New Year Special Update: 2016 in Review – Weekly Update for January 3, 2017

2017-01-03-blog-imageFirst things first: Happy New Year! We’re thankful for all of you keeping up with us in 2016 and looking forward to what this next year holds. We appreciate your time and thoughts throughout the past year, and we are excited to work together to accomplish your financial goals in 2017.

Looking back on the final trading week of a very eventful year, we saw low volume and a break from the recent rallies for domestic indexes. While international stocks in the MSCI EAFE added 0.56%, all major U.S. indexes declined. The S&P 500 lost 1.10%, the Dow was down 0.86%, and the NASDAQ gave back 1.46%. For the first time since November 4, the indexes posted three straight days of losses. Despite these last-minute decreases, 2016 ended very differently than it began.

Last January, domestic indexes rang in the New Year with quite unpleasant performances. While the S&P 500 and NASDAQ dropped, the Dow experienced its worst-ever five-day start to a year, losing 1079 points on fears of an economic slowdown in China and plummeting oil prices.

By market close on December 30, 2016, all three indexes showed healthy growth for the year:

  • S&P 500: Up 9.5%
  • Dow: Up 13.4%
  • NASDAQ: Up 7.5%

In addition to this equity growth, last week showed us a number of encouraging economic indicators for 2016, including:

Consumer Confidence Surge: On December 27, Consumer Confidence beat expectations to reach 113.7 — a 13-year high. This metric indicates that consumers feel more positively about jobs, personal finances, business conditions, and more.

U.S. Dollar Increase: The dollar was up for the fourth straight year, showing a 3.7% increase for 2016 after hitting a 14-year high on December 20.

Crude Oil Recovery: After a rough start to the year, oil experienced its largest annual increase since 2009. In fact, three-dozen U.S. gas and oil producers in the S&P energy index gained more than 40% during 2016.

We all know that 2016 brought its fair share of surprises — from victories for Brexit and Donald Trump, to our recent stock market rally and beyond. However, the year ended with domestic indexes up and a number of positive economic indicators. As we look toward our future in 2017, we see opportunities for continued growth, as well as many questions that no one can yet answer.

  • Will President Trump reduce regulation and taxes?
  • Will OPEC keep its pledge to lower oil output?
  • How will China’s economy perform?
  • Could more “Brexits” be on the horizon?

The questions remain, but no matter the answers, we are here to help guide you through the year—and toward your goals—with proactive, strategic support. If you want to talk about what we experienced in 2016, or what we anticipate for the year ahead, we would love to get in touch with you. Please reach out to us at hello@hzcapital.com or give us a call at 419-425-2400.

ECONOMIC CALENDAR:

Monday: Markets Closed in Observance of New Year’s Day
Tuesday: PMI Manufacturing Index, ISM Manufacturing Index, Construction Spending
Wednesday: ADP Employment Report
Thursday: PMI Services Index, ISM Non-Manufacturing Index
Friday: Employment Situation, International Trade, Factory Orders

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A Week for Giving Thanks – Weekly Update for November 28, 2016

2016-11-28-blog-image-1As we gathered our families and friends to give thanks last week, the market gave us even more to be thankful for. Through the four-day trading week, the Dow gained 1.51%, the S&P 500 was up 1.44%, the NASDAQ added 1.45%, and the MSCI EAFE increased 1.26%.

What Happened Last Week?

The S&P 500, Dow, and NASDAQ hit all-time highs: For the third straight week, the three major domestic indexes increased—and they all reached record highs. By market close on Friday, November 25, the S&P 500 was at 2,213.33, the Dow reached 19,152.14, and the NASDAQ was up to 5,398.92. Each of the indexes is now up over 7% for the year.

U.S. Dollar / Euro move closer together: A combination of positive news in the United States and ongoing economic challenges in Europe have moved the dollar and euro increasingly closer together for the past three weeks. In fact, Deutsche Bank now predicts parity between the two currencies by the second quarter of 2017— and the dollar to be worth more than the euro by the third quarter. The two currencies have not had equal value since November 2002. At the euro’s highest in July 2008, it was worth more than 1.6 times as much as the dollar.

