Archives for October 2014

Markets: Signal, Noise & Fundamental Factors Weekly Update – October 27, 2014

Image courtesy of FreeDigitalPhotos.net/cooldesign

Image courtesy of
FreeDigitalPhotos.net/cooldesign

After several weeks of dismal performance, equities shook off their worries and rallied enthusiastically on solid quarterly earnings giving the S&P 500 its biggest weekly gain of the year. For the week, the S&P 500 gained 4.12%, the Dow grew 2.59%, and the Nasdaq surged 5.29%, erasing much of their losses from previous weeks.1

Last week, we discussed some of the factors behind the recent pullback; what changed in a single week? Fundamentally, very little. However, investors regained their optimism on the reminder that many companies are still doing quite well in the economic recovery. Traders also took the opportunity to buy the dip, which added buying pressure, pushing markets up.

Markets are fundamentally forward-looking, and while global growth fears remain, investors are looking at the earnings growth picture, and realizing that the picture looks reasonably good. Not great, to be sure, but so far, S&P 500 firms are reporting 4.1% year-over-year earnings growth on 4.7% revenue growth, with about 41% of the S&P 500 firms reporting as of October 24.2 If we leave out the struggling Finance sector, earnings growth jumps to 5.5%. These results are largely in line with performance in recent quarters, though earnings growth is below the four-quarter average, largely because of weak performance in the Finance and Technology sectors.3  All told: Firms seem to be holding their own and turning profits, despite some weak demand issues.

Does this mean that the pullback is over? Hard to say. Markets are responding more to perception and noise than they are to fundamental factors right now. That means that more turbulence – and perhaps downward movement – can be expected in coming weeks. On the other hand, if earnings and economic fundamentals continue to look good, we may see a continuation of the rally.

Looking ahead, earnings reports from the energy and healthcare sectors will dominate this week; the two sectors represent opposite sides of the market. Healthcare was one of the big success stories of the year, while energy companies have struggled with declining oil prices.4 While analysts expect weak results from many energy firms, they will be paying close attention to forward guidance; if energy leaders foresee a weak global economic environment, investors could respond with another attack of the nerves.

The week ahead is also heavy in economic data, with the Federal Reserve’s Open Market Committee meeting and a first look at Q3 Gross Domestic Product (GDP). The Fed is widely expected to announce the end of quantitative easing at this week’s meeting; analysts also expect the formal announcement at the end of the meeting to signal a more cautious Fed and their desire to let economic data decide future policy moves.5

Altogether, a big week ahead. We’ll keep you informed.

 

ECONOMIC CALENDAR:

 

Monday: Pending Home Sales Index, Dallas Fed Mfg. Survey

Tuesday: Durable Goods Orders, S&P Case-Shiller HPI, Consumer Confidence

Wednesday: EIA Petroleum Status Report, FOMC Meeting Announcement

Thursday: GDP, Jobless Claims

Friday: Personal Income and Outlays, Employment Cost Index, Chicago PMI, Consumer Sentiment

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HEADLINES:
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Jobless claims remain close to 14-year low. Jobless claims inched higher last week, but stayed below pre-recession levels, suggesting that the labor market is firming up. The four-week moving average of claims, considered to be a less volatile measure, fell to the lowest level since May 2000.6

New home sales at six-year high. Purchases of new single-family homes rose to a multi-year high in September, though revisions to August numbers suggest sales remain on a lower trend. Single-family home sales tend to be volatile, but lower mortgage rates could spur more sales.7

European Central Bank fails 25 in stress test. The ECB failed 25 Eurozone lenders during a series of financial health tests. Though banks have improved markedly since last year’s tests, a few still have to raise more capital to protect against another potential financial crisis.8

Inflation indicator remains tame. Overall consumer prices rose a tepid 0.1% in September after falling 0.2% in August. Year over year, headline inflation is up 1.7%, indicating that inflation remains soft and is giving the Federal Reserve breathing room to manage interest rates.9

Protecting Your Sensitive Financial Information

In October, hackers accessed the personal information of over 83 million JP Morgan Chase customers. Fortunately, the hackers weren’t able to access financial information or gain access to client accounts. However, they were able to access the names, phone numbers, addresses, and email addresses of any current or past customer who logged into Chase.com, JPMorganOnline, Chase Mobile or JPMorgan Mobile.1,2 This unprecedented cyber-attack on a major American financial company naturally raises questions about the state of security in the financial services industry.

