Archive for ND&S Updates
Summers out of the Picture…
September 16, 2013
09.16.13
We’re sure Larry Summers saw this coming. His informing President Obama that he was not interested in the Fed Chairmanship was greeted today by strong rallies in the bond and stock markets. The ten year Treasury note yield was down around 2.8%, having reached 3.0% earlier this month. This is the lowest level reached in September. The ten year note has risen substantially in recent months with the talk of tapering bond purchases by the Fed. The Dow-Jones average was also pleased, up around 125 points as we write. Summers had a reputation as a potentially hawkish chairman who would be more inclined to raise interest rates.
The leading candidate now becomes Fed vice-chair Janet Yellen who is viewed as more like Ben Bernanke and less likely to tighten monetary policy in 2014. She is described generally as a monetary policy dove who is more concerned with unemployment than inflation. Of course there is no certainty she will be the choice. One interesting possibility is Stanley Fischer, an American citizen who recently stepped down as Governor of the Bank of Israel. Several other candidates, even Tim Geithner have been mentioned.
Mr. Bernanke’s term expires in January 2014, so the waiting game should not last much longer. The Fed chair has been described by some as the second most powerful person in America. We think Mr. Bernanke has done an admirable job, and we look forward to an equally sound replacement.
“The only place where your dream becomes impossible is in your own thinking.”
– Robert H. Schuller
Gradual Improvement
September 9, 2013
09.09.13
Last week U.S. stock markets rallied with the S&P 500 advancing 1.4% and the DJIA rising 0.8% the first positive week for the DJIA in 5 weeks. Equities were supported by recent improving economic reports on U.S. auto sales and the service sector of the economy. Also, China economic news is showing signs of a gradual improvement which would be a positive for emerging country economies.
A weaker than expected jobs report on Friday caused Treasury prices to rally for the first time in September. 10 year Treasury rates have nearly doubled from their lows of the year and are approaching 3%. August’s jobs report showed new jobs created of 169,000 vs. expectations for 175,000. In addition the prior two months were revised downward by 58,000 and 16,000. Bond investors were hopeful that this would mean that the Federal Reserve would not discontinue its bond buying program or at least any reduction in bond purchases would be moderate.
One encouraging sign for further job improvement was the four week average for initial jobless claim at 328,500, the lowest level since October 2007. With productivity also running at a low level, companies may have to higher more employees if the economy continues to improve.
Fall Forecast?
September 3, 2013
09.03.13
The markets declined last week with U.S. stocks posting their worst month since May 2012. The S&P 500 declined 4.5% for the month but is still up nicely for the year with a 14.5% gain. International markets faired better in August with the MSCI EAFE down 2.12% while maintaining a year-to-date gain of 9.67%. Ongoing Fed taper talk continued to pressure fixed income. Our bond benchmark, the Barclay’s U.S. Aggregate, continued to struggle in August down .83%, adding to the year-to-date decline of 2.81%.
This week’s cover story in Barron’s, Fall Forecast: Sunny, highlights a growing economy and rising earnings for stocks. Their consensus is for the S&P to reach 1700 by year-end, 4% higher than Friday’s close and a 19% gain for the full year. They see earnings growth, which hovered around 5% in the first half of this year, accelerating to 8% toward year end. Their experts believe that an uptick in GDP will lead to cyclical and large capitalization stocks outperforming defensive names.
We also note the Interim Economic Assessment report out of the Organization for Economic Co-operation and Development – “the pace of recovery in the major advanced economies improved in the second quarter and growth is expected to be maintained at a similar rate in the second half of the year. Activity is expanding at encouraging rates in North America, Japan and the United Kingdom, while the euro area as a whole is no longer in recession. In several major emerging economies, however, growth has slowed.”
Finally, we are encouraged to see two major M&A deals occur over the weekend. MSFT will purchase substantially all of Nokia’s Devices & Services business, license Nokia’s patents, and license and use Nokia’s mapping services for $7.2 billion in cash. In addition, Verizon agreed to acquire Vodafone’s 45% stake in Verizon Wireless for $130B.
“I know that you believe you understand what you think I said, but I’m not sure you realize that what you heard is not what I meant.”
– Robert McCloskey
Fed Up
September 23, 2013
09.23.13
Markets advanced last week on news that the Federal Reserve will delay the start of any tapering of its asset purchase program.
For the week, the Dow Jones Industrial Average finished at 15,451 to close up by 0.49%. The broader-based S&P 500 closed at 1,710 for a gain of 1.30% for the week. The Nasdaq Composite closed the week at 3,775 for an advance of 1.40%. International markets fared better than the U.S. as the Dow Jones Global (ex US) Index gained 2.62% for the week (we see international equities outpacing U.S. equities for the next few quarters). The 10-year Treasury closed the week at a yield of 2.74% … down quite a bit from last week’s 2.90% yield (thanks to comments from the Fed).
Investors seem to be cheering the Fed’s decision to delay their tapering efforts. Strong home and auto sales along with better manufacturing and overall economic activity was not enough to persuade the Fed to begin taking away the punch bowl. The Fed remains concerned (who doesn’t … except the President and Congress?) about the anemic rate of job growth and the U.S.’s tepid GDP outlook. Of course, the Fed could quickly change their decision should the data indicate stronger employment and economic growth. St. Louis Fed President, James Bullard, indicated last week that the Fed could actually begin their taper process in October … thus contributing to Friday’s sell-off.
Now that the Syria situation has moved off the front pages, the next item on the worry list is the ongoing debt ceiling/budget debate in Washington. It is quite likely that the drama will continue this week, but we do not anticipate a government shut-down any time soon.
Third quarter earnings season should wind-down this week, and we expect earnings to be reasonable (as they have been for most companies who have already reported). A number of U.S. and international economic releases will take place this week … expect a lot of short-term “noise” from what will likely be conflicting news.
As always, we urge investors not to get caught up in the day-to-day noise of the markets. Instead, focus on long-term goals and enjoy the beginning of fall (yes, summer is really over).
“To conquer fear is the beginning of wisdom.”
– Bertrand Russell