A rising dollar signals our economic strength but can also negatively affect exports. While we wait to see whether EUR/USD parity is ahead, we will say: If you have European travels planned, the favorable exchange rate is certain to be welcome news.

Oil continues to falter: Of course, not everything can be perfect in the markets. Oil continued its patchy performance to close at $47.24 on Friday. OPEC meets this week, and no one knows whether they will be able to reach a deal for oil producers to curb production. As of now, the markets are still oversaturated with oil, but we’re significantly above the 10-year low of below $30 per barrel that we reached earlier this year. If production stabilizes and prices rise to a more sustainable level, then oil companies will be better able to invest in new long-term projects. For the meantime, enjoy the low gas prices while they last — as we all wait to see how OPEC and the major oil producers decide to move forward.

As we’ve mentioned in recent market updates, the Federal Reserve’s December meeting remains the next big event on the economic calendar. The odds of an interest-rate increase are now nearly 100%. But if 2016 has shown us anything, it’s that even highly predicted outcomes don’t always occur. In the meantime, we remain thankful for the recent market growth and continue to focus on your long-term interests. As always, we are grateful for the trust you place in us to care for your family and financial future.

ECONOMIC CALENDAR:

Tuesday: GDP

Wednesday: ADP Employment Report, Personal Income and Outlays

Thursday: Motor Vehicle Sales, Jobless Claims, PMI Manufacturing Report

Friday: Employment Situation

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Quarter End Questions – Weekly Update for October 3, 2016

2016-10-3-blog-imageThe presidential debate, surging oil prices, and concerns about a global bank all took their toll on the market last week; however, we were pleased to see a positive quarter end for stocks. For the week, the S&P 500 gained 0.17%, the Dow grew 0.26%, the NASDAQ edged up 0.12%, but the MSCI EAFE lost 0.87%.

Why did Deutsche Bank affect markets?

Last week, concerns about one of the world’s largest banks caused investors to worry that a new “Lehman moment” might spark a new financial crisis. Germany’s scandal-prone banking giant is facing financial penalties in the U.S. for the role it played in the financial crisis; the bank’s problems are causing key clients to distance themselves and analysts wonder about the firm’s financial health. Investors reacted to Deutsche Bank’s woes negatively, setting off a 200-point drop in the Dow Jones Industrial Average on Thursday.

A similar loss of confidence in Lehman Brothers in 2008 caused counterparties (major clients) to ask the cash-strapped firm for their money back, triggering its collapse and the beginning of the financial crisis. However, Deutsche Bank is not Lehman, and the world is a different place than it was in late 2008. International financial institutions are not as dangerously interconnected as they were then, and global regulators are much better positioned to respond to situations that arise.

Markets agreed with that assessment and rebounded on Friday. While news from Deutsche Bank may still create headlines, we think the worst has passed. If you have any questions about Deutsche Bank or other financial firms, please reach out to us so we can respond to your concerns.

What does the data say about the economy in the third quarter?

With the third quarter officially in the rearview mirror, analysts are turning their attention to the data. Here’s what we know so far:

The third estimate of second-quarter economic growth showed that Gross Domestic Product (GDP) grew a stronger-than-expected 1.4%, up from initial estimates. Even better, some economists think the economy could have accelerated and grown 2.8% in the third quarter, which would put it closer to the pace we want to see. The latest September data on consumer sentiment, an important indicator of future consumer spending, shows that Americans are more confident in their financial prospects, possibly opening the door to higher spending in the critical holiday shopping season.

What might the final months of the year bring?

As we enter the final three months of 2016, markets are contending with some headwinds we’re watching. We can expect plenty of headlines around the presidential election as we get closer to November. Political beliefs aside, elections represent a lot of uncertainty, especially with wild-card candidates. Markets may react with relief after election uncertainty resolves; however, concerns about the changes a new administration will bring may also trigger further volatility.

