October 2015
October 30, 2015 04:35 p.m.
Your Retirement Finance Week in Review
There definitely are divergences in the global economy, with the U.S. separating itself from most of the rest of the globe. Within the U.S. the manufacturing sector is lagging while the rest of the economy is doing well. I expect these divergences to continue, because there’s nothing on the horizon to change established trends.
You know the story about slower global growth. China’s economy is burdened with heavy debt, and the government is engineering a shift from a manufacturing export economy to a more domestic, consumer-oriented one. Japan is doing better, but it still is struggling after a 25 year depression. Many emerging markets are struggling because of a combination of factors: slower growth in China and Europe; the strong dollar; less liquidity flowing from the U.S.; and the commodities bear market.
Despite all this, the U.S. economy continues to grow at about or above its long-term average. The growth rate is nothing spectacular, but the economy continues to grow even after the Fed ended quantitative easing in 2014. The first estimate of GDP for the third quarter that was released this week indicated that the economy grew in the third quarter but at a slower rate than in the second quarter. This is consistent with the data released during the quarter.
A broad measure such as GDP doesn’t show what’s really happening in the economy. Someone who saw only the manufacturing data, for example, would believe that the U.S. is in a recession or perhaps a depression. Manufacturer’s been suffering under the forces of global deflation, falling commodity prices, the strong dollar, and slow global growth. The rest of the U.S. economy, however, has been doing well. The service economy is growing at above average rates and even the housing market is contributing to growth. The growth outside manufacturing clearly is self-sustaining, since it’s been happening for about a year after the Fed ended QE.
The concern is that the other forces will drag down U.S. growth. So far, there’s no sign of that happening. The U.S. service sector seems capable of doing well even when the rest of the globe isn’t. But it won’t take much to change that. If the Fed raises rates too much, the global forces of deflation and slow growth could arrive in the U.S. That’s why the Fed’s been delaying a rate increase and why the greatest risk to the economy and markets remains the Fed.
Before we dive into this week’s data and markets, here’s a note on Nicholas fund. You might have noticed that since the correction bottom in late September, the fund hasn’t recovered as much as the major market indexes. This is partly because the large company stocks that drive the S&P 500 have done better than the mid-size and smaller companies favored by the fund. The S&P 500 has recovered most of its losses since mid-August, while the Russell 2000 still is down more than 5%. The Nicholas fund is down even more, about 7%, primarily because its largest holding has suffered bad publicity. Valeant Pharmaceuticals has lost close to 60% of its value in the last three months. The fund has declined to comment on the stock. But that’s the main reason for the fund’s divergence at this point.
The Data
The data for manufacturing this week continued to be bad. The Dallas Fed Manufacturing Survey reported that the sector took another dive in the last month to record the 12th consecutive negative month. The Richmond Fed also reported a negative manufacturing index, but only at negative one. That’s an improvement from last month and barely negative. Durable goods orders also were negative across the board, and last month’s numbers were revised lower.
The positive surprise for manufacturing was the Chicago Purchasing Managers Index which unexpected jumped sharply high for a reading above 50, which indicates expansion rather than contraction.
Housing data was mixed. New homes sales declined sharply after two months of strong gains. A decline was expected, but this was larger than expected. The report isn’t consistent with the index for the NAHB and other data. New homes sales can be volatile, so we shouldn’t read too much into one month’s report. Also, the average selling price was higher over the last month, indicating that builders are confident.
But existing home sales also declined 2.3%. The report said a lack of low-priced homes for first-time buyers is a problem as well as uncertainty caused by the stock correction in August and September.
Home prices increased slightly, according to the S&P Case-Shiller Home Price Index. That puts the 12-month appreciation at 5.1%.
The PMI Services Flash Index found that the sector continues to grow but at a slower rate than last month. In fact, it is the lowest reading since January.
Consumer Confidence as measured by The Conference Board declined more than expected. A decline in views about the availability of jobs was behind the decline. The measure still is near the highs of this cycle. Consumer Sentiment as measured by the University of Michigan also declined, but not as much. It still is above the final reading for September but below the mid-October reading.
New unemployment claims increased slightly, indicating the job market continues to steadily improve.
Personal Income and Consumer Spending both increased at the same modest rate after a few months of steady gains. The increases were slightly below expectations. More importantly, the PCE Price Index, the Fed’s preferred measure of inflation barely budged and shows only a 1.3% increase for 12 months.
