October 2013
October 25, 2013 11:45 p.m.
Your Retirement Finance Week in Review
Investors need to be careful now when reviewing three- and five-year returns for mutual funds. We’re past the five-year anniversary of the worst of the financial crisis, and stock indexes have recovered dramatically from that point.
Most stock-based mutual funds are going to have very high returns for these periods. But keep a couple of points in mind when evaluating funds over this period. The three- and five-year returns don’t give a clue how a fund performed before the crisis. Also, the recent returns don’t indicate how well a fund picks stocks or other investments based on fundamentals, because fundamentals haven’t mattered much in this era of Federal Reserve-manipulated markets.
Finally, in this era of extreme monetary stimulation, funds that took the most risks have earned the highest returns. So, if you seek the highest returns, you’re going to be taking the highest risks. A case can be made for buying the riskiest assets after a steep decline, but that move is less likely to be profitable at this point.
With the partial federal government shutdown over, the delayed data gradually is being released. So far, the data re-enforces what we already knew. The economy is growing slowly, but growth slowed after the interest rate increases of the spring. There are signs that the growth rate is stabilizing, and I anticipate the growth rate will increase into 2014 if there aren’t additional surprises.
The partial shutdown also appears to have done some long-term damage to the U.S.’s draw for international investors. The dollar has declined fairly steadily since the deal to end the shutdown was announced, and I don’t see economic fundamentals to explain that. It could be that despite the high regard U.S. markets held before the shutdown, international investors have decided to diversify away from the dollar as a long-term strategy.
The Data
The big report this week was the three-week-old employment situation report. (It’s actually two reports issued together.) The headline number of new jobs created was below expectations and is another indication that the interest rate increases earlier in the year reduced growth. But I want to focus on a couple of other parts of the reports.
There’s a lot of discussion about part-time employment. Some point out that the overall percentage of part-time workers is in line with historic levels. So, they say we shouldn’t say slow economic growth and Obamacare are increasing part-time employment. But the bulk of new jobs created this year are either part-time or in low-wage industries. I suspect this is at least partly due to Obamacare and certainly is a result of slow economic growth and low confidence by both consumers and businesses.
Another factor is wage growth. Wage growth has been very low, about 2% annually, and hours worked has been stagnant for a while. The good news from that is that inflation isn’t likely to be a problem soon, because there isn’t enough income to support a general rise in prices. The bad news is that households have to reduce their savings for retail sales to increase, and there’s a limit to how much savings can be reduced. As long as we have an overhang of unemployed, economic growth will be slow. At the recent page, unemployment won’t be near the historic average until early 2015. We can expect slow growth, despite all the monetary stimulation, until close to then.
The view that the labor market remains weak is supported by the JOLTS (Job Openings and Labor Turnover Survey). It continues to find that workers with jobs aren’t confident enough to leave them in search of new jobs. Also, the rate of hirings lags job openings. That means employers are being picky about whom they hire, and they aren’t finding people that meet their standards to fill all their openings.
The new unemployment claims were higher than expected, but the Department of Labor continues to say that “special factors” were effecting it, such as the federal government partial shutdown and continuing administrative/computer problems in California. The number hasn’t been useful for a couple of months now and might not be reliable for a few more weeks.
The few reports on manufacturing this week were mixed. The Richmond Fed reported a very modest increase in activity. The Kansas City Fed had a stronger report, but not considerably stronger or robust. The mid-month PMI Manufacturing Flash Index showed growth but at a lower rate than last month. The Durable Goods Orders report had a good headline number. Once the volatile transportation segment is removed, however, orders were slightly negative for the month and well below expectations. That leaves the year to year increase at 5.6%, compared to 7.3% after last month’s report.
There were two housing reports. Existing home sales were a little below expectations and less than the previous month. This shows that the increase in interest rates is slowing activity. It also bears out that the pace of 2012 and earlier in 2013 couldn’t be sustained for long. The FHFA House Price Index showed that home prices continue to increase but at a lower rate than earlier this year.
Construction spending is related to housing. It rose a little more than expectations and the same as last month’s number, after being revised down. Private residential construction was the leading factor in the report, with gains in both apartments and single family homes. Indications are that construction now is fairly healthy and will continue to increase for a while.