Britain’s prime minister announced her intention to begin negotiating the UK’s Brexit from the European Union next spring. By 2019, Britain could be a sovereign nation once again, bringing a slew of changes to the EU. Ultimately, we don’t expect to see too much volatility around the Brexit until next year.

Oil prices might have finally hit bottom and be poised to rally this fall. Major oil producers, including Saudi Arabia and Iran, seem ready to coordinate production to bring oil prices back up. If a pact is made (and held), oil could head back toward $60/barrel next year, which would bring relief to beleaguered U.S. energy companies. However, higher oil process could bite consumers by making gas more expensive at the pump. It’s likely that oil prices will play a role in market movements in the weeks to come.

The week ahead is packed with data, including the September jobs report, which may factor into future Federal Reserve interest rate decisions. As always, we’ll keep you updated.

ECONOMIC CALENDAR:

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

Wednesday: ADP Employment Report, International Trade, Factory Orders, ISM Non-Manufacturing Index, EIA Petroleum Status Report

Thursday: Jobless Claims

Friday: Employment Situation

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HEADLINES:

New home sales tumble in August. Sales of newly constructed homes fell 7.6% in August after surging in July to the highest level in nearly nine years. The retreat isn’t unexpected and further volatility in the housing sector may occur.

Durable goods orders slip. U.S. factories saw fewer orders in August for long-lasting goods like aircraft, appliances, and electronics. However, a core category that represents business investment grew for the third straight month.

Weekly jobless claims edge higher. The number of Americans filing new claims for unemployment benefits rose slightly last week but held at stable levels, supporting the view that the labor market continues to improve.

Pending home sales drop. The number of homes under contract slumped in August, suggesting that home sales fell across the board. Since pending sales forecast future activity, it’s likely the drop in housing activity will be felt in the weeks ahead.

Current Events Cause Rates to Remain – Weekly Update for September 26, 2016

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Stocks rallied again last week after the Federal Reserve voted not to raise interest rates this month. While few expected the Fed to act last week, official statements suggest the path to higher rates looks clearer. For the week, the the S&P 500 gained 1.19%, the Dow grew 0.76%, the NASDAQ added 1.17%, and the MSCI EAFE stayed stable.

Let’s dig more deeply into the Fed’s recent statements. The Fed cited continued strength in the labor market, economic growth, and better wage growth in its case for higher interest rates. However, tepid inflation (largely due to lower energy prices) and a desire to get the timing right caused most of the Federal Open Market Committee (FOMC) to vote to hold rates steady.

Three members of the FOMC dissented from the majority vote, believing that the Fed should have raised interest rates this month. One dissident, Boston Fed President Eric Rosengren, believes that the labor market could overheat in 2017, potentially derailing the economic recovery if action isn’t taken.

An overheating labor market could send wages to unsustainably high levels while productivity (output per worker per hour) falls. While higher wages might sound pretty good to American workers, unsustainable labor market trends could lead to the sharp recessionary contraction economists want to avoid. However, the health of the labor market doesn’t boil down to a single measure of unemployment, and the rest of the committee seems to believe that raising interest rates too soon is riskier than potentially raising them too late.

The market appears to agree, and investors see the Fed reinforcing the idea that the economy still has room to grow. At least one Wall Street analyst believes we’re in the “sixth or seventh inning of a nine inning game.” Despite the Fed’s increasingly hawkish tone about raising interest rates, Wall Street isn’t fully convinced the central bank will pull the trigger in December. Though the FOMC will meet again in November, the Fed is unlikely to make a move until after the election. The latest estimate of trading interest shows that traders view the odds of higher rates in December at 54.2%.

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The Fed has worked hard to convince the public that it intends to raise rates soon. Why? One of the tools the central bank can use to affect markets is that of its “bully pulpit,” the leverage of its powerful position. In the past, the Fed has used the bully pulpit to sound the warning about irrational market highs and give Americans plenty of notice about future policy moves. The Fed hopes that telegraphing plays will give markets time to digest the news and avoid a shock.