The GDP report came in mostly as expected. The first estimate for the third quarter was well below the second quarter’s third estimate and a little below expectations. I don’t pay much attention to the report, because it is both backward-looking and subject to revisions. There weren’t any surprises in the report. It mostly matched data that came out during the third quarter.
The Markets
Most stock markets were up for the week despite losses on Friday. The leader was the S&P 500 with a gain of just under 1%. The Dow Jones Industrial Average followed with a 0.5% gain. The Russell 2000 U.S. Smaller Companies Index gained a fraction while the All-Country World Index lost a fraction. Emerging markets had the worst week, losing about 3%.
Bonds didn’t fare as well. Long-term treasury bonds lost about 1.1%. Investment grade bonds lost 0.8%, and Treasury Inflation-Protected Securities (TIPS) lost 0.4%. High-yield bonds lost about 0.2%.
The dollar gained a fraction after being up almost 1% at midweek.
Commodities had a mixed week. Energy-based commodities did well, gaining about 2.3%. Broad-based commodities gained only a fraction. Gold lost about 2%.
Some Reading for You
There were some important Social Security and Medicare changes in the new federal budget bill.
Here’s Byron’s Wein’s interesting take on the summer’s correction.
Is home ownership about to increase? Read this.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
October 23, 2015 04:10 p.m.
Your Retirement Finance Week in Review
Only two months ago, stocks and most other assets were in swoons. They were 10% or more below their highs of earlier this year. Many analysts were pronouncing the bull market dead and talking about how far stocks would fall before they hit bottom.
Problems in China were foremost in people’s minds, especially the bear market that began in Chinese stocks. There were other worries. An interest rate increase by the Federal Reserve at its September meeting seemed certain at the time. We also were nearing the end of the third quarter, and many analysts were expecting poor earnings reports for the quarter. Europe was in the news again and seemed headed for another problem period. Of course, there were the usual geopolitical problems that could explode into crises at any point.
All that now seems a long time ago. Stocks indexes reached a bottom around August 26, approached the bottom again near the end of September, and have been rallying since. Third quarter earnings have been better than expected, except for manufacturing and commodity-related companies. The European Central Bank announced that it likely will increase quantitative easing soon, and it asked other policymakers for help with fiscal policies that will stimulate growth. The Fed decided not to increase interest rates for at least another month and probably longer. At the end of this week China announced that it would reduce interest rates.
There’s been a steady rally since September 29. U.S. stocks are up around 8%, depending on the index. European stocks are only a little behind, and emerging market stocks rallied about 12%. Commodities still are declining. The dollar declined for a while and now is up a bit. The rally in U.S. stocks hasn’t been across the board. Small company stocks are up only a small amount since late September.
The global economy and markets aren’t without risks at this point. There still are strong deflationary forces and weak growth around the globe. But recent events show the importance of not adjusting investment portfolios according to recent headlines or assuming current trends will last indefinitely. It’s important to have a process that focuses on fundamental factors that matter to the markets in the long term.
The Data
Housing continues its modest growth and positive contributions to the economy. The Housing Market Index from NAHB, which measures the new home market, registered a nice increase for its highest level since 2005. Housing starts were better than expected, and last month’s number was revised higher. The bad news in the report was that building permits were down 5%. But the decline was in multifamily housing, while permits for single family homes were flat.
The FHFA House Price Index increased 0.3% and showed the 12-month gain in home prices to be 5.5%. That’s down slightly but still shows modest appreciation. Existing home sales climbed after a decline last month. In fact, it was the second best number since the bottom. Single family homes led the increase, while condo sales were flat.
The Index of Leading Economic Indicators declined a bit, largely because of lower building permits last month. But this month’s number should reverse that in next month’s LEI. The stock market declines that helped drag down the index also are likely to be reversed in the next report.
Manufacturing actually had some not-bad news this week. The Kansas City Fed Manufacturing Index had only a slight decline this week after months of steep declines. The Kansas City Fed is the region most affected by the decline in the decline in oil fracking activity. Surprisingly, new orders registered a nice increase in the report. Also, the PMI Manufacturing Index Flash increased to its best level since May. Most of the strength came from domestic activity, which new orders reaching a seven-month high.