While there are a lot of questions still being answered, there is some good news to take away from this incident:3

  • No money was taken from client accounts and it doesn’t appear that financial databases were accessed at all. No fraudulent transactions have yet occurred using client information.
  • S. law enforcement and intelligence services are working closely with financial institutions to glean information and prevent future attacks.
  • This serious attack is a wake-up call for the whole industry that a coordinated hacking attack, possibly with the tacit support of foreign governments, can have a major impact on financial institutions. This realization will likely result in some major changes to security protocols at financial institutions.

Financial data theft is a major problem that can affect anyone. Though statistics on this type of data breach are scarce, it’s safe to say that millions of Americans are at risk. Fortunately, there are many ways that you can protect yourself from identity theft and fraud. Most of these actions are common sense, but they’re worth passing along to your loved ones:

  1. Be wary of emails or social media messages asking you to log into a financial account. Your bank, mortgage company, investment account, or the IRS will never request personal information by email. Never click on links embedded in those emails; instead, always log into your accounts by manually typing the web address into your browser.
  2. Never give out personal information in response to a phone call from someone claiming to represent the IRS or a financial institution. If you get a suspicious phone call, hang up and call the organization directly for more information.
  3. Protect your sensitive information by collecting mail promptly and shredding documents containing account numbers, credit card numbers, or your Social Security number.
  4. Never use the same PIN or password for multiple accounts or websites. Doing so increases the risk that a single attack could compromise your identity or result in fraud.
  5. Monitor your financial and credit card statements carefully to identify suspicious activity. If you find fraudulent transactions, report them to the relevant institution immediately to reduce your financial liability.
  6. Check your credit report each year at each of the three reporting agencies. You can check your report for free at com. If you find fraudulent accounts or activity that you don’t recognize, immediately file a report with all three agencies and place a security freeze on your account to prevent more accounts from being opened.

We take security very seriously and are committed to protecting our clients’ personal information in the following ways:

  • We partner with major financial institutions that use industry-recommended encryption to protect your data;
  • We never share any personal or financial information without your explicit knowledge and consent;
  • We regularly participate in audits of our internal procedures to help ensure that we are always following industry best practices;
  • We regularly update our knowledge and attend specialized training about security.

If you’re worried about how you may have been affected by a data breach or have questions about protecting your sensitive personal information, please give our office a call. We are happy to be a reassuring source of information and assistance.

Special Edition: Putting Market Corrections Into Perspective Weekly Update – October 20, 2014

Image courtesy of FreeDigitalPhotos.net/renjith krishnan

Image courtesy of
FreeDigitalPhotos.net/renjith krishnan

Markets posted another week of losses amid continued fears, though markets trimmed losses on Friday on better-than-expected earnings results from top companies. For the week, S&P 500 lost 1.02%, the Dow fell 0.99%, and the Nasdaq dropped 0.42%.1

After reaching new highs in mid-September 2014, markets have been roiled by volatility and selling pressure. We know that market declines can be nerve wracking and we wanted to take the opportunity to discuss the recent pullback with our clients.

Market Corrections are Normal

Since 1928, the S&P 500 has generally experienced between three and four corrections of more than 5.00% each year; the October pullback was the 20th decline of 5.00% or more in the current bull market.2 Declines of 10.00% or more are rarer, but are still seen nearly every 1½ years.3 Obviously, these are all averages and the performance of any single year can deviate significantly from historical norms.

In the current bull market cycle, markets have experienced just two declines of 10.00% or more: in Spring 2010 when the Federal Reserve launched its quantitative easing programs and in Summer 2011 when the euro appeared to be in trouble.4

Putting the Current Selloff Into Perspective

After a lengthy period of market gains – between January 1, 2013 and September 19, 2014, the S&P 500 gained 43.35%5 – many analysts were confident that a selloff had to happen eventually. The current selloff has largely been spurred by a combination of global worries: recessionary fears in Europe, slowing growth in China, some disappointing domestic economic reports, and Ebola concerns all contributed to the drop.

How far equities decline during a selloff depends on a lot of factors, including investor sentiment, corporate earnings, economic data, and growth prospects for the near future. In this case, markets are largely moving because of fear, not because of fundamental factors, so we can hope that the selloff will be brief. Although we ended the week with a loss, equities halted their slide on Friday and regained ground on the strength of recent earnings reports.6 Is the decline over? Hard to say.

