September 27, 2013 06:30 p.m.
Your Retirement Finance Week in Review
You can look for interest rates to decline in coming months. Most investors and analyst concluded from the Fed’s taper talk in May and June that interest rates were on an endless upward rise. Markets pushed rates substantially higher. The Fed didn’t have to act. A few well-chosen words caused investors to overreact.
The result is a reduction in economic growth. We saw it first in housing starting a month or so ago. More recently it’s shown up in manufacturing. It is clear now that the economy isn’t going to adjust to these higher rates as easily as it adjusted to the changes in fiscal policy at the start of 2013. Perhaps that is because the fiscal tightening was expected for some time and the Fed’s tapering talk surprised a lot of people. Also, the talk of military action against Syria probably chilled some economic activity.
Markets interest rates already declined a little in response to the weakness and to the Fed’s decision at the September meeting not to reduce its bond buying. Expect them to decline some more as data come in below expectations. If the economy weakens too much, the Fed is likely to seek a way to add stimulus, though there are many analysts pointing out that each of the stimulus measures since 2009 has been less effective than the previous one.
I’m not expecting the economy to tumble into a recession. There should be a gradual decline in market rates that rekindles some of the activity that’s dropped off. That’s the most probable scenario. But it might not happen if talk about action against Syria or some other country is returns. Economic activity also might be chilled if the spending and debt ceiling debates in Washington get ugly. Barring such events, however, the recent change in the data should be temporary slowing that is followed by a return to the growth we experienced earlier in the year.
The Data
Analyzing the recent housing data requires a little work. Prices continue to rise as measured by both the FHFA House Price Index and the S&P Case-Shiller Home Price Index, both released this week. The rate of increased declined in the Case-Shiller data but not the FHFA Index. Also, new home sales increased above expectations. But existing home sales and pending home sales have been slowing. I think the best way to interpret these trends is that the rise in rates caused a number of potential buyers to accelerate their plans. But the combination of higher mortgages rates and higher prices is causing some potential buyers to put their plans on hold. The recent burst in sales borrowed some sales from the future. Expect both home prices and home sales to calm down. They should grow, but at less than recent rates.
The Personal Income and Outlays report was modestly positive. Last month’s almost flat income figure was revised slightly upward to a 0.2% gain, and this month income increased 0.4%. That’s an annual rate of increase of 3.7%. Spending also rose more than last month by 0.3% for a 3.2% annual spending increase. Not surprisingly, inflation as measured by the PCE Index remains well below the Fed’s 2% target at a 1.2% annual rate. It’s not surprising, because it is tough for inflation to rise when incomes aren’t rising much. The data continue to show that deflation is more of a risk than inflation.
Higher interest rates and some signs of a slowdown in housing probably explain the modest decline in Consumer Sentiment as measured by the University of Michigan. It’s back to where it was in early 2013 after experiencing a surge to recovery highs in the spring and summer.
Manufacturing also appears to be slowing again. It slowed earlier in the year but began to pick up during the summer. The more recent data shows fairly broad-based slowing. The PMI Manufacturing Index Flash was down. The Richmond Fed Manufacturing Index was flat after a substantial gain last month. Durable goods orders were better than expectations but barely grew after a sharp decline last month, and the manufacturing component was soft. The Kansas City Fed Manufacturing Index showed less growth than last month and was below expectations. The only manufacturing index to show strength this month was last week’s Philadelphia Fed Index.
The GDP estimate for the second quarter matched the first quarter’s 2.5% number, but that’s history and doesn’t tell us anything about current trends. Corporate profits for the second quarter were revised down slightly but still showed an 8.5% annualized growth rate after a decline in the first quarter.
New unemployment claims declined to 305,000, much lower than expected and without the administrative errors of the last two weeks.
The Markets
Only a few bonds did well this week. For other investments it was mostly a slow, steady decline. I suspect all the talk of a government shutdown and likely failure to increase the debt ceiling are weighing on investors and most markets.
The best-performer was long-term U.S. Treasury bonds. They closed up about 1.5% after being up almost 2.0% earlier in the week. Investment-grade corporate bonds were behind with a 0.7% increase. Treasury Inflation-Protected Securities (TIPS) were just above break even. The dollar was flat until dropping sharply on Friday to give it a 0.2% loss. Those were the only major investments with positive returns. High-yield bonds lost about 0.5%.