The Markets
It was a very good week for stocks. The Dow Jones Industrial Average led the way with a gained of about 2.8%. The S&P 500 gained about 2.25%. The All-Country World Index gained just under 2%. Emerging market stocks gained about 1.25%. The Russell 2000 U.S. Smaller Companies Index lost a fraction.
Bonds had a volatile week. High-yield bonds led the way with a 0.8% increase. Investment-grade bonds gained about 0.4%. Treasury Inflation-Protected Securities (TIPS) gained about 0.2%. Long-term treasury lost more than 0.2%.
The dollar gained almost 2.5%.
Commodities continued to suffer. Gold had the best week and lost more than 0.8%. Broad-based commodities lost more than 1.8%, and energy-based commodities lost 2%.
Some Reading for You
Here’s an interesting essay on the hidden factors, mostly due to technology, that cause markets to move these days.
The folks at the Wasatch-Hoisington U.S. Treasury fund make the case for a continuation of low long-term interest rates.
Are we seeing the first signs of significant wage inflation?
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
October 16, 2015 04:50 p.m.
Your Retirement Finance Week in Review
The Fed and China continued to dominate economic headlines and the focus of short-term investors.
China announced weaker economic growth, which initially was viewed as negative news. But investors soon saw it as good news, apparently concluding that it would trigger more stimulation and reform measures from the government. In fact, China unveiled more reforms of state-run enterprises late in the week. The Shanghai Composite Index had its best week in four months and is up about 13% from its lows at the end of September.
In Fed news, two Fed officials this week said explicitly that they believe the Fed shouldn’t raise rates in 2015. That of course contradicts the message from Chairman Janet Yellin and some other Fed officials. Investors also were inclined to believe the Fed wouldn’t raise rates as weaker economic news was released in the U.S. and elsewhere.
It’s important to step back from the day-to-day hype and put all the data in perspective.
The U.S. economy appears to be doing well. Manufacturing, of course, is having problems because of the strong dollar (though it’s been weak lately), low commodity prices, and lower global growth. Much of manufacturing is commodity-production related, so the decline in oil and other prices hurts the manufacturing sector more than other sectors. Manufacturing is estimated to be about 13% of the U.S. economy, so it’s not a large segment. It also doesn’t have large spill over effects on the rest of the economy.
Outside manufacturing, most sectors are doing well. Growth has been self-sustaining since the Fed ended quantitative easing in 2014. There was a downshifting in growth after stock prices tumbled in August and September. So far, however, the growth rate has remained positive. Absent some serious shock, the headwinds in the global economy don’t seem sufficient to derail U.S. growth.
The Fed released its Beige Book assessment of the economy this week, and that supports this general outlook. Growth remains stable outside of manufacturing and energy. Households aren’t overreacting to the disruptions in stock prices. There are a few pockets of higher wage growth, but those aren’t widespread.
I’ve said for some time that deflation is more of a concern than inflation, and that inflation isn’t high enough for the Fed to raise rates. The biggest risk to the economy is that the Fed will raise rates too far, too fast. Recent events seem to have convinced most Fed officials not to flirt with that risk.
The Data
There wasn’t much data this week, but the data that was issued was interesting.
Manufacturing remains in the doldrums. The bottom it seemed to be forming during the summer didn’t hold. The Empire State Manufacturing Survey was strongly negative (though not as negative as last month) and was below expectations. Important segments of the report, such as new orders, were strongly negative. The story was the same at the Philadelphia Fed Business Outlook Survey. It declined again, though not as much as last month. But important segments of the report, such as new orders, were more negative. Industrial Production was a mixed report. Last month’s numbers were revised higher, but still were negative. This month’s numbers both overall and for the manufacturing component were negative again but were slightly better than expectations. Overall, manufacturing seems to have started a new leg down after stabilizing a bit over the summer.
The mid-month Consumer Sentiment Survey from the University of Michigan increased sharply after last month’s decline. It is much higher than the August readings, which sank with news of the bear market in China’s stocks. Also, inflation expectations are lower.
The week’s two inflation reports confirm the inflation expectations. The Producer Price Index indicated deflation again, even after excluding food and energy. Over 12 months, when food and energy are excluded, the PPI is up only 0.5%. The Consumer Price Index isn’t as deflationary. The headline number was down 0.2% for the month but was up 0.2% when food and energy are excluded. The headline number is flat for 12 months, but there’s a 1.9% increase for 12 months when food and energy are excluded.