It’s no surprise that Consumer Sentiment as measured by the University of Michigan took a tumble. The shenanigans in Washington coupled with higher interest rates and slower economic growth caused sentiment to decline steadily through the month and brought it to the lowest levels in about two years. Sentiment is volatile but is loosely related to future retail sales. Declining sentiment often leads to slower retail sales growth in a few months.
The Markets
I’m out of the office Friday afternoon, so the markets data is through just before noon on Friday.
It generally was a good week for stocks, with the exception of emerging markets. A sharp decline Wednesday in Latin American stocks brought down the emerging market equities index, giving is about a 2% loss for the week. The other major indexes were clustered with gains of 0.25% and 0.75% for the week. The Dow 30 led the way around 0.75% with the S&P 500 gaining 0.50%. The All-Country World Index was slightly ahead of the Russell 2000 small U.S. companies index with gains of around 0.25%.
The dollar continues its slide of recent weeks, losing 0.7%.
Bonds did well, with long-term treasuries leading the way. They were up 1.7% on Wednesday fell to a 1% gain on Wednesday but crept back on Friday for a 1.5% gain. The rest of the bond classes I follow were all positive but with lower gains. Treasury Inflation-Protected Securities (TIPS) led the way with a 0.7% gain. Investment-grade bonds earned about 0.4% and high-yield bonds rose 0.2%.
Gold had a good week, leaping after the employment situation reports were issued. The notion that the Fed won’t reduce bond buying encouraged gold investors. The metal rose 2% for the week but was up about 2.5 on Thursday. Other commodities didn’t do as well. Broad-based commodities lost 1%, while energy-related commodities lost 2.5%.
Some Reading for You
I like George Friedman’s essay on the founders’ perspective on the debt crisis.
If you’re looking for some insight on the difficult issue of how to value gold, take a look at this article.
Bill Gross of PIMCO expects low short-term interest rates for a long time. I agree.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
October 18, 2013 04:15 p.m.
Your Retirement Finance Week in Review
There were two interesting news items this week. The first, of course, was the deal announced to end the government partial shutdown and raise the debt ceiling. The deal defers most things instead of reaching a final resolution, but it takes pressure off the economy and markets for now.
The others news was the awarding of the 2013 Nobel Memorial Prize for Economic Science. This went to three Americans for their separate work on how asset prices, especially stock prices, are determined. The award was shared by Eugene Fama, Robert Shiller, and Lars Peter Hansen. Hansen’s work is largely technical and mathematical.
Fama is considered the father of efficient market theory, propounding the view that markets are efficient and process all information quickly. So, it is difficult or impossible for investors to beat the market. His work is credited with leading to the development of index funds.
Shiller, among other things, pointed out that markets aren’t rational all the time. Investors make mistakes, and that leads to bubbles or irrational enthusiasm. It also leads to deeply undervalued assets.
The media generally reported this as a conflict between the two winners. But that’s not the full story. Fama also discovered what are now referred to as anomalies in the efficient market theory. He found certain investment models that consistently beat the indexes. Among them are small company stocks, value stocks, and momentum investing. He did a lot of work with Dimensional Fund Advisors, which is devoted to building funds that invest using the anomalies and consistently beat the indexes.
Fama’s real point isn’t that markets are completely rational, which is different from being efficient. It is that it’s hard for an individual investor to consistently beat the stock market indexes by selecting individual stocks. He doesn’t argue that an asset class, such as stocks, never becomes overvalued and that an investor could benefit by reducing holdings of a highly valued asset while increasing holdings of undervalued assets. He argues that you aren’t going to beat the index over time by trying to process new data faster than the markets.
The commentary on Fama’s work also begs the question of whether index funds are “the market” or are the most efficient portfolios an individual can construct. The stock market indexes are constructed by people using guidelines and parameters they selected. While most mutual funds and individual investors don’t outperform the indexes, that doesn’t mean the indexes are “the market.” It could be that the indexes are well-managed stock portfolios. But as he demonstrated, an investor could take the major indexes and adjust them with a bias toward small stocks and value stocks and do better over time.
