Archives for May 2015

Fed Upbeat About Economic Recovery Weekly Update – May 26, 2015

ID-100192676Despite flirting with new records, markets weren’t able to hold on to gains last week and closed mixed after comments about interest rates were made by Federal Reserve Chair Janet Yellen. For the week, the S&P 500 gained 0.16%, the Dow lost 0.22%, and the NASDAQ gained 0.81%.[1]

Yellen gave a speech Friday that underlined her determination to raise interest rates this year as long as the economic recovery continues. Though she didn’t really say anything new, her comments underscore the fact that the Fed is committed to returning to normal monetary policy as soon as economists feel the economy can handle it. She also emphasized that interest rate hikes will be done gradually over a period of years, which should help cushion the blow to financial markets.[2]

Could Yellen have been floating the idea to see how markets will react to a more aggressive stance on interest rates? Possibly. If so, the next few weeks could give us an idea of how investors will treat the news. Her speech also highlights her optimism about economic growth despite some weak reports in recent weeks.

Last week’s jobs report showed that the number of Americans filing new claims for unemployment benefits rose slightly to 274,000. However, the four-week moving average, a less volatile indicator, fell to the lowest level since April 2000.[3] Outside of the energy sector, which has lost thousands of jobs due to low oil prices, layoffs in the U.S. have been minimal in the past months.

Though jobless claims (a good indicator of layoffs) rose slightly, claims from Americans renewing unemployment applications fell to the lowest level since November 2000.[4] Currently, the overall trend is one of steady improvement in the labor market, which we hope will translate into higher consumer confidence and spending this summer.

Core inflation data also supports a move to higher interest rates later this year. The Fed has the “dual mandate” of keeping unemployment low and inflation stable and had tied monetary policy changes to two numbers: a headline unemployment rate of 5.2-5.6% and annual inflation of 2.0%.[5] While the employment goal has been reached, the inflation target has been more elusive.

While some economists have worried about too-low inflation, the latest Consumer Price Index (CPI) figures suggest that core CPI, the number most used by economists, rose 1.8% in the last year. This stable rise, just under the Fed’s target, indicates that price pressures remain stable but are moving higher and closer to the 2.0% goal.[6]

Looking ahead, analysts will be closely watching Friday’s second reading of the Q1 Gross Domestic Product (GDP) report. Unfortunately, the news isn’t expected to be good, and many economists expect to see that the economy shrank amid harsh winter weather and dock strikes. However, there’s considerable hope that the economy is rebounding in the second quarter (much as it did last year).[7]

ECONOMIC CALENDAR:

 Monday: U.S. Markets Closed For Memorial Day Holiday

Tuesday: Durable Goods Orders, S&P Case-Shiller HPI, New Home Sales, Consumer Confidence, Dallas Fed Mfg. Survey

Thursday: Jobless Claims, Pending Home Sales Index, EIA Petroleum Status Report

Friday: GDP, Chicago PMI, Consumer Sentiment

2015-05-26

HEADLINES:

Factory growth slows for second month. Growth in the U.S. manufacturing sector, a major driver of economic activity, slowed down for another month in May. New orders increased at a very slow pace, indicating that next month might be slow as well.[8]

U.S. gas prices at six-year low. Just in time for the summer driving season, pump prices across the nation are at a multi-year low. According to AAA, average gas prices were just $2.74 across the country. Hopefully, fuel savings will result in greater consumer spending.[9]

Greece can’t pay its June bills. Greek leaders announced that they won’t be able to make debt repayments next month unless they receive another round of rescue funding. Despite months of negotiation, it’s unclear whether a deal can be reached that would prevent Greek insolvency.[10]

April housing starts surge. Groundbreaking and permits for new homes spiked in April to the highest level in over seven years, indicating that homebuilders were confident about future sales. March numbers were also revised upward in a very hopeful sign for the housing market.[11]

 

 

[1] https://www.google.com/finance?q=INDEXDJX%3A.DJI%2CINDEXSP%3A.INX%2CINDEXNASDAQ%3A.IXIC&ei=wQxiVdmaM5S1mAHoh4BY

[2] http://www.businessinsider.com/janet-yellen-us-economic-outlook-speech-may-22-2015-5

[3] http://www.cnbc.com/id/102697540

[4] http://www.cnbc.com/id/102697540

[5] http://www.foxbusiness.com/economy-policy/2015/05/22/us-consumer-prices-soft-underlying-inflation-pushes-up-116548863/

[6] http://www.foxbusiness.com/economy-policy/2015/05/22/us-consumer-prices-soft-underlying-inflation-pushes-up-116548863/

[7] http://www.foxbusiness.com/economy-policy/2015/05/22/week-ahead-1q-gdp-revision-and-housing-data/

