Archives for March 2016

Q4 GDP Revised Upward by Strong Consumer Spending – Weekly Update for March 28, 2016

Image courtesy of FreeDigitalPhotos.net/Stuart Miles

Image courtesy of FreeDigitalPhotos.net/Stuart Miles

Stocks ended the holiday-shortened week down, snapping their five-week winning streak. However, losses were mild amid low trading volume before the Easter weekend. For the week, the S&P 500 lost 0.67%, the Dow fell 0.49%, and the NASDAQ dropped 0.46%.

Last week’s economic calendar was highlighted by the third estimate of fourth-quarter 2015 economic growth. The report showed that Gross Domestic Product grew much faster than originally thought—by a 1.4% annualized rate instead of 1.0%. For all of 2015, the economy grew by a respectable 2.4%— not too shabby considering the headwinds the country faced down last year.

The revision reflected much stronger consumer spending than originally thought, which is a relief to recession-watchers and could bode well for the economy in 2016. Spending is being supported by a strong labor market and low gas prices. However, the news isn’t all rosy. Business inventories were revised lower, showing that companies are reluctant to tie up cash in the face of uncertain demand. Since stockpiles are still high, it’s possible that weak business spending will eat into economic growth in the first quarter.

Can we trust GDP estimates? That interesting question was recently brought up by a CNBC report, which found that GDP growth estimates could be off by as much as 1.3%. When growth rates are already low, such a large margin of error (if it exists) could have serious business and policy implications.

A large part of the problem may be that many reports used by federal economists to calculate GDP arrive months— even a year—after the initial reports on economic growth go out, forcing them to use estimates. As these reports come in, economists revise the data, long after the relevant quarter matters to investors and policy makers. It’s often a question of trading accuracy for timeliness. That’s one of the reasons why we look at many different indicators and must understand the limitations of each one when we create models.

A vicious bombing attack on Tuesday killed at least 30 people in Brussels, putting the European Union capital on lockdown. Major cities around the world are bolstering security around transportation hubs in response. The attack brings attention to the ongoing threat of terrorism and highlights the problems Europe is having in sharing intelligence and tracking suspected terrorists. Our thoughts are with the victims and their families.

Looking at the week ahead, we can expect some volatility as investors react to last week’s GDP report, which was released during Friday’s market holiday. While investors may react positively to the better-than-expected growth, we may also see some market turmoil ahead of the end of the quarter. The question is: Did the first quarter of 2016 deliver on expectations?

ECONOMIC CALENDAR:

Monday: International Trade in Goods, Personal Income and Outlays, Pending Home Sales Index, Dallas Fed Mfg. Survey

Tuesday: S&P Case-Shiller HPI, Consumer Confidence, Janet Yellen Speaks 11:30 AM ET

Wednesday: ADP Employment Report, EIA Petroleum Status Report

Thursday: Jobless Claims, Chicago PMI

Friday: Motor Vehicle Sales, Employment Situation, PMI Manufacturing Index, ISM Mfg. Index, Consumer Sentiment, Construction Spending

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HEADLINES:

Durable goods orders fall. Orders for long-lasting factory goods like appliances and vehicles fell in February by 2.8%. The data shows that the manufacturing sector is still struggling with falling demand.

Weekly jobless claims rise modestly. The number of Americans filing new claims for unemployment benefits rose by 6,000, though revisions to prior week claims show that the labor market was stronger than expected.

Q4 corporate profits down 3.2%. A measure of after-tax corporate profits shows that the overall bottom line for U.S. companies declined 3.2% over the previous year, held down by results from petroleum and chemical industries.

New home sales rise in February. Sales of newly built homes rose last month; however, the increase was concentrated in a single region, suggesting the growth is not widespread as the busy Spring season takes off.

Dow and S&P 500 Green for 2016 – Weekly Update for March 21, 2016

Image courtesy of FreeDigitalPhotos.net/jscreationzs

Image courtesy of FreeDigitalPhotos.net/jscreationzs

After a historically rough start to the year, stocks finally rallied enough to put the S&P 500 and Dow in the green for the year. Extended weakness in the dollar—, which investors hope, could boost economic growth and corporate profits—contributed to the gains. For the week, the S&P 500 rose 1.35%, the Dow added 2.26%, and the NASDAQ grew 0.99%.