The Data
It was another week of light data, because the federal government didn’t issue anything. As of Friday morning, the agencies still were developing schedules for releasing the data that wasn’t reported during the partial shutdown. Even the Conference Board had to delay its Leading Economic Indicators because several of its components are government data that wasn’t available.
Normally I only briefly cover the Federal Reserve Beige Book, a monthly compendium of reports from each of the district Federal Reserve Banks. The report usually is an anecdotal collection that mostly confirms the other hard data that’s been issued. But for now it is the only data we have. Since the Fed isn’t considered part of the government, it remained open and issued the Beige Book Wednesday.
The latest Beige Book mostly confirmed what we interpreted in recent data. Economic growth slowed a bit after interest rates increased in May and June. But the reduction in growth isn’t great and isn’t moving the U.S. toward a recession. In fact, given that rates increased sharply in a short period of time, the economy appears to be adjusting to it well. This could be a sign that the economy is healthier than many people believe. It is clear that the U.S. economy is among the healthiest around the globe.
This is not to say that the economy is back to normal. But it does mean that we continue on the slow path back toward normal. Retail sales continue to increase modestly, and there wasn’t a major reduction over the summer, according to the Beige Book. There also were only limited signs of a slowdown in the housing market. While some home builders and realtors reported they were concerned about the potential effects of rising rates, they weren’t seeing much of an effect yet. This is consistent with the recent data that shows sales still increasing but at a lower rates than earlier in the year.
Overall, the Beige Book confirms the view of slow growth and gradual improvement in the economy and debt levels. The labor market, however, continues to lag and that will keep a lid on both growth and inflation.
Only a few other data reports were issued during the week. Two reports on manufacturing were positive. The Empire State Manufacturing Survey and Philadelphia Fed Survey both indicated that higher interest rates and the government partial shutdown haven’t stopped growth. The Empire State Survey showed growth but at a slower rate than last month. The Philadelphia Fed Survey on the other hand showed growth accelerating the last couple of months. In both surveys, the new orders index, an important measure of future growth, was strong.
The Housing Market Index from the homebuilders was below its recent highs but still strong and near its best levels in 10 years. The major problems continue to be shortages of new home inventories and labor, though the government problems and recent rise in mortgage rates also are problems.
New unemployment claims were less than last month but substantially higher than expectations. But the report has distortions. The computer or administration problems for the last few months continue to flow through. Also, some of the claims are undoubtedly tied to the temporary furlough of federal government workers and contractors.
The Markets
The end of the partial federal government shutdown caused a broad-based increase in asset prices.
Among stocks, the Russell 2000 Small U.S. Companies Index led the way with a 3% gain. Close behind at around 2.5% were the S&P 500 and All-Country World Index. Emerging market stocks didn’t do as well, despite favorable news from China, gaining only about 1.6%. Lagging was the Dow 30, with a 1.4% gain, primarily because IBM held back the index.
Bonds also had a good week. Long-term treasuries led, with a 1.7% gain. Investment-grade and high-yield bonds were almost tied with gains around 1.5%. Treasury Inflation-Protected Securities (TIPS) lagged with a 0.6% gain. The dollar had a sharp decline after it was clear there would be a deal to end the partial shutdown and lost about 0.7% for the week.
Gold had the best week among commodities, rising 2.5% for the week, though it was over 3% at one point. Broad-based commodities gained about 0.6% while energy-based commodities were just over break even for the week.
Some Reading for You
Does your bank adhere to privacy laws and policies? May be not. Read this.
Here’s another take on the Nobel Prize winners and the efficiency of markets.
This is an important discussion of how aging affects financial decisions by everyone and what you can do about it.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
October 11, 2013 04:45 p.m.
Your Retirement Finance Week in Review
There wasn’t much for investors to respond to this week other than the war of words in Washington. Stocks in particular were influenced by the ebbs and flows of talks concerning the federal government shutdown and debt ceiling.
The difficulty for investors is assessing the effects of the shutdown using the limited amount of data that’s being released. Little federal government data is released, leaving only a few private sector reports. Yet, the shutdown will affect the economy if it continues much longer, Investors will have difficulty assessing the extent of the shutdown’s effect on the economy.