[8] http://www.cnbc.com/id/102698399

[9] http://www.foxbusiness.com/personal-finance/2015/05/22/memorial-day-gas-prices-touch-6-year-low/?intcmp=bigtopmarketfeaturesside

[10] http://www.marketwatch.com/story/greece-wont-meet-imf-repayments-in-june-interior-minister-says-2015-05-24

[11] http://www.cnbc.com/id/102690006

What’s Going On With The Economy and Interest Rates? Weekly Update – May 18, 2015

Image courtesy of FreeDigitalPhotos.net/Danilo Rizzuti

Image courtesy of
FreeDigitalPhotos.net/Danilo Rizzuti

Markets ended on a high note with the S&P 500 setting a new record though economic data was lukewarm.[1] For the week, the S&P 500 gained 0.31%, the Dow grew 0.45%, and the NASDAQ rose 0.89%.[2]

Months of tepid economic data and flirtation with higher interest rates lead many to ask:

What’s going on with the economy, and how will it affect the Federal Reserve’s interest rate decision?

The Fed, which has kept interest rates low to help the economy out of the 2008 financial crisis, needs to start returning to “normal” monetary policy to keep inflation in check and to prevent too-low interest rates from spurring another asset bubble. However, raising rates too soon could derail the economic recovery, so the Fed is being quite cautious.[3]

The Fed has emphasized flexibility in its approach to raising rates, which doesn’t give us much of an idea of when they will raise rates. Right now, the consensus among economists is that the first rate hike will come in September, though it’s not at all certain.[4]

Let’s take a look at a couple of major indicators that give us a brief snapshot of the economy right now:

The latest jobs data shows that the labor market is improving. The economy added 223,000 new jobs in April, and the number of underemployed Americans is dropping.[5] Another recent report shows that the number of workers voluntarily quitting their jobs has hit its highest point since 2008 as Americans gain confidence in new opportunities.[6]

In the first quarter, economic growth flat lined, increasing just 0.2%, due to a combination of factors.[7] However, many economists expect the economy to shake off some of its headwinds and pick up this quarter.

Corporate profits in the first quarter were up a respectable 2.4% for S&P 500 companies (as of May 15, 2015), though revenues were down 3.7%.[8] However, companies have all lowered their expectations for the second quarter, indicating that they’re still worried about domestic and global demand.

All of these indicators paint a picture of an economy that’s still chugging along without showing the breakout growth we had hoped for this year. Though a recession doesn’t seem likely, there are a number of global headwinds that may continue to dog the economy: volatile oil prices, a Chinese slowdown, and tepid consumer spending.

What would the Fed like to see before raising rates?

Recent statements from the Fed indicate that it is still in wait-and-see mode. Waiting to see what? A solid, sustainable turnaround in economic growth that’s supported by the labor market. The deceleration of economic growth in the first quarter and a lack of wage growth gave the Fed pause for thought, and economists will want to see sustainable improvements in indicators like durable goods orders, business investment, and GDP growth before making their next policy move.[9]

What does this mean for investors?

Bottom line: We can expect markets to remain choppy as investors take stock of current conditions and try to determine where markets are going. Overall, we’re cautiously optimistic about market performance. However, we recognize that persistent market highs in the face of mediocre data could set the stage for a short-term pullback. As always, we’re keeping an eye on conditions and will let you know when anything changes.

ECONOMIC CALENDAR:

 Monday: Housing Market Index

Tuesday: Housing Starts

Wednesday: EIA Petroleum Status Report, FOMC Minutes

Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey, Existing Home Sales

Friday: Consumer Price Index, PMI Manufacturing Index Flash, Janet Yellen Speaks 1:00 PM ET

 5-18-15

Weekly unemployment claims fall unexpectedly. The most recent weekly jobs report showed that layoffs are dropping and new unemployment claims are close to the 15-year lows reached several weeks ago.[10]

HEADLINES:

 Retail sales unchanged from March. Though March numbers were revised upward, April retail sales data was flat as Americans cut back on big-ticket purchases like televisions and autos. Economists had hoped that Americans would spend – rather than save – the money they pocketed from cheaper gasoline.[11]

 China is America’s largest creditor (again). Though central banks around the world have decreased their holdings of U.S. Treasuries, China’s central bank is back on top with $1.261 trillion. Central banks hold foreign currency reserves mainly to cushion currency exchange rate shocks and keep rates steady.[12]

Mortgage applications fall as rates rise. A sharp rise in interest rates last week caused a drop in mortgage applications for both buyers and refinancers. Though mortgage volume is still up 14% from the same time last year, volume is shrinking as homebuyers balk at higher rates.[13]

 

[1] http://www.foxbusiness.com/markets/2015/05/15/indecisive-day-on-wall-street-ends-with-stock-indexes-mostly-higher-sp-500-at/