Among stocks, U.S. small companies measured by the Russell 2000 gained about 0.5%. The All-Country World Index was the next-best performer with a loss of 0.5%. The S&P 500 lost about 0.75%. The Dow 30 lost just over 1% while emerging market stocks tumbled on Friday to close with a loss of over 2%.
Gold had a very volatile week, finishing with a gain of about 1%. Other commodities also were volatile, though a little bit less so. Broad-based commodities finished with a 0.4% gain, while energy-based commodities lost about 0.2%.
Some Reading for You
I enjoyed this story about the great honey fraud.
Here’s a good explanation of why, despite many forecasts, commercial real estate didn’t crash the way residential real estate did.
The latest U.N. report on climate change is out, and you should balance media coverage with this view.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
September 20, 2013 04:50 p.m.
Your Retirement Finance Week in Review
Most investors were surprised this week when the Fed decided after all the noise of the last few months that it wouldn’t reduce its monthly bond purchases after all. Readers of these messages and of Retirement Watch shouldn’t have been. It was clear from the start that investors were overreacting to and misreading what Fed officials were saying. The good news is that created some market opportunities, that I think will be profitable at least through the end of the year.
It’s clear that the Fed’s talk caused the market to raise interest rates, and that caused economic growth to slow. In effect, the markets did the Fed’s work for it. In fact, market rates rose so much that the Fed itself was spooked and concerned that economic growth would slow too quickly.
This was clear in Ben Bernanke’s statements after the Fed’s decision, and should have been clear to anyone who reviewed statements from Bernanke and other Fed officials before that.
Unsaid in Bernanke’s statement was what I think are strong concerns about non-U.S. economies. Europe merely deferred actions the last few years. Everything was put on hold until after the German elections on Sept. 22. Beginning soon after that election, a string of important decisions will have to be made in Europe. I don’t think Fed officials are confident European policymakers will do what they should in order to increased economic growth.
Likewise, emerging market economies have suffered recently, especially since the Fed started to talk about tightening. India’s had especially bad problems, and China continues to allow debt to grow at unsustainable levels. Some people blame the Fed at least partly for problems in emerging economies, and they are a potential source of a global contagion if just a few things go wrong.
But now investors are uncertain about future Fed policy. They were comfortable when they thought quantitative easing would continue indefinitely and adjusted when they thought quantitative easing was ending. Now that they realize the Fed is “data dependent” as its been saying, investors can’t really forecast or plan. That’s going to lead to a lot of market volatility such as we saw this week as investors change their perspective and outlook each week.
The Data
There was a fair amount of data this week, though markets didn’t react to it very much. They were focused on the Fed’s action, or lack of action. The data also didn’t change the picture of the economy.
Let’s start with housing. The data here were mixed and indicate that higher interest rates are having some slowing effect on housing but not a crushing effect. Home builders remain very positive. Their Housing Market Index came in the same as last month (which was revised down slightly), and that keeps the number where it was during the 2005 peak. Home builders are especially optimistic about the next six months.
Housing starts rose, but that’s only because last month’s number was revised down. Last month’s housing starts were below expectations, and this month’s starts also lagged expectations. But looking below the headlines, most of the disappointment was due to a decline in apartments, which are volatile. Single family home starts rose 7% after declining 3% last month.
Existing home sales increased well above expectations for the month and are at a post-2008 high. This could be due to some panic buying from potential homeowners concerned about further mortgage rate increases. July and August sales could have moved some sales forward from future months.
Manufacturing had a mixed week. Industrial production rose close to expectations after no change last month, and the manufacturing component increased well above expectations after a decline in July. But the Empire State Manufacturing Survey came in below expectations and last month’s number, indicating softness.
Yet, the Philadelphia Fed Survey soared well above expectations and last month’s number. In fact, it was the highest monthly number in two and a half years.
Inflation remains under control, and in fact is raising more of a deflation fear than inflation fear. The CPI is 1.5% for the last 12 months and 1.8% after excluding food and energy.
Leading Economic Indicators from the Conference Board rose more than last month and than expectations. That makes two months of very solid gains, and most of the components in the index were strong.
New unemployment claims rose a bit to 309,000. The last couple of weeks numbers were distorted by “administrative issues” related to the introduction of new computer systems in some states. The Department of Labor says it appears that some claims weren’t reported because of the problems.