This week, Monday’s presidential debate and a key meeting of Organization of the Petroleum Exporting Countries (OPEC) members could lead to more market volatility. Oil prices have been a major driver of market movements this year and movement toward freezing production (thereby reducing the supply glut that is contributing to low prices) would cause volatility. How likely is a coordinated production freeze? Not very likely since it would require historic cooperation between geopolitical opponents such as Saudi Arabia and Iran. We’ll keep you informed.

ECONOMIC CALENDAR:

Monday: New Home Sales, Dallas Fed Manufacturing Survey

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

Wednesday: Durable Goods Orders, EIA Petroleum Status Report

Thursday: GDP, International Trade in Goods, Jobless Claims, Pending Home Sales Index

Friday: Personal Income and Outlays, Chicago PMI, Consumer Sentiment

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HEADLINES:

Housing starts fall more than expected. Groundbreaking on new houses fell 5.8% in August as building activity declined broadly after increasing this summer. However, a rebound in permits for new houses suggests housing demand may strengthen.

Existing home sales fall for second straight month. Home resales fell in August, dinged by a shortage of housing inventory on the market. Growth in home prices is outpacing wage growth, weighing on sales activity.

Weekly jobless claims fall. The number of Americans filing new claims for unemployment benefits fell by 8,000 to a two-month low last week. Continued labor market growth could give the Fed the green light to raise interest rates in December.

Manufacturing gauge drops to three-month low. A measure of manufacturing activity slipped in September as weakness in new orders and a strong dollar weighed on demand. New orders rose at the slowest rate this year and hiring was slow.

A Volatile Market Waiting for Answers – Weekly Update for September 19, 2016

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Volatility picked up last week due to pressures from lower oil prices and speculation about the timing of the Federal Reserve’s next rate hike. This summer has been historically calm for markets, leading markets to trade without big intraday gains or losses. However, Friday broke that streak, possibly ushering in a period of greater volatility as uncertainty looms. For the week, the S&P 500 gained 0.53%, the Dow grew 0.21%, the NASDAQ added 2.31%, but the MSCI EAFE dropped 2.49%.

With mixed information and an uncertain political landscape, the market is facing a dilemma. On the one hand, economic data is neither weak nor strong enough to make policymakers’ choice easy on whether they should raise interest rates. On the other hand, the unpredictable nature of the presidential race contributes to market volatility. We’ve discussed throughout the race that it is not the result of the election that cause volatility, but rather the uncertainty leading up to the ultimate vote. All in all, Fed economists have repeatedly stated their intentions to raise rates soon, though no one is certain about the timing of this hike.

The Federal Reserve’s Open Market Committee will meet this week to decide whether or not to raise interest rates for the first time since December 2015. The Fed has a dual mandate: to maximize employment and keep inflation stable. Headline unemployment is below the Fed’s target of 5.0%, but inflation has remained stubbornly below the Fed’s long-run goal of 2.0%.

Fresh inflation data suggests a warmer trend. Two measures of inflation, the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) deflator, rose in recent months, indicating that the economy is getting closer to the Fed’s target. While the increase in inflation might give pro-hike Fed economists ammunition at this week’s meeting, many analysts still don’t think the Fed will immediately raise rates.

Markets have been pushing new highs recently, and it wouldn’t surprise us to see a return to a volatile pattern in the days and weeks ahead. Uncertainty around economic growth, the November elections, Federal Reserve activity, and a future British exit from the EU could cause investors to become more cautious in the weeks ahead. We’ll be closely monitoring the overall market climate and will be in touch if we feel any prudent changes to investment strategies are necessary.

As always, we want to be sure to focus on long-term investing especially when there are brief ups and downs in the market. Please reach out to us by leaving a comment, emailing (hello@hzcapital.com) or giving us a call at 419-425-2400 if you have any questions about your portfolio. We’d love to connect with you and chat about how current events impact the market as a whole. Thanks for reading!

