Fed Blinks on Brexit Fears – Weekly Update for June 20, 2016

FED Blinks on Brexit Fears

Markets fell on Brexit fears and concerns about the Fed’s dovish statements, giving the Dow its worst week in a month. For the week, the S&P 500 slipped 1.19%, the Dow fell 1.06%, the NASDAQ dropped 1.92%, and the MSCI EAFE lost 2.78%.

The big news last week was the Federal Reserve’s decision not to raise interest rates. The decision wasn’t a surprise; just before the announcement, traders had assigned just a 1.9% chance of a June rate increase.

Looking at the official statement, we can see that the Fed is concerned enough about a slowdown in the labor market and persistently low economic growth to hold off on raising rates. However, the Fed hasn’t lowered its forecasts for economic growth or unemployment, indicating that its concerns may be short-term. Is that decision a reflection of the data or a political move designed to support its vision of a healthy economy? It’s hard to say.

A July rate increase is still possible though traders don’t seem to buy it. Current probabilities of a July rate hike sit at just 7.0%. What would need to happen for the Fed to move in July? Well, we’re not Fed economists, but experts think the Fed would want to see a strong June jobs report, a British vote to remain in the EU, solid data out of China, and stable financial markets.

It seems more likely that the Fed will push rate increases out to September or December despite Fed Chair Janet Yellen’s hawkish statements. With a contentious presidential election in November, it doesn’t seem likely that the Fed will rock the boat until the votes are tallied.

In a Q&A session, Yellen cited Britain’s upcoming referendum vote on EU membership as a factor in the decision to hold pat on interest rates. She believes that a Brexit is a decision that would have consequences for the U.S. financial and economic outlook.

After the shocking murder of a British member of Parliament, Brexit polls have swung closer to a “Remain” vote. However, the vote is still too close to call and politicking will continue until the votes are counted. Uncertainty around Britain’s possible exit will likely keep markets on edge, and investors should expect continued volatility as we approach the end of the quarter. We’ll keep you informed.

ECONOMIC CALENDAR:

Monday: International Trade in Goods, Dallas Fed Manufacturing Survey

Tuesday: GDP, S&P Case-Shiller HPI, Consumer Confidence

Wednesday: Personal Income and Outlays, Janet Yellen Speaks 9:30 AM ET, Pending Home Sales Index, EIA Petroleum Status Report

Thursday: Jobless Claims, Chicago PMI

Friday: Motor Vehicle Sales, PMI Manufacturing Index, ISM Manufacturing Index, Construction Spending

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HEADLINES:

Retail sales beat forecasts. Stronger-than-expected May retail sales numbers point to renewed demand for automobiles and other goods. Core retail sales, which correspond best with the economic component consumer spending, rose 0.4% after growing 1.0% in April.

Industrial production falls in May. Industrial output fell more than expected on declines in utilities and manufacturing output.

Business inventories increase slightly. Stockpiles for U.S. businesses edged upward in April, indicating that businesses expect higher demand this summer.

Housing starts fall. Groundbreaking on new houses fell in May as construction on multi-family units dropped. However, permits for future construction grew, indicating that the housing sector is still active.

Is Britain Really Going to Leave the EU? – Weekly Update for June 13, 2016

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Before we begin our usual weekly commentary, we wanted to take a moment to honor the victims of Sunday’s terrible attack in Orlando. Though details are still scarce, it is the most devastating mass shooting in U.S. history. Our thoughts are with the victims, their families, and with the community that now must cope with the aftermath of the tragedy. As we look for answers, let’s also remember to be grateful for the ones we love.

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Though stocks reached new 2016 highs last week, they ended the week mixed as investors showed nervousness ahead of Britain’s vote on exiting the European Union. For the week, the S&P 500 slipped 0.15%, the Dow gained 0.33%, the NASDAQ fell 0.97%, and the MSCI EAFE lost 1.79%.

Though fear took over last week, some strategists believe that the S&P 500 could still test new historic highs in the days ahead, indicating that there’s still some optimism on Wall Street.

What’s going on in Britain?

