Category Archives: economy

The Markets This Week

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Stock prices fell about 1% last week,
ostensibly on the lack of a political accord ahead of looming deadlines for the
federal government budget and for raising the debt ceiling. With some kind of
deal needed by Oct. 1, political wrangling and brinkmanship caused investors to
cash in gains from the all-time highs registered Sept. 18.

The
more important issue, however—and here we’re going to assume the politicians
eventually act like adults and reach a deal—is lurking beneath the budget
turmoil. The question is: How and when will the Federal Reserve eventually
taper the quantitative easing (QE) policy that has kept interest rates
artificially low and stock prices high.


The
Fed surprised investors on Sept. 18 by not tapering. But after a strong, albeit
brief, rally, uncertainty has ensued. Since then several members of the central
bank have made speeches that have given contradictory signals about the timing
of the promised tapering of the bank’s $85 billion monthly bond buying.


The
Dow Jones Industrial Average gave up 193 points, or 1.3%, to 15,258.24, while
the S&P 500 index lost 1%, or 18 points, to 1691.75. Both indexes managed
only one up session, Thursday. Bucking the trend, however, was the Nasdaq
Composite Index, which finished the week fractionally to the upside, closing at
3781.59.


The
question for investors ahead of the Oct. 1 budget deadline is, “How big a
showdown is this going to be?” says Giri Cherukuri, head trader at
Oakbrook Investments. Assuming a deal is struck, investor focus can return to
the economy and earnings, and the market can work higher, he says, adding,
“It’s going to be wait and see for the next couple of days.”


However,
if there’s no deal by the deadline Tuesday, shares will likely continue to drop
for as long as the politicians in Washington, D.C., bicker.


Without
an agreement, stocks probably would fall further than they would rise in the
event of a deal, adds Michael Yoshikami, CEO of Destination Wealth Management.


Still,
it’s the central bank’s policy that matters most, he adds. “There are
conflicting signals coming out of the Fed, and—while investors know that QE is
eventually going to end—people don’t know what to make of it.”


The Fed’s Sept. 18 decision suggests
the economy isn’t growing strongly enough to handle any slackening of its QE
stimulus. As a consequence, the coming third-quarter earnings reporting season
might assume greater importance (Source: 
Barrons Online).


Heads Up!

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THE FED SURPRISES!

The Federal Reserve unexpectedly refrained from reducing the $85 billion pace of monthly bond buying, saying it needs to see more evidence of improvement in the economy.

“The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington. While “downside risks” to the outlook have diminished, “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement.”

Chairman Ben S. Bernanke and his policy making colleagues refrained from paring record accommodation as rising borrowing costs show signs of slowing the four-year expansion. Treasury yields have jumped since May, when Bernanke first outlined a possible timetable for a reduction in the asset purchases that have swelled the Fed’s balance sheet to $3.66 trillion.

The Fed chairman has orchestrated the most aggressive easing in the Fed’s 100-year history, pumping up the balance sheet from $869 billion in August 2007 and holding the main interest rate close to zero since December 2008.

“Asset purchases are not on a preset course, and the committee’s decisions about their pace will remain contingent on the committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.”

The Economy

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Fed
officials want to start scaling back their $85 billion-per-month bond-buying
program this year and could take a small step in that direction at their policy
meeting Sept. 17-18. But the economic data in recent months have been ambiguous
and new threats to the economy and markets loom, which could prompt officials
to wait longer before acting.

The Economy

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Recent
downturn in activity in the home sales has caught my attention – I suspect it
is linked to the uptick in mortgage rates.  
The report on home sales is only one month’s data so we would be wise to
avoid putting too much importance on it. 
However, we must continue to watch this data carefully because the U.S.
real estate recovery is the keystone to the U.S. economy rebound.  

The Economy

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You could not tell from the stock market’s poor showing last week, but the economic news was positive, not negative.  Housing data was better than expected and the jobs data was strong.  Perhaps, the data was too strong – too much of a good thing may mean the FED is more likely to tighten its monetary policy.

The Economy

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Those hoping for good economic news last week were rewarded.  U.S. jobless claims four-week average falls to lowest level since November 2007.  All 13 manufacturing categories increased in June — this is has not happened since 1992.  The trade deficit narrows to $34.2B in June, narrowest it has been since 2009.


