“Persistence can change failure into extraordinary achievement.”
– Matt Biondi
Monthly Archives: July 2014
Personal Notes
It seems to me the number of conflicts and flashpoints around the world is increasing. So, I research this and, I found my suspicion to be true, at least in one regard. The number of people displaced from their homes due to conflict exceeds 50,000,000 – the most since World War II. But, The UN has demonstrated it is ineffective in restraining conflicts. And, I am worried there is no other mechanism in place to prevent a continued escalation of conflicts around the world.
Thomas M. Riddle
President, VNFA
The Markets This Week
Stocks backtracked almost 1% last week in quiet trading, mainly on profit-taking and short-lived jitters caused by reports that a relatively small European banking firm missed debt payments. For a few moments last Thursday, it looked like a Greek banking crisis redux.
Riskier small caps took the brunt of the beat-down, suggesting the return of the “risk off” trade. But the drop likely had more to do with a minor reversal—so far—of end-of-second-quarter capital flows into small-cap stocks, and profit-taking from record highs reached the previous week. Nervousness about the European banking sector reemerged briefly Thursday morning after news reports said Portuguese conglomerate Espírito Santo International—the largest shareholder in the parent of Portugal’s largest bank, Banco Espírito Santo (ticker: BKESY)—missed a debt payment. Stocks pared the losses Friday.
With the 64-month-old bull market not far from all-time highs, investors will be better served by focusing on U.S. shores in coming weeks as second-quarter earnings tumble out in bunches from the likes of JPMorgan Chase(JPM), Intel (INTC), Johnson & Johnson (JNJ), and Google(GOOGL), among others in the Standard & Poor’s 500 index.
Despite the contraction in U.S. gross domestic product in the first quarter, there’s a basic market assumption that the economy is on a growth track, if a slow one, says Richard Weeks, partner at HighTower Advisors., as many assume, he adds.
Last week, the Dow Jones Industrial Average fell 0.7% or 125 points to 16,943.81, and the S&P 500 lost 18 or 0.9%, to 1967.57. The Nasdaq Composite index dropped 1.6%, or 70, to 4415.49. The Russell 2000 index fell 4% to 1159.93.
At the Federal Reserve’s Open Market Committee meetings last week, the Fed reaffirmed that its bond-buying monetary stimulus will wind down in October.
A U.S. economic recovery is taken for granted, says Michael Shaoul, chairman of Marketfield Asset Management. U.S. companies, by dint of keeping a tight lid on labor and capital expenditures, have produced growing earnings. To the extent there are negative second-quarter profit surprises, perhaps caused by labor or capital capacity constraints, it will lead to choppy action in the market in the near term, he says. The bull “needs good corporate data.”
Eventually, this market is going to correct and it’s not likely to be the result of woes at a small bank in a small country on the edge of Europe.
(Source: Barrons Online)
Heads Up!
The “Heat Map” is indicating the U.S. stock market is in good shape ASSUMING no international crisis. One potential international crisis hot spot is Iraq. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate the Iraq situation as a 4 at this time. This is unchanged from last week. Risks continue to lurk, and they deserve our ongoing attention.
The “Heat Map”
Most of the time the U.S. stock market looks to 3 factors (call them the “pillars” that support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: We have graded this factor B (above average) based upon the increase in retail sales as reported in recent economic reports.
THE FED AND ITS POLICIES: We continue to 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: We rate this factor B- (slightly above average).
NOTE: There is no change from the last report.
The Economy
The Personal Consumption Expenditures index (PCE) advanced 1.8% in May from a year earlier, the Commerce Department reported. PCE measures the prices paid by consumers for goods and services to reveal underlying inflation trends. Excluding volatile food and energy costs, prices rose 1.5% in May. Shelter costs such as higher rents pushed prices higher and medical costs are showing signs of a pick-up. PCE is an important indicator as the Feds policy has been using this as an indicator for its interest rate policy. For now the gauge remains below the Feds 2.0% threshold, but it remains an important data point worth watching.
Personal incomes increased .40% in May over the prior month and over the last 12 months the gauge has increased 3.43%. This is a good sign as growing incomes normally translate to increased consumer confidence as you will see below, and additional consumer spending. This is important for our economy as consumer spending makes up roughly two thirds of US Gross Domestic Product.
In other economic news new home sales increased to 504k in May, marking a big jump from Aprils 425k. Existing home sales rose in May and is now on a two month upward trend. Consumers remain confident as the Conference Board Consumer Confidence index read 85.2 in June, higher than the prior months reading of 82.2.
The Numbers
Last week, U.S. Stocks and Foreign Stocks declined. Bonds were unchanged. During the last 12 months, STOCKS outperformed BONDS.
|
Returns through 6-27-2014 |
1-week |
Y-T-D |
1-Year |
3-Years |
5-Years |
10-Years |
|
Bonds- BarCap Aggregate Index |
.4 |
3.8 |
4.4 |
3.4 |
4.8 |
4.9 |
|
US Stocks-Standard & Poor’s 500 |
-.1 |
7.2 |
24.1 |
17.8 |
18.8 |
7.8 |
|
Foreign Stocks- MS EAFE Developed Countries |
-.9 |
2.6 |
20.1 |
6.4 |
8.5 |
4.0 |
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.
“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®, AEP®. This week, Laurie will discuss:
“Independence Day – getting out of debt and building a cash management program.”
Laurie will take your calls on this topics and other inquiries this week. 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 and Phillipsburg area; and, it is broadcast on FM 93.7 in the Fogelsville and 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.comand visit www.wdiy.org.
Personal Notes
My wife Jo Anne and I just returned from a 4 day vacation with some friends in Manchester Vermont. Manchester is located in rustic southern end of the state amid the Green Mountains – an impressive array of tree covered peaks absent microwave or cell towers. And, it’s home to rustic towns with friendly locals. Several challenging golf courses invite the player to take in the gorgeous views between striking golf balls. The shopping is worth the trip too: the Vermont Country Store as well as Orvis outlet store are for real. Art galleries and woodworking shops are bountiful. Oh, don’t forget the numerous Ben & Jerry ice cream stores – I think their new “turtle cheese cake” ice cream is the best ever. Since we can drive Vermont in about 4 ½ hours, I think Jo Anne and I will be back.
Thomas M. Riddle
President, VNFA
Motivational Quote of the Week
“He who does not move his feet will not stumble, but he won’t get ahead either.”
– Gonzo Arzuaga