[2] https://goo.gl/HBaZDb

[3] http://fortune.com/2014/10/08/federal-reserve-interest-rates-2/

[4] http://blogs.wsj.com/economics/2015/05/14/wsj-survey-most-economists-see-fed-raising-rates-in-september/

[5] http://www.foxbusiness.com/markets/2015/05/08/traders-cautious-ahead-april-jobs-report/

[6] http://www.usnews.com/news/articles/2015/05/12/us-workers-are-confident-and-quitting-jolts-report-implies

[7] http://www.foxbusiness.com/markets/2015/04/29/us-gdp-grows-scant-02-in-first-quarter/

[8] http://www.zacks.com/commentary/46056/retail-in-the-spotlight-as-earnings-season-winds-down

[9] http://www.bloomberg.com/news/articles/2015-04-29/what-the-fed-needs-to-see-before-it-raises-rates

[10] http://www.foxbusiness.com/economy-policy/2015/05/14/weekly-jobless-claims-fall/?intcmp=obnetwork

[11] http://www.cnbc.com/id/102674466

[12] http://www.cnbc.com/id/102684920

[13] http://www.cnbc.com/id/102673397

Remember What Happened May 6, 2010? Weekly Update – May 11, 2015

Image courtesy of FreeDigitalPhotos.net/renjith krishnan

Image courtesy of
FreeDigitalPhotos.net/renjith krishnan

In this week’s commentary, we want to draw your attention to a significant market anniversary. Five years ago, on May 6, 2010, the U.S. stock market experienced a “flash crash” when the Dow Jones Industrial Average plummeted nearly 1,000 points in minutes, erasing almost $1 trillion in market value. The Dow immediately reversed itself and regained much of the lost ground that day. The event, caused by a large institutional trading program, was the largest single day drop in market history and caused an immediate media frenzy.[1]

In the weeks after the crash, news outlets blazed with headlines like: “Mean Street: Crash — The Machines Are in Control Now” and “Was Last Week’s Market Crash a Direct Attack By Financial Terrorists?”[2] Fear mongering by talking heads led many investors to worry that they were outclassed by big traders. A London-based trader was indicted last month for contributing to the 2010 crash by placing fraudulent orders that helped spark the selloff.[3] Fortunately, the flash crash was a miniscule blip on the market radar and ended up having very little effect on most investors.

So, what have we learned in the five years since then?

Despite panics and flash crashes, financial markets are still functioning. You’ll always find someone to tell you that the sky is falling and markets won’t recover from some event. Though the past can’t predict the future, U.S. markets have survived panics, crashes, bubbles, and crises and risen again.

Today’s markets are volatile and unpredictable. Smart investors don’t worry too much about what markets are doing this week, this month, or even this year. Instead, they focus on their own financial goals and create strategies that can withstand challenging market environments.

Flash crashes (or some other minor event) could happen again. Today’s markets are flooded by orders generated by sophisticated trading programs and institutional investors. Though Congress acted swiftly to institute “circuit breakers” that pause trading in stocks that experience a violent swing, it’s possible that another confluence of events or intermarket feedback loop could cause a similar problem in the future.[4]

Since we can’t predict these “black swan” events, all we can do is build prudent strategies and carefully manage risk.

Things aren’t always as bad as the media makes them out to be. The media makes money on eyeballs and shocking headlines. It’s absolutely critical to both your portfolio and your mental health that you learn to tune out the noise and focus on fundamentals. One of the greatest advantages of working with financial professionals is that we keep an eye on economic and market events for you. We are also trained to take emotion out of the equation and make rational decisions in the face of market movements.

If you’re ever worried about where markets are going or have questions about how events affect your financial picture, please reach out to us. While we can’t predict markets, we are always available to offer reassurance and answer questions.

ECONOMIC CALENDAR:

 Monday: Factory Orders

Tuesday: JOLTS, Treasury Budget

Wednesday: Retail Sales, Import and Export Prices, Business Inventories, EIA Petroleum Status Report

Thursday: Jobless Claims, PPI-FD

Friday: Empire State Mfg. Survey, Industrial Production, Consumer Sentiment, Treasury International Capital

Capture

HEADLINES:

Jobs rebounded in April. U.S. job growth surged in April, and the unemployment rate dropped to a multi-year low. Tempering the good news, the March report was revised to show that just 85,000 new jobs were created.[5]

Eurozone economy grew in first quarter. Despite worries about Europe’s weak growth prospects, experts believe that the Eurozone economy may have grown at a faster pace than the U.S. economy.[6]

Despite drop in sales, wholesalers increase inventories in March. Wholesalers, the firms that supply U.S. retailers, slightly increased their inventories in March in anticipation of Spring-led retail demand. Higher retail sales would spur restocking and boost their sales.[7]

