Economists: Labor Market is Growing Less “Fluid” Weekly Update – August 25, 2014

Image courtesy of FreeDigitalPhotos.net/sscreations

Image courtesy of
FreeDigitalPhotos.net/sscreations

Despite lingering concerns about the Ukrainian crisis, markets picked up steam last week, giving the Dow and S&P 500 their best weekly performance since April. For the week, the S&P 500 grew 1.71%, the Dow gained 2.03%, and the Nasdaq rose 1.65%.1

Last week, headlines were largely dominated by the annual economic symposium in Jackson Hole that plays host to some of the world’s most powerful financial players. Though the format of the event is casual, central bankers, academics, and economists use the meeting to discuss important economic issues from the day.2 One key session from this year’s meeting centered on labor market dynamics.

Economic research suggests that the U.S. labor market is not as flexible as it once was and that the fluidity of workers between jobs is falling. According to results presented at Jackson Hole, factors like an aging workforce that is less likely to change jobs, higher training and regulatory requirements to take many positions, and dominant firms driving others out of business, are all contributing to the problem. Why does this fluidity matter?

Part of what makes a labor market strong is the ability for workers to transition between jobs and industries as needs and conditions change. Across industries, researchers found a decline of about 25% in the rate at which jobs were created and eliminated between 1990 and 2013. The implications of this decline could be particularly serious for the young or the less skilled, who may struggle to find jobs or progress in their careers.3

Federal Reserve Chair Janet Yellen seems to support this view, painting a picture of a still-fragile labor market that requires accommodative monetary policy in her speech Friday. In another big speech, European Central Bank President Mario Draghi stated that the ECB stands ready to provide further liquidity to boost the EU’s sluggish economy.4

Looking ahead, Russia and Ukraine will be in the spotlight as Russian President Vladimir Putin and Ukraine President Petro Poroshenko are scheduled to meet on Tuesday.5 The S&P 500 is also bumping up against 2,000 points, a key technical milestone. Though we don’t place a lot of faith in technical indicators, investor psychology may come into play, and markets may experience some volatility as investors consider whether further short-term upside is likely.6

 

ECONOMIC CALENDAR:

Monday: New Home Sales, Dallas Fed Mfg. Survey

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

Wednesday: EIA Petroleum Status Report

Thursday: GDP, Jobless Claims, Corporate Profits, Pending Home Sales Index

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

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HEADLINES:

Jobless claims fall. Weekly new unemployment claims fell more than expected, dropping below 300,000. While weekly data is volatile, there were no seasonal factors affecting the data, pointing to sustained improvement in the labor market.7

Housing starts heat up in July. A measure of homebuilding soared 15.7% last month, showing that builders may be feeling confident about their prospects in the coming months. While monthly starts are volatile, the increase could show that the housing market isn’t down for the count yet.8

Existing home sales increase for fourth straight month. July sales of previously owned homes soared , hitting the highest pace of growth in 2014. Hopefully, increased inventory levels will stabilize prices and give homebuyers an opportunity to purchase.9

Chinese factory activity slumps. China’s factory sector slumped to a three-month low, renewing concerns that the world’s second largest economy might be slowing down. Economists hope that government measures to support growth will keep economic momentum up.10

Markets Fall on Ukraine Fears, Still End Positive Weekly Update – August 18, 2014

Image courtesy of FreeDigitalPhotos.net/Salvatore Vuono

Image courtesy of
FreeDigitalPhotos.net/Salvatore Vuono

Despite a late-week selloff due to renewed concerns about the situation in Ukraine, the major indices ended the week on a positive note. For the week, the S&P 500 gained 1.22%, the Dow grew 0.66%, and the Nasdaq added 2.15%.1

Geopolitical tensions in Europe ratcheted up when Ukrainian forces engaged an armored Russian column that crossed the border. Russia denies that any military vehicles entered Ukraine and that the mission was humanitarian. Although the full picture has yet to emerge, investors are worried that the engagement may cause further escalation of tensions.2

Retail sales slumped in July as consumers took a break from buying automobiles. However, with employment growth on a steady upward trend, economists think that sales will likely rebound later in the quarter.3 The weak retail data begs the question: How are U.S. retailers doing? Not so well, it turns out. Overall, many retailers are suffering from low consumer demand and low margins in an intensely competitive promotional environment. Online retailers like Amazon have forced competitors to lower prices and offer special discounts, eroding margins and hurting earnings.4

Low-cost retailers like Wal-Mart (WMT) and Family Dollar are also struggling, mirroring the economic struggles of their largely working-class customers. Many low-income consumers have yet to fully recover from the financial crisis and stagnant wage growth is limiting their buying power. Though its overall Q2 earnings were respectable, Wal-Mart slashed its forward guidance, indicating that the giant is mired in a nationwide slowdown.5

This week, investors will be focusing on the release of the Federal Reserve Open Market Committee meeting minutes on Wednesday, as well as a major gathering of central bank leaders in Jackson Hole, Wyoming. Fed chair Janet Yellen and embattled European Central Bank President Mario Draghi will both speak at the meeting.6 Given Europe’s weak Q2 economic results, investors will be waiting to see whether Draghi has the stomach to step in with stronger quantitative easing strategies.