It’s important to note that the CPI is artificially high in the current environment because rent for housing is such as large component. Rents are rising because of a shortage of rental housing in many areas. But people aren’t paying those increases monthly, and people who own homes aren’t paying them at all. So real inflation for most people probably is less than these numbers.
Retail sales initially appear to be flat. When gasoline sales are excluded, there’s a decent 0.4% increase. Gasoline sales drag down the numbers because gas prices have been declining. Real retail sales are doing even better, because inflation is flat to negative. When retail sales and consumer sentiment are combined, it appears household demand is holding up. That indicates overall economic growth will continue.
New unemployment claims declined again, indicating the job market is solid. The JOLTS (Job Openings and Labor Turnover Survey) also reported a high number of job openings, affirming that the labor market is strong.
The Markets
Stocks rallied late in the week as earnings season is doing satisfactory and weak data convinced more investors that the Fed would continue to support stock prices. The Russell 2000 U.S. Smaller Companies Index was flat, rising from a 2% loss earlier in the week. The Dow Jones Industrial Average gained about 0.5%. The S&P 500 and the All-Country World Index each gained about 0.8%. Emerging markets led the way with a gain of just over 1%.
Bonds had a mixed week. Long-term treasuries fared best, gaining about 0.7. Investment-grade bonds gained about 0.4%. High-yield bonds gained about 0.2%, and Treasury Inflation-Protected Securities (TIPS) lost about 0.1%.
The dollar was down about 0.1%.
Gold had a good week, though it slid late Friday, gaining just under 1%. Broad-based commodities lost 2% while energy-based commodities lost 2.5%.
Some Reading for You
Here’s a report on the dissent among Fed officials about raising rates.
Here’s a profile of the latest economist to be awarded the Nobel in Economic Science.
This article explains why energy prices could be relatively low and stable for a while.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
October 9, 2015 04:10 p.m.
Your Retirement Finance Week in Review
Last week’s disappointing employment reports changed the tone and direction of the markets. It also changed the views of many analysts and investors. The release of the minutes from the recent Federal Reserve meeting continued to move sentiment and outlooks.
Observers generally became more optimistic about stocks and the U.S. economy. The belief is that the weaker-than-expected jobs reports would keep the Fed from raising interest rates in 2015. The Fed minutes also persuaded more observers that a rate hike wasn’t imminent. The minutes indicated that a majority of the Fed won’t increase interest rates until inflation is higher and appears to be sustainable. If that view holds, the Fed isn’t likely to raise rates any time soon because of the global deflationary forces overpowering the inflationary forces.
The optimism spread beyond the U.S. Emerging market stocks and commodities rallied for the week.
Of course, all the news means is that the Fed isn’t going to raise interest rates and try to slow the U.S. economy soon. It means the problems in China, Europe, and in the commodity markets won’t get worse because of the Fed’s actions. But there still is a lot of work needed to improve the situations in China and Europe. The bear market in commodities also isn’t going to end simply because the Fed isn’t going to raise rates for a while.
Overall, not much has changed. The U.S. economy continues to grow at a decent rate. Growth slowed recently because the strong dollar, commodity price declines, and slow global growth combine to cause a contraction in the manufacturing sector. The rest of the U.S. economy continues to grow. The issue is to what extent the problems elsewhere are going to cause the U.S. non-manufacturing economy to slow. This week’s data indicate non-manufacturing growth slowed some, but we can’t tell how much it will decline.
The Data
There wasn’t much data released this week.
The problems elsewhere around the globe recently caused the non-manufacturing sector in the U.S. to reduce its growth rate. The PMI Services Index reported that growth declined a bit but still is at a healthy rate. The ISM Non-Manufacturing Index was similar. Growth is slower but still solid. The decline in this index shouldn’t be a surprise after two months of very strong growth.
Consumer credit continues to be interesting. For much of the recovery, only auto loans and student loans increased. Mortgages, of course, were stagnant but credit card use also lagged. This month marked the sixth straight month of gains in new credit card debt. While personal finance advisers caution against using credit cards unless you plan to pay the total bill each month, the rise in credit card use does indicate that consumers are feeling more confident and secure in their financial positions.
New unemployment claims decline 13,000. The four-week moving average is down to 267,500, which is historically low. This indicates that the labor market continues to be good for those seeking employment and that few companies are using layoffs.