Over all, the data continue to reveal an economy that is growing but growth slowed from the pace at the beginning of the year. The last couple of weeks, however, indicate that the economy might be adjusting to the interest rate increases of May-June. It’s still too early to tell, because effects from interest rate increases tend to lag, but there are some hopeful signs.
The Markets
Markets had a volatile two days this week. The treading water Monday, Tuesday, and Wednesday until the Fed’s 2:00 p.m. announcement. Then, markets reacted one way immediately after the announcement and the other way after some reflection.
Stocks soared on Wednesday afternoon, lost some ground on Thursday, and lost a lot of ground on Friday. Global stocks as measured by the All-Country World Index closed with a gain of just over 1%. The Russell 2000 U.S. Small Companies Index was right behind with a 1% gain. Emerging market stocks rose about 0.5%, after being up about 3.5% on Wednesday’s close. The S&P 500 broke even, while the Dow 30 actually lost 0.5%.
Bonds had a better week. Treasury Inflation-Protected Securities (TIPS) did the best by a large margin, gaining 1.2% for the week. That’s a huge gain for bonds. High-yield bonds gained almost 0.8%, while investment-grade bonds gained 0.4%. Long-term treasuries had a wild week. They were down about 1.5% at Monday’s close as investors were confident the Fed would begin to scale back its bond purchases, soared to a 0.8% gain for the week late Wednesday, and closed the week with a net gain of 0.5%.
The dollar went from a modest gain early in the week to a 0.8% loss for the week after the Fed’s announcement.
Gold had the wildest week. After the Fed’s announcement, the metal soared to almost a 4% gain. But it declined to a slight weekly loss. Broad-based commodities lost about 0.8%, while energy-related commodities lost 1%.
Some Reading for You
One of the better reviews of where we are five years after the Lehman Brothers bankruptcy is here.
Here’s another perspective on the crisis that I like.
Finally, read this explanation of why the government didn’t save Lehman Brothers.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
September 13, 2013 04:50 p.m.
Your Retirement Finance Week in Review
Before we dive into this week’s report, I’m letting you know about my upcoming appearances. These are different from the usual investment conference.
I’m going to appear at the live, online eMoneyShow. It’s sponsored by the people who hold the well-known MoneyShows in places such as Orlando and Las Vegas. But this time the presentations are online. You don’t have to travel to hear the presentations. And it’s all free.
I’ll be giving two presentations. I’ll be doing one hour on Supporting Your Lifetime Income Stream. More details and sign up are here. I’ll also be part of a panel on The Five Best Income Strategies for this Stage of the Market Cycle. More details and sign up are here.
Now, on to this week’s report.
The interest rate increases that began in May clearly are slowing the economy. We’ve seen that in the data in recent weeks, and it continued in most of the small number of reports issued this week. Households and businesses aren’t adapting as well to the rates increases as they did to the tax increases and lower federal spending that occurred earlier in the year. Perhaps that’s because the other issues were well-telegraphed, while the rate increases surprised many people.
The issue for investors is how much the rate increases will slow growth. My expectation is that the reduction in growth will be modest. I think the rate increases were too far and too fast. Rates already retreated a bit, and I expect they will retreat further. Economic players will adjust in coming months and growth should stabilize by the end of the year.
The real concerns are outside the U.S. Europe stabilized since the peak of the crisis, but policymakers haven’t taken serious actions. Decisions have been delayed until after the German elections this month. Later this year and through 2014 Europeans will have to make decisions. They’ll need to take much stronger actions if they want to enter the road to sustainable growth. I expect they’ll be dragged by circumstances into doing most of the right things, but we can’t be sure.
China and other emerging economies also are a concern. China’s been reporting better data, but the data are backed by the same policies and imbalances that raised concerns the last few years. Debt is expanding too rapidly, and other actions need to be taken. A number of other emerging economies became too dependent on hot money fleeing the U.S. and other developed nations in search of higher returns. Now that the emerging economies have hit potholes and the Fed is likely to scale back quantitative easing, these economies are likely to have problems for a while.
As always, I’ll be watching the data and not relying on forecasts. For now, there are opportunities but also a number of risks out there.
The Data
This was a very light week for economic data.
