Summer has arrived, yet the Market Continues to Soldier On

July 1, 2014

The markets turned in another lackluster performance last week, with the DJII and the S&P declining slightly, while the NASDAQ advanced by 0.7%.  The Middle East concerns have temporarily eased, as ISIS territory gains in Iraq stalled.  Economic reports on 1Q GDP growth and May consumer spending were less-than-expected, but these disappointments only depressed the markets temporarily.

The third estimate for 1Q GDP was lowered to -2.9% from the previous -1.0%E [-1.8% expected].  We knew that the winter weather [and inventory volatility] was bad, but now the distress can be quantified. Also, it must be acknowledged that without a strong consumer [real final sales of -1.3%], GDP growth will not sustain an above-average rate. This 1Q decline can be compared to the 4Q 2013 GDP of +2.6%.

These “top-down” statistics have set the stage for concern about earnings, which will be reported starting next week [AA officially starts the earnings reporting season on the 8th].  S&P earnings are still officially expected to grow 4.8% [sales +2.8%E] during the just-completed quarter.  This compares with first quarter earnings growth of 2.3% [sales of +0.9%].

The market continues to advance using the “three yards and a cloud of dust” offense.  It may not be pretty, but it has been effective [the S&P is up 6.1% YTD].  Consequently, while we’re prepared for a summer swoon, we’re staying the course.

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”
– Winston Churchill

Don’t Forget the Fed

June 23, 2014

The old expression – Don’t Fight the Fed – seems to be alive and well.  Dovish comments from Fed Chair Janet Yellen sent most markets to all-time highs last week.

For the week, the Dow Jones Industrial Average finished at 16,947.08 to close the week higher by 1.02%.  The broader-based S&P 500 closed at 1,962.87 for an increase of 1.38% for the week.  The Nasdaq Composite jumped 1.33% to close the week at 4,368.04 (still 15% off its April 2000 high).  International markets finished higher, but slightly trailed U.S. market gains as the Dow Jones Global (ex US) Index advanced 0.62% for the week.   After last week’s gains, market averages are higher for the year-to-date period with the Dow Jones Industrial Average up 2.2% and the NASDAQ ahead by 4.6%.  The S&P 500 is showing higher year-to-date gains as it is up 6.2%.  The 10-year Treasury was relatively flat to close the week at a yield of 2.63% … up a bit from last week’s 2.60% yield.

Economic news released last week was reasonably upbeat – stronger-than-expected Industrial Production, Capacity Utilization, NAHB housing index, and Philly Fed and Empire State manufacturing series.  On the softer-side were May Housing Starts and Permits (a bit worrisome).  M & A activity got the market excited as Medtronic announced a $42.9 billion buyout of Covidien.  Other M & A activity included Level Three / Time Warner, SanDisk / Fusion IO and Williams / Access Midstream Partners.

We expect gasoline prices to move higher in the weeks ahead given the mounting tensions in the Middle East. A gradual move higher could be absorbed by consumers and businesses, but a spike in prices would be a negative for the ongoing economic recovery.   Markets have been fairly calm lately, but don’t be surprised by an occasional downward swoon in the markets … we are way overdue.

Summer has started … don’t forget to get out enjoy the beautiful weather.


Three Percent GDP Growth!!

June 16, 2014

While the stock market chugs along quietly with low volatility, measures of economic activity show continued improvement.  The Institute of Supply Management produces two important economic indices of activity; the index of manufacturing and the index of services.  In May the index of manufacturing reached a five month high of 55.2, well above its winter low of 51.3.  Any number above 50.0 means the manufacturing side of the economy is growing. The index of services which hit a nine month high of 56.3 and was well above its February trough of 51.6. The auto industry also showed signs of growth-its annual rate of sales was 16.8 million, the highest since June 2006.  The average year to date is nearly 16 million.  As a local anecdote, we are amazed to see the number of Chevrolets in downtown Providence, whereas we typically see mostly imports.

Employment data for May confirms the ISM data.  Non-farm payroll employment rose by 217,000.   The unemployment rate remained 6.3%, which surprised many economists because it had dropped so precipitously in April.  Non-farm payroll employment surpassed its pre-recession peak. Employment has risen by 8.8 million to an all-time high of 138.5 million, and Government employment is one-half million jobs lower than in 2008.

One clear negative in the data was the trade deficit for April.  It was the largest in two years.  This deficit is a negative for the GDP calculation since the lower domestic production is a driving force in calculating the GDP numbers.  Putting everything together, we still see indications that the second quarter for Gross Domestic Product can bounce back from the negative number for the first quarter to three percent in the second.

