Weekly Roundup … “Fed-up”

December 21, 2015

Markets finished lower last week as volatility continued to weigh on investors’ minds and psyches. For the week, the Dow Jones Industrial Average finished at 17,128.55 to close down 0.79%. The broader-based S&P 500 closed at 2,005.55 for a loss of 0.34% for the week. The Nasdaq Composite closed the week at 4,923.08 as it shed 0.21%. International markets eked-out small gains as the DJ Global ex U.S. index advanced 0.36%. The 10-year Treasury closed the week at a yield of 2.197% (up from a close of 2.139% the prior week) as bonds pared year-to-date gains.

Big news during the week was the decision by the Federal Reserve to raise the key fed funds rate by 25 basis points. The Fed’s first rate increase since 2008 was not enough to push markets higher as falling crude prices sent markets lower. Junk bonds struggled last week as a major mutual fund halted redemptions in their junk bond fund due to a lack of liquidity for their bonds … no doubt an unsettling step for an open-end mutual fund.

Volatility continues to exhaust investors. The Dow Jones Industrial average has see-sawed plus or minus 1% on 70 different occasions so far this year … the most since 2011. With the uncertainty about the Fed and a rate hike behind us, attention has focused on what seems to be a never-ending slide in oil prices. Oil prices will ultimately find their bottom, earnings will be reasonable, junk bonds will settle-down, and the world will likely not end anytime soon … so we continue to look through the noise of the markets to position investors for the gains that lie ahead.

Best wishes to our clients and friend a happy and peaceful holiday season!

“Love the giver more than the gift.” – Brigham Young

December Rate Increase? Probably, But Not a Given

December 14, 2015

There seems to be an almost unanimous opinion from economists that the Fed will raise the Fed funds rate this week. We are not entirely convinced. The problem for the Fed is that their target for inflation of 2% has not happened, while their target for unemployment of 5% has been reached (a conundrum). Their perception of how strong the economy actually is then becomes critical. The negatives on the economy are the weakness in exports caused by the strong Dollar and the sluggishness showing in domestic manufacturing activity, while the consumer seems relatively upbeat about spending. Another potential negative popped up this week in the junk bond market as concerns about credit quality and liquidity led to one junk bond fund deciding to close up shop. One new positive is the perception that the Chinese economy showed more life in its most recent reports, allaying fears somewhat that China would be a negative for the rest of the world.

It’s not so easy then – positives and negatives for the Fed to assess. Given the uncertainty surrounding the health of the economy, it now makes it harder for the Fed to do their first rate hike. One consoling factor for investors is that the first rate hike doesn’t necessarily lead to a weaker stock market, so we have more time to analyze just how healthy our economy is. This is not an easy decision for the Fed to take, but their telegraphing that they want to do the December move and then not following through would be a bit of an embarrassment for them.

Our conclusion then is what we always recommend-don’t be swept up by current media discussion. Instead, stick by your strategy that you have established for your investments. Enjoy the holiday season and have some eggnog.

Policy Divergence Appears Likely

December 7, 2015

The U.S. equity market finished a back-and-forth week slightly positive after a rash of monetary policy guidance set the mood for markets. For the week, the S&P 500 finished at 2092 for a gain of 0.12%. The DJIA fared a little better closing up 0.36% for the week. Small Cap US companies didn’t fare as well as the Russell 2000 finished down 1.56% for the week. International markets also closed lower as the MSCI EAFE was down 0.81% and MSCI EM was 1.69% lower. Treasury yields moved higher after a volatile trading week as investors began to process a diverging monetary policy landscape.

On Thursday, Mario Draghi, head of the ECB (European Central Bank), announced a further rate cut and an extension of its bond-buying program. Although this fell short of extremely dovish expectations, the ECB committed to extending its easing program through March 2017 while the Federal Reserve is on the verge of beginning its first rate hike cycle since 6/30/2004. In her public testimony to Congress on Thursday, Janet Yellen effectively committed to a December rate hike pending the results of last Friday morning’s DOL employment report. According to the report, the US nonfarm payrolls added 211,000 jobs in the month of November, a positive revision to October (298,000 jobs added from 271,000), and the unemployment rate holding steady at 5%.