For now, the economy continues to grow slowly and at a slower pace than in the spring. There are some early indications that the economy might have adjusted to the interest rate increases in May and June, but it is too soon to be confident of that. The best advice for investors is to maintain current positions but decide now which prices or other factors should trigger sales to protect profits and avoid big losses.
The Data
There wasn’t a lot of data this week, thanks to the continuing federal government partial shutdown. To some extent investors are flying blind, though it could be helpful if this experience teaches a few investors to react less to the latest data or realize how little value some reports have to investors. But there were a few reports issued by non-government sources, and these generally are measures of sentiment.
Small business continues to improve, according to the NFIB Small Business Optimism Index. The index dipped only slightly and was above expectations. Small business lagged and struggled for much of the post-2008 recovery, because it didn’t benefit much from the federal stimulus programs. The improvement in the NFIB Index over the last year has been a very positive sign, indicating the economy is closer to be self-sustaining. Good news in the current report is that it declined only marginally despite the recent downturn in retail sales and other economic data. Small businesses also report they are increasing wages, which is good for the labor market. Small businesses also are back to listing regulations and taxes as their biggest problems. Until recently, weak sales were their main problem.
Consumer sentiment as measured by the University of Michigan was a similar story with the measure down slightly but not as much as expectations. Surprisingly, the survey showed the assessment of current conditions actually improved over the month. The decline in the index was due to future expectations.
New unemployment claims is the only government data being released. It increased sharply from 308,000 to 374,000. This is attributed to a technical or computer problem that continues from last month. About 15,000 of new claims are estimated to be federal contractors affected by the government shutdown, while federal workers aren’t in the count yet.
Consumer credit showed a big increase but it was due again to a surge in student loans. Revolving credit, or credit card use, declined, indicating consumers are becoming cautious about spending again. This is the third straight month of declining credit card use and shows households spending less after the interest rate increases earlier in the year.
Reports that were delayed this week include JOLTS (Job Openings and Labor Turnover), Producer Price Index, and Retail Sales.
The Markets
Most markets began the week by continuing the slow, steady decline of recent weeks. But stocks reversed course after news on Wednesday that negotiations over the federal shutdown and debt ceiling would begin. Emerging market equities had the best response, returning more than 2.5% for the week. The other major indexes were closely clustered. The Dow 30 returned about 1.75; the All-Country World Index added about 1.5%; and the S&P 500 returned 1.4%. The Russell 2000 Index of small U.S. companies fared the worst. It was down over 2.5% early in the week and closed with a gain of only 1%.
The dollar was flat early in the week but jumped on news of the negotiations in Washington. It gained about 0.4%. High-yield bonds were the best among bonds, returning about 0.6%. Investment-grade bonds gained enough on the negotiation news to break even for the week. Treasury Inflation-Protected Securities (TIPS) lost ground all week, closing with a 0.4% loss. Long-term treasuries moved the opposite of other assets. They lost ground on news of the negotiations and were down almost 1.6% on Thursday. They recovered a bit to close with a 0.6% loss.
Commodities had a mixed week. Gold declined steadily most of the week and fell sharply on Friday’s opening. It lost almost 0.5%. Broad-based commodities were up about 1% several times during the week but closed with a slight gain. Energy-based commodities seemed to move independent of the news from Washington and gained 1.5%.
Some Reading for You
How did you start your morning? Read this for the right way.
Is housing about to rollover again? Read different perspectives here.
Frequently I point out some indicators are unreliable and overhyped. Read this list of seven such indicators.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
October 3, 2013 06:15 p.m.
Your Retirement Finance Week in Review
On Tuesday I was driving my car here in Northern Virginia. As I drove past the nearest golf course, I noticed the parking lot was packed. At first, I was puzzled why a course would be full on a Tuesday, the first day of October. Then, I realized these likely were all federal employees and contractors who were furloughed because of the federal government shutdown. The closure of the government will hurt some sectors of the economy but apparently will help others, as long as the furloughed workers have some money to spend.