The last two weeks have been important in terms of global monetary policy. The European Central Bank, Bank of Japan, and Federal Reserve all met to determine next steps for their respective economic spheres of influence. Currently, there is a divide between the Fed, which is moving away from low rates while supporting economy growth, and the ECB and BOJ, which are fighting slowing economic growth with negative rates and quantitative easing. However, the latest Fed meeting suggests that the divide may not be as great as it was before.

The Fed voted last week to hold rates steady, not being ready to commit to further increases at the moment. However, the central bank’s official statement indicated that we can expect two interest rate hikes this year, instead of the four projected in December. The statement makes it clear that the Fed is adjusting its expectations to a slow-growth, slow-inflation world, which brings it more in line with the concerns of other central banks.

The Bank of Japan also voted to hold rates steady at the current negative 0.1% level last week; however, official notes from the January meeting showed that central bankers also debated expanding asset purchases to further stoke growth. The move into negative interest rates by the ECB and BOJ—essentially charging depositors for the privilege of holding cash—is worrying to some. Some economists fear competition between central banks to lower rates (potentially triggering a currency devaluation war) as well as the effect of negative rates on bank profits.

One big question on everyone’s mind is this: Does the Fed have enough bullets left to respond to an economic slowdown?

After seven years of ultra-low rates, the Fed can’t push rates much lower without going into negative territory. Though Fed chair Janet Yellen has stated that negative rates aren’t off the table in the event of a slowdown, it’s clear that the Fed isn’t keen on the idea.

Former chair of the Federal Reserve Ben Bernanke waded into the fray last week with a blog post supporting a “balanced monetary-fiscal response” to a potential downturn. In his ideal scenario, the best response to an economic slowdown would combine further quantitative easing and interest rate decreases with fiscal policies like increased government spending.

Bernanke’s support for accommodative fiscal policy isn’t new; in the past, he has rebuked Congress for not doing enough (in his opinion) to stoke economic growth. Leaving the politics of government spending firmly aside, here’s what we can take from Bernanke’s remarks: The Fed is taking threats of a slowdown seriously and may still have enough tools in the toolbox to fight a downturn if it comes.

Is a downturn likely? We can’t say. Predicting a recession is always difficult, and the probabilities of a recession this year are all over the place. A Wall Street Journal poll of economists has the current probability at 20%, down from 21% last month. The Federal Reserve Bank of Atlanta sees the risk as much lower—just 10%. Yet another prediction has the odds at just 4.06%. Basically, no one knows for sure.

In the week ahead, investors will be watching currency prices to see if the dollar continues its downward trajectory. If investors believe the dollar has peaked in value, it could give markets enough confidence to extend the rally further.

ECONOMIC CALENDAR:

Monday: Existing Home Sales

Tuesday: PMI Manufacturing Index Flash

Wednesday: New Home Sales, EIA Petroleum Status Report

Thursday: Durable Goods Orders, Jobless Claims

Friday: GDP

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HEADLINES:

Retail sales revised downward in January. Retail sales slumped in February as expected; however, a sharp downward revision in January sales— from a 0.2% increase to a 0.4% decrease— could be a sign of trouble.

Housing starts rebound in February. Groundbreaking on new home construction surged more than expected last month as U.S. homebuilders invested heavily in single-family homes. The rise is a strong sign of confidence in the economy.

Consumer sentiment dips in March. A measure of optimism about the economy among Americans fell slightly this month as consumers felt the effects of rising gasoline prices and worried more about the economy.

Job openings rise in January. Job openings rose to 5.5 million in January, up from 5.28 million in December, though the hiring rate dipped slightly. Increased openings are a positive sign for the economy and show that the labor market is in stable territory.

 

Bull Market Anniversary: What’s Changed in 7 Years? – Weekly Update for March 14, 2016

Image courtesy of FreeDigitalPhotos.net/ddpavumba

Image courtesy of FreeDigitalPhotos.net/ddpavumba

Stocks closed out their fourth week of gains as investors gained confidence from higher oil prices and aggressive moves by the European Central Bank. For the week, the S&P 500 rose 1.11%, the Dow grew 1.21%, and the NASDAQ added 0.67%.

Last week marked the seventh anniversary of the market bottom on March 9, 2009. To put the recent volatility into perspective, let’s take a look at what has changed over the last seven years:

The S&P 500 has grown 199%

From the depths of the bear market, the S&P 500 grew nearly 215% through it’s mid-May 2015 high, surpassing previous historic highs.[i] Since then, stocks have lost value, pummeled by global economic forces. However, it’s a testament to how resilient markets are that they have lost so little when faced with serious concerns about global growth.

