We came upon a recent article with the catchy title “U.S. EMBARKING ON A NEW SECULAR BULL MARKET?”. We were taken not so much by the title but by the good developments referenced in our economy. While a caveat of fears about the fiscal cliff exists, a number of fundamental changes have occurred. Annualized decreases in Government expenditures have actually occurred in the 2009-12. Household debt has decreased from 98% of GDP to 84%.
Households keep only 27% of their wealth in real estate compared for example to France’s 57%. Housing prices have stabilized as have starts.
Then we have some of the advantages accruing from finding more natural gas here. Drilling is a nice stimulant in itself, but the effects of $3.00 gas prices are manifold. Electricity costs are much lower in the U.S. which has positive effects on our chemical, metals, machinery and paper industries. We are now competitive with China for domestic prices of steel. Finally, there is the advance in technology which helps almost every industry. You need look no further than the Apple iPhone 5 to see the fruits of technological advance.
In sum we sometimes ignore many of the good changes which can underpin the economy and the markets in the years ahead. Now if we can just get by this fiscal cliff problem.
“Unless someone like you cares a whole awful lot, Nothing is going to get better. It’s not.”
Last Thursday the Fed announced QE 3 saying that it plans to spend $40 billion per month to purchase mortgages and it pledged to keep short term interest rates low until mid-2015. The news started a 2 day stock market rally which put the DJIA at its highest level since 2007.
Retail sales were also reported last week and were up 0.9% for the month of August mostly due to higher gasoline prices and auto sales. Without those items sales were only up 0.1%. Oil prices are back close to $100/barrel and gasoline prices have risen for the last 2 months and may weigh on consumer spending going forward. CPI was also up 0.6% for the month, the highest monthly increase in 3 years, due mostly to higher gasoline prices.
“If the world was perfect, it wouldn’t be.”
- Yogi Berra
September, historically the worst month of the year, got off to a roaring start, with the NASDAQ up 2.3% and the DJIA advancing 1.6%. The markets were buffeted by mostly positive political developments offset by mixed economic reports. This week will be more of the same, leavened by Wednesday’s launch of the new iPhone.
Bernanke started the week on a strong note by reaffirming his commitment to act if economic conditions deteriorate, noting that our labor market is a grave concern. On Wednesday, Bloomberg reported that the ECB would do unlimited [but sterilized] bond buying. Thursday Mario Draghi confirmed that the ECB will buy bonds of countries who ask for aid. All of these items helped support/propel the markets higher.
While the week’s economic data was much less positive, it was mostly interpreted in a positive manner. Friday’s jobs data was an important reaffirmation of the weakening economic recovery. Nonfarm payrolls added only 97,000 [130,000 expected] and the prior report was reduced by 22,000. Moreover, the widely watched unemployment rate came in at a superficially favorable 8.1% [8.3% expected], but this was achieved by having more people leave the workforce. The immediate response was to increase hopes for more quantitative easing [the glass is half full!]. The problem is that each additional round of QE has less and less positive impact [similar to an addict getting one more dose of his favorite drug].
AAPL’s products have been a big positive over the last decade, and this year’s goodies will be no exception. New product details have been leaking for weeks [where is Steve when you need him?], and they include a bigger [longer] and thinner screen, smaller connector, LTE/4G [but no NFG!], new mapping etc. Santa will not be wanting for ideas [new iPods too?] this holiday season.
“ Leadership is action, not position. ”
— Donald H. McGannon
Markets were fairly quiet last week in an end-of-summer, low volume, vacation week haze. The Dow and the S&P 500 were down fractionally by 0.3%. International stocks were a bit lower on continuing concerns of economic slowing in Europe and China.
The Dow Jones Industrial Average rose 0.6% in August for the third consecutive monthly gain. The S&P 500 rose 2% for the month to close at 1406.58. Oil prices (and gas prices) moved higher … potentially putting a cap on consumer spending.