On June 23, Great Britain will hold a national referendum on whether or not to remain within the EU. The polls had shown that both sides were neck and neck, though the pro-“Brexit” (British exit) side has recently opened a 10-point lead. Though Britain retains the pound sterling and isn’t part of the monetary union, it is a member of the 28-member European Union, which gives it access to the EU’s tariff-free single market, accounting for 45% of Britain’s export trade. One estimate suggests that Britain’s trade with Europe is 55% higher than it would be had it not joined the EU.

Why would Britain want to leave such a lucrative arrangement?

The debate over whether to stay or go comes down to a few key issues:

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What would a Brexit mean for U.S. investors?
Markets would likely react badly if Britons voted to leave the EU. The situation would create serious uncertainty about the future of the EU, and markets hate uncertainty. We don’t know exactly how a Brexit would play out; many legal agreements would have to be renegotiated, work situations for EU and British citizens would be left in limbo, and the political climate would drastically change. However, these consequences would play out over several years as both sides negotiate the exit.

Estimates on the cost of a Brexit vary; one worst-case scenario projects a 6.2% loss of economic growth in Britain by 2030. Another estimate projects a best-case scenario of a 1.6% increase in Gross Domestic Product. It’s very difficult to predict the relative benefits and costs because so much depends on exit negotiations. However, since Britain and Europe need each other, it’s likely that post-Brexit negotiations would be favorable to free trade, making the worst-case scenario unlikely.

Many of the worst-case fears regarding a Brexit are similar to those we faced in 2015 with the “Grexit” or Greek exit. The departure of an important member nation could fracture the EU and cause other countries to consider following suit.

Though it seems unlikely that a Brexit would seriously harm U.S. interests, Federal Reserve Chair Janet Yellen stated that the Fed would consider the potential impact of a Brexit when setting interest rate policy this month. Most experts don’t expect the Fed to raise rates this week, though there’s always room for a surprise.

Our view

Is a Brexit the black swan event that could throw a wrench into markets? It’s certainly possible, but it’s not the most likely scenario. Though a British exit would certainly affect global markets, it’s important to keep things in perspective. Headwinds and threats come in all shapes and sizes, and it’s important to take them in stride. Some headwinds blow in for a while and then go away; others linger and cause more significant volatility. Being a long-term investor means staying flexible and maintaining focus on your individual goals. If you have any questions about how Britain’s vote may affect your portfolio, please give us a call.

 

ECONOMIC CALENDAR:

Tuesday: Retail Sales, Import and Export Prices, Business Inventories

Wednesday: PPI-FD, Empire State Manufacturing Survey, Industrial Production, EIA Petroleum Status Report, FOMC Meeting Announcement, FOMC Forecasts, Fed Chair Press Conference 2:30 PM ET, Treasury International Capital

Thursday: Consumer Price Index, Jobless Claims, Philadelphia Fed Business Outlook Survey, Housing Market Index

Friday: Housing Starts

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HEADLINES:

Consumer sentiment slips in June.
A measure of how Americans are feeling about the economy and their prospects fell slightly even though Americans are feeling the benefit of higher wages.

Jobless claims fall unexpectedly. The number of Americans filing new claims for unemployment benefits fell last week, suggesting strength in the labor market after May’s weak hiring.

Employers announce most job openings in nine months. Though employers are posting record job openings, they are holding back on filling them, suggesting businesses may have concerns about economic growth.

Oil prices jump on supply disruptions.  Though the world is still gripped in an oil-supply slump, supply disruptions in several oil-producing nations gave oil prices a recent boost.

 

What Did the May Jobs Report Show Us? – Weekly Update for June 6, 2016

Adobe Spark (7)Stocks closed the holiday-shortened week mixed, with some sectors losing ground while others gained after a disappointing May jobs report signaled that the economy may not be strong enough for the Federal Reserve to raise rates this month. For the week, the S&P 500 ended flat, the Dow lost 0.37%, the NASDAQ increased 0.18%, and the MSCI EAFE added 0.13%.