So where does this leave us now? Equity markets should remain volatile due to the pending December rate hike and year-end tax-loss selling. As always, we recommend investors stay globally diversified in-line with their risk tolerances. As we enter a rising rate cycle in the US, the benefits of diversification should begin to pay off as rates remain stable overseas.

“The best preparation tomorrow is doing your best today.” – H. Jackson Brown, Jr.

The Pause that Refreshes

November 30, 2015

The stock market was mostly flat on lower volume during the Thanksgiving-shortened week. The S&P 500 was flat for the week while the Nasdaq advanced by 0.4%. The raft of economic data releases was mostly greeted with a shrug, although crude oil declines are no longer automatically dragging down energy stocks [the sector is already down 10% to 25% YTD]. Overseas, China’s Shanghai Composite dove 5.5% Friday as the stock brokerage probe widened [in addition to ongoing weakness in industrial profits].

This week contains a plethora of events which will set the stage for the rest of the year, and probably beyond. Yellen’s speeches on Wed and Thursday, the November jobs report on Friday all precede the 12/16 FOMC meeting. In addition, the ECB will hold its final meeting of the year [further accommodation is likely]. Finally, OPEC will be meeting at the end of the week [production is expected to remain unchanged].

The IMF yuan approval as a component in the IMF’s Special Drawing Rights [SDRs] {along with the Dollar, Euro, Yen and Pound Sterling} is a step closer to the yuan becoming the world’s next primary reserve currency [the Pound dominated the 19th century, the Dollar was preeminent during the 20th century, and if economic irresponsibility continues to fester in Washington’s beltway, yuan primacy may rule during the 21st]. The following highlights some of the milestones in China’s long and arduous path to international economic respectability:


“We are made wise not by the recollection of our past, but the responsibility for our future.”
George Bernard Shaw

Earnings Recession?

November 23, 2015

Equity prices rebounded with the S&P 500 up 3.34%, MSCI EAFE advancing 2.52%, and the MSCI EM increasing 2.73% for the week. The DJIA was flat while growth stocks continued to outperform value (energy drag).

Despite the holiday shortened trading week, there will be reports on existing and new home sales as well as the 2nd revision to 3rd quarter GDP, which should show an increase to 2.1% from the initial report of 1.5%

With 93% of companies having reported earnings for the 3rd quarter, results are on track to show a decline of 1.8% from a year ago. For the year, S&P 500 earnings are expected to decline 0.3%, primarily due to the energy sector which is forecasted to see earnings decline 58% this year. Corporate profits are on pace for their worst year since the financial crisis. The good news is that next year earnings are expected to increase 8.2%.

Happy Thanksgiving!

“Gratitude can transform common days into Thanksgiving, turn routine jobs into joy, and change ordinary opportunities into blessings.” – William Arthur Ward

Weekly Roundup … Nous Sommes Paris

November 16, 2015

Markets finished broadly lower last week, breaking a streak of six straight weekly advances. For the week, the Dow Jones Industrial Average finished at 17,245 to close down 3.71%. The broader-based S&P 500 closed at 2,023 for a loss of 3.63% for the week. The Nasdaq Composite closed the week at 4,928 as it shed 4.26%. International markets were broadly lower as well. The 10-year Treasury closed the week at a yield of 2.28% (down from a close of 2.33% the prior week) as bonds gained on equity market uncertainty.

We are skipping our usual review of economic and market conditions out of respect for the people of France who have suffered a massive loss. Our hearts and prayers go out to the people of France, and we stand in solidarity with them and the civilized world.

Truly, we say – Nous Sommes Paris.

Keeping Our Perspective

November 9, 2015

Weekly economic numbers ebb and flow, but has anything really changed? The “blockbuster report” on Friday was the jobs increase (271,000 in October) and average hourly income (up 2.5% from a year earlier). The immediate Wall Street reaction – the Fed will raise the Fed Funds rate in December. Our reaction has been that this is not critical and should not limit the equity markets. However, the stock market was up 6-7% in October despite lackluster earnings, making the balance of the year somewhat less exciting.