ECONOMIC CALENDAR:

 

Monday: Housing Market Index

Tuesday: Consumer Price Index, Housing Starts

Wednesday: EIA Petroleum Status Report, FOMC Minutes

Thursday: Jobless Claims, PMI Manufacturing Index Flash, Philadelphia Fed Survey, Existing Home Sales

CaptureHEADLINES:

Jobless claims tick upward to six-week high. Applications for unemployment benefits climbed slightly last week, interrupting the positive trend we’ve seen the last few weeks, though most economists still think employment trends are moving in the right direction. Weekly data is often noisy, and economists prefer to look at longer-term trends.7

EU economic growth fades. Economic activity in the Eurozone slowed in the second quarter as Germany’s economy slid into reverse and France stagnated. Economists’ worry that sanctions against Russia will damage the fragile EU recovery, putting more pressure on Europe’s economic recovery.8

Low doc loans return. So-called “stated income” mortgages are returning as lenders chase applications that they can no longer afford to ignore. These mortgages, which allow applicants to show bank statements instead of pay stubs or tax returns may help expand the pool of mortgage applicants as lending volume falls.9

Consumer sentiment falls, but the news isn’t all bad. Sentiment among U.S. consumers fell to its lowest level since last November, but a gauge of current economic conditions remains positive. While lowered sentiment could threaten demand, economists believe consumer spending could still grow this year.10

July 2014 Monthly Video Update

Markets End Slow Week Lower Weekly Update – June 16, 2014

Image courtesy of FreeDigitalPhotos.net/jscreationzs

Image courtesy of
FreeDigitalPhotos.net/jscreationzs

Markets snapped their winning streak and ended the week down slightly as investors decided to take some profits off the table. The light economic calendar led to sluggish activity since investors were reluctant to commit to positions without new data to bolster their analysis. For the week, the S&P 500 lost 0.68%, the Dow fell 0.88%, and the Nasdaq slid 0.25%.1.

Geopolitics took center stage last week when Iraqi insurgents captured Mosul and Tikrit, major cities in northern Iraq, and advanced toward Baghdad. In response to the threat, the U.S. moved a carrier group into the Persian Gulf to support the government in Baghdad. Analysts are worried about how instability in Iraq might affect global oil markets. U.S. crude oil rose to nearly $105/barrel on the new security fears.2 Iraq is an important Organization of the Petroleum Exporting Countries (OPEC) producer and disruptions in regional supplies could send oil prices through the roof and throttle consumer spending.3

In Ukraine, the ongoing conflict escalated when well-armed pro-Russia separatists shot down a Ukrainian military plane. Russia and Ukraine have been caught in a standoff since March, when Russia annexed Crimea. European leaders spoke with Ukrainian and Russian officials about the incident, stressing the need for a cease-fire in eastern Ukraine and a return to stability.4 EU countries rely on natural gas supplies that pass through Ukraine, and interruptions could cause price spikes and temper much-needed economic growth in Europe.

On the economic front, last week’s data was mixed. Weekly jobless claims increased slightly, but the overall trend is still heading in the right direction, giving economists hope that businesses will step up hiring this quarter.5 However, the latest consumer sentiment numbers show that lower-income Americans are worried about wages and economic growth even as higher-income consumers are staying upbeat about their prospects. This split in attitudes could spell trouble for the economy if low-income Americans become reluctant to spend.6

The week ahead is packed with economic events, including the June Federal Open Market Committee (FOMC) meeting, which concludes Wednesday. Analysts don’t expect any surprises from the Fed, which has been taking pains to present an image of slow, predictable change in order to avoid spooking investors. However, analysts are hoping for more guidance about future interest rate increases as well as Fed economic projections, which will forecast Gross Domestic Product (GDP), unemployment, and inflation.7

ECONOMIC CALENDAR:

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

Tuesday: Consumer Price Index, Housing Starts

Wednesday: EIA Petroleum Status Report, FOMC Meeting Announcement, FOMC Forecasts, Chair Press Conference 2:30pm

Thursday: Jobless Claims, Philadelphia Fed Survey

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HEADLINES:
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.