Though the past can’t predict the future, we can look back at past market declines for hints of what we might expect going forward. Since 2009, pullbacks of 5.00% or more have lasted an average of about a month, peak to trough, meaning that the recent downturn may not be completely over.7

As of Friday’s close, the S&P 500 was down 6.19% since its peak in mid-September.8 Markets have gone 1109 trading days since the last 10.00% + correction. Since the average is around 509 days between corrections, we might be overdue. However, we went more than 2,500 trading days between corrections in the mid-nineties, so there is precedent for the winning streak to continue.9 Let’s also keep in mind that although the S&P 500 has lost ground this year and is hovering around 2.00% return, it’s still up more than 8.00% since the same period last year.10

Looking Ahead

The week ahead is thin on economic data but earnings season will be in full swing, which means that positive earnings could override fear-based selling. However, global worries still exist and it’s unknown how long the present weakness in the market will continue. We can hope that lower equity valuations, decent corporate earnings, and seller exhaustion will help push investor sentiment into positive territory as traders “buy the dip.”

Though some economic headwinds exist, we believe that slowing growth in Europe will have only a modest impact on the U.S. economy. Declines in oil prices may be a net positive for the economy as consumers have more money to spend; weakness in the euro should help European exports and mitigate recessionary fears. Corporate earnings appear to be reasonably decent, which should also help spur market growth. While we can’t predict the future, we believe that economic fundamentals are solid and favor continued market growth.

Conclusions

Though market corrections are rarely welcome, they are a natural part of the overall business cycle and it’s important to take them in stride. Declines also provide an environment to test your risk tolerance and ensure that your financial strategies and asset allocations are aligned with your long-term objectives and appetite for risk.

As professional investors, we’ve learned to seek out the opportunities in market corrections and volatility. Declines often create openings for tactical investing and allow us to invest in high quality companies at attractive prices. While we can’t use the past to predict the future, history tells us that having the patience to sit out brief rough patches often benefits our clients in the long run.

We hope that you have found this information educational and reassuring. If you have any questions about market corrections or are concerned about how the recent pullback may have affected your portfolio, please give us a call; we’re always happy to speak with you.

ECONOMIC CALENDAR:

 

Tuesday: Existing Home Sales

Wednesday: Consumer Price Index, EIA Petroleum Status Report

Thursday: Jobless Claims, PMI Manufacturing Index Flash

Friday: New Home Sales

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HEADLINES:

Jobless claims plummet to 14-year low. Applications for new unemployment benefits unexpectedly fell to the lowest level since April 2000 as employers trimmed fewer jobs. Although this may be a blip, it’s a positive sign that businesses are boosting payrolls in the face of global uncertainty.11

Oil prices bounce back from four-year low. Brent crude oil prices moved above $86/barrel as investors speculated on oversold market conditions. Oil prices have largely moved on expectations of shifts in supply and demand rather than actually observed conditions, which may cause prices to move upward again, though changing fundamentals may keep oil prices low.12

Mortgage rates fall, spark refi mini-boom. Mortgage rates dropped below 4% last week, falling to their lowest level since June 2013. The drop has spurred a boom in refinancing as homeowners scramble to take advantage of lower rates.13

Mixed retail sales data leaves analysts guessing. Slow retail sales numbers and weak earnings reports from big retailers contrast with the optimistic forecasts of industry analysts, who are predicting strong holiday sales growth. It’s a situation where macroeconomic data supports strength while the microeconomic numbers from individual firms paint a weaker picture.14

Goal-based Investors Know Where to Focus Weekly Update – October 13, 2014

Image courtesy of FreeDigitalPhotos.net/ddpavumba

Image courtesy of
FreeDigitalPhotos.net/ddpavumba

Concerns about global growth caused markets to hit the brakes last week in a cloud of smoke and volatility, giving the S&P 500 and Nasdaq their worst week since May 2012. For the week, the S&P 500 lost 3.14%, the Dow slid 2.74%, and the Nasdaq dropped 4.45%.1

Macro-economic issues dogged markets last week and investors fell prey to concerns about issues like slowing growth in Europe, Ebola, the situation in Ukraine, and the coming end to the Federal Reserve’s quantitative easing programs. A confluence of fears helped open up a trapdoor beneath stock markets, but much of the selloff can be attributed to concerns about how a strong dollar and a weak European economy could hurt company profits. Both of these factors may combine to erode demand for U.S. exports and hurt businesses that rely on overseas demand.2

On the other hand, a weaker euro might be just the ticket Europe needs to stoke demand for its exports and jumpstart economic growth, much as a soft dollar helped pull the U.S. out of recession. A weak euro makes European products more competitively priced, hopefully boosting demand and giving the Eurozone economy a push.

As investor sentiment swung towards a fear-based selloff, investors ignored positive domestic economic news in favor of pessimistic headlines and questioned the soundness behind the recent run-up in stock prices. It’s not uncommon for periods of strong market gains to be interrupted by short-term pullbacks, but as long as the underlying economic trends in the U.S. remain solid, we can hope for more upside this year.

