Will October be ‘spooky’ for stocks?
During the past three months, the stock market has turned in one of its strongest performances in U.S. history. Since early June, the Dow Jones Industrial Average has gained 12%. If this rate of increase continued, it would offer close to a 50% annualized gain. [1] But of course, such expectations are entirely unrealistic. While we are grateful for market gains when we can notch them, we must acknowledge that healthy markets move up and down.
In keeping with this behavior, markets closed slightly down last week as investors weighed promises by the Fed and other central banks against signs of economic hurdles and political challenges ahead. The S&P closed 0.38% lower, the Dow lost 0.1%, and the Nasdaq trimmed 0.13%. [2]
Federal Reserve officials made the rounds last week, giving speeches and expressing support for the Chairman’s efforts to stimulate the economy. Some comments lead analysts to believe that the Fed will act on its strong mandate and take further action if necessary; however, most believe it will leave policies unchanged until the end of the year. While investors cheered the recent aggressive Fed actions, some believe the move indicates the U.S. recovery is still uncertain at best. [3]
As we near the end of the third quarter, we will begin to see the first corporate earnings reports. Profit warnings from companies in the S&P 500 are outpacing positive pre-announcements by the largest margin in 11 years, indicating that businesses are still feeling the economic crunch. [4] Because companies have been cutting earnings estimates for months already, there is a possibility that weak earnings could trigger a decline in stock prices. Even so, equities could heat up in the first week of October due to market-moving events like the release of unemployment data, the presidential debate, and the Eurozone finance meeting.
As the elections near, politicians are ramping up the rhetoric, but still failing to deal with the fiscal cliff, a huge issue in the minds of analysts and investors. Although we wish that legislators would get their priorities straight and do their jobs, it is unlikely that any major resolution will be reached until after the elections. Should you have any questions about how the fiscal cliff or any other issue could affect your personal financial picture, please contact us. We are always happy to provide guidance.
ECONOMIC CALENDAR:
Monday: Dallas Fed Mfg. Survey
Tuesday: S&P Case-Shiller HPI, Consumer Confidence
Wednesday: New Home Sales, EIA Petroleum Status Report
Thursday: Durable Goods Orders, GDP, Jobless Claims, Pending Home Sales Index
Friday: Personal Income and Outlays, Chicago PMI, Consumer Sentiment
HEADLINES:
Homebuilders see strong third quarter. In a further sign that the housing sector may have turned the corner, U.S. homebuilder KB Homes, reported strong third quarter earnings. The company reports that it is experiencing rising orders for new homes as inventory drops and housing prices rise. [5]
Jobless claims rise in 26 states. Unemployment rates rose in 26 states in August, according to a Labor Department report, although most states still showed lower rates than a year ago. 42 states and the District of Columbia had lower rates last month than in August 2011. [6]
Oil prices near $93 per barrel. Oil prices rose higher Friday as traders weighed slowing economic growth and reduced demand for oil against potential supply disruptions in the Middle East. Higher energy prices as we head into the winter months could hit consumer spending hard. [7]
Concern grows about China’s hard landing. A raft of negative economic reports is raising concerns that China’s economy will not recover. A one-two punch of softening domestic and foreign demand is threatening the giant’s economic stability. A recent report shows that manufacturing grew only slightly in September and that foreign direct investment fell in August for the third month in a row. [8]
QUOTE OF THE WEEK:
“Be a student by staying open and willing to learn from everyone and anyone” Dr Wayne Dyer
Will QE3 be a ‘blessing’, or a ‘curse’ ?
Markets experienced a sharp rally last week as the Federal Reserve unleashed its long-expected quantitative easing. The major indices closed higher with The S&P gaining 1.94%, the Dow gaining 2.15%, and the Nasdaq picking up 1.52%.
Under the pressure of the previous week’s disappointing jobs report, the Fed finally let the genie out of the bottle. The report showed that the economy had added just 96,000 jobs in August, a number much lower than economists expected. This was enough to get the Fed to finally launch long-awaited additional quantitative easing. Under QE3, the Fed has made an open-ended commitment to buy mortgage-backed securities to the tune of $40 billion per month. The move is designed to lower long-term interest rates and spur more lending to businesses and consumers. The Fed said it also will “closely monitor” the economy and continue these purchases and possibly expand them until it sees substantial improvement in the outlook for the labor market. This open-ended commitment means that QE3 will last as long as the Fed wants it to and we cannot be sure when it will end.
The Fed’s recent action sends a signal to businesses and investors that it fully intends to use its powers in a major (and unusual) way to spur economic growth. That is a powerful statement to make in a time of economic uncertainty. QE3 is designed to convince businesses to invest in the future by assuring them that the Fed stands ready to do whatever is necessary.
