Archive for ND&S Updates

Consumer Headwinds

October 29, 2013 


The S&P 500 closed the week at a record high as third quarter results have been received as mostly favorable.  Adding to the market strength has been a change in outlook for the Fed’s unwinding of “Quantitative Easing.” Most prognosticators do not see the program winding down until April of 2014, compared to previous estimates of September 2013 not long ago. For the week the Dow Jones was up 1.1% and the S&P 500 up 0.9%.

Today we saw consumer confidence is at its lowest point in 6 months mostly due to the government shutdown and debt-ceiling debate. This data is consistent with the recent declines in consumer sentiment. Below is a chart of the University of Michigan: Consumer Sentiment Index showing the decline since August:

Wells Fargo & Company recently released a study conducted on middle class retirement.  Here are a few statistics from their study:
•    52% of 1,000 “middle class” Americans (defined as having household income less than $100,000) surveyed in August 2013 have no money invested in the stock market, citing the volatility of equities as the main reason they avoid this asset class.
•    60% of middle-class Americans say that getting monthly bills paid is their top concern, up from 52% in 2012.
•    34% of middle-class Americans say that they will work until they are 80 years old, because they will not have enough money saved up for retirement. In 2012, the number of respondents with a similar opinion stood at 30%; and in 2011, this number was at 25%.
Wells Fargo Institutional Retirement and Trust summarized with the following comment, “We do this survey every year and for the past three years, the struggle to pay bills is a growing concern and the prospect of saving for retirement looks dim, particularly for those in their prime saving years.”

Real estate has been in recovery mode and the S&P 500 has doubled from it’s lows of 2009. Main Street is missing the boat.

Stink Bug

October 21, 2013 



We read in in today’s Wall Street Journal that reeking legions of the bugs have solidified their grip on the nation’s capitol.  Actually this is no laughing matter since the stink bugs threaten up to $21 billion of crops.  In a classic display of DC ineptitude, head of the USDA project team and seven of her eight staff were furloughed as nonessential employees.  You really can’t make these stories up.

We wish the nasty bugs had attacked the bureaucrats who have harassed JP Morgan into a $13 billion civil settlement.

Moving to happier tales, earnings for the third quarter have been coming in slightly better than expectations (4% better).  Leading the way have been financial services stocks, followed closely by technology and health care.  Much of the earnings success has been through cost-cutting, as revenue growth has been modest at best.

The government shutdown pushed the employment report for September back to this Tuesday.  The only economic report we saw today was for sales of existing homes.  Sales dipped 3.1%, but prices are up 11.7% over the same month last year to an average of $199,200. One of the issues in real estate is a shrinking inventory of houses for sale.

“The basis of effective government is public confidence, and that confidence is endangered when ethical standards falter or appear to falter”
– John Fitzgerald Kennedy

Kick the Can

October 15, 2013 


Recently the markets’ focus has been on the battle in Washington DC over the government shutdown. Last week a major economic report, the monthly jobs report, was postponed due to the shutdown.  It is likely that more economic news will be delayed therefor shifting more importance to corporate earnings for the third quarter.

Initially, analysts were estimating a 6% increase for third quarter earnings but that has been gradually reduced to a 2% go ahead. If the shutdown continues on it will be a drag on fourth quarter earnings as well. Right now the solution seems to be to “kick the can” into next year.

Continuing the uncertainty does not bode well for consumer spending or corporate earnings in the fourth quarter.

“Do not yield to misfortunes, but advance more boldly to meet them, as your fortune permits you.”
– Virgil

Government Shutdown

October 7, 2013 


The S&P 500 declined 0.2% last week following the partial shutdown of the U.S. government as investors try to figure out the negative implications to growth. Weakness Monday is attributable to the lack of any progress in Washington over the weekend. Most economists expect a 0.1% to 0.2% hit to GDP for every week the government is closed. Though none of us know when there will be a resolution, the markets are just 2.5% below all-time highs (the DJIA is down 4.1%) from September.

We expected uncertainty and increased volatility to continue until there is an agreement from Congress.  However, monetary policy will remain accommodative, tapering is probably off the table until December or later and expectations for corporate earnings have come down to an achievable level. In addition, we see global economies improving, with better manufacturing data in the Eurozone and China. This is a positive tailwind which will be supportive of equities into year end and into 2014.

Several clients have been asking about the market implications from a government shutdown. The following chart should shed some light. Both the stock and bond markets have tended to look through past Federal government shutdowns as temporary ‘non-events’. The chart below shows that the equity market has tended to be choppy heading into and during past government shutdowns, but has strengthened markedly once they are resolved.

Click image to see larger version.

“The reason why worry kills more people than work is that more people worry than work.”
– Robert Frost

Regulatory Morass

October 1, 2013 


Markets were mixed last week as the Federal budget building process careened toward impasse and a partial government “shutdown”.  The combatants are involved in a game of chicken which is increasing uncertainty and the size of the so-called “Washington DC discount”. The S&P fell by 1.1% last week, while the bond market continued to strengthen on the taper postponement [which was probably motivated by the Fed’s “shutdown” concerns].  The 10 year treasury yield is down to 2.62%, giving up 11 BP over the last week.

The US economy is expanding, but at a lethargic pace. Higher taxes, slower Federal spending growth due to the sequester [which, if continued, will be positive in the intermediate and long-term], and more regulations are all dragging down the GDP growth. One interesting example is the “Jobs Act” passed in 2012.

The Jumpstart Our Business Startups Act [Jobs Act] was designed to expedite startup funding. The idea was to allow these rapidly growing companies [which are big jobs creators] to more easily access expansion capital, using 21st century tools such as Kickstarter or other crowdfunding alternatives. Unfortunately, the Washington sausage mill is producing an edifice which is in many ways worse than the Depression-era original. Investor requirements, filing timetables and penalty thresholds have become more onerous.  Details of this ongoing counterproductive tragedy are available in a recent WSJ oped.

The good news is that our economy is growing in spite of these accumulating impediments. Just think about how well it will do when [if?] they are removed.

“Worry is like a rocking chair – it gives you something to do but it doesn’t get you anywhere.”