03-14-2016 

Economic growth has regained speed

03-14-2016

Source: BEA

The economy has also made major strides in the last seven years. Taking a look at this chart, we can see that in the first quarter of 2009, the economy contracted by 5.4%, putting it firmly in recession territory. In contrast, the latest data from Q4 2015 shows that the economy grew by 1.0%. Now, we’re not too excited about that level of growth, but we can see that the economy has grown substantially since 2009.

Millions of Americans have returned to work

03-14-2016

Source: BLS

Over the last seven years, the economy has gained over 11.5 million jobs – far more than the 8.7 million jobs lost in the recession. While much of the growth has been in relatively low-paying industries, the improvement has been broad-based, indicating that many sectors of the economy are hiring.

03-14-2016

Source: BLS

We can also see that the number of both unemployed and “discouraged” workers has been steadily declining since peaking in mid-2010. This is a broader measure of unemployment because it also captures those who are not looking for jobs because they believe no work is available. As the labor market improved, more Americans gained confidence in their prospects and returned to the labor market.

Americans are driving economic activity by spending

03-14-2016

Source: BEA

In tandem with the increase in available work, Americans opened their wallets and started spending again, increasing personal spending by 15.9% over the last seven years. Since consumer spending accounts for about 70% of economic activity, it represents a driving force for our economy. Though we don’t have February or March data yet, consumer spending still appears to be on a healthy trajectory.

 

Our view

With all of the talk of recession and bear markets, it can be easy to lose sight of just how far we’ve come during this rally. We don’t believe that it’s possible to accurately time the beginning or end of any market cycle. Since we can’t predict where markets will go later this year, we can take a look at underlying fundamentals and make prudent adjustments to investment strategies as needed. We’re keeping a close eye on markets and will continue to keep you informed.

The week ahead is packed with data. In addition, investors have two central bank meetings in what the media is calling “bank-a-palooza,” a series of meetings by the ECB, Federal Reserve, and Bank of Japan to decide monetary policy. While the Fed isn’t expected to raise interest rates again next week, officials could provide valuable insight into the timing of future rate hikes. If economic data supports further increases, investors could confront the possibility of multiple rate hikes this year.

ECONOMIC CALENDAR:

Tuesday: PPI-FD, Retail Sales, Empire State Mfg. Survey, Business Inventories, Housing Market Index, Treasury International Capital

Wednesday: Consumer Price Index, Housing Starts, Industrial Production, EIA Petroleum Status Report, FOMC Meeting Announcement, FOMC Forecasts, Fed Chair Press Conference

Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey, JOLTS

Friday: Consumer Sentiment

 

03-14-2016

HEADLINES:

China trade data shows slowdown. Exports from the world’s second-largest economy dropped 25.4% in February, far worse than estimates, stoking concerns about China’s growth in 2016.

Weekly jobless claims fall. The number of Americans filing new claims for unemployment benefits fell more than expected last week, reaching the lowest level since October.

Oil prices drive higher after watchdog report. Oil rallied last week after the International Energy Agency reported that after months of lows, oil may have bottomed out now that producers are working to stabilize prices.

European Central Bank moves aggressively to stoke growth. After months of anticipation, the ECB voted to cut interest rates to zero and unveiled a raft of measures to pull the EU out of the doldrums.

[i] S&P 500 price performance between 3/9/09 and 5/21/15. Source: Yahoo Finance

 

Stocks Rally for Third Week – Weekly Update for March 7, 2016

Image courtesy of FreeDigitalPhotos.net/cuteimage

Image courtesy of FreeDigitalPhotos.net/cuteimage

Markets closed out a third week of gains, putting the Dow at a two-month high and erasing much of the year’s losses. Higher oil prices and an upbeat February jobs report contributed to the rally.[i] For the week, the S&P 500 increased 2.67%, the Dow added 2.20%, and the NASDAQ grew 2.76%.[ii]

Investors cheered at a reasonably solid jobs report. The February Employment Situation report showed that the economy gained 242,000 new jobs last month. That’s the 65th straight month of job increases, and the trend shows that the labor market continues to improve.[iii] The headline unemployment rate remained unchanged at 4.9%; however, the labor force participation rate rose slightly to 62.9% as a greater percentage of Americans joined the labor market by working or actively looking for jobs.[iv] A declining participation rate had worried economists, and an uptick could indicate that discouraged workers are returning to the search.