On the negative side, our concern is that QE3 will simply add to the already enormous national deficit without dealing with the underlying causes of our current economic weakness. We are also skeptical that the Fed’s actions will convince banks to lend aggressively; rates are already at historic lows, but businesses and homeowners are still having trouble borrowing from gun-shy lenders. In short, QE3 is not a magic bullet that will solve our economic issues. In fact, it may actually add to our problems when the Fed is forced to unload all the bonds it has purchased – not just the QE3 bonds, but the $2 trillion in Treasury bonds it bought during QE1 and QE2 as well. Selling all that debt will drive up interest rates and may stall the recovery just when it has finally taken off.
So, what can we expect next? It’s clear that markets are jubilant about finally seeing what the Fed had in store. However, once investors get over their reaction high, if the economic numbers don’t show improvement, markets will likely retreat. Although we hope that businesses respond positively to the Fed’s move by increasing hiring and capital investment, we really want to see Congress pull itself together enough to address the fiscal cliff and tighten its purse-strings. If you have any questions about how QE3 or any economic issue will affect your portfolio, please feel free to call or e-mail us. We are delighted to be of service..
HEADLINES:
Consumer Sentiment Jumps in September. Consumer sentiment unexpectedly rose to its highest level in four months as Americans became more upbeat about their economic and job prospects. Although this could be a temporary bounce fueled by the recent presidential candidate conventions and the stock market rally, a significant increase could lead to increased consumer spending.
Credit card use drops for second month in July. Americans cut back on credit card use in June and July amid concerns about unemployment and slow economic growth. According to the Federal Reserve report, consumer debt declined even as overall consumer spending grew, indicating that consumers are paying with current income.
U.S. Credit Rating Cut by Egan-Jones. The ratings firm cut America’s credit rating to AA-, citing its opinion that QE3 would hurt the U.S. economy by increasing federal debt and devaluing the dollar, making important commodities expensive and widening the trade gap.
Gas prices push up inflation. A rise in gas prices pushed up inflation in August by the largest increase since 2009. Rising gasoline prices accounted for about 80% of the increase. Although other indicators show that inflation is contained, pressure at the pump could rein in consumer spending.
QUOTE OF THE WEEK:
"It’s never too late to be what you might have been." – George Eliot
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Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
Diversification does not guarantee profit nor is it guaranteed to protect assets
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
The Housing Market Index (HMI) is a weighted average of separate diffusion indices based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. Each resulting index is then seasonally adjusted and weighted to produce the HMI.
The Pending Home Sales Index, a leading indicator of housing activity, measures housing contract activity, and is based on signed real estate contracts for existing single-family homes, condos and co-ops. The PHSI looks at the monthly relationship between existing-home sale contracts and transaction closings over the last four years. The results are weighted to produce the index.
The Chicago Board Options Exchange Market Volatility Index (VIX) is a weighted measure of the implied S&P 500 volatility. VIX is quoted in percentage points and translates, roughly, to the expected movement in the S&P 500 index over the upcoming 30-day period, which is then annualized.
The BLS Consumer Price Indexes (CPI) produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. Survey responses are seasonally adjusted and weighted to produce a composite index.
The Conference Board Leading Economic Index (LEI) is a composite economic index formed by averages of several individual leading economic indicators, which are weighted to produce the complete index.
Google Finance is the source for any reference to the performance of an index between two specific periods.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
Past performance does not guarantee future results.
You cannot invest directly in an index.
Consult your financial professional before making any investment decision.
Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.
By clicking on these links, you will leave our server as they are located on another server. We have not independently verified the information available through this link. The link is provided to you as a matter of interest. Please click on the links below to leave and proceed to the selected site.
Bulls and Bears getting set to battle…
The major indices closed out last week in positive territory despite a disappointing jobs report as investors’ disappointment vied with renewed hope that the Fed could take action as early as next week’s FOMC meeting. The S&P gained 2.23%, the Dow gained 1.13%, and the Nasdaq closed up 2.26%.
In light of the sustained rally, we want to discuss some of the forces at work right now and take a look at both the bull and the bear case for coming weeks.
Headwinds could trigger a market decline:
The market run-up puts the S&P trading at 13.3 times forward earnings estimates, meaning that investors are paying just over $13 for each dollar of expected corporate earnings. Given the insipid corporate performance of the second quarter, and reduced expectations for the year, most analysts don’t believe that markets will move significantly higher. Weak economic fundamentals may be a drag on market movements as we get closer to the end of the year. Last week’s disappointing jobs report underscored just how far the economy still has to go before it can be considered healthy. Although the overall unemployment rate fell to 8.1%, that decline can be largely ascribed to discouraged Americans dropping out of the job search.