Markets reacted positively to continuing signs of improvement in the US housing market, marginally higher 2nd quarter GDP and positive comments by the Fed. The June Case-Shiller Home Price Index rose 0.5% versus expectations of a decline of 0.3%. It was the first year-over-year increase since late 2010. U.S. GDP for the 2nd quarter came in at 1.7% versus consensus expectations of 1.5%. Lastly, Ben Bernanke and the Fed came to the rescue of the markets as they indicated a willingness to further stimulate (artificially, of course) the economy if necessary.
Europe and China are another matter. There are definite signs of slowing in Europe and China. Investors are anxiously awaiting the ECB’s press conference this Thursday for signs of hope. Let’s hope that it is not more of the same – rhetoric.
We suspect that the markets will give back August’s gains as investors wake-up to the headwinds in Europe and to the geopolitical challenges in the Middle East. Let’s not forget that September is historically the worst performing month of the year. Buckle-up.
“Let us not waste our time in idle discourse! Let us do something, while we have the chance! It is not every day that we are needed. But at this place, at this moment of time, all mankind is us, whether we like it or not. Let us make the most of it, before it is too late!”
- Samuel Beckett, Waiting for Godot
Last week stocks took a step back, the first after several continuous weekly gains. The Dow Jones was down 0.9%; the Nasdaq, down 0.2%; and the Russell 2000, down 1.3%. Economic data has been mixed lately with housing being the bright spot. New home sales improved in July, by 3.6%, to an annual rate of 372,000. July’s existing home sales also posted a 2.3% increase to a 4.47 million annual rate.
Later this week and weekend will be the Jackson Hole Economic Symposium. This is an annual forum for central bankers, policy experts and academics to come together to focus on emerging economic issues and trends faced by the U.S. and world economies. The market is focusing on Ben Bernanke’s upcoming comments around additional forms of quantitative easing. Click here to see a more detailed overview from Bloomberg.com
“It’s the price of leadership to do the thing you believe has to be done at the time it must be done.”
-Lyndon B. Johnson
The stock market has now rallied off the lows in June by about 11%. Thus it seems incumbent for the prudent investor to consider the near term market direction. We would conclude that a correction could occur, but that the overall environment remains healthy. Sentiment and valuation measures support current levels. However, the slowing level of economic activity and the historically high margins for most companies reduce our enthusiasm. In addition, September has the honor of being the worst performing month on average over the last sixty years.
The preponderance of evidence does argue for better days ahead. However, the major longer term issues can weigh on investors. The Middle East uncertainty, European sovereign debt concerns, and the so-called “fiscal cliff” here at home, cause concern. Particularly worrisome is the “fiscal cliff”- potential tax increases and spending cuts would produce a serious slowdown in 2013. Congress and the President must get their acts together by year end.
We continue to prefer an investment strategy that focuses on high-paying dividend companies that grow their dividends yearly. They continue to look attractive versus the fixed income market.
“We can’t solve problems by using the same kind of thinking we used when we created them.”
“You have to learn the rules of the game. And then you have to play better than anyone else.”
Equity markets continued their advance again last week with the S&P 500 gaining 1%. This was the fifth consecutive weekly increase. Interest rates, however, moved higher with the 10 year U.S. treasury rate rising to 1.65% from a recent low of 1.40%. Last week saw further evidence of a slowing global economy with reports from China of a drop in their trade surplus for the month of July from $31.7 billion to $25.1 billion.
This week Germany, France, and the Eurozone as a whole, will report GDP figures for the second quarter. These reports should confirm a slowdown/recession in Europe. In the U.S., we will get reports on retail sales on Tuesday and CPI on Wednesday. Retail sales which had declined for the last 3 months are expected to show an increase of 0.3%.
CPI, which was unchanged in June, is anticipated to be up 0.2%. Inflation, which has been relatively tame, may come under some pressure in the near term as gasoline prices have increased sharply. The U.S. economy should continue to struggle with subpar growth.
