April Jobs Report Shows Slower Pace of Growth – Weekly Update for May 9, 2016

Image courtesy of FreeDigitalPhotos.net/phasinphoto

Image courtesy of FreeDigitalPhotos.net/phasinphoto

Markets slumped for the third week as global concerns pressured investors again, and domestic data painted a modest picture. For the week, the S&P 500 lost 0.40%, the Dow fell 0.19%, the NASDAQ dropped 0.82%, and the MSCI EAFE fell 3.19%.

April’s job report showed investors that the labor market continues to improve, adding 160,000 jobs last month. However, the gains were far below the consensus estimate of 200,000 new jobs. Though the unemployment rate remained unchanged at 5.0%, one estimate of the underemployment rate—measuring discouraged workers and part-timers who want full-time work—fell to 9.7% from 9.8% in March. That’s good news, because it means that workers who have struggled in the recovery may finally be catching up.

However, it’s not all good news. A separate private industry report found that job cuts surged 35.0% between March and April as firms let go of workers. Over 250,000 pink slips were handed out between January and April, the largest number since early 2009. Though the beleaguered energy sector is driving layoffs, shifting consumer preferences are also causing retail and computer companies to cut jobs.

Further analysis of the job gains also showed that much of the fastest growth in hiring is coming from low-paying industries like retail and hospitality. The lack of high-paying job opportunities is reflected in wage growth numbers. Since 2005, the median weekly wage across all jobs has increased by just $176. Wage gains are even slower in low-paying industries and for workers with less education.

Economists suspect that slow wage growth is contributing to sluggish consumer spending and slower economic growth. When foreign demand drops, economic growth depends more on domestic spending. However, there are signs that growth may be picking up; in April, wages grew 2.5% from the previous year.

Will wages pick up enough this year to drive more purchases of big-ticket items? We’ll have to see.

Looking ahead, it’s unclear whether domestic economic data will drive away global woes. Realistically, we’re likely to see both soft and strong data in the weeks to come that will hopefully push stocks higher again once earnings season is over.

ECONOMIC CALENDAR:

Tuesday: JOLTS

Wednesday: EIA Petroleum Status Report, Treasury Budget

Thursday: Jobless Claims, Import and Export Prices

Friday: Retail Sales, PPI-FD, Business Inventories, Consumer Sentiment

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HEADLINES:

Construction spending grows .03% in March. Spending on commercial and residential construction reached its highest level in eight years after a strong gain in February.

Motor vehicle sales close to record month. After a slow start to the year, April light vehicle sales are expected to grow 5.0%, setting a new monthly high and putting U.S. automakers on track to beat last year’s sales record.

China’s trade slumps. Imports and exports in the world’s second-largest economy contracted sharply in April in the latest sign that weak demand is prolonging China’s slowdown.

March factory orders increase 1.1%. Orders to U.S. manufacturers increased modestly after dropping in February. Economists hope that the dollar’s drop will help the manufacturing sector bounce back.

Special Quarterly Update: Roller Coaster Q1 Ends Mixed – Weekly Update for April 4, 2016

Image courtesy of FreeDigitalPhotos.net/Sira Anamwong

Image courtesy of FreeDigitalPhotos.net/Sira Anamwong

After a rocky start to the year, most stocks ended the first quarter slightly higher, which is remarkable considering the negative sentiment that caused stocks to selloff in the early weeks of 2016. For the quarter, the S&P 500 gained 0.77%, the Dow grew 1.49%, and the NASDAQ fell 2.75%.

Markets faced serious headwinds last quarter due to slowing economic growth around the world. Combined with rising interest rates, a strong dollar, and falling commodities prices, we faced a perfect storm of factors that ticked off a stock market correction. However, after falling by as much as 10.5% earlier in the quarter, the S&P 500 gained 6.7% in March. That’s the best performance since October 2015. Given the roller coaster ride we’ve had this year, the recent gains are a testament to the resilience of investors.

Let’s talk about what happened last quarter.

What affected markets in Q1 2016?

Slowing global economic growth. Concerns about overseas growth were responsible for a lot of market activity. China’s ongoing economic woes caused major turmoil in markets around the world as investors digested the news that the world’s second-largest economy is slowing. Though China is grappling with a transition away from a manufacturing-centered economy, experts fear that the move won’t come without pain. Europe also faced its share of concerns. China’s slowing demand for foreign goods will hit European firms harder as many worry about terrorism and the migration crisis currently facing the borderless Schengen region.