ECONOMIC CALENDAR:

Monday: Housing Market Index

Tuesday: Housing Starts

Wednesday: EIA Petroleum Status Report, FOMC Meeting Announcement, Fed Chair Press Conference

Thursday: Jobless Claims, Existing Home Sales

Friday: PMI Manufacturing Index Flash

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HEADLINES:

Consumer sentiment steady in September. A measure of how Americans feel about the economy and their financial prospects remained unchanged between August and September, suggesting households remain upbeat heading into fall.

Retail sales fall unexpectedly. U.S. retail sales fell more than expected in August on weak sales of autos.

Industrial production falls in August. Production in U.S. factories fell 0.4% last month amid a drop in demand for appliances, electronics, and machinery. Cooling demand for big-ticket items could spell trouble this quarter.

Weekly jobless claims rise less than expected. The number of Americans filing new claims for unemployment benefits rose last week, but increased less than economists expected.

Interest Rate Debate: The Fed’s Decision is Nearing – Weekly Update for September 12, 2016

blog-post-2016-09-12Monetary policy was at the forefront of investors’ minds last week as we all continue to calculate the odds of an interest rate increase at this month’s Federal Reserve’s Open Market Committee (FOMC) meeting. After trading flat for most of the week, stocks sank Friday on fears of the future rate hike. For the week, the S&P 500 lost 2.39%, the Dow fell 2.20%, the NASDAQ dropped 2.36%, and the MSCI EAFE lost 0.16%.

The European Central Bank (ECB) declined to increase its stimulus program, voting to stand pat on interest rates and current bond-buying activity. The decision wasn’t a total surprise as the Eurozone economy has proved resilient after Britain voted to exit the EU. However, the ECB did confirm that it will consider further quantitative easing in 2017 if conditions worsen. No exit date for Britain has been announced, though the new prime minister has indicated it will not begin before next year.

On our side of the Atlantic, surprise comments by a voting member of the Fed increased speculation that a rate hike may come this month. When markets are quiet, even rumors can be enough to spark a selloff. In previous weeks, Fed officials have ramped up hawkish rhetoric, suggesting sentiment that the Fed is moving toward a rate hike. Even reliably dovish officials, who have historically maintained a cautious stance, are showing interest in raising rates again.

We have now entered the quiet period before the FOMC meets September 20th, meaning we won’t get more statements from Fed officials before they vote on monetary policy. The information blackout will give investors plenty of spare time to digest previous statements and come to grips with the idea that the Fed is serious about raising rates this year.

All the speculation around the Fed’s increasing assertiveness about rates had a palpable effect on markets, which may be what the Fed wants to achieve. The chart below shows Wall Street trading probabilities of higher interest rates in coming months.

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On Thursday, traders put the odds of a September hike at just 18.0%. By the close of trading on Friday, the odds had surged to 24.0%. The odds of a December hike had been about even; now, traders seem to believe the Fed will raise rates again this year.

Is last week’s pullback a minor blip? We can’t know for certain, but investors should prepare for a bumpy ride this fall.

The week ahead is packed with economic data, including critical reports on business inventories. Positive data could contrarily cause further selling if investors believe it could spur the Fed to act. Negative data might likewise be greeted with cheers. As we move to a Fed vote and uncertainty around the November election peaks, markets are likely to remain volatile and perhaps even move into a more prolonged selloff. Ultimately, we want to focus on investing for the long term, and encourage you to tune out the media “noise” as volatility occurs. We’ll be sure to keep you updated on the latest.

ECONOMIC CALENDAR:

Tuesday: Treasury Budget

Wednesday: Import and Export Prices, EIA Petroleum Status Report

Thursday: Jobless Claims, PPI-FD, Retail Sales, Philadelphia Fed Business Outlook Survey, Empire State Manufacturing Survey, Industrial Production, Business Inventories

Friday: Consumer Price Index, Consumer Sentiment, Treasury International Capital

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HEADLINES:

Fed Beige Book shows wage gains restricted to skilled workers. A key report released by the Federal Reserve showed that the economy grew modestly in July and August. However, data shows that most wage gains occurred only in skilled jobs where employers are struggling to find qualified workers.