On Friday, we got a look at how the labor market did in May. Analysts looked to the report to see whether the labor market would give the Fed the ammunition it needed to move at the June meeting. Here are a few things we took away:

Job growth disappoints…but it has happened before

The economy created just 38,000 new jobs last month, the worst showing since September 2010. The number of new jobs sharply missed expectations, which called for around 160,000 new jobs. However, seasonal factors, like a massive Verizon worker strike, which took 34,000 workers out of the count, were at play and may have affected hiring numbers.

The labor market has suffered temporary setbacks before. For example, in December 2013, the economy added a paltry 45,000 jobs; four months later, the economy gained 310,000 jobs. In March 2015, the labor market added just 84,000 jobs; in July, 277,000 new jobs were created.

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Labor market trends may slow job creation

The jobs report showed that the unemployment rate fell to 4.7%, the lowest since November 2007. However, much of the decrease occurred when jobseekers dropped out of the job search. As we approach full employment (some may argue that we’re already there), the effects of having fewer jobseekers begin to be felt by employers.

Employers who are hiring may struggle to find qualified candidates due to skill mismatches, a problem that’s likely to continue to affect certain industries.

These issues affect job creation in a “mature” labor market recovery. One industry expert projects that monthly job growth will average 175,000 for the rest of 2016. In comparison, monthly job increases averaged 251,000 in 2014 and 229,000 in 2015.

Can the slower pace of hiring support the consumer spending the economy needs to grow? Perhaps, if wages continue to grow. Wages were up 2.5% in May as compared to a year ago, which is a better pace of growth than we have seen. Another measure of wage growth favored by economists, the Employment Cost Index (ECI), shows that wages were up 2.4% (year-over-year) in the first quarter. A third measure calculated by the Atlanta Fed shows a rosier 3.4% annual increase in hourly wages in April. You can bet that the Fed will be looking at all three measures when deciding if wage growth is strong enough to support consumer spending this year.

The Fed may not raise rates in June

The weak report also may have reduced the odds of a June interest hike by the Federal Reserve, though some analysts think that other positive economic indicators might give the Fed the confidence to act. Right now, the market is pretty convinced the Fed won’t raise rates in June; one measure shows that the current market probability of a June hike is just 3.8%, while the probability of a July hike is 31.3%.

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Our view

Overall, does the weak May jobs report signal weakness in the U.S. economy?

Perhaps, though it’s far to soon to sound the alarm. Since other economic indicators like Gross Domestic Product growth, housing market activity, and personal spending all point to positive growth, it’s not likely that one weak report spells disaster for the economy. Rather than fixate on a single piece of data, it’s more important to look at overall economic trends.

Looking ahead, we’re expecting investors to take stock of the dismal jobs report and perhaps hit the brakes on the three-month rally we’ve experienced. Summer tends to be a slow season for markets as many traders take time off and stocks can overreact to headlines. A small pullback in the weeks to come wouldn’t surprise us, though traders could also shrug off the report. While weak data always sidelines some investors, long-term investors should focus more on their goals and less on short-term market swings. As always, we’ll keep you updated.

 

ECONOMIC CALENDAR:

Monday: Janet Yellen Speaks 12:30 PM ET, Janet Yellen Speaks 2:00 PM ET

Tuesday: Productivity and Costs

Wednesday: JOLTS, EIA Petroleum Status Report

Thursday: Jobless Claims

Friday: Consumer Sentiment, Treasury Budget

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HEADLINES:

Motor vehicle sales slump in May. The latest data shows that fewer selling days and lower foot traffic hurt U.S. auto sales last month.

Construction spending falls in April. Spending by construction firms on residential, government, and nonresidential projects declined, surprising economists who had expected a slight overall increase.

Factory orders beat expectations. April orders for U.S. manufactured goods grew by the largest amount in six months, though much of the growth came from volatile commercial aircraft orders.

Personal spending surges in April. Spending by American consumers grew more than expected while personal income increased in line with expectations, showing that consumer spending is off to a good start in the second quarter.