“If you only do what you can do- you never do very much.”
The market was flat to down for most of the week, but a 1.9% advance Friday enabled the S&P to finish the week up 0.4%. Despite Europe [the ECB’s Mario Draghi is procrastinating], the Middle East [Syria, Egypt, Iran etc.], and the vicious US political campaign, the S&P 500 has advanced by 10.6% so far this year. The July employment report has been given much of the credit for Friday’s stock market advance, since the 163,000 nonfarm jobs increase, which normally is nothing to write home about, nicely exceeding estimates of ~100,000 and three previous months of sub 100,000 reports.
This BLS report was a big surprise, since other recent economic data have been cautious: For example, the ISM’s business activity index is below 50 [indicating contraction!] for the second month in a row. However, skeptical analysts point out that the jobs number is inflated by an above average seasonal adjustment of 377,000 jobs [82,000 above the 10 year average. Also, the birth/death model [don’t ask] chipped in 52,000 additions. Of course, the big picture is that at this point of a normal recovery, payrolls should be growing by ~200,000/month.
Earnings season is coming to a close. 80%+ of the S&P 500 companies have now reported better than expected quarterly earnings, but more than 55% fell short on their revenue line, and most are issuing cautious guidance. This week will see the final large week of reports, with over 500 companies checking in. Stay tuned.
“I can see clearly now, the rain is gone. I can see all obstacles in my way.”
Muddle through – to achieve a certain degree of success but without much skill, polish, experience, or direction. (www.dictionary.com)
Last week featured some tame economic and earnings news as the economy has hit a soft patch. However, investors have shifted their attention on the increasing possibility of additional monetary policy action, both at home and abroad. For the week the Dow was up 2.0 percent; the S&P 500, up 1.7 percent; the Nasdaq, up 1.1 percent; the Russell 2000, up 0.6 percent.
The recovery lost steam in the second quarter. GDP growth decelerated to 1.5% annualized from 2.0% in the first quarter. This Friday is an update on the US employment situation. Current consensus has the US economy adding 100,000 jobs.
Progress continues in the housing sector as home prices have experienced 4 months in a row of gains. The FHFA home price index in May increased 0.8 percent, following a 0.7 percent boost in April. The year-on-year rate is up 3.7 percent. Tuesday we’ll get more housing data from the S&P/Case-Shiller home price index.
The muddle through continues…
“When everything seems to be going against you, remember that the airplane takes off against the wind, not with it.”
- Henry Ford
Market average moved higher last week on reasonable earnings reports and hopes of an eventual Fed intervention (stimulus). Europe, however, brought everybody back to reality.
Sovereign yields in Europe are soaring on renewed fears that Spain may need a formal bailout from the European Central Bank. The 10-year Spanish bond yield rose to 7.5% … a very costly level to fund debt (compared to U.S. 10-year yields of 1.42%). Of course, the fear is that Italy and France may be next (never-mind Greece and Portugal).
Debate in Europe is raging over the creation of a central banking union as well as other mechanisms (deposit insurance chief among them) to strengthen the monetary union. Reform packages in Europe are getting harder and harder to implement with interest and unemployment moving quickly higher. European leaders continue to drag their feet, and the rest of the world is suffering as a result.
Meanwhile, back in the United States, second quarter earnings have been reasonable. Earnings have been mostly in-line with expectations, but top-line growth has been difficult to achieve. Perhaps U.S. companies have extracted as much as they can from operations … we expect to see profit margins narrowing as worldwide economic growth moderates. Fortunately, valuations, strong balance sheets, low interest rates and improving housing will likely keep U.S. markets range-bound. In the end, however, the U.S. cannot decouple from the rest of the world.
Investors should not be surprised by increased volatility.
“It is not the ship so much as the skillful sailing that assures the prosperous voyage.”
- George William Curtis