Bottom line: Threats to the market exist in the form of a slowdown in global growth and wildcards like the Ebola epidemic and security issues overseas. However, overall, the U.S. economy is doing well and many sectors are experiencing broad-based growth that’s driven by solid economic fundamentals. Though markets slid last week, let’s take a look at how far we’ve come since last year: As of last Friday, the S&P 500 has gained 12.62% since October 14, 2013.3  While these pullbacks are often frustrating, keep in mind that as goal-based investors, we are more focused on how long-term performance affects our personal financial goals and less focused on short-term market behavior.

With a thin economic calendar next week, analysts will be shifting their attention to Q3 earnings as U.S. banks and some technology companies begin to report.  Historically, as earnings season ramps up, analysts tend to focus less on macro-economic issues in favor of company-level data. Thus far, earnings expectations are modest, with S&P 500 companies expected to show 1.6% earnings growth on 1.7% higher revenues.4 However, keep in mind that many companies purposefully keep the bar set low so that they can benefit from positive earnings surprises. While more volatility is likely, positive earnings results could shift sentiment and encourage investors to buy the dip and give stocks a boost.

ECONOMIC CALENDAR:

 

Wednesday: PPI-FD, Retail Sales, Empire State Mfg. Survey, Business Inventories, Beige Book

Thursday: Jobless Claims, Industrial Production, Philadelphia Fed Survey, Housing Market Index, EIA Petroleum Status Report, Treasury International Capital

Friday: Housing Starts, Consumer Sentiment

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Jobless claims fall to lowest level since before recession.
Weekly claims for new unemployment benefits fell sharply last week, pointing to continued improvement in the labor market. Initial claims dropped to 287,000, beating out estimates of 294,000 new claims.5HEADLINES:

Federal Open Market Committee Minutes show concern for growth. The minutes from the Fed’s September FOMC meeting showed little change from previous reports, indicating that quantitative easing will likely end on schedule this month. However, economists are worried about the effect of slow overseas growth on U.S. exports.6

Job openings surged in August. The latest reports show that the number of open jobs increased more than expected in August, led by industries like manufacturing, social assistance, and healthcare. This is good news for future hopes about the labor market.7

Oil prices tumble below $84. Crude oil prices fell below $84/barrel Friday for the first time since 2012 on concerns about global demand. Surging U.S. output also lessened worries about supply, pushing gasoline prices to an average of $3.24 across the U.S.8

October 2014 Monthly Video Update

Gains and Growth: Contributions to a Strong Q3 Weekly Update – October 6, 2014 3rd Quarter Edition

Image courtesy of FreeDigitalPhotos.net/emptyglass

Image courtesy of
FreeDigitalPhotos.net/emptyglass

After some market stumbles in recent weeks that erased earlier gains, stocks ended about where they started at the beginning of the quarter. However, broad economic gains means that solid fundamentals could contribute to market upside later this year. For the quarter, the S&P 500 gained 0.62%, the Dow grew 1.29%, and the Nasdaq added 1.93%.1

What are some of the factors that contributed to strong market performance in Q3?

After a very slow start to the year, economic growth rebounded in the second quarter, giving investors confidence that the economic recovery was still healthy. The latest estimate of Q2 gross domestic product (GDP) growth showed that the economy grew 4.6%;2 while official Q3 numbers aren’t out yet, some estimates indicate that the economy may have slowed slightly in the past three months, but could still clock in a healthy 3.0% gain.3

The labor market made great strides last quarter, adding 671,000 new jobs in the past three months. In September, hiring accelerated and the jobless rate reached a six-year low of 5.9%.4 To compare: In September of 2013, the unemployment rate stood at 7.2%, and the labor market added just 430,000 jobs.5 On the other hand, wage growth seems to be frozen, indicating that many Americans are failing to see income gains that could lead to greater consumer spending.6

Strong corporate profits coming off of the second quarter helped boost markets by showing that demand is improving across many sectors. Even better, Q3 guidance was modestly higher, indicating that corporate leaders felt more positive about their chances going into the second half of the year.7 We’ll know whether their optimism was merited once Q3 earnings reports are released.

What could act as headwinds in the weeks and months to come?

Geopolitical issues continue to drag on market performance as the situation in Ukraine continues to simmer and parts of the Middle East roil with violence. Since these areas play key roles in global petroleum and natural gas production, supply disruptions could have a serious impact on fuel prices.

Europe and Japan continue to struggle with stubbornly weak economic growth and low inflation, prompting calls for additional central bank activity. If these major U.S. trading partners continue to experience trouble, it could weaken market outlooks this year.

