal losses. High-yield bonds gained about 0.3%.
The dollar surged at the end of the week, closing a 0.5% gain.
Commodities were uncorrelated this week. Gold was a big loser after there were indications that the Russia-Ukraine crisis might be winding down. Gold lost almost 2%. Broader-based commodities lost about 0.7%, and energy-based commodities gained just under 0.2%.
Some Reading for You
The great economist Gary Becker passed away.
Here’s a good discussion of the reasons for the declining labor force.
I like this discussion of the real effects of high-frequency trading.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
May 2, 2014 04:35 p.m.
Your Retirement Finance Week in Review
This was the big week of the month for economic data. The data released seemed contradictory and confusing to investors and caused a fair amount of volatility in the markets.
This is the type of week when you really need to ignore the short-term market noise and media headlines. You need to focus on established trends and not act until trends clearly are changing.
The trends have been modest growth with low inflation. Growth slowed early this year because of the weather, slower growth overseas, changes in Federal Reserve policy, and fiscal tightening. Even so, growth seems to be sustainable at a below-average level and could tick up above that rate. Inflation is low and likely to remain low. Because of slow growth and low inflation, interest rates aren’t likely to spike higher.
Those are the established trends, and this week’s data and other news hasn’t done anything to change them.
The wild card for several months has been the extent to which bad weather in the U.S. reduced economic activity early in 2014. The data of the last couple of weeks indicate that the weather-related slowing was substantial, because we’re seeing some very strong rebounds in the data. Friday’s employment conditions report was a good example.
The key to watch is whether the Fed will make a policy mistake. Historically, the Fed’s economic forecasts are wrong and too optimistic. I think that is the case again. There’s a risk that the Fed will tighten too much or reduce stimulus too rapidly, stalling economic growth. There’s no sign we’ve reached that point, but it is the main risk at this point.
Let’s dive into the data.
The Data
Friday’s employment conditions reports were not the market movers they often are, which I think is a positive sign. The headlines from the reports were very good. The number of jobs created was well above expectations and recent months. Also, the unemployment rate dropped sharply from 6.7% to 6.3%.
That’s the good news. Tempering that is that the number of new jobs likely is a rebound from the bad weather. Jobs that would have been created the last few months probably were packed into this report. Also, the drop in the unemployment rate largely is due more to a sharp drop in the labor force participation rate than other factors.
Earnings and hours worked also are a concern. There was no increase in average hourly earnings or in the average workweek. That means no increase in the average household’s income, which makes it tough to expect retail sales and overall demand to continue increasing.
Other employment-related reports during the week were consistent with these. New unemployment claims increased a bit and raised the four-week moving average. The ADP Employment report also indicated more jobs were created than expected. And the Employment Cost Index, which is a quarterly report, found that employment costs slowed significantly in the first quarter.
Overall the reports again indicate a slowly-healing employment market that should be back to a normal balance in another 12 months or so at recent rates of improvement. After that, we could see more rapid wage increases as employers might have to compete for workers.
Two other important reports this week moved markets, but in different directions.
First, the GDP estimate for the first quarter was very disappointing. It showed almost no growth, for an annualized rate of 0.1%. The report also showed sharply lower inflation to an annualized 1.3%. While well below expectations, the market response was somewhat tempered by the thought that much of the decline was temporary and weather-related.
The Personal Income and Outlays report, on the other hand, showed sharp increases in both personal income and consumer spending. Spending increased at one of the highest rates of the recovery. The Personal Income growth in this report is higher than that in the monthly employ