The Markets
Stocks rose steadily for the week. Emerging market stocks led the way with a gain of over 4%, and they were up over 5% on Friday morning. Next with a gain of just over 3% is the Russell 2000 U.S. Smaller Companies Index. The All-Country World Index and Dow Jones Industrial Average tied with a 2.5% gain. The S&P 500 lagged with a 2% gain.
High-yield bonds had a good week, gaining almost 2.5%. The rest of the bond market didn’t do as well. Investment-grade bonds had a marginal gain. Treasury Inflation-Protected Securities (TIPS) lost about 0.5%. Long-term treasuries lost 1%.
The dollar also lost 1%.
Commodities had a strong weak. Energy-based commodities gained almost 4%. Broad-based commodities gained about 2.5%. Gold lagged with a 1.5% gain, all of which occurred on Friday.
Some Reading for You
Here’s a good piece on how to use reverse mortgages to secure retirement income.
This is a good article to keep in mind as we enter corporate earnings season.
Here’s a good summary of Ben Bernanke’s new book.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
October 2, 2015 04:10 p.m.
Your Retirement Finance Week in Review
There was a lot to talk about and think about this week. Let’s start with the markets.
For years markets were supported by the Federal Reserve’s quantitative easing policies. Those were tapered down and ended by the close of 2014. Since then, markets and the economy have been responding more to fundamentals and valuations than to monetary policy. Investors had been used to the idea of a Fed “put” that kept a floor under market prices.
This quarter investors were forced to remember what things can be like when the Fed isn’t manipulating markets. Markets generally were down. In fact, for major stock indexes it was the worst quarter since the third quarter of 2011. That’s when the European debt crisis was at its worst.
The Dow Jones Industrial Average lost 7.6% for the quarter, despite a 1.5% gain on the last day of the quarter. The S&P 500 lost 6.9% for the quarter and the Nasdaq Composite lost 7.4%. It was the Dow’s third straight negative quarter. The All-Country World Index lost about 10% while the Bloomberg commodity index lost 14%. Only U.S. government bonds did well, and they gained only 1.4%.
It’s looking like stock indexes are going to have their first negative year in a while and their worst year since the financial crisis. The Dow needs to gain more than 2,500 points, or 15%, from recent levels to avoid that fate. The Dow didn’t reach any new highs in the quarter and has had only six new all-time highs in 2015. That’s well behind the pace since 2013 when it first touched a post-crisis new high. It’s now more than 11% below its all-time high.
Market volatility also increased, as you know. Volatility is not near the levels of the financial crisis, but it reached the levels of 2011 and is well above recent levels.
There’s no secret to the causes. Contributing factors are bad news and surprises from China, a slower global economy, steep drops in commodity prices, geopolitical turmoil, and the prospective of higher interest rates in the U.S.
More recently, it is clear the U.S. economy was slowing. It’s been the strongest economy around the globe and resistant to problems outside the U.S. The commodity collapse, especially in oil, did serious damage to the manufacturing sector. Slower global growth and a strong dollar are triggering another downturn in manufacturing.
The issue for investors now is whether the rest of the U.S. economy can resist the downward pull of the rest of the global economy. For now, the U.S. still is growing at a decent rate, but the most recent data show a definite deceleration in the last few weeks. The uncertainty is why we’ve been diversified and why we increased diversification and reduced risk in since early summer. You’ll see many analysts making bold forecasts and predictions about what’s next and recommending appropriate investment moves. No one can predict accurately the next turns in the markets and economy, so we manage risk and maintain appropriate balance.
The Data
Most of this week’s data was negative and more negative than expected.
Let’s start with the Employment Situation reports, which were a good example this month of why people pay too much attention to them. The headline number of new jobs, 142,000, came in much lower than expected and than in recent months. But the last two months’ strong numbers were revised down by a total of 59,000 jobs. Only a month ago economists were saying that the strong jobs number sealed the deal for a Fed rate hike in September. It’s a good thing other events intervened and caused a delay in the rate hike, because those previous jobs numbers weren’t as good as they appeared.
Other negative in the report were that labor force participation declined by 0.2% to a 40-year low, average hourly earnings didn’t change, and the average workweek declined.
Some of the bad news is distorted by the renewed decline in manufacturing and commodities. By contrast, there was strong job growth in retail and professional and business services.
The disappointing employment reports weren’t foreshadowed in the week’s previous labor reports. The ADP Employment Report said 200,000 new jobs were created. New unemployment claims increase 10,000, but that still keeps the number n