Dow, S&P 500 Post Best Week Since March – Weekly Update for May 31, 2016

Adobe Spark (13)

Stocks ended a solid week on a high note ahead of the Memorial Day weekend after statements by Federal Reserve officials boosted expectations of a rate hike this summer. For the week, the S&P 500 gained 2.28%, the Dow rose 2.13%, the NASDAQ increased 3.44%, and the MSCI EAFE added 2.11%.

Markets jumped on Fed statements last week after the previous week’s release of minutes from the April Fed meeting fanned expectations of an interest rate hike soon. On Friday, Fed Chair Janet Yellen stated support for an interest rate hike over the next few months, indicating that yes, the Fed is looking hard at a June or July rate increase if data holds. One measure of the probability of a rate hike at the June meeting rose to 34% after Yellen’s remarks, while bets on a July increase increased to 60%, more than double the probability estimate of a month ago.

Does the data support the Fed’s view of healthy economic growth? So far, it might. We got our second look at first-quarter economic growth Friday, and the latest official estimate shows that the economy grew 0.8% in the first three months of the year. Better-than-expected consumer spending led the increase, which is a good sign for the rest of the year. Fears about a recession seem to have largely faded as the latest data indicates more growth this year.

Two regional Fed banks raised their estimates of second-quarter growth last week as well, perhaps prepping markets for a rate increase soon. The New York Fed Nowcast Report increased its estimate of Q2 growth to 2.2% while the Atlanta Fed raised its GDPNow forecast to 2.9%. Why the difference in two reports issued by the Federal Reserve?

To come up with their “nowcasts,” Fed economists use existing economic data, extrapolate other data that hasn’t been released yet, and use statistical models to come up with a real-time forecast for GDP growth far ahead of the official releases by the Bureau of Economic Analysis.

Forecasting is challenging because of the amount of noise associated with major macroeconomic indicators; even official estimates of past GDP growth are revised multiple times as data is released. The gap between the two Fed GDP forecasts is the result of different computational methods used to arrive at a growth estimate. Is either estimate 100% reliable? Most likely not, which is why we like to look at a variety of forecasts and indicators when building investment models. Regardless of which forecast you might prefer, both are trending in the same general direction.

This week, investors will key in on several important economic data releases, including the May jobs report on Friday. The health of the labor market is expected to take a major role in Fed deliberations on interest rates at the upcoming June Market Committee meeting.

ECONOMIC CALENDAR:

Tuesday: Personal Income and Outlays, S&P Case-Shiller HPI, Chicago PMI, Consumer Confidence, Dallas Fed Manufacturing Survey

Wednesday: Motor Vehicle Sales, ADP Employment Report, PMI Manufacturing Index, ISM Manufacturing Index, Construction Spending, Beige Book

Thursday: Jobless Claims, EIA Petroleum Status Report

Friday: Employment Situation, International Trade, Factory Orders, ISM Non-Manufacturing Index

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HEADLINES:

Weekly jobless claims fall. The number of Americans filing new claims for unemployment benefits fell by 10,000, bringing claims back in line with long-term trends. However, some seasonal factors may have affected the data.

Durable goods orders increase. New orders for long-lasting manufactured goods like electronics, appliances, and vehicles increased in April. However, much of the growth came from orders for commercial aircraft—a notoriously volatile category—and may not be sustainable.

Consumer sentiment rises in May. A measure of American optimism about the economy increased to the highest levels in nearly a year as cheap gasoline, low interest rates, and an improving economic picture boosted sentiment.

Pending home sales increase to 10-year high. The number of homes under contract rose 5.1% over March levels, indicating the housing market is gaining steam.

 

Fed Changes Tune On Interest Rates – Weekly Update for May 23, 2016

Adobe Spark (1)Stocks closed out a bumpy week mixed, ending a three-week stretch of losses for the S&P 500 and NASDAQ. The Dow, however, extended losses for a fourth straight week for the first time since 2014. For the week, the S&P 500 gained 0.28%, the Dow lost 0.20%, the NASDAQ gained 1.10%, and the MSCI EAFE added 0.16%.

Market reactions to the release of the April Federal Reserve Open Market Committee meeting minutes drove much of last week’s volatility. The official minutes showed that the Fed is moving away from its cautious stance and is open to raising interest rates as soon as June if data points to a solid second quarter. The unexpected hawkishness surprised many investors who weren’t expecting a hike until later this year.