 

2016-03-07 chart

The report showed that the biggest job gains were in healthcare, retail, and hospitality. The construction industry also added thousands of new jobs, which is a sign that builders expect economic demand to pick up in the coming months. Unsurprisingly, the mining sector was the biggest job loser.[v]

However, the news wasn’t all rosy.

Digging deeper into the data, we also see that wages slipped last month. Average hourly wages are up just 2.2% from 12 months ago, slower than the 2.5% rate we have seen recently and well below target rates of 3-4%. Though the decline might be a seasonal issue or involve data technicalities, it could be a sign that jobs growth isn’t being reflected in wages. It could also mean that employers are offering incentives like benefits or vacation time that aren’t reflected in income.[vi]

Overall, the report is a mixed bag for the Federal Reserve, though the data shows that there isn’t a slowdown in the labor market and will help tamp down fears of a recession. Is a March interest rate hike in play? Realistically, the data probably isn’t solid enough for the Fed, which is looking for positive economic data to counterbalance global concerns and the recent market declines. Current bets on the next hike are all over the place. Some economists believe an April or June hike is likely while some futures traders are placing bets on a November hike.[vii]

This week’s economic calendar is thin, highlighted by trade data on Friday and a speech by Federal Reserve Vice President Stanley Fischer. Though the Fed isn’t likely to raise rates at next month’s meeting, Fischer may give some insight into the timing of the next rate hike. Most attention will be on presidential debates, caucuses, and the primary race.[viii]

ECONOMIC CALENDAR:

Wednesday: EIA Petroleum Status Report

Thursday: Jobless Claims, Treasury Budget

Friday: International Trade

2016-03-07

HEADLINES:

Motor vehicle sales jump in February. Sales of cars and trucks soared by 7% last month, soaring to a 15-year high for the month of February—traditionally a slow time for auto sales.[ix]

U.S. factory activity slows for fifth straight month. A gauge of manufacturing activity shows that the sector contracted again in February, but the pace of decline slowed, indicating that relief may be on the horizon.[x]

Beige book shows economic activity increased. A mid-quarter indicator of U.S. economic growth showed that overall activity increased, but it varied widely by region. This mixed picture may be a headache for the Fed.[xi]

Oil prices jump 10%. Benchmark oil prices logged their biggest weekly gain this year as traders digested news of falling U.S. production and possible supply freezes. West Texas Intermediate closed at $35.92 on the likelihood of lower production in the coming weeks.[xii]

[i] http://www.cnbc.com/2016/03/04/us-markets.html

[ii] http://finance.yahoo.com/q/hp?s=%5EGSPC&a=01&b=29&c=2016&d=02&e=4&f=2016&g=d

http://finance.yahoo.com/q/hp?a=01&b=29&c=2016&d=02&e=4&f=2016&g=d&s=%5EDJI%2C+&ql=1

http://finance.yahoo.com/q/hp?a=01&b=29&c=2016&d=02&e=4&f=2016&g=d&s=%5EIXIC%2C+&ql=1

[iii] https://www.glassdoor.com/research/jobs-report-feb-2016/

[iv] http://www.bls.gov/news.release/empsit.nr0.htm

[v] http://www.bls.gov/news.release/empsit.nr0.htm

[vi] https://www.glassdoor.com/research/jobs-report-feb-2016/

[vii] http://www.marketwatch.com/story/fed-could-hike-as-early-as-april-economists-after-jobs-report-2016-03-04 http://www.reuters.com/article/us-usa-fed-futures-idUSKCN0W61MR

[viii] http://www.foxbusiness.com/markets/2016/03/04/week-ahead-fed-speech-debates-and-primaries.html

[ix] http://www.reuters.com/article/us-usa-autos-idUSKCN0W34LC

[x] http://www.foxbusiness.com/markets/2016/03/01/u-s-manufacturing-remained-in-contraction-in-february.html

[xi] http://www.foxbusiness.com/markets/2016/03/02/fed-u-s-economic-activity-expanded-but-conditions-mixed.html

[xii] http://www.marketwatch.com/story/hope-that-us-production-is-shrinking-drives-gains-for-oil-2016-03-04