Volatile oil prices. Oil producers faced falling demand and stubbornly high oil supplies, which caused oil prices to plunge. At the end of the quarter, prices appear to have stabilized somewhat as oil-rich nations like Kuwait and Saudi Arabia seek to stabilize prices through cooperation between producers.

The volatility and prolonged lows will likely be felt in energy sector earnings for the first quarter; however, low prices were a boon to consumers. Though gasoline prices will likely rise as refineries switch to summer blends ahead of the peak summer driving season, the average cost per gallon hit a 12-year low in the first quarter. The national average for the quarter was $1.86 per gallon—saving Americans nearly $10 billion, or about $45 per licensed driver. Did Americans plow those gas savings back into the economy through spending? We’ll see when spending data for the quarter is released.

Recession worries. At the beginning of the year, investors became increasingly concerned that global issues could come home to roost in the form of a recession. Though fears of a slowdown are serious, some domestic economic data suggests that a recession may not be nigh. The labor market added 628,000 jobs in the first three months of the year. Other employment factors also improved; the labor force participation rate increased and the number of discouraged workers decreased. Wages also increased 2.25% in March from a year earlier. Consumer spending, which is a significant contributor to U.S. economic growth, also increased, albeit sluggishly.

Central bank actions. Markets also responded to decisions by the Federal Reserve, European Central Bank, and Bank of Japan. While the Fed is working to bring interest rates closer to historic averages, the BOJ and ECB are struggling to stoke economic growth by lowering rates into negative territory and buying up assets. The big questions remain: When will the Fed raise rates again? Do central banks have enough bullets left to fight a global slowdown?

What’s in store for Q2 2016?

After the first quarter’s wild ride, we can hope for a smoother second quarter. Current estimates peg U.S. economic growth at 0.7% in the first three months of 2016. That’s a big comedown from the 1.4% growth in the fourth quarter, but it’s in line with the slow start the economy has experienced in several of the past few years. Is the economy still at risk of a slowdown? That’s very possible, and may depend on how much consumers open their wallets this year.

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Our view

What can we look forward to in the second quarter? Well, more uncertainty is certain. Though some fears have abated, most of the headwinds are still with us as we head into the second quarter. However, a lot of the potential pain facing the economy may already be priced into markets, and analysts are considerably more optimistic than they were during the rocky ride in January and February.

If first-quarter results show a rosier picture, then investors could react with a resumption of the rally. A lot depends on what the Federal Reserve has in store for interest rates; currently, the odds favor a June hike. Fed Chair Janet Yellen has struck a dovish tone in recent remarks, indicating that she plans to “proceed cautiously.” However, the rosy March jobs report could increase the odds of an April rate hike. We’ll know more in the coming weeks.

ECONOMIC CALENDAR:

Monday: Factory Orders

Tuesday: International Trade, JOLTS, ISM Non-Mfg. Index

Wednesday: EIA Petroleum Status Report, FOMC Minutes

Thursday: Jobless Claims, Janet Yellen Speaks 5:30 PM ET

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HEADLINES:

Economy adds 215,000 jobs in March. Though the unemployment rate increased to 5.0%, economists view it as a good sign that jobseekers are reentering the market.

Motor vehicle sales rise. U.S. car makers expect to have sold 1.66 million autos last month, roughly a 7.0% increase over a year ago. One estimate suggests that carmakers had the best monthly sales in a decade.

Consumer sentiment drops slightly. Though one gauge of consumer optimism fell in March, it came in better than economists had expected. The steady pattern suggests that consumers are still fairly optimistic about their finances this year.

Construction spending falls. Spending on new construction projects fell in February by the largest amount in three months following a January gain. However, residential construction rose solidly.

 

 

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.

The Joy of the Journey

The other day I was listening to a leadership podcast where John Maxwell, a best selling author and influential leadership coach, was being interviewed.  A portion of his interview that stuck out to me was his thoughts on our journey in life, business, parenting, or ________ (fill in the blank).  He stated that most of us suffer from Destination Disease, always looking ahead to when we finally ‘arrive’.  While its certainly not wrong to have future goals and strive for them, he cautioned us not to miss the Joy of the Journey.  It’s stepping back, right now, where you are…and being thankful.