The Federal Reserve was a big player last quarter, and its monetary policy decisions will likely impact market activities in the coming weeks and months. The current round of bond purchases are scheduled to end in October, bringing the Fed’s quantitative easing programs to a halt.8 Investors are now turning their attention to the question of when the Fed will begin raising interest rates, and speculations will likely lead to further market volatility.

Markets have been running high, with multiple indexes reaching new records in the third quarter, which can sometimes presage a pullback as investors pause to take stock of the market environment. Is a pullback certain? Definitely not. Bottom line: Domestic economic fundamentals are strong going into the final three months of the year. As earnings start trickling in, solid performances could translate into further market upside. As always, we recommend staying focused on long-term goals instead of short-term volatility and market performance.

ECONOMIC CALENDAR:

 

Tuesday: JOLTS

Wednesday: EIA Petroleum Status Report, FOMC Minutes

Thursday: Jobless Claims

Friday: Import and Export Prices, Treasury Budget

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HEADLINES:

U.S. auto sales rise. After a sharp increase in August, sales of cars and light trucks rose on big Labor Day discounts in September. While the higher trend is good news for the industry, price cuts and incentives will chip away at company profits.9

Trade gap shrinks on low oil prices. The gap between imports and exports dropped in August as lower oil prices caused the overall cost of imports to fall. This is good news for consumer spending as lower import costs puts dollars in consumers’ wallets.10

Factory orders drop in August. As expected, orders for manufactured goods plummeted 10% in August, erasing July gains. The July jump was driven by a one-off surge in aircrafts; stripping out the volatile transportation category, core orders were down slightly by 0.1%.11

Consumer confidence drops sharply in September. After hitting a seven-year high in August, confidence among American consumers hit a speed bump as they worried about jobs and income growth. However, consumers were still upbeat about the future, hopefully indicating that consumer spending won’t take a hit in the months to come.12

Do Your Children Understand Money?

Are the young people in your life financially literate? By helping them learn about money, you give them an important head start on important life skills like developing good savings behavior, living within their means, and avoiding many common financial pitfalls.

Unfortunately, many young Americans are not learning the right financial lessons. Research shows that 46% of teens don’t know how to create a budget and 55% would like to know more about managing money. We can’t rely on schools to teach financial skills because many of the practical classes we took no longer exist. Too many kids reach adulthood without knowing how to budget or make important financial decisions.

Based on our experience working with young people, here are some recommendations for helping kids develop the right financial behaviors:

Start early. If your kids are old enough to ask for things, they are old enough to start learning about money. Teach young kids that we have to save for the things we want by helping them choose a toy and then saving to buy it. Use an allowance to teach budgeting skills and incentivize chores with older children. Give kids an age-appropriate allowance – Mint.com has a great piece on average allowances by age. Some parents choose to tie an allowance to specific chores, while others prefer to treat chores as an expected family contribution that is separate from an allowance.

Set financial expectations and be honest about money. Until kids start earning a living and being responsible for their own expenses, it’s easy for them to believe that money grows on trees. Involve kids in everyday shopping decisions so that they understand your thought process behind common financial decisions and learn your values about money. Depending on their age level and maturity, you can also ask for their input when making financial choices. Give them a budget for back-to-school shopping and help them prioritize their spending so that they learn about living within their means.

Expect kids to contribute to their financial future. If your kids have an allowance or receive money on birthdays or holidays, require them to set aside a certain amount for the future.

We recommend using the three-bucket approach: one third of every dollar goes to long-term savings, one third goes to charity, and one third is pocket money. Long-term savings can be used toward education expenses or to pay for a major purchase like a car. By teaching your kids how to allocate money, you help them establish critical saving while teaching them about your values.

Teach kids about debt. It’s very easy for young adults to get in over their heads with credit card debt or student loans. Teach your kids how debt works so that they can evaluate offers and avoid predatory lending. If possible, help your kids establish their credit through a secured credit card or low-limit card that they must pay off each month so that they learn how to manage debt responsibly.

If you’d like help teaching your children, grandchildren, or other young people about money, please reach out to us. As financial professionals, we know the difference financial education can make in someone’s life, and we want to offer ourselves as a resource to you and your family. Together, we can sit down and come up with strategies to make sure the next generation is fully prepared to navigate their finances and make smart decisions about money. We can help you:

  • Establish smart savings behaviors in young children
  • Create college savings strategies
  • Prepare teens for young adulthood
  • Develop strategies for boomerang kids

If we can be of service to your loved ones, please contact us. We’re always happy to listen and help.