The market gyrations of the past few weeks—after a 21-month ride up to the highs of Sept. 18—have investors fearful and perplexed. The cure is to take dispassionate look at the economic facts and business conditions and tune out the “noise” coming from the media. I recommend stop listening to the media’s conjecture about what is likely to happen in the future. Instead, focus on the 3 pillars that generally support the stock market prices- what I refer to as the “Heat Map”.
Monthly Archives: October 2014
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 grade this factor to A- (very favorable)
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). In general, the third-quarter earnings season has shown healthy growth. With over 40% of the S&P 500 components reporting, some 75% have beaten earnings-per-share expectations and 60% revenue projections, above the five-year average.
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in good shape ASSUMING no international crisis. We have added the risk of an EBOLA pandemic to the “powder keg” in the Middle East to the situations to be watched. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these collectively as a 3 at this time. Risks continue to lurk, and they deserve our ongoing attention.
The Economy
Inflationary pressures continue to remain a non-issue. The United States consumer price index increased .10% in September over the prior month. Year over year inflation stands at 1.70 percent. We’ve been reporting over the last several weeks’ energy costs have been declining, which should keep inflation muted.
The US 30-year fixed mortgage rate as reported by the Mortgage Bankers Association averaged 4.10 percent in the week ending October 18th, which is down from the prior week average of 4.20 percent. Lower interest rates are beginning to create a tailwind for housing as mortgage applications increased 11.6 percent for the week ending October 18th. Existing home sales rose 2.40 percent and new home sales rose .20 percent in September.
US initial jobless claims came in at a seasonally adjusted 283,000 in the week ending October 18th. The recent trend for initial jobless claims below 300k confirms strength in the employment market. The Chicago Fed National Activity Index, which is designed to gauge overall economic activity and related inflationary pressure increased to .47 in September from -.25 in August. A positive index reading corresponds to growth above trend.
The data from the prior week points to continued expansion within the US economy. Lower energy prices should improve consumer’s wallets as we head into the all-important holiday shopping season. Additionally, benign inflation places less pressure on the Federal Reserve to increase rates thus providing support to the stock market.
The Numbers
Last week, U.S. Stocks and Foreign Stocks increased and Bonds decreased. During the last 12 months, STOCKS outperformed BONDS.
|
Returns through 10-24-2014 |
1-week |
Y-T-D |
1-Year |
3-Years |
5-Years |
10-Years |
|
Bonds- BarCap Aggregate Index |
-.3 |
5.3 |
4.4 |
3.1 |
4.4 |
4.4 |
|
US Stocks-Standard & Poor’s 500 |
4.1 |
8.0 |
14.5 |
18.7 |
15.1 |
8.2 |
|
Foreign Stocks- MS EAFE Developed Countries |
2.4 |
-4.9 |
-3.7 |
9.2 |
5.2 |
5.7 |
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 and guest host Matt Petrozelli COO and Executive Vice-President of Valley National Financial Advisors, will discuss: “How technology has changed the face of investing.”
Laurie and Matt will take your calls on this topic 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.com and visit www.wdiy.org.
Motivational Quote of the Week
“I said “Somebody should do something about that.” Then I realized I am somebody.”
– Lily Tomlin
Personal Notes
I attended the Penn State game and was disappointed with the outcome. But, the ride was Brilliant! The fall foliage was at its max color in central Pennsylvania. The trip up through the mountains along the Juniata River on Route 322 to State College from Harrisburg was breath-taking. The Route 322 upgrade certainly propels it into the list of Pennsylvania’s most scenic roads.
Thomas M. Riddle
President, VNFA
The Markets This Week
Stocks bounced back last week in a powerful upswing that saw the Standard & Poor’s 500 index soar 4.1%. The rise erased the deep losses of the previous week and then some. Equity markets around the world joined in the rally, up about 2%.
“Investors were buoyed by a combination of sentiment improving on better global economic figures and solid U.S. third-quarter earnings results,” says Yousef Abbasi, a market strategist at JonesTrading.
In particular, the market was bolstered by profit reports from some of the biggest industrial names, continued good U.S. macroeconomic numbers, and better-than-expected—if still unimpressive—euro-zone and Chinese data.
The strong earnings news—from the likes of Caterpillar (ticker: CAT), 3M (MMM), Microsoft (MSFT), and General Motors (GM)—came later in the week and seemed to expunge the memory of the poor showings. The latter, for example, came from equally large mega-cap companies such as International Business Machines (IBM), Amazon (AMZN), AT&T (T), McDonald’s (MCD), and Coca-Cola (KO).
The Dow Jones Industrial Average, which is filled with many of the above-named stocks, didn’t do as well as the S&P. It rose 425 points or 2.6% to 16,805.41. The S&P 500 index gained 78 to 1964.58. The Nasdaq Composite index added 225, or 5.3% to 4483.72, while the Russell 2000 picked up 3.4% to 1118.82.
(Source: Barrons Online)
Heads Up!
RECOMMENDATION: We recommend you review your planned withdrawals from your portfolio for the next 18 months and invest this amount in short term bond funds and other stable investments – and, not invest any of this in the stock market or stock market mutual funds.
REASON: We are receiving signals on the stock market pointing in two different directions. The details follow:
- The fundamental analysis signal for the economy, which I report weekly to you as the “Heat Map” continues to be strong. The trend for the 3 pillars comprising the Heat Map is improving. Thus, the fundamental analysis would say BUY. Note: fundamental analysis attempts to be impartial as to investor emotions and behavioral attitudes toward the markets for intermediate and long term time periods.
- The technical analysis signal for the market has weakened materially and indicates SELL. Technicians seek to identify momentum, price patterns, reversals, channels, lines of support, resistance and other market trends based upon charts or computer based computations. Note: technical analysis is typically short-term and used by many day traders to take advantage of investor emotional reactions and behavioral attitudes.
We continue to believe it is exceptionally difficult to time the market for quick developing corrections. For most investors, the best course of action is “stay the course”, but keep out of the stock market the money you intend to withdraw (i.e., to use)during the next 18 months.
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 grade this factor to A- (very favorable)
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).
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in good shape ASSUMING no international crisis. We will add the risk of an EBOLA pandemic to the “powder keg” in the Middle East to the situations to be watched. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these collectively as a 3 at this time. Risks continue to lurk, and they deserve our ongoing attention.