There were two labor market reports. The Job Openings and Labor Turnover Survey (JOLTS) showed essentially no change in the job market. There is modest growth in job openings, but not enough for employees to quit jobs at the rate they did in normal times. The new unemployment claims report showed a sharp reduction in new claims, but the Department of Labor reported that this was an anomaly caused by computer and administrative issues.
The headline number for the NFIB’s Small Business Optimism Index showed a small drop after several months of improvements. But the details of the survey were more positive than the headline number. Small businesses have lagged in the recovery but have done better than large businesses in recent months. The survey indicates that small businesses haven’t seen growth decline as much larger businesses and the national data indicate.
Some other reports were more negative.
I don’t usually cover import and export prices, but this week’s report showed declines across the board. Price declines usually indicate reduced demand. That’s another sign that higher interest rates slowed growth.
Retail sales also were a disappointment, coming in well below expectations. After excluding autos, there barely was retail sales growth. This is a volatile number, so we can’t read a lot into one month. Sales growth was strong the previous month. But lower sales growth makes sense in light of the last few months labor reports showing very low income growth.
Related to that, consumer credit growth remains steady, or stagnant, depending on how you want to look at it. Credit card use declined, while auto loans increased. It’s another sign of households responding to slow income growth and higher interest rates.
Consumer sentiment as measured by the University of Michigan also took a tumble after surging to recovery highs over the spring and summer. This is the mid-month report, and it could reflect concerns about the pending conflict with Syria that was at its height when the survey was taken but now has receded.
The Producer Price Index continued to show inflation below the Fed’s 2% target, though it was higher than expectations for the month.
The Markets
It was a good week for stocks, though the positive action was packed into the first two days of the week. The Dow 30 was the exception, rising steadily all week for a closing gain of almost 2.5%. The S&P 500 was the laggard among major indexes, gaining about 1.4%. Clustered with gains around 1.5% were the Russell 2000 Small Company Stock Index, All-Country World Index, and emerging market stocks. Most of the good returns in stocks were a combination of news that made an attack on Syria less likely and positive economic data from China.
Bonds generally were flat for the week, though there was some volatility during the week. Long-term treasuries had the most volatile week. They were down 1.2% at midweek, up about 0.3% early Thursday, and closed with a loss of almost 0.2%. Treasury Inflation-Protected Securities (TIPS) followed a similar, though less volatile, path and closed with a 0.2% gain. High-yield bonds had about the same gain. Investment-grade corporate bonds closely followed treasuries and finished with an almost identical loss.
The dollar was down all week and closed with a loss of about 0.6%
Commodities had a bad week, with gold faring the worst. It closed near its lows with a loss of 5%. Reports surfaced this week forecasting that gold demand will fall because of economic problems in India. Broad-based commodities and energy-based commodities weren’t as volatile and traded in close to the same range. Energy lost about 0.6% while broad commodities lost over 1%.
Some Reading for You
Puzzled about the priced of gold. Read this research summary from FTAlphaville.
Another good compilation from FTAlphaville reveals why China might not be out of the economic doghouse.
Tony Crescenzi of PIMCO has a good take on what’s happening and likely to happen at the Fed.
I comment and link to these and other items on my public blog at http://www.bobcarlson.net.
September 6, 2013 04:20 p.m.
Your Retirement Finance Week in Review
Before we dive into this week’s report, I’m letting you know about my upcoming appearances. These are different from the usual investment conference.
I’m going to appear at the live, online eMoneyShow. It’s sponsored by the people who hold the well-known MoneyShows in places such as Orlando and Las Vegas. But this time the presentations are online. You don’t have to travel to hear the presentations. And it’s all free.
I’ll be giving two presentations. I’ll be doing one hour on Supporting Your Lifetime Income Stream. More details and sign up are here. I’ll also be part of a panel on The Five Best Income Strategies for this Stage of the Market Cycle. More details and sign up are here.
Now, on to this week’s report.
The Fed seems to have borrowed a strategy from the European Central Bank. The ECB basically ended the crisis in Europe by saying that it would do “whatever it takes.” The ECB hasn’t done much since then and certainly hasn’t taken the strong measures the Fed and Bank of England have. Yet, Europe seems to have stabilized, and talk of the euro falling apart no longer is in the headlines.