However, some professional economists predicted a June hike. The most recent Wall Street Journal survey of economists showed that their experts were split, with 31.4% predicting a June increase, 21.4% favoring a July hike, and 31.4% forecasting a September increase. On the other hand, Wall Street largely discounted a June move. Early in the week, before the minutes were released, traders predicted just a 4% chance of a June rate hike. By Friday, that probability had increased to 30%. Clearly, the new information is forcing investors to revise their expectations for interest rate movements this year.

The labor market will play a major role in the Fed’s June decision. The April jobs report was softer than expected, showing that many employers were reluctant to hire in the face of uncertain business conditions. The May jobs report, due on June 3rd, will be key to showing whether the labor market has returned to a strong trend or is continuing to weaken.

Will a strong May jobs report guarantee a June rate hike? Some experts think so while others think the risks posed by Britain’s upcoming vote on whether to leave the EU (the “Brexit” you may have read about) will be enough to give the Fed pause. All told, it’s likely to be a lively June meeting at the Fed.

Volatility is likely to continue in the days and weeks ahead as analysts fixate on predicting when the central bank will raise rates again. While short-term volatility can be stressful to investors who would prefer a steady ride, it’s important not to let intraday swings and bumps in the road derail your long-term investment strategies. We’ll keep you updated.

 

ECONOMIC CALENDAR:

 Monday: PMI Manufacturing Index Flash

Tuesday: New Home Sales

Wednesday: International Trade in Goods, EIA Petroleum Status Report

Thursday: Durable Goods Orders, Jobless Claims, Pending Home Sales Index

Friday: GDP, Consumer Sentiment, Janet Yellen Speaks 10:30 AM ET

 

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HEADLINES:

April housing starts surge. Groundbreaking on single- and multi-family homes jumped 6.6% last month as construction firms grew more optimistic about business prospects.

Industrial production rises. Stronger demand for utilities drove industrial production 0.7% higher in April. However, the manufacturing component rose just 0.3% after declining in March, indicating that U.S. manufacturers are still struggling.

Jobless claims fall from 14-month high. Weekly claims for new unemployment benefits fell last week, showing that the previous weeks of increases might have been an anomaly.

Existing home sales increase more than expected. Sales of existing homes rose 1.7% in April and March’s resales were revised slightly higher, suggesting that the housing market is gaining ground.

Stocks Drop on Retail Earnings Woes – Weekly Update for May 16, 2016

Image courtesy of FreeDigitalPhotos.net/sixninepixels

Image courtesy of FreeDigitalPhotos.net/sixninepixels

Stocks fell again for the third week in a row, driven lower by poor earnings reports from some major department store retailers. For the week, the S&P 500 lost 0.51%, the Dow fell 1.16%, the NASDAQ dropped 0.39%, and the MSCI EAFE lost 0.46%.

Despite a growing economy and strong labor market, Americans didn’t shop as much as retailers expected last quarter, leaving some puzzled over the disconnect. Many retail giants posted dismal earning results for the first quarter. Among the problems: same-store sale declines, falling traffic, and an inability to predict apparel trends. Even industry insiders aren’t sure what’s going on, and some say that the retail doldrums are bringing back memories of the last recession. However, economists may have some answers.

Though consumers are doing much better than they did in the immediate post-recession recovery, some worry lingers, causing people to save more instead of spending. As the cost of housing and healthcare has increased, many Americans also don’t have as much discretionary money to spend.

The good news is that Americans are still spending—just not the same way they did in the past. An increasing number—particularly Millennials—prefer to spend what they have on things like services, dining out, and concerts. Americans are shifting to online spending, which hurts brick-and-mortar retailers that rely on foot traffic. While Commerce data shows that overall retail sales grew 3.0% since last April, the category that includes online retailers and shopping apps grew 10.2%.