“We can’t help everyone, but everyone can help someone.”
-Ronald Reagan

The Recovery is Just Strong Enough

June 10, 2014

The Stock Market continued its unassuming advance last week, with the Russell 2000 advancing 2.7% and the sluggish DJII climbing 1.2%. Year to date, the market is up 5.5% as measured by the S&P, or 2.1% according to the Dow. The Non-farm Payrolls came in as expected at 217,000 additional workers, but hourly earnings increased at a still sluggish 0.2%.

This consensus result was, as far as the stock market is concerned, just what the doctor ordered. Higher numbers would lead to faster policy tightening by the Federal Reserve, while smaller increases would lead to concerns about the economic “recovery”.

“The most important thing is to enjoy your life – to be happy – it’s all that matters.”
– Audrey Hepburn


How Strong is the Recovery?

June 2, 2014

Last week stocks continued their slow upward movement with the S&P 500 finishing up 2.1% for the month of May, the 4th monthly rise in a row. The Nasdaq Composite was up 3.1% for the month. Friday’s economic news was mixed with U.S. consumer spending falling 0.1% in April and April personal income rising 0.3%. This week the major economic news item should be the jobs report due on Friday. Current forecasts look for an increase of 215,000.

Perhaps the biggest surprise this year has been the decline in interest rates, the 10 year Treasury note started the year at 3.0% and ended May at 2.46%. Most forecasters at the beginning of the year were calling for an increase in interest rates based on an improving economy. First quarter GDP has been revised to -1% and most people are blaming the weather, but maybe the bond market is trying to tell us the economy is not going to be as strong as consensus predictions. Keep your eye on the economic reports for clues as to strength of the recovery.

S&P 500

December 2013 – June 2, 2014

1,924.60+1.03 (0.05%)

“If you don’t like something, change it.  If you can’t change it, change your attitude.”
-Maya Angelou


Don’t Worry, Be Happy

May 27, 2014

Bobby Mcferrin’s 1988 song – Don’t Worry, Be Happy – seems to sum up investors’ attitudes lately.  Despite a plethora of headwinds, investors are focusing only on the positives.  Perhaps if we hum a few lines everything might just be alright …

Here’s a little song I wrote
You might want to sing it note for note
Don’t worry be happy
In every life we have some trouble
When you worry you make it double
Don’t worry, be happy

For the week, the Dow Jones Industrial Average finished at 16,606.27 to close the week higher by 0.70%.  The broader-based  S&P 500 closed at 1,900.53 for an increase of 1.21% for the week.  The Nasdaq Composite jumped 2.33% to close the week at 4,185.81.  International markets finished higher, but trailed U.S. market gains as the Dow Jones Global (ex US) Index advanced 0.33% for the week.   After last week’s gains, market averages are now higher for the year-to-date period with the Dow Jones Industrial Average up 0.2% and the NASDAQ ahead by the same amount.  The S&P 500 is showing higher year-to-date gains as it is up 2.8%.  The 10-year Treasury sold-off slightly to close the week at a yield of 2.54% … up a bit from last week’s 2.52% yield.   

Economic news released last week was fairly mixed, but there was enough data to support a slightly positive bias in the economy.  Among the better-than-expected releases were existing and new home sales, a positive manufacturing report, and an in-line Leading Economic Index.  China’s PMI numbers were above consensus as were Japan’s machine orders.   Europe saw challenging news as its manufacturing PMIs were weaker-than-expected.  U.S. retail sales proved to be a bit disappointing  as broad-line retailers reported disappointing numbers (only to be partially offset by decent numbers out of Home Depot and Lowes).

We expect continued volatility in the markets, yet we still see market averages higher at year-end.  In the meantime – enjoy the beginning of summer, and don’t make your troubles double by worrying


May 19, 2014

The economic data that comes out each day often leaves you scratching your head.  Is the economy picking up or is it still sluggish?   The most recent estimate of GDP growth for the first quarter was just 0.1%.  Most economists are looking for a substantial improvement in the second quarter of 2 ½-3.0%.  Compare some of the recent positives and negatives.  Positives-unemployment claims for the most recent week decreased to a seven year low of 297,000; the New York state manufacturing index spiked up to its highest level since June 2010; small business confidence rose to its highest level since 2007; Japan’s GDP boosted by an expected sales tax increase rose 5.9%; and perhaps most interesting foreign governments bought $118 billion of our treasury notes and bonds year to date which absorbs much of the tapering undertaken by the Fed.  What about the negatives?  Retail sales were weak, down 0.1% and the consumer confidence number slipped from 84.1 to 81.8.  Perhaps the most surprising numbers were the CPI and PPI.  The CPI rose 0.3% and the PPI jumped 0.6% driven heavily by food prices.  Industrial production unexpectedly fell 0.6%; and many international reports were soft.   So what do we make of this confusing data?  This is a pattern we have seen for many months of ups and downs in the numbers.  The general trend does seem stronger.  Worrisome are the inflation numbers for this month, but here again the month to month changes often cancel each other out.  They will bear watching over the next several months.  Stay tuned.