 


And, there was a lack of bad economic news during the week.

The Economy

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Not all economists and economic experts believe the U.S. economy is improving.  For example Comstock Partners has this to say:


 


Although the market celebrated today’s releases on weekly unemployment claims and the ISM Manufacturing Index, the trajectory of this weak economic recovery has probably not changed.  Both of these indicators are affected by the difficulty the government has in gauging the seasonal adjustment factors in this part of the year as a result of the timing of the annual auto industry shutdowns for re-tooling.  In our view, the 1st and 2nd quarter GDP results offer a much more representative outlook for an economy that seems to be losing steam rather than picking up as most observers believe.


 


The GDP results for the first half are a more accurate indicator of how weak the economic recovery has become.  An unexpectedly large rise in inventories accounted for 24% of 2nd quarter growth, while consumption was up only 1.2%, compared to a still anemic 1.5% in the prior quarter.  Final demand was up only 1.3% in the 2nd quarter and 0.3% in the 1st.  The need to work off the excess inventories will tend to impede second half growth.  In addition government spending was down less than expected, indicating that further layoffs related to the sequester are still ahead. 


 


My observation is that I am not sure whether Comstock is correct or not.  But, it does seem our economy is growing but growing at a slower pace than during economic rebounds in the past.

The Markets This Week

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The Goldilocks economy is back. Soft job news Friday wasn’t enough to dent another big week for equities, with the major indexes setting new highs Friday—again. The continuing excitement has come on generally “just good enough” data from the U.S. economy, from second-quarter corporate earnings, and even from the jobs arena.


In many cases, bullish data—such as Thursday’s lower jobless-benefit filings—came with ancillary figures or revisions that undercut the trend, like Friday’s weaker-than-expected hiring data. Yet the combination didn’t set off investor fears the reports would sway the Federal Reserve Board to speed up an eventual withdrawal of monetary stimulus.


In general the economic figures “were nothing great, but nothing too bad,” says Dan Morgan, a portfolio manager at Synovus Trust.


The Dow Jones Industrial Average rose almost 100 points to 15,658.36, up 0.6%, a new high and up 19.5% this year. The S&P 500 index gained 18 to finish at 1709.67, also a record high, the 25th this year. The tech heavy Nasdaq Composite index jumped 2%, or 76 points, to 3689.59.


In the way of technical indicators, the market shows strong underpinnings: The number of stocks making new 52-week highs remains firm, those over their 50-day moving average hover around 80%, and breadth is strong.


It does seem as if the Goldilocks economy is back, says Stephen Massocca, a managing director at Wedbush Equity Management. Older readers remember that the 1995-1996 stock rally came amid U.S. domestic-product growth that was neither too fast to set off inflation fears nor too slow to ignite earnings-growth worry. “It’s a bumbling, stumbling recovery,” Massocca says of today’s U.S. economy.


Investors are again wrestling with whether they want a stronger economy or not. Slower growth means the Fed’s punch bowl remains available but that corporate earnings increases, now a tepid 4%, could ease even more. Faster economic expansion would help profits—and therefore stocks—but investors fear the early withdrawal of central-bank stimulus, a big propellant of this year’s hefty gains (Source:  Barrons Online).

The Economy

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The majority of economic reports released last week indicated the economy continues to grow and strengthen.  And, University of Michigan’s consumer sentiment survey registered its highest level in 6 years.

On the negative side, some real estate industry reports indicate the recent rise in interest rates is creating a negative effect on its activity. If rates resume their upward trend, more damage to the real estate recovery could occur.

Heads Up!

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As we forecasted in the last three issues of The Weekly Commentary, the FED’s Chairman, Ben Bernanke, calmed the bond market using wording in his Congressional testimony that pressured the bond market to reduce interest rates.  We suspect this tactic will continue with the end result of interest rates on mortgages, bonds with a maturity of 5 or more years, and intermediate/long term bond funds will decline for the next 1 to 3 weeks. This tactic which I call “jawboning” can work for only a limited time period until economic reality sets in again at which time interest rates could move higher.  Our interest rate forecast is for interest rates on the above mentioned securities will generally decline for 1 to 3 weeks or longer, but rise over the next 5 to 10 years.