Daily Archives: August 12, 2014

The “Heat Map”

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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 CONTINUE to rate this factor B- (slightly above average).The second-quarter earnings season turned out to be a pleasant surprise. According to Zacks Investment Research, 453 companies in the S&P 500 have reported, with earnings up 8.7%, on average, from the year-earlier quarter’s and revenue ahead 4.6%. Two-thirds of the companies beat profit expectations, and an above-average 61.4% topped revenue estimates. This is much better than predicted, and the best showing since 2011’s fourth quarter.

The “Heat Map” is indicating the U.S. stock market is in good shape ASSUMING no international crisis. We have identified one potential international crisis hot spot:

Iraq and the “powder keg” in the Middle East including Gaza. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate this Middle East powder keg situation as a 3 at this time. This is unchanged from last week even in light of the inability to find a diplomatic solution to the Israeli/Gaza conflict. Risks continue to lurk, and they deserve our ongoing attention.

The Numbers

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Last week, U.S. Stocks and Bonds decreased. Foreign Stocks declined. During the last 12 months, STOCKS outperformed BONDS.

Returns through 8-8-2014

1-week

Y-T-D

1-Year

3-Years

5-Years

10-Years

Bonds- BarCap Aggregate Index

 .3

 4.2

  4.4

  2.8

  4.8

4.7

US Stocks-Standard & Poor’s 500

  .4

 5.8

16.2

22.6

16.3

8.4

Foreign Stocks- MS EAFE Developed Countries

-2.5

-2.4

 6.0

 8.6

  5.3

3.9

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”

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“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:

“What you need to know as a beneficiary when inheriting assets.”

Laurie will take your questions on this topic and others. 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

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The 2014 PGA: as thrilling as golf can be: a hotly contested 4 way race among golf’s greatest, darkness quickly approaching, along with lightning strikes from a threatening storm. The winner, Rory McIlroy, came back from being 3 down with only 9 holes to go.

The FED and Its Policies

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The FED cannot do much more than it is doing to support the stock market and asset prices. Two metrics that influence the Federal Reserve’s Monetary Policy are:

Employment: The Fed is looking for signs that the slack in the job market is declining. They are following the U6 “underemployment” rate or the level of people working part-time because they can’t find full-time work or are otherwise marginally attached to the labor force. The gap between the U3 (total unemployed) and the U6 (underemployed) suggests there is plenty of room for the labor markets to tighten up before there is a risk that rising wages will lead to inflation. The U3 and U6 unemployment measures are still higher than the peaks seen during previous recessions.

Inflation: The Consumer Price Index increased .30% in June over the prior month.  Year over year the inflation rate remained steady at 2.10%.  Two-thirds of the increase was primarily driven by the gasoline index.  However, since June, oil and gas prices have decreased which should lower inflation expectations and keep the Federal Reserve on the same easy monetary policy path.

The Markets This Week

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Rising geopolitical tensions and violence in global hot spots slowed, but didn’t deter, stocks from finishing a touch higher on the week. Trading was choppy amid heightened concerns about Ukraine and the Middle East, but the broad market rose 0.3% on light summer volume.

Friday saw a recovery from lows the day before, when investors scattered in the wake of loud Russian saber-rattling over the ongoing unrest in Ukraine and the U.S. authorization of airstrikes in Iraq. Shares ended higher than the week’s lows, but below the highs they reached Monday.

Seemingly ignored were continued good second-quarter earnings reports and strong U.S. macro-economic data, such as falling jobless claims and a better-than-expected non-manufacturing expansion number.

The broad rebound was led by a revived utilities sector, suggesting that many investors are seeking safer equity bets. This is supported by the weekly rise in Treasury bond prices as well, even though investors generally expect interest rates to rise in the coming 12 months. The question, of course, remains when.

Last week, the Dow rose 61 points, or 0.4%, to 16,553.93, and the S&P 500 index climbed 6.44 points to 1931.59. The Nasdaq Composite rose 18, or 0.4%, to 4370.90.

Friday saw a relief rally on easing fears about what the U.S. might do militarily in Iraq and the escalation in Ukraine, says Malcolm Polley, president of Stewart Capital Advisors. With the stock market price/earnings ratio “not cheap” at 16 times, interest rates at a secular bottom, and risks of war seemingly all around, “…equity investors don’t know where to go,” so it’s no surprise that safer utility shares rallied.

(Source: Barrons Online)