More current data also paints a more reassuring picture. The most recent report by the Commerce Department shows that monthly retail sales increased 1.3% in April, much higher than the 0.8% increase Wall Street expected. So-called core spending, a retail sales control category that economists use to estimate underlying consumer spending, grew 0.9%, causing economists to raise their forecasts for second-quarter economic growth.

The chart below shows the most current unofficial forecast of Q2 Gross Domestic Product (GDP) maintained by the Federal Reserve Bank of Atlanta. You can see that the forecast has been revised upward over the last two weeks as new data is released.

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So, does the fact that retailers had a bad quarter indicate we’re in a recession? Not really. Americans are spending money; they’re just changing where and how they spend, and the retail industry needs to adapt to those changing preferences.

Looking ahead, we have some housing and manufacturing data coming out this week as well as minutes from the last Federal Reserve Open Market Committee meeting. While analysts aren’t expecting major revelations from the meeting notes, they’re hoping for more guidance on when to expect another interest rate increase. While an April survey of economists showed that 75.0% expected a June rate hike, the May survey shows that expectations have split, with 31.4% forecasting a June increase and 31.4% targeting a September increase.

ECONOMIC CALENDAR:

Monday: Empire State Mfg. Survey, Housing Market Index, Treasury International Capital

Tuesday: Consumer Price Index, Housing Starts, Industrial Production

Wednesday: EIA Petroleum Status Report, FOMC Minutes

Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey

Friday: Existing Home Sales

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HEADLINES:

Jobless claims jump to highest level since February 2015. The number of Americans filing new claims for unemployment surged unexpectedly, touching off concerns about a labor market slowdown. However, claims remained below the key 300,000 threshold, suggesting that the jump may be seasonal.

Job openings near record highs. There were over 5.5 million job openings in March, indicating that employers are keen to hire. The rate of people voluntarily quitting their jobs remained stable at 2.1%, showing workers are still confident of finding new jobs.

U.S. business inventories rise. U.S. businesses increased their stockpiles by the biggest amount since last June, indicating they expect a good summer.

Consumer sentiment rises more than expected. A measure of consumer optimism about the economy jumped far more than expected, indicating that Americans are feeling more upbeat about their prospects despite some uncertainty around the November elections.

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.

Is the Bull Market Too Old? – Weekly Update for May 2, 2016

Image courtesy of FreeDigitalPhotos.net/hywards

Image courtesy of FreeDigitalPhotos.net/hywards

As of Friday, the S&P 500 is on the second-longest bull market run in history, surpassing the 1949-1956 bull market that lasted 2,607 days. The longest bull market in history ran between 1987 and 2000, lasting nearly 4,500 days.

After months of volatility and challenges on the horizon, can the bulls keep running?

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In the pro-bull column, we have a few major points to consider:

Bull markets don’t just die of old age. History shows us that bull markets ended because of a variety of shocks like oil price spikes, recessions, bursting asset bubbles, geopolitical issues, and extreme leveraging. While the past doesn’t predict the future, we should evaluate threats to market performance instead of worrying about birthdays.

Economic indicators support growth. Recessions have accompanied or presaged many previous bear markets. Currently, economic indicators like a growing job market, low gas prices, and a healthy housing market point to sustainable—though moderate—economic growth. Even when recession risks are higher this year, most economists don’t see an economic downturn in the short-term future.

We have experienced healthy pullbacks. One of the markers of a bull market top is elevated investor optimism and unsustainably high stock valuations. Since the last S&P 500 market high in May of 2015, markets have retrenched several times as investors have taken stock of global risks to growth. We haven’t seen the irrational exuberance that often foreshadows a bear market turn.

In the pro-bear column, we also have some points to weigh in our thinking:

Threats to economic growth from China and Europe may prove too much for markets. We don’t know that we have seen the worst out of China, and a hard landing of the world’s second-largest economy would send ripples throughout the global economy that could threaten markets. Europe is grappling with political, economic, and security issues that could threaten the EU.

The Federal Reserve may bungle monetary policy. The Fed is performing a very delicate dance to bring interest rates closer to historic levels. Raise rates too fast and the economy could stumble; raise them too slowly and the Fed could leave itself unable to fight off another economic slowdown. A monetary policy misstep could trigger a market downturn.