The positive force in our economy is the improvement in jobs, with the unemployment rate dropping to a recent low of 5.0%. The U-6 rate, which measures underemployment more broadly, fell to 9.8%, a seven-year low. Yet thus far, with the exception of housing and autos, the consumer has been slow to increase overall spending.

Conclusion? Don’t be excited by weekly reports. The U.S. economy is growing slowly on the order of 1-2%. Do you feel confident about your asset allocation, your sector weightings and the individual holdings? The ebb and flow of weekly and monthly numbers should not overly influence your overall investment strategy. The solution as always is to focus on what you hold in a portfolio.

“Progress is man’s ability to complicate simplicity.”  –  Thor Heyerdahl

Weekly Review

November 2, 2015

US equity markets finished a volatile trading week to finish slightly higher marking the 5th consecutive week the DJIA and S&P 500 has done so. For the week, the S&P 500 closed at 2079 for a gain of 0.22% while the DJIA closed at 17664 for a gain of 0.14%. International markets were negative for the week with the MSCI EAFE down -0.30% while the MSCI EM was off -2.38%. Treasury yields were higher across the board as the FOMC stood pat on rates for now. The Fed officials indicated they would still consider a possible rate increase at its December meeting.

Third-quarter earnings continued this week and were relatively strong. Some high-profile earnings reports were perhaps overshadowed by M&A talks. Major deals between Walgreens and Rite Aid, Allergan and Pfizer, and Starwood and Hyatt received most of the headline attention. Economic data was rather disappointing as US GDP growth slowed to 1.5% annual rate in the third quarter, US consumer confidence fell to 97.6 in October (from 102.6), and US durable goods orders fell a seasonally adjusted 1.2% in September.

This week, 19.6% of the S&P 500 companies will be reporting earnings. We expect volatility to continue as we are in the middle of earnings season and FOMC noise remains.

“Life is 10% what happens to you and 90% how you react to it.” – Charles Swindoll

The (Unexpected) Market Advance

October 26, 2015

The market continued its 4th Quarter advance, with the S&P500 rising 2.0% while the Nasdaq increased by 3%.  This fourth consecutive week increase has restored positive year-to-date price advances of 0.8% and 6.2% respectively.  In addition, dividends have added 1.7% to the S&P and ~1% to the Nasdaq so far this year.

This fourth quarter rally is facilitated by continued world-wide monetary ease [let’s hope that we don’t experience a devaluation war], low expectations for third quarter earnings reports [with plenty of upside when, and if, a company beats], and positive seasonality.

This cycle’s conundrum is a combination of unusually restrictive fiscal policy [how much GDP growth is lost to our large and growing regulatory bureaucracy?] and the Fed’s “lower for longer” monetary policy [at least we’ve gotten rid of QE].  However, the market is finally coming to realization that the Fed is pushing on a string.  At this point, starting to gradually raise rates may actually help our economy.  As this chart shows, the US consumer has long-lived liabilities [mortgages and auto loans] and short-term assets.


An increase in interest rates would start to provide a return on the ~$10 trillion on deposit [currently earning ~0%], thus increasing disposable income. This non-consensus thinking is further discussed in a recent Bloomberg article.

“Never accept ultimatums, conventional wisdom or absolutes”Christopher Reeve

Stocks Up For a Third Week

October 20, 2015

Last week, stock prices rose for the third consecutive week on generally better than expected earnings reports and increasing doubts about whether the Fed will raise interest rates this year. For the week, the DJIA rose 0.8%, the S&P 500 was up 0.9% and the NASDAQ increased 1.2%. International equity markets also advanced for the week with the MSCI EAFE up 0.29% and MSCI EM advancing 0.71%. Treasury yields have remained subdued during this Fed uncertainty.

Investors have been expecting one of the worst quarters for corporate earnings in years. Analysts’ estimates are for a decline of 5.6%, but looking at companies that have reported so far, earnings are on track for a decline of 4.6%. Unexciting economic data during the week included retail sales -0.1%, industrial production for September -0.2% from August, and the Philadelphia Fed survey was -4.5 … lowering chances for an interest rate hike this year. This week, look for reports on housing starts and existing home sales and numerous earnings announcements.

“Three Rules of Work: Out of clutter find simplicity; From discord find harmony; In the middle of difficulty lies opportunity.” – Albert Einstein