Weekly jobless claims drop. The number of Americans filing new claims for unemployment benefits fell unexpectedly last week, marking the 79th straight week that claims remained below the key 300,000 level associated with a healthy labor market.

Monthly job openings increased in July. The number of available jobs, a data point closely watched by Federal Reserve economists, increased by 3.9% In addition, the hiring rate rose by 3.6%, pointing to a strong labor market.

Gas prices slide after summer. The summer driving season is over and falling gas prices might slip further this winter. Americans enjoyed the cheapest summer gas since 2004, and economists hope the “gas dividend” will boost spending this quarter.

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.

Dow Ends Best Week in a Month – Weekly Update for April 18, 2016

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Image courtesy of FreeDigitalPhotos.net/hywards

Stocks rallied again last week on better-than-expected earnings and some reassuring news about China’s economy, giving the Dow its best weekly performance since mid-March. For the week, the S&P 500 gained 1.62%, the Dow added 1.82%, and the NASDAQ grew 1.80%.

Earnings reports are trickling in and the news so far is not as bad as expected. Since advance estimates had prepared investors for very weak earnings reports, the weak reports we’re seeing so far are being treated as victories. Out of 35 S&P 500 firms reporting in so far, total earnings are down 9.0% from Q1 2015 on 0.1% higher revenues with 71.4% beating their earnings estimates. As earnings season continues to unfold in the weeks ahead, we may see more of the same, which could give markets room to rally. On the other hand, investors could take the weak earnings picture as a sign that the economy is struggling to produce sustainable growth.

After months of gloom on China’s economy, a new report shows that China’s economy grew 6.7% in the first quarter. Though this is down from the fourth quarter’s 6.8% rate of growth, it’s not as bad as investors had feared. U.S. investors treated the news as a win, though China experts are skeptical about the reliability of these statistics. Since China’s ruling body has staked its political legitimacy on economic stability, officials have a lot of pressure to produce reassuring data. Overall, it’s not likely that China’s economic woes are over.

The European Union gave us some headlines at the end of the week as Britain officially launched a campaign ahead of a referendum on leaving the EU on June 23rd. Current polls on a “Brexit” are evenly split with a significant number of people undecided on the issue. However, if Britain were to exit the EU, it would likely have a serious knock-on effect on markets, trade agreements, and currencies.

In other international news, several major oil-producing nations met over the weekend to discuss coordinating oil output to stabilize prices. If they come to an agreement, oil prices might bounce higher and offer some relief to the beleaguered energy sector; however, closing a deal between a large group of producers with widely varying national interests will be tough.

The week ahead is packed with earnings reports from 101 S&P 500 companies, including heavy hitters like Caterpillar [CAT], General Electric [GE], General Motors [GM], and Yum Brands [YUM]. Investors will also get a look at housing market data and see how well the sector is doing during the spring real estate season.

ECONOMIC CALENDAR:

Monday: Housing Market Index

Tuesday: Housing Starts

Wednesday: Existing Home Sales, EIA Petroleum Status Report

Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey

Friday: PMI Manufacturing Index Flash

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HEADLINES:

Retail sales fall unexpectedly. U.S. retail sales dropped last month as Americans cut back on purchases of cars, trucks, and other big-ticket items. The stumble suggests economic growth likely slowed last quarter.

Weekly jobless claims fall. Weekly claims for new unemployment benefits fell by 13,000 to levels last seen in 1973. Claims for the prior week were also revised lower.

Consumer sentiment drops. A measure of consumer confidence fell for the fourth straight month last week, showing that volatility and recession talk are weighing on optimism.

Federal Reserve survey shows economy still expanding. The Beige Book survey indicated that energy weakness and a slow manufacturing sector didn’t hold the economy back too much between late February and early April.

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.