“Success is not final, failure is not fatal: it is the courage to continue that counts.”
-Winston Churchill

Ups and Downs

May 12, 2014


Last week the DJIA set a fresh record high of 16583 and shares of small companies as well as biotech and internet stocks bounced back somewhat from recent weakness. Major indexes continued to fluctuate near record highs as investors weigh weak 1st quarter corporate earnings against improving economic reports. Biotech and internet stocks have fallen 25% from earlier highs and money has been shifting to safer dividend paying stocks such as utilities and telecom.

High dividend stocks are not as attractive as a few years ago when their yields were above those of U.S. Treasuries, but dividends matter. From 1970 to 2012 dividend yield accounted for two-thirds of real stock market returns in major markets according to Credit Suisse. Value has been outperforming growth year to date.

“To repeat what others have said, requires education; to challenge it, requires brains.”
-Mary Pettibone Poole

Spring Thaw, part II

May 5, 2014


The markets struggled mightily last week, but ended a difficult week with a ~1% advance. Economic news, especially on the domestic front, was mostly positive, while challenges came from abroad. The Ukrainian-Russian conflict, German economic stagnation and the rapidly inflating UK housing bubble are just a few of the international hot-spots.

US manufacturing continues to rebound from a deep-freeze winter as the ISM rose from 51.3 in December to  54.9 in April [2H13 averaged 56.2]. Payrolls grew by 288,000 while the unemployment rate fell to 6.3%, the lowest since September 2008. Unfortunately, the labor force shrunk by 806,000, which brought the participation rate down to 62.8%, its lowest rate since 1978. The WSJ has charted the “gains…and pains” succinctly as follows:

Overall, the US economy grew by only 0.1%, well below expectations of 1.2%. Housing, trade and investment were all drags. Consumers did rebound, but the consumption numbers were boosted by healthcare [Obamacare?] and heating expense increases. There was no money for incremental holiday cheer since so much was spent feeding the household furnace. In these situations, it is best to remember that:

“The Best Things in Life are Free” – performed in 1948 by the  Ink Spots

Three Yards and a Cloud of Dust …

May 1, 2014

The Woody Hayes market continues. Equity markets continued to grind last week on the heels of decent earnings and a notable pickup in M&A deals. Despite reasonable market and economic news, most of last week’s volatility and weakness came on Friday due to rising tensions in Ukraine.

For the week, the Dow Jones Industrial Average finished at 16,361.46 to close the week lower by 0.29%. The broader-based S&P 500 closed at 1,863.40 for a slight loss of 0.08% for the week. The Nasdaq Composite closed the week at 4,075.56 for a decline of 0.49% (due to selling in biotech and technology). International markets followed U.S. markets lower as the Dow Jones Global (ex US) Index dropped 0.31% for the week (following nice gains over the past months … perhaps catching-up to U.S. equities). After last week’s give-back, market averages are somewhat mixed for the year-to-date period with the Dow Jones Industrial Average down 1.3% and the NASDAQ lower by 2.4%. The S&P 500 is eeking-out a gain of 0.8% for the same year-to-date period. The 10-year Treasury rallied slightly to close the week at a yield of 2.67% … down a bit from last week’s 2.72% yield.

Economic news released last week was fairly mixed, but there was enough data to support a slightly positive bias in the economy. Among the better-than-expected releases were FHFA house prices, Richmond Fed manufacturing, durable goods orders, University of Michigan confidence and existing home sales. New home sales, Kansas City Fed manufacturing and jobless claims were less-than-expected. Purchasing Managers’ Index news out of China was in-line with expectations, and Eurozone PMI were ahead of expectations. Earnings news out of the U.S. is reasonable with 73% of the companies in the S&P 500 reporting better-than-expected results (about one-half of the S&P 500 companies have already reported).

We continue to expect more of the same over the next few months – increased volatility and markets grinding higher and lower on mixed news. Stay the course.

Spring is here, and as Candide said “… let us cultivate our garden”.