In today’s culture, it’s always about the next best thing, rising to the top, being the best.  These are not bad items in and of themselves, they are what drive us forward, they’re what make businesses profit, they’re what excite us.  However, if we strive so hard for the ‘arrival point’ that we miss the tremendous blessing of the journey to get there, we rob ourselves of the joy of life today, the joy of our business today, the joy of our children today…

Bottom line, don’t get caught with Destination Disease.  Rather, step back and find the Joy of the Journey.  For me, as a Partner of an Investment Management firm, it is easy to get caught up in the volitility of the markets and future goals for growth of our firm.  But today, right now, I’m reminded of the joy it is to serve a loyal group of clients as we navigate the markets and journey together toward successfully managing their investments.

10 Secrets to Success

Investor’s Business Daily (IBD) has become a great resource for me and should be on every investor’s reading list. If you aren’t familiar with this daily newspaper I encourage you to go to their website and sign up for a free trial. I like the paper because it contains an abundance of relevant information on a daily basis.

In addition to the excellent coverage of the stock market the paper does a great job of pointing out some of the best leaders in business. IBD has spent years analyzing leaders and successful people in all walks of life. Most have 10 traits that, when combined, can turn dreams into reality. Each day, on the Leaders & Success page, the paper will highlight one of those traits.

Here are IBD’s 10 Secrets To Success:

  1. HOW YOU THINK IS EVERYTHING: Always be positive. Think success, not failure. Beware of a negative environment.
  2. DECIDE UPON YOUR TRUE DREAMS AND GOALS: Write down your specific goals and develop a plan to reach them.
  3. TAKE ACTION: Goals are nothing without action. Don’t be afraid to get started. Just do it.
  4. NEVER STOP LEARNING: Go back to school or read books. Get training and acquire skills.
  5. BE PERSISTENT AND WORK HARD: Success is a marathon, not a sprint. Never give up.
  6. LEARN TO ANALYZE DETAILS: Get all the facts, all the input. Learn from your mistakes.
  7. FOCUS YOUR TIME AND MONEY: Don’t let other people or things distract you.
  8. DON’T BE AFRAID TO INNOVATE; BE DIFFERENT: Following the herd is a sure way to mediocrity.
  9. DEAL AND COMMUNICATE WITH PEOPLE EFFECTIVELY: No person is an island. Learn to understand and motivate others.
  10. BE HONEST AND DEPENDABLE; TAKE RESPONSIBILITY: Otherwise, #s 1-9 won’t matter.

THE UPSHOT: What a great list of leadership traits! I couldn’t have written the list any better. It is this combination of traits that I strive to execute in my life. You can turn dreams into reality by executing these traits.

Outwork Your Competition

Earlier this week I was talking to a friend who was about to speak to our local high school football team. The takeaway from his message was going to be that success requires an attitude that you will outwork your competition. Winners outwork their opponents. Not just on game day, but everyday. In order to be the best football team in the conference every player on the team must come to each practice 100% committed to outworking the opponent. Success takes work. Hard work produces winners.

As I thought about this I realized how similar this philosophy is to investing. I was reminded of what William O’Neil said in his book, How to Make Money in Stocks:

Many long evenings of study led to precise rules, disciplines, and a plan that finally worked. Luck had nothing to do with it; it was persistence and hard work. You can’t expect to watch television, drink beer every night, or party with all your friends and still find the answers to something as complex as the stock market or the American economy. In America, anyone can do anything by working at it. If you get discouraged, don’t ever give up. Go back and put in some detailed extra effort. It’s always the study and learning time you put in after nine to five, Monday through Friday, that ultimately makes the difference between winning and reaching your goals or missing out on truly great (and profitable!) opportunities.

This is great advice from two people whom I highly respect. You can’t expect to succeed with your investments without doing your homework. To truly understand the markets and to exploit trends you’ve got to do some work. Spend some time reading how others have been successful. Study charts, price action, and company fundamentals. Learn what works and what doesn’t. And most importantly, be sure you understand what NOT to do. Have a plan and set some rules regarding buying, selling, and risk management.

Sound overwhelming? Don’t have the time or desire to do the work? That’s fine. My firm can do it for you. Contact us to see how we might be able to help you.