Most of the time, the U.S. stock market looks to 3 factors to support its upward trend – let’s grade each of the factors: CONSUMER SPENDING: I grade this factor a C (neutral). THE FED AND ITS POLICIES: I grade this factor an A+ (extremely favorable) because the FED cannot do much more than it is doing to support the stock market and asset prices. BUSINESS PROFITABILITY: I grade this factor a B+ (favorable). Many of the biggest companies in the U.S. reported their first quarter profits last week. Surprisingly, many beat their forecasted profits. The scoreboard with two-thirds of the S&P 500 companies reporting their earnings: 70% have beat their earnings estimates. And, the S&P 500 will likely report record earnings for this quarter. If this trend holds for the next two weeks, we will raise this grade. NOTE: the above grades remain unchanged from last week.
Daily Archives: May 7, 2013
The Economy
Last week, the big news, and somewhat of a surprise, was Friday’s Employment Report. Total nonfarm employment is up 2.077 million over the last year, and up 783 thousand so far in 2013 (a 2.35 million annual pace).
Private employment is up 2.166 million over the last year, and up 813 thousand so far in 2013 (a 2.44 million annual pace).
This would be the strongest annual rate for private sector job growth since 1999 (update) if this pace continues for the entire year! Imagine if there was less fiscal restraint … Hopefully fiscal restraint will ease later this year, and we will see an increase in economic growth.
Although this report was somewhat better than expectations (and much better than some of the “whisper” numbers), it is still a fairly weak job growth considering the slack in the economy (the upward revisions to February and March make this a more solid report). I’d like to see an average or 250 thousand jobs per month or more.
Of course public payrolls are continuing to shrink (four years of declining public payrolls now), and that is one reason job growth is sluggish.
And on construction employment: Construction employment is up 154 thousand over the last year, and up 79 thousand so far in 2013 (a 237 thousand annual pace). (Source: Calculated Risk).
Heads Up!
The home building industry has been a critical part of past economic recoveries. It makes sense to keep an eye on current developments, even forecasting what the future holds for the home building industry. My analysis is that the home building industry is poised for a sharp move ahead, thus adding a significant number of new jobs to the economy. My forecast is based upon the number (or lack thereof) of homes for sale. Keep in mind that a surplus of homes for sale like we saw in 2008 – 2012 will deter developers from starting new homes to build. GOOD NEWS: As of March 31, 2013, there were 1.93 million existing homes for sale in the USA whereas just 4 years earlier, the number of homes on the market was 3.65 million (source: National Association of Realtors). For more information, click: http://www.realtor.org/topics/existing-home-sales/data
The Numbers
Last week, U.S. Stocks and Foreign stocks increased. Bond decreased. During the last 12 months, STOCKS outperformed BONDS.
LAST WEEK-Here is a look the cause of the volatility created this week by hedge funds, institutions, and those we call “traders”.
Returns through 4-19-2013 | 1-week | Y-T-D | 1-Year | 3-Years | 5-Years | 10-Years |
Bonds- BarCap Aggregate Index | -.3 | .6 | 3.3 | 5.5 | 5.7 | 5.0 |
US Stocks-Standard & Poor’s 500 | 2.1 | 13.9 | 18.7 | 12.7 | 5.0 | 7.8 |
Foreign Stocks- MS EAFE Developed Countries | 1.2 | 9.1 | 16.4 | 4.4 | -4.1 | 6.2 |
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
Motivational Quote of the Week
“Nothing will ever be attempted, if all possible objections must first be overcome.” – Samuel Johnson
Investment Quote of the Week
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Warren Buffett
Letter to shareholders, 1989
“Your Financial Choices”
“Your Financial Choices” The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP. This week, Laurie will discuss: “Your personal income statement.” Laurie will take your calls on this topic and other inquiries this week. This show will be broadcast at the regular time. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton/Phillipsburg area; and, it is broadcast on FM 93.7 in the Fogelsville/Macungie area – or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.
Personal Notes
My daughter Erika moved from NYC to Lower Saucon Twp last month. When I travel from my home to her home to visit, I travel through the Rt 412 construction project running from the Sands Casino to Rt 78 in Hellertown. It is an impressive project creating 3 northbound lanes, 2 southbound lanes and, in some areas, one or two additional turning lanes. After its completion in August 2015, Route 412 will become an important entry point to Bethlehem and the Lehigh Valley. I predict significant commercial and retail development will occur along Rt 412 into Hellertown.
The Markets This Week
Everyone loves nice round numbers and the market produced its share last week on the way to a 2% rise. The Dow Jones Industrial Average crossed over the 15,000 mark Friday for the first time but failed to hold it by inches. While the venerable index disappointed floor traders, who broke out the Dow 15,000 baseball caps, the broader Standard & Poor’s Index broke through and finished above 1,600.
Investors were primed for a bad Friday on expectations of poor jobs data. Instead, the figures were stronger than anticipated, which improved sentiment. There’s been a notable sector mini-rotation, too, as tech stocks, one of the worst performers of 2013, jumped 5% last week and finished at the top.
On the week, the Dow closed at 14,973.96, up 1.8%, or 261 points, while the S&P 500 added 32 points to end at 1614.42, record highs for both. The Nasdaq Composite index added 99 points, up 3% to 3,378.63.
Friday, the Labor Department said payrolls rose 165,000 last month, and the unemployment rate fell to 7.5%, the lowest level since late 2008, from 7.6%.
With stocks hitting all-time highs, we asked for an update from the two market forecasters who have been successful in prior forecasts. Both see the 2013 rally continuing.
Stephen Auth, Federated Investors’ chief investment officer, remains unbowed. His 1,660 S&P 500 year-end 2013 doesn’t look so far off as it did on Dec. 31, when the S&P 500 finished at 1,426.
“We can get a market melt-up from here,” he opines, as a rotation back into cyclicals gathers steam. The 2013 rally has been piloted by defensive sectors, but in the last week or so, tech, industrial, and materials stocks have led because long-term risk perceptions are easing, he says.
Those perceptions remain, he adds, the issue for the market getting to 1,660 — still his 2013 target — and will affect the market price/earnings ratio, he says. “Most recently, the debt woes of Cyprus were supposed to be Europe’s Lehman moment, but it wasn’t. Before that it was the U.S. fiscal cliff, Spain, Italy, etc.,” he says.
Cyprus broke the bears’ back, he asserts. The market’s forward P/E, now less than 15 times S&P 500 index earnings-per-share estimates of $110, could rise to 17 to 18 eventually, he says, as the risk perception eases more. That view includes inflation of 1% to 2% and bond yields a more-normal 4% to 5%.
Tobias Levkovich, chief U.S. equity strategist for Citi Research, believes the market will move to 1,650-1,675 and overshoot his year-end target of 1,615. “People will capitulate to the trade,” he says, and first-quarter earnings are coming in all right.
Citi’s strategist says the market will correct in the fall on the possible tapering off of central-bank easing, continued European economic woes, and no resolution to the U.S. fiscal battles in Washington.
That’s a long way off, and investors still have to navigate the summer, the market’s traditional weakest period (Source: Barrons Online).