Puerto Rico braces for austerity measures. Faced with financial shortfalls and $72 billion in public debt, the U.S. territory slashed its proposed budget and requested help in finding a solution to the fiscal crisis. If a solution is not found, the Puerto Rican government could stop debt repayments.[8]

 

Footnotes:

[1] http://money.cnn.com/2010/10/01/markets/SEC_CFTC_flash_crash/

[2] http://blogs.wsj.com/deals/2010/05/06/mean-street-crash-the-machines-are-in-control-now/, http://www.alternet.org/story/146793/was_last_week’s_market_crash_a_direct_attack_by_financial_terrorists

[3] http://www.usatoday.com/story/money/markets/2015/05/06/uk-flash-crash-trader-navinder-singh-sarao/70881770/

[4] http://money.cnn.com/2010/06/10/markets/SEC_circuit_breakers_rules/index.htm?postversion=2010061013

[5] http://www.foxbusiness.com/markets/2015/05/08/traders-cautious-ahead-april-jobs-report/

[6] http://www.cnbc.com/id/102665345

[7] http://www.foxbusiness.com/markets/2015/05/08/us-wholesale-stockpiles-up-slight-01-percent-in-march-despite-eighth-straight/

[8] http://www.foxbusiness.com/markets/2015/05/08/puerto-rico-braces-for-austere-budget-amid-warnings-financial-shortfall/

Hixon Zuercher May 2015 Monthly Video Update

First Look at Q1 Economic Growth Weekly Update – May 4, 2015

Image courtesy of FreeDigitalPhotos.net/cooldesign

Image courtesy of
FreeDigitalPhotos.net/cooldesign

Markets fell last week as investors digested lukewarm economic data and considered future economic growth prospects. However, stocks bounced back on Friday and trimmed their losses. For the week, the S&P 500 lost 0.44%, the Dow slid 0.31%, and the NASDAQ dropped 1.70%.1

Last week, investors got their first look at Q1 economic growth. The advance estimate of Gross Domestic Product showed that the economy basically ground to a halt in the first quarter, growing just 0.2%. Though this early report is based on incomplete data, the picture so far shows that exports plunged, businesses slashed spending, and consumers kept their pocketbooks closed.2

While some of the weakness is due to a cold winter and a West Coast port strike, the effects of a strong dollar and weak global demand may linger into the second quarter. So far, we know that consumer spending edged upward in March and that wages increased in the first quarter, giving Americans more money to spend.3

The Federal Reserve’s policy-setting Open Market Committee also met last week to take stock of the economy and discuss future interest rate policy. As expected, the central bank made no moves to raise rates and emphasized that any future rate hikes will be based on a careful analysis of the economic environment. Bottom line: It’s unlikely that rate hikes will come before the fall.4

Can markets sustain the rally amid sputtering economic growth? We can’t know for sure, but we are keeping a close eye on factors like business investment, corporate expectations, and future economic growth projections to guide our decision-making process. While fundamentals show that the economy is still growing, obstacles like weak business investment, cautious spending, and global growth concerns may lead to a market pullback in the coming weeks and months.

Since the bottom of the last bear market in 2009, the S&P 500 has returned over 200%.5 Though we’ve had some bumps in the road, we haven’t experienced a serious 10%+ correction since 2011.6 Some analysts believe that we are overdue for pullback while others have a brighter outlook on market performance.7 Since history never repeats itself exactly, we don’t believe it’s useful to worry about what might be around the corner. Instead, we focus on creating personalized strategies that pursue our clients’ goals and then make prudent adjustments as conditions warrant.

ECONOMIC CALENDAR:

Monday: Factory Orders

Tuesday: International Trade, ISM Non-Mfg. Index

Wednesday: ADP Employment Report, Productivity and Costs, Janet Yellen Speaks

9:15 AM ET, EIA Petroleum Status Report

Thursday: Jobless Claims

Friday: Employment Situation

Capture

HEADLINES:

Weekly jobless claims plummet. The number of Americans filing new claims for unemployment benefits, an indicator of layoffs, fell to the lowest level since 2000. These numbers suggest that the weak March jobs report was a seasonal aberration.8

April consumer sentiment at 2nd highest level since 2007. A monthly indicator of consumer sentiment rose last month as Americans became more optimistic about current and future conditions. Though consumers are worried about interest rates, they are more confident about jobs and income prospects.9

Motor vehicle sales driven by trucks and SUVs. Cheap gas appears to have reignited Americans’ love affair with big vehicles; though April is typically a slow month for auto sales, demand for sport-utilities and trucks accounted for about half of April’s sales.10

Manufacturing growth slows in April. Though the manufacturing sector is growing, the pace of growth fell last month to the slowest pace in almost two years. Though new orders are up (a good sign for future growth), employment is down to its lowest level in five years.11