Detroit bond settlement reached. Bankruptcy court mediators announced that a settlement had been reached between the City of Detroit and bondholders over the treatment of unsecured general obligation bonds. Although final details have not been released, it is likely that bondholders will receive only a percentage of their principal, though bond insurers may make up some of the difference.8

Producer prices fall. The price paid for goods and services by U.S. producers fell for the second straight month, but economists still think inflation is firming up. Producer prices matter because higher prices generally lead to higher inflation as consumers are forced to pay more for goods and services.9

Retail sales growth less than expected. Though consumers spent more on retail goods for the fourth straight month in May, sales growth was slower than forecasted. This trend may mean that consumers will be less likely to increase their spending later this year.10

Would you pay more in taxes to fix your roads? The brutal winter has taken a toll on roads across America and federal maintenance dollars are coming up short. A recent AAA survey found that two-thirds of respondents would be willing to take a tax hike or pay more at the pump to improve roads.11

Choppy Week Ends Mixed Weekly Update – May 12, 2014

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Image courtesy of FreeDigitalPhotos.net/stuart miles

The major indices closed out a volatile week on a mixed note, though the Dow was able to notch another all-time closing record on Friday.1 Though stocks showed some momentum mid-week as investors bought the dip, they lost conviction on Friday as traders trimmed exposure ahead of the weekend.  For the week, the S&P 500 lost 0.14%, the Dow gained 0.43%, and the Nasdaq fell 1.26%.2

Last week was fairly quiet in terms of economic reports. The jobs market continues to show improvement. Jobless claims fell more than expected last week, snapping three weeks of increases. Though the four-week moving average rose slightly, the level is consistent with stable growth.3

Fed Chair Janet Yellen spoke before the House and Senate about the state of the economy. Her testimony was mostly upbeat and she reassured lawmakers that economic activity should pick up speed after the slow first quarter. However, she expressed concern about weakness in the housing sector and indicated that Fed economists will be watching the sector closely in the coming months. Despite housing sector worries, the Fed will continue to pare back bond purchases and still plans to wrap up current quantitative easing programs by this Fall.4

Ukraine is slipping closer to civil war as pro-Russian separatists in Eastern Ukraine move ahead with a disputed referendum on self-rule. Though Russia denies any role in the escalating conflict, Western leaders fear that Russia is funding rebels in order to absorb the Russian-speaking eastern portions of Ukraine.5 On the positive side, Russian President Vladimir Putin seems reluctant to engage in a showdown with the West by sending in troops. A destabilized Ukraine could lead to disruptions to natural gas supplies and other economic damage in Europe.

The week ahead is packed with important economic data, and analysts will be closely watching retail sales and business inventory numbers as well as the next consumer sentiment report to get a feel for how strong demand is in the second quarter. Though housing data is still expected to be weak, analysts are hopeful that warmer weather will boost activity.

ECONOMIC CALENDAR:

 

Monday: Treasury Budget

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

Wednesday: PPI-FD, Housing Market Index, EIA Petroleum Status Report

Thursday: Janet Yellen Speaks, Consumer Price Index, Jobless Claims, Empire State Mfg. Survey, Treasury International Capital, Industrial Production, Philadelphia Fed Survey

Friday: Housing Starts, Consumer Sentiment

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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:

Strong wholesale inventories may reduce Gross Domestic Product (GDP) downgrade. Though economists may lower first quarter GDP estimates, a better-than-expected increase in wholesale inventories in March – a key component of GDP estimates – may temper the downgrade.6

China will avoid large-scale economic stimulus. Despite the signs of a slowing Chinese economy, its central bank will not employ any significant stimulus programs – similar to the U.S. Federal Reserve’s quantitative easing – to boost the economy.7

Mortgage applications rise. After weeks of lethargy, mortgage markets picked up as loan applications rose. Total mortgage volume rose on a surge of home buying activity spurred by lower interest rates and continued job market growth.8

Cash deals rule in housing market. High demand and low supply are forcing homebuyers to get competitive with all-cash offers, which accounted for 43% of total home sales in the first quarter. Strict lending standards have reduced the opportunities for many traditional homebuyers and given investors a competitive edge.9

 

 

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

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 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

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 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

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 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 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

 

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

 

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

 

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

March 2014 Monthly Video Update

Tony Hixon of Hixon Zuercher Capital Management leads our March 2014 video update. This month he will be talking about some of the major events that moved markets in February as well as what might affect us in the days and weeks ahead.

Don’t forget to register for our 2014 Tax Strategies Webinar, March 21 at 12pm EST.

Register here.