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Learning From A Market Drop Weekly Update – April 14, 2014

April 14, 2014 by Adam Zuercher

Image courtesy of FreeDigitalPhotos.net/renjith krishnan
Image courtesy of FreeDigitalPhotos.net/renjith krishnan

Markets closed a volatile week on a bearish note as the first earnings reports trickled in. For the week, the S&P 500 lost 2.65%, the Dow fell 2.35%, and the Nasdaq dropped 3.10%.[1. Yahoo! Finance] One bright spot: Despite the dismal stock performance, economic fundamentals are looking up. What lessons should we take away from last week? We’ll get to that in a moment. First, let’s review the factors that contributed to last week’s performance.

Most of last week’s market decline came as a result of investors positioning themselves for a challenging earnings season. Many analysts had predicted a market reversal in 2014 as investors paused to take the pulse of last year’s big winners, and that is precisely what we’re seeing. Most of the sectors that have been hit hard this year were high fliers in 2013.[2. http://www.cnbc.com/id/101575864]

On the economic front, consumer sentiment reached its highest level since last July as improvements in the labor market boosted optimism about the economy.[3. http://www.bloomberg.com/news/2014-04-11/michigan-u-s-sentiment-index-increased-to-82-6-in-april-from-80.html] However, since sentiment tends to mirror equity performance, if markets don’t improve, we may see that optimism wane in coming weeks. The week’s unemployment report was also very positive as new unemployment claims fell to the lowest level since May 2007.[4. http://www.usatoday.com/story/money/business/2014/04/10/jobless-claims/7541515/]

The crisis in Ukraine continued to simmer last week as the Ukrainian army sought to eject pro-Russian separatists from a complex near the eastern border.[5. http://www.nbcnews.com/storyline/ukraine-crisis/warning-violence-ukraine-confronts-pro-russia-rebels-n79096] Tensions increased as Russia raised the price of natural gas exports to Ukraine by 80% and Ukraine retaliated by halting payments, pushing the two sides closer to another “gas war.”[6. http://www.reuters.com/article/2014/04/03/ukraine-crisis-gas-idUSL5N0MV2WL20140403, http://www.reuters.com/article/2014/04/12/ukraine-crisis-idUSL6N0N407F20140412] If Russia makes good on its threat to shut off the gas pipeline through Ukraine, EU states that depend on supplies from Ukraine could be affected.

Recent market troubles offer a teachable moment for investors: Don’t buy the hype. Let your long-term personal and financial goals drive your investment strategy and choose solid investments that suit your needs. Market volatility will always challenge investors, but we believe that a prudent investment strategy and active risk management can ultimately lead to better long-term outcomes.

Another important lesson is the need to tune out emotion and stick to a disciplined investment plan. Plenty of investors are looking glumly at their portfolio values, not realizing that a) recent losses may provide opportunities to cherry-pick solid stocks at attractive prices, and b) that economic fundamentals point to a rosier second quarter, giving us hope that equities will rally soon. The real losers will be those who gave in to greed and bought high-performers on the upswing, and who panicked and sold near the bottom.

ECONOMIC CALENDAR:

Monday: Retail Sales, Business Inventories

Tuesday: Consumer Price Index, Empire State Mfg. Survey, Treasury International Capital, Housing Market Index

Wednesday: Housing Starts, Industrial Production, EIA Petroleum Status Report, Beige Book

Thursday: Jobless Claims, Philadelphia Fed Survey

Friday: U.S. Markets Closed for Good Friday Holiday

 

Data as of 4/11/2014

1-Week

Since 1/1/14

1-Year

5-Year

10-Year

Standard & Poor’s 500

-2.65%

-1.77%

13.95%

22.39%

5.94%

Dow

-2.35%

-3.32%

7.81%

19.65%

5.35%

NASDAQ

-3.10%

-4.23%

21.20%

28.41%

9.48%

U.S. Corporate Bond Index

0.72%

2.84%

-2.11%

5.33%

0.84%

International

-1.63%

-1.25%

9.41%

17.21%

7.21%

Data as of 4/11/2014

1 mo.

6 mo.

1 yr.

5 yr.

10 yr.

Treasury Yields (CMT)

0.04%

0.06%

0.09%

1.58%

2.63%

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

HEADLINES:

 

Gold prices log weekly gain on Fed hopes. Sagging risk appetites and hopes that the Fed will hold interest rates steady until next year pushed up gold prices. However, analysts expect gold prices to head lower this year as economic fundamentals improve.[7. http://www.cnbc.com/id/101574545]

 

IMF issues hard-landing warning for China. The International Monetary Fund warned that though the risk of a sharp decline in China’s economic growth was small, overinvestment and structural issues in the financial system pose global risks.[8. http://www.rappler.com/business/economy-watch/55040-imf-world-growth-outlook-2014-2015]

 

Producer prices edge up. Companies paid more for goods and services last month as wholesale prices rose. This may squeeze company profits this quarter as slack demand makes it hard for retailers to pass those costs on to consumers.[9. http://www.usatoday.com/story/money/business/2014/04/11/producer-price-index/7587131/]

 

Food prices on the rise in 2014. Drought and harsh winter weather has sent food prices higher by as much as 20%, according to some estimates. While U.S. consumers may not be affected greatly, since growing costs account for only 15% of retail prices, consumers in poorer nations may be hit hard.[10. http://www.bloombergview.com/articles/2014-04-11/food-price-shock-2014-edition]