Because of the shutdown it was a fairly quiet week in the markets and an even quieter week for data releases. Only non-government data were issued this week. Because I’m out of the office most of Friday and the Employment Situation reports won’t be issued on Friday, I’m preparing this entry on Thursday, and it will include only market data through Friday.
The Data
Since there wasn’t much U.S. data this week, let’s first focus briefly on European data. Recall that in 2011 and 2012 Europe was in crisis and most people were debating when, not if, the euro and European Union would fall apart. More recently, Europe has been stable and people generally are off crisis watch. But the support the European Central Bank gave to the economy now is fading. With it, growth is fading. European growth wasn’t much to begin with and was rising off a very low level.
This isn’t a good time for European growth to slow. A number of decisions were postponed until after the German elections. Now that those are over, a number of decisions have to be made now through the middle of 2014. Good decisions will maintain European growth, perhaps even increase it. Poor decisions will bring back the crisis and perhaps trigger a downward spiral.
Most importantly, the ECB at some point will have to adopt quantitative easing policies similar to those in the U.S. and U.K. In addition, the continent needs regulatory relief, improvement of bank balance sheets, tax reform, and other fiscal measures other than tight austerity. Watch for at least some of these measures. If they don’t appear, be prepared for another crisis.
In the U.S., most of the data released this week was surprisingly positive, except for employment data. Keep in mind that all the data reflects activity before the government shutdown and budget impasse.
Let’s look first at manufacturing. A group of reports was higher than the previous month and above expectations. These include the Dallas Fed Manufacturing Survey (a solid increase), Chicago PMI (accelerating growth), ISM Manufacturing (one of the best readings since early in the recovery), and PMI Manufacturing (holding steady). Factory orders and construction spending were scheduled but not released because of the government shutdown.
Two employment reports were released. New unemployment claims increased slightly. Clearly layoffs are steadily declining as the economy stays in a slow growth mode. But new hiring still isn’t occurring fast enough to reduce unemployment to a normal level. The ADP Employment report disappointed investors again by showing lower-than-expected payroll growth.
The non-manufacturing economy continues to grow slowly and steadily as measured by the ISM Non-Manufacturing Index. The Index showed a decline from the last two months, but those were very strong months and the best of the recovery. The latest reading still shows growth, though at a slower rate than the last couple of months.
In the last couple of months we started to see economic activity slowing in the face of higher interest rates. We’re not seeing that in the latest data. One week’s data isn’t enough to draw conclusions, but the initial sign is that the economy might have adjusted to higher rates and resumed slow, steady growth. But we still need to watch for effects from the government shutdown and slowing growth in Europe.
The Markets
It’s been a volatile week in the markets. Stocks in general didn’t do well, but there was an unusual divergence between major indexes. Emerging market equities did best among equity indexes, gaining about 0.4% through Thursday’s close, but it was up 1.2% at one point and down 1.6% at another. The Dow 30, on the other hand, did the worst, losing 1.6%. It wasn’t in positive territory for the week. The S&P 500 and All-Country World Index closely tracked each other, losing about 0.6% through Thursday. The Russell 2000 small companies stock index was doing well until Thursday. It closed with a gain of about 0.3%, but was up 1.4% earlier in the week.
Bonds and the dollar also had a rough week. The dollar lost about 0.5% with losses accelerating after the federal government closed. Long-term treasuries did worse, losing 0.8% through Thursday. They had a roller coaster week but were in negative territory all week. High-yield bonds and investment-grade bonds lost 0.2% and 0.3% respectively. Treasury Inflation-Protected Securities (TIPS) were in positive territory most of the week and finished with a 0.1% gain.
Commodities also had a bad week. Most probably thought gold would do well in light of the federal government shutdown, but it did the worst among commodities. It lost about 1.6% and was down over 4% at one point. Energy-related commodities did better but lost about 0.6%. Broader-based commodities lost about 1.2%.
Some Reading for You
Here’s a group of charts that should give you some optimism about the economy.
And here’s the latest academic work on the best strategy for choosing Social Security benefits.
How are individual insurance premiums affected by Obamacare? It’s hard to tell, but here’s an attempt to quantify the changes.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