In the same way, Ben Bernanke seems to have slowed the economy and markets without the Fed actually reducing its bond buying. All he had to do was mention the possibility and investors did all the work for him. They sold income investments in a panic, raising market interest rates.
Those higher rates seem to have flowed through to the economy. This week’s employment situation reports were only the latest in a series of reports that came in below expectations and indicate the economy is growing at a lower rate than it was at the start of the year. Investors quickly turned from believing the Fed was about to end quantitative easing and increase interest rates to thinking maybe the Fed won’t take any action at its September meeting.
As you know, I believed investors overreacted to Bernanke’s words, and income investments became short-term bargains after the declines in June and again in August. Any action the Fed takes in the next few months will be modest. The reductions in bond buying will be equal to or less than the reductions in the amount of debt that will be issued by the federal government and the mortgage industry.
The real question is how much the higher interest rates we’ve seen will slow the economy. We already slowed from a rate of close to 3% to around 2%. The weakness is not uniform or widespread throughout the economy. I suspect we’ll stabilize around here or a little lower, avoiding a recession. But it won’t take much of a shock to push the economy into negative growth.
It looks like the markets priced in a tightening move far greater than what the Fed is likely to take. With the economy slowing, the Fed is more likely to increase stimulus than it is to tighten as much as the markets have priced in. In fact, I think the highest probability surprise is that the economy turns weaker than anticipated, causing a decline in stocks. If I’m right, income investments should see some capital gains by the end of the year, and stocks won’t do badly either. I think it is unlikely that the economy will be strong than anticipated, causing the Fed to reducing bond buying faster than expected.
The Data
Let’s start with the Employment Situation reports. Longtime readers know I believe these are overhyped, unreliable reports. We saw that in this week’s release, because the numbers of the last few months were revised meaningfully downward. That made this week’s disappointing reports even more disappointing to many investors.
There wasn’t much for optimists to latch on to. The average workweek rose by 0.1 hours, and average hourly earnings rose by 0.2% after a few months of little or no growth. The unemployment rate declined, but that’s only because workforce participation declined again. Beyond that, job growth was below expectations across the board. The jobs that were produced generally was part-time and in low-wage industries.
This was consistent with Thursday’s job report from ADP, showing slower private sector job growth. The new unemployment claims improved over the previous week and were in the range they’ve been in for some weeks. Add the employment reports and we see that the labor market no longer is at crisis levels but the healing process has slowed.
The Fed Beige Book, a monthly summary of anecdotal evidence from each Federal Reserve Bank, was released. It showed basically an unchanged economy. While higher interest rates had some slowing effect in the report, the picture generally is of a slowly-growing economy that’s having trouble generating sustainable momentum. Housing and consumer spending remained fairly strong, while manufacturing lagged.
Several manufacturing reports were issue this week and generally showed some improvement over the lackluster reports of the last few months.
ISM Manufacturing Index had its second month of strong growth, and new orders were particularly strong. The PMI Manufacturing Index was not as strong but still showed positive growth for the last two weeks of the month. Factory orders declined after three months of gains, but that decline was focused in the volatile transportation sector. Exclude that and new orders rose a bit. Nonfarm productivity for the second quarter was revised upward to 2.3% after a 0.9% initial estimate last month.
All in all, manufacturing is growing faster than it was a few months ago, but manufacturers still are cautious. They’re not expanding until they’re sure the demand is there instead of trying to anticipate demand.
The ISM Non-Manufacturing Index had a strong increase and was above expectations. New orders and employment were particularly strong.
Wrap it up and you have a slowly-growing economy that is showing early effects of growing more slowly thanks to the higher market interest rates. My expectation, as I said, is the economy will stabilize around recent growth levels and perhaps pick up pace late this year or early next year. But that depends on how households react to interest rates at these levels.
The Markets
Markets reacted more to news about Syria and data from China than they did to U.S. economic data. The leading investment was emerging market stocks after the monthly data from China indicated that economy increased its growth rate. Emerging market equities have been laggards for some time because of fears about and slower growth from China.
Developed world stocks had modest gains. The All-Country World Index did best, partly aided by a weak dollar, with a gain of just over 2%. The S&P 500 gained just over 1% while the Dow 30 rose around 1%.
Bonds didn’t fare as well. Long-term treasury bonds did worst, losing
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