Corporate profits may continue to fall. U.S. companies are struggling to find growth amid challenging global conditions; earnings declined year-over-year for the fifth quarter in a row last quarter, and continued weakness could cause investors to become bearish about U.S. stocks.

Our view

The simple truth is that no one can predict market tops or bottoms; plenty of people say they can, but it’s all a matter of educated (or uneducated) guesswork. Instead of trying to call markets, what we do is take a look at overall domestic and international fundamentals and create portfolio strategies that align with our clients’ overall goals. We can assume that the current bull market will come to an end someday; to reach the #1 spot it would have to continue through 2021, and that’s a pretty big stretch. Rather than worrying about when the end might come, we’ll adjust portfolio strategies as needed and prudently position our clients for risk.

If you have any questions about market strategies for volatile times, please give our office a call. We’d be happy to speak to you.

ECONOMIC CALENDAR:

Monday: PMI Manufacturing Index, ISM Mfg. Index, Construction Spending

Tuesday: Motor Vehicle Sales

Wednesday: ADP Employment Report, International Trade, Productivity and Costs, Factory Orders, ISM Non-Mfg. Index, EIA Petroleum Status Report

Thursday: Jobless Claims

Friday: Employment Situation

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HEADLINES:

Durable goods orders rise. March orders for long-lasting factory goods like airplanes, appliances, and electronics rebounded but grew less than expected, indicating the manufacturing slump isn’t over.

Economy grew 0.5% in first quarter. Gross Domestic Product (GDP), the primary measure of overall economic growth, grew just 0.5% on an inflation-adjusted basis, showing that the economy slowed after the fourth quarter of 2015. GDP growth estimates will be adjusted as new data arrives.

Consumer sentiment falls in April. One measure of consumer sentiment shows that Americans were less optimistic about their financial prospects last month. Falling sentiment could mean less consumer spending this quarter.

Federal Reserve holds interest rates steady. The Fed’s Open Market Committee voted to keep rates where they are out of concern about slowing economic growth. Though rates could increase this summer, some think that the Fed will wait until December to hike.

Stocks End Mixed as Tech Falls on Earnings – Weekly Update for April 25, 2016

Image courtesy of FreeDigitalPhotos.net/jscreationzs

Image courtesy of FreeDigitalPhotos.net/jscreationzs

Stocks ended last week mixed on earnings that were largely better than expected, though the tech sector disappointed. For the week, the S&P 500 gained 0.52%, the Dow grew 0.59%, and the NASDAQ lost 0.65%.

First-quarter earnings reports drove a lot of market activity last week. Though analysts expect overall S&P 500 earnings to be negative for the fifth quarter in a row, the news so far is more about earnings surprises and fewer negative revisions to estimates. Given how low the bar was set by many corporate teams, it’s not so unexpected to see positive surprises. With reports in from 132 S&P 500 members, overall earnings are down 7.9% on 1.1% lower revenues, though nearly three-quarters beat their earnings estimates. Capture1

However, the tech sector is another story. Tech stocks sold off after disappointing results from major players. Overall, much of the tech sector is painting a picture that is the inverse of the rest of the market — many companies are failing to rise to the expectations built over previous quarters of strong growth, disappointing investors.

Will investors hold on to their optimism in the days ahead? We’ll see.

The week ahead is packed with important economic data, including the first estimate of first-quarter economic growth and a measure of consumer sentiment. The Federal Reserve Open Market Committee also meets next week to discuss interest rates; though no one expects the Fed to raise rates this month, analysts are hoping for more clarity on the timing of future hikes.

Last week, a Reuters poll of economists found that about two-thirds expect a June rate increase while another 20% are betting on September. In March, the Fed acknowledged its concerns about global risks, stating that it expects two more rate hikes this year, only half as many as were planned in December.

Earnings season also heats up next week with releases by 183 S&P 500 companies. By the end of the week, we’ll have seen quarterly results from about 60% of the index and will have a much more complete picture of business activity last quarter. With all the reports coming out, we can expect some volatility in the days ahead as investors digest the latest data.

