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Your Retirement Finance Week in Review

Last update on: Nov 22 2019

The Federal Reserve might have signaled a pause in its tightening policy, but it’s too soon for investors to relax.

The Fed began talking about tighter monetary policy in 2013. Then-chairman Ben Bernanke’s remarks led to what is known as the taper tantrum.

Markets, especially bond markets, panicked at the notion that the Fed might one day curtail its extraordinary monetary policy. Since then, the Fed consistently has tightened less than what was priced into the markets.

That approach ended in 2018. The Fed began to tighten as much or more than the markets expected. More importantly, Fed officials began to talk about more aggressive tightening.

The Fed became particularly aggressive in September. That’s when Fed Chairman Jerome Powell gave an interview in which he indicated economic growth was too strong and he was inclined to aggressively raise interest rates through at least 2019. Other Fed officials followed with similar comments. Powell’s comments triggered the stock market decline that accelerated through late November.

Powell’s comments this week indicated he might have had a change of mind. In his September comments, Powell said interest rates were a “long way” from the neutral level he sought. But on Nov. 28, Powell said rates were “just below” the neutral range.

Investors took that as an indication that Fed officials had noticed the decline in the markets and economic data over the last couple of months and now are planning fewer interest rate increases. On Wednesday, the Dow Jones Industrial Average increased 617 points, or 2.5%, erasing November’s losses. It was the best rally in eight months and the second-best day of 2018.

Even so, it could be a little soon for investors to issue the “all clear” declaration. Even if it doesn’t raise interest rates much more, the Fed still plans to reduce its balance sheet by not purchasing new bonds to replace some of the bonds that mature. The markets will need to find other buyers for those bonds, and that will continue to put upward pressure on interest rates.

Markets have pushed interest rates higher than the Fed has, and there’s a good probability that will continue.

Earnings growth also faces substantial head winds. These include higher interest rates, faster wage growth, slower global growth, the strong dollar, trade conflicts and more. There also are likely to be fewer stock buy backs going forward. Earnings growth and buy backs have been key reasons stock prices increased faster than economic growth since 2009.

We’re now in the most difficult phase of the economic cycle, especially for central bankers. They have to keep the economy from growing so fast that inflation becomes a problem without flipping the economy into a recession. Markets are more volatile in this phase, creating traps for investors. It still is a good time for investors to be cautious.

The Data

The headline numbers in the Personal Income and Outlays report were strong. Income increased 0.5% for the month, and consumer spending increased 0.6%. Interest income and proprietor income led the Personal Income gain. Wages and salaries increased only 0.3%. The spending gain was led by a 0.7% increase in spending on services. But last month’s spending was revised down to 0.2% from 0.4%.

The PCE Price Index, the Fed’s preferred inflation measure which is part of the report, increased only 0.2% for the month and 2.0% over 12 months. The core price index (excluding food and energy) increased only 0.1% for the month and 1.8% for 12 months.

The economy still is growing but at a slower rate, according to the PMI Composite Flash Index. The index for the manufacturing sector dropped to 55.4 from 55.9. The service sector declined to 54.4 from 54.7. The composite index declined to 54.4 from 54.8. The results still indicate solid growth for the fourth quarter.

Manufacturing activity in Texas declined sharply, according to the Dallas Fed Manufacturing Survey. The General Activity Index was 17.6, down from 29.4. New orders were at their lowest level in almost two years.

But the Richmond Fed Manufacturing Index remained solid. The index was 14, down from last month’s 15. This is well below the 29 reported in September but still indicates growth.

Home prices aren’t increasing as fast as they were, indicated the S&P Corelogic Case-Shiller Home Price Index. Prices increased 0.3% for the month. The 12-month price increase was down to 5.1% from 5.5% last month and more than 6.0 until recently. This is the lowest level in almost two years.

The FHFA House Price Index told a similar story. Prices increased 0.2% for the month, down from 0.4% last month. They’re up 6.0% over 12 months, which also is the lowest level in almost two years.

New home sales continue to decline more than expected. This was the fifth consecutive month sales were below expectations and brought sales to their lowest level since March 2016. Over 12 months, new home sales are down 12%. Prices of new homes declined 3.6% for the month and are down 3.1% over 12 months.

Pending sales of existing homes declined 2.6% for the month. The consensus estimate was for no change. Over 12 months, pending home sales are down 6.7%.

Consumer Confidence, as measured by The Conference Board, remains positive. It declined to 135.7 from 137.9. That’s the largest monthly decline in 2018. But last month’s level was the highest since 2000, so the current level remains among the highest in history. Not surprisingly, there was a sharp decline in the percentage of consumers expecting higher stock prices.

But there’s a big difference between consumers’ assessments of their present situation and their expectations for the future. Confidence about the present situation is among the highest readings ever, but expectations about the future have been stagnant for more than a year. The gap between the two is near the all-time high. In the past, a large gap between these two measures often occurred before recessions.

The second estimate of third-quarter gross domestic product (GDP) was unchanged, showing 3.5% growth. The GDP Price Index also was unchanged at 1.7%. The big news in the report probably is that business investment was revised higher from the first estimate. But it still is less than the level in the second quarter.

New unemployment claims increased for the third consecutive week, this time by 10,000. Total new claims were 234,000, which is the highest in six months. Continuing claims also increased to the highest level since July. We’ll wait to see if this is a short countertrend move or a signal that the economy is weakening.

The Markets

The S&P 500 rose 3.61% for the week ended with Wednesday’s close. The Dow Jones Industrial Average returned 3.76%. The Russell 2000 added 2.84%. The All-Country World Index gained 2.96%. Emerging market equities increased 3.16%.

Long-term treasuries lost 0.50% for the week. Investment-grade bonds returned 0.23%. Treasury Inflation-Protected Securities (TIPS) fell 0.41%. High-yield bonds rose 0.70%.

On the currency front, the dollar gained 0.15%.

Energy-based commodities lost 4.02% for the week. They’re now down 14.11% for four weeks. Broader-based commodities fell 1.33%, while Gold lost 0.43%.

Bob’s News & Updates

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I’m a regular contributor to the Forbes.com blog. You can view my contributor page here.

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