Filed Under: Economy, Investing, Personal Finance, Weekly Market Update Tagged With: bear market, economic front, economy, investments, nasdaq, nyse, stock market, Ukraine

Stocks Stall on Jobs Data

January 13, 2014 by Adam Zuercher

Classifieds
Image courtesy of Gualberto107/ FreeDigitalPhotos.net

Markets stalled in the first full week of 2014, with major indices ending on a mixed note. For the week, the S&P 500 gained 0.6%, the Dow lost 0.2%, and the Nasdaq rose 1.03%.[1. http://briefing.com/investor/markets/weekly-wrap/weekly-wrap-for-january-6-2014.htm]

Friday’s December Employment Situation report showed that job growth slowed significantly in December, adding just 74,000 new jobs. This was well below consensus estimates, which expected a number in the neighborhood of 200,000 new jobs. At odds with the dismal jobs data, the household survey showed a very large drop in unemployment, causing the headline unemployment number to fall to 6.7%, very close to the Fed’s goal of 6.5%.[2. http://briefing.com/investor/markets/weekly-wrap/weekly-wrap-for-january-6-2014.htm#ixzz2q86oe2lb]

Markets reacted nervously to the unexpectedly negative data, which is completely out of line with the generally positive labor trends of the past weeks and months. One way for unemployment to drop even as job growth declines is for people to quit searching for jobs, thus dropping out of the labor force. In December, the labor force participation rate dropped to its lowest in more than three decades. However, labor force participation jumped in November, so it’s possible that the December data is a statistical outlier.[3. http://www.reuters.com/article/2014/01/10/us-usa-economy-idUSBREA090FP20140110] Divergences between the two surveys do occasionally happen and economists usually wait a month or so for revisions to be made that straighten out the data.

Bottom line: we’re getting very close to the Fed’s threshold rate of 6.5% unemployment, but the overall labor market is still weak. Given this weakness, the Fed will probably need to clarify its tapering plans and give guidance about how critical that 6.5% floor really is.

Looking ahead, earnings season will be kicking off this week. First up are several major financial firms; like JPMorgan Chase [JPM], Wells Fargo [WFC], Bank of America [BAC], Citigroup [C],[4. http://www.cnbc.com/id/101326378] and investors, will be taking a hard look to get a sense of how fourth quarter earnings season will go. If earnings continue their positive trend, investors could see further upside; if earnings disappoint, investors may decide to take some more profits off the table and wait for better news.

ECONOMIC CALENDAR:

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

Wednesday: Producer Price Index, Empire State Mfg. Survey, EIA Petroleum Status Report, Beige Book

Thursday: Consumer Price Index, Jobless Claims, Treasury International Capital, Philadelphia Fed Survey, Housing Market Index, Ben Bernanke Speaks 11:10 AM ET

Friday: Housing Starts, Industrial Production, Consumer Sentiment

Data as of 1/10/2014

1-Week

Since 1/1/14

1-Year

5-Year

10-Year

Standard & Poor’s 500

0.60%

-0.32%

25.15%

21.39%

6.42%

Dow

-0.20%

-0.84%

22.02%

18.23%

5.72%

NASDAQ

1.03%

-0.05%

33.73%

33.13%

10.00%

U.S. Corporate Bond Index

0.78%

0.97%

-3.82%

3.64%

0.47%

International

1.26%

-0.43%

15.35%

14.76%

7.81%

Data as of 1/10/2014

1 mo.

6 mo.

1 yr.

5 yr.

10 yr.

Treasury Yields (CMT)

0.01%

0.06%

0.12%

1.64%

2.88%

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

HEADLINES:

Yellen confirmed as next Fed chair. The Senate voted to confirm current Federal Reserve vice chairman Janet Yellen as the next Fed chairman. She will replace current chairman Ben Bernanke when his term ends at the end of January. A major focus of her tenure will be the unwinding of the central bank’s unprecedented quantitative easing programs.[5. http://www.bloomberg.com/news/2014-01-09/yellen-says-u-s-economy-may-strengthen-this-year-time-reports.html]

Wholesale inventories grew in November. Business inventories increased 0.5% in November, following a 1.3% increase in October. Inventory growth has been strong over the last few months, suggesting firms have confidence in consumer demand and that restocking could contribute significantly to Q4 economic growth.[6. http://briefing.com/investor/markets/weekly-wrap/weekly-wrap-for-january-6-2014.htm]

China exports slow.  Chinese exports declined more than expected in December, though the drop may be due to changes in how exports are calculated. Regulators clamped down on speculative trading activities disguised as export deals. Economists are optimistic that a brighter 2014 will cause export activity to pick up in the world’s second largest economy.[7. http://www.reuters.com/article/2014/01/10/us-china-economy-trade-idUSBREA0905L20140110]

Retailers cut forecasts. A disappointing holiday season led to several retailers cutting 2014 earnings forecasts. Despite aggressive actions to lure shoppers, a shortened shopping season, unseasonably cold weather, and anemic spending combined to hit retailer revenues hard.[8. http://www.smdailyjournal.com/articles/business/2014-01-10/stocks-mixed-as-retailers-give-weaker-outlook/1776425116243.html]

 

Filed Under: Economy, Investing, Personal Finance Tagged With: economy, nasdaq, nyse, stock market, unemployment

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