ECONOMIC CALENDAR:

Monday: New Home Sales, Dallas Fed Mfg. Survey

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

Wednesday: International Trade in Goods, Pending Home Sales Index, 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:

Housing starts drop. Groundbreaking on new houses dropped 8.8% in March, and permits for new home construction fell, indicating that home builders are expecting the sector to cool off.

Existing home sales bounce 5.1% higher. Resales of existing homes rose more than expected in March, suggesting that the housing market had legs last quarter. Though monthly sales are volatile, growth was solid across all four U.S. regions.

Jobless claims drop to multi-decade low. The number of weekly applications for new unemployment benefits dropped to the lowest level since 1973 in the latest sign that the labor market is steaming ahead despite slow economic growth.

Oil prices post third week of gains. Benchmark crude oil prices rose again last week on expectations that the global oil supply glut is easing and demand will rise in the peak driving season.

Stocks Post Worst Week Since February – Weekly Update for April 11, 2016

Image courtesy of FreeDigitalPhotos.net/Stuart Miles

Image courtesy of FreeDigitalPhotos.net/Stuart Miles

Stocks tumbled last week on downward revisions to U.S. economic growth and worries about global growth. For the week, the S&P 500 fell 1.21%, the Dow lost 1.21%, and the NASDAQ gave up 1.30%.

After a rosier-than-expected fourth quarter, economic forecasts suggest that the economy barely grew in the first three months of 2016. A report showing that wholesale inventories declined in February caused estimates of Q1 real economic growth to plummet from 0.7% to just 0.1%. In mid-March, the estimate was as high as 2.3%, but forecasts are dropping fast.

A couple of things to keep in mind: 1) these are very early estimates that are missing a lot of data; 2) early forecasts are very sensitive to updates to the data. Other economists think that the seasonal bias against first-quarter results could be pushing down estimates and that underlying economic growth could be closer to 2.0%. We’ll know more when the first estimate of Q1 Gross Domestic Product (GDP) growth comes out on April 25.

Last week, attention turned to the upcoming Fed meeting at the end of April. Minutes from the March meeting show that opinions among voting members of the Open Market Committee are running against an April rate hike. Other economists seem to agree; currently, just 1.0% think the Fed will raise rates in April. 75.0% think a June hike is likely.

In a public session with three other former Federal Reserve chairs last week, current Chair Janet Yellen reiterated her upbeat stance on the economy and stated that the Fed is on a “reasonable path” to future rate hikes. Her predecessor, former chair Ben Bernanke, supported her position by saying he doesn’t believe that recession risk is much higher in 2016 than in other years, which could pave the way for more hikes later this year. Given that the Fed has little room to lower rates again if economic growth slows, and plenty of room to raise rates if growth surprises, Yellen seems determined to be cautious.

The next few weeks are packed with earnings results, which will likely mean more market volatility. We know that the growth picture is weak and that the earnings outlook is negative. However, we also know that managers like to sandbag expectations so that they can post better-than-expected results. Will we see positive surprises next week? We’ll let you know.

ECONOMIC CALENDAR:

Tuesday: Import and Export Prices, Treasury Budget

Wednesday: Retail Sales, PPI-FD, Business Inventories, EIA Petroleum Status Report, Beige Book

Thursday: Consumer Price Index, Jobless Claims

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

 

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HEADLINES:

Factory orders fall in February. Orders for manufactured goods fell in February for the third time in four months, showing that the manufacturing sector is still struggling.

Trade deficit widens more than expected. The difference between imports and exports increased in February as an increase in exports was offset by growth in imports. However, a weakened dollar could mean that the increase in exports is sustainable.

Jobless claims fall more than expected. Weekly claims for new unemployment benefits dropped by 9,000, indicating that the labor market continues to gain strength despite modest economic growth.

Tesla receives over 325,000 deposits for $35,000 electric car. The Tesla Model 3 launch blew away expectations as fans placed $1,000 deposits for the automaker’s mass-market electric car. The success leads analysts to wonder: Can Tesla successfully make the transition from niche manufacturer to major automaker?