The Gross Domestic Product (“GDP”) economic report has been released for the first quarter 2016. It shows a meager .5% increase. But, we do not put much faith in its accuracy. The Bureau of Economic Analysis, according to the Wall Street Journal, uses a flawed calculation for the seasonal adjustment. The Bureau could make an adjustment but it has chosen not to thus far.
Given the math of seasonal adjustments, the first quarter growth is being understated and the three remaining quarters understated.
The take-away is to keep in mind the economy is stronger than it seems in the economic reports.
Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade is A- (very favorable).
THE FED AND ITS POLICIES: This factor is rated B (favorable). The U.S. economy can handle higher rates as long as the pace of future interest rate increases is slow. Fed Chair Janet Yellen made clear in her press conference after the December meeting that the path higher would be “gradual”.
The Fed’s plan to gradually raise rates in the coming years won’t derail the economy and brings some certainty to the market, says Morningstar’s Bob Johnson.
BUSINESS PROFITABILITY: This factor’s grade is aC-(below average). So far, first quarter corporate-earnings reports weren’t as bad as anticipated but certainly nothing to write home about.
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 4. While decreased, these risks still deserve our ongoing attention.
Last week, Bonds increased and U.S. Stocks and Foreign Stocks declined. During the last 12 months, BONDS outperformed STOCKS.
Returns through 4-29-2016
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
.4
3.2
2.8
2.2
3.5
4.9
US Stocks-Standard & Poor’s 500
-1.0
1.9
.9
11.5
11.2
7.0
Foreign Stocks- MS EAFE Developed Countries
-.9
-.6
-8.9
1.7
1.5
1.4
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.
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 don’t know in financial planning might hurt you.”
Laurie will discuss situations that could have had a different financial outcome if only the person had known some useful strategies. She will take listener’s questions – live on-air, off-air or through the website www.yourfinancialchoices. Questions may be submitted early through www.yourfinancialchoices.com by clicking Contact Laurie.
One of the best personnel moves Valley National ever made was to recruit Laurie Siebert over 16 years ago. Prior to joining Laurie had obtained her Certified Public Accountant designation, and was working for a local law firm. Valley National was seeking a caring professional with income tax knowledge, great communications ability, and the desire for more knowledge. It was a great match. Once on board with Valley National, Laurie obtained her Certified Financial Planner and Accredited Estate Planner designations and hosted her own weekly radio program, “Your Financial Choices”. In all facets, Laurie uses her own knowledge to help others by educating and providing guidance to Valley National’s clients.
And, Laurie has been active in the financial planning industry by currently serving as President of the Estate Planning Council of the Lehigh Valley and as the Personal Financial Planning coordinator for the PICPA’s CPA Journal.
Laurie has been generous with her time outside the office, too. In addition to raising 3 children with her husband Carl, Laurie serves on the Leadership Team for the American Heart Association Go Red for Women Lehigh Valley, as a cabinet member of the Women’s Leadership Council of United Way of the Greater Lehigh Valley, and the organizing committee for TEDx Lehigh River.
Organizations are noticing: BW NICE Lehigh Valley Chapter recently honored Laurie as its 2016 Businesswoman of the Year. “BW NICE” stands for Business Women Networking Involving Charity & Education. It brings women together to gain meaningful business connections, learn new ways to succeed and foster an empowering environment. For details on BW NICE, click www.bwnice.org
Equities fell more than 1% as the major indexes sold off in the latter half of the week. Tech stocks took the brunt of the damage. Several factors combined to disappoint investors, including weak U.S. economic data, a continuation of lousy first-quarter earnings from tech companies, and a Bank of Japan decision not to introduce new stimulus.
Tech stocks, which lost 3.6% last week, were particularly battered by fallout from Apple ’s first quarterly sales drop in 13 years. Apple shares declined 11% to $93.74. First-quarter U.S. gross domestic product, out Thursday, wasn’t encouraging, either, with GDP expansion a sluggish 0.5% in the period, weaker than forecast – see additional information in the “Heads Up” section.
Investors were treated to the relatively unusual phenomenon of Europe growing faster than the U.S. Euro-zone first-quarter GDP rose 0.6%, a blistering rate by Continental standards, and higher than expected. That relative disparity drove the U.S. dollar down some more.
For the past 18 months, investors have bemoaned the extraordinarily strong greenback, which depresses overseas sales at U.S. multinationals. Last week, however, greenback weakness became an issue. To the extent that it indicates that U.S. expansion is slow compared to the rest of the world, investors don’t like it.
Last week, the Dow Jones Industrial Average lost 230 points to 17,773.64 or 1.3%. The S&P 500 index fell 26 to 2065.30. Tech stock weakness again hit the Nasdaq, which fell 2.7% to 4775.36.
A whiff of global growth fears returned on the dollar woes, says John Canally, an investment strategist. The concern that central banks are “out of bullets” also hasn’t gone away, he says. Unlike in the January-February market downdraft, however, commodity prices, oil especially, are being supported by the lower dollar.
Outside the tech sector, reactions to earnings were relatively muted, adds Edward Perkin, chief investment officer at Eaton Vance Management. In tech, the stocks that are being punished the most are the “heavily owned issues,” like Apple and Alphabet (GOOGL), where “good earnings numbers weren’t good enough,” if they fail to meet expectations.
Though the energy sector should be less of a drag on earnings in the future, says Joseph Amato, chief investment officer of Neuberger Berman, “…I wouldn’t chase the market at these levels until there’s greater clarity on earnings.”
Since last summer, the market has attempted two major rallies that have failed to surpass all-time highs set in May 2015. This latest one has seen some strong breadth. Even so, “the momentum just isn’t there,” says Perkin, and we agree.
The second-longest bull market in history is stalled, waiting for a catalyst, and that will be earnings growth. If the market is convinced profits will expand, it’s party on. Without it, chances are the S&P 500 index will continue to shilly-shally roughly between 2000 and 2100.