Chronic troubles in Europe and Asia may continue to dominate headlines and provoke concern among investors about possible contagion. National elections in the Netherlands and a German ruling on the legality of Europe’s major bailout fund could severely hamper efforts to knit Eurozone countries more closely together. Domestically, presidential elections have often produced a great deal of uncertainty in markets. With January’s fiscal cliff looming, investors will look to politicians to provide leadership, potentially creating market turbulence as the parties duke it out.
Tailwinds could push equities higher:
There are important events coming down the pike that could lengthen the rally such as additional quantitative easing by the Federal Reserve. This is the big payoff traders have been waiting for all summer, and one of the major factors in the rally. Quantitative easing is getting so much attention because monetary policy is pretty much the only game in town for improving the economy right now, given the political impasse in Congress. It’s hard to know when the Fed will implement further easing, although many expect it to happen this year.
Activity by foreign central banks in Europe and Asia could also give stocks a bump. Last week’s bond-buying announcement by the European Central Bank did a great deal to reassure investors that Eurozone bankers and politicians have the backbone to push through much-needed changes to fiscal and monetary policy. The plan is Europe’s most ambitious yet and will be able to buy unlimited amounts of government bonds to stabilize the debt of struggling countries.
In short, there are a great number of conflicting factors at play right now that could push equities higher or pull markets down. Regardless of how things move, we are committed to keeping you informed and to guiding you as you make investment decisions.
ECONOMIC CALENDAR:
Tuesday: International Trade
Wednesday: Import and Export Prices, EIA Petroleum Status Report
Thursday: Jobless Claims, Producer Price Index, FOMC Meeting Announcement, FOMC Forecasts, Treasury Budget, Chairman Press Conference
Friday: Consumer Price Index, Retail Sales, Industrial Production, Consumer Sentiment, Business Inventories
HEADLINES:
U.S. worker productivity grew in second quarter. Despite slower hiring, companies were able to get more from their workers this spring. Productivity, measured as the amount of output per hour, grew 2.2%, beating the consensus estimate of 1.6%. While this may have a positive effect on corporate earnings, it may mean companies will need to hire fewer workers.
U.S. economy loses global competitiveness. According to a recent World Economic Forum report, the U.S. economy has become less competitive, slipping two places to become the world’s 7th most-competitive economy, just behind Germany and the Netherlands. Economists cited concerns over fiscal health and macroeconomic stability as reasons for the decline.
China urges greater economic cooperation. While announcing a new government infrastructure fund designed to boost internal spending, Chinese president Hu Jintao expressed concern over the slowing global economy and urged greater cooperation between Asian-Pacific countries. Such an announcement could presage a move to coordinate further monetary policy easing.
Silver lining: Small businesses added 99,000 new jobs in August. Despite an overall disappointing jobs report, many sectors showed improvement in August. Small and medium-sized businesses added a combined total of 185,000 new jobs in August, compared with 16,000 jobs added by large companies. The service and construction sectors also added significant jobs, indicating that some areas of the economy are doing well.
QUOTE OF THE WEEK:
“It’s not the will to win that matters—everyone has that. It’s the will to prepare to win that matters.” – Paul "Bear" Bryant
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Share the Wealth of Knowledge!
Please share this market update with family, friends, or colleagues. If you would like us to add them to our list, simply click on the "Forward email" link below. We love being introduced!
If you would like to opt-out of future emails, please reply to this email with UNSUBSCRIBE in the subject line.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
Diversification does not guarantee profit nor is it guaranteed to protect assets
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
The Housing Market Index (HMI) is a weighted average of separate diffusion indices based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. Each resulting index is then seasonally adjusted and weighted to produce the HMI.
The Pending Home Sales Index, a leading indicator of housing activity, measures housing contract activity, and is based on signed real estate contracts for existing single-family homes, condos and co-ops. The PHSI looks at the monthly relationship between existing-home sale contracts and transaction closings over the last four years. The results are weighted to produce the index.
The Chicago Board Options Exchange Market Volatility Index (VIX) is a weighted measure of the implied S&P 500 volatility. VIX is quoted in percentage points and translates, roughly, to the expected movement in the S&P 500 index over the upcoming 30-day period, which is then annualized.
The BLS Consumer Price Indexes (CPI) produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. Survey responses are seasonally adjusted and weighted to produce a composite index.
The Conference Board Leading Economic Index (LEI) is a composite economic index formed by averages of several individual leading economic indicators, which are weighted to produce the complete index.
Google Finance is the source for any reference to the performance of an index between two specific periods.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
Past performance does not guarantee future results.
You cannot invest directly in an index.
Consult your financial professional before making any investment decision.
Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.
By clicking on these links, you will leave our server as they are located on another server. We have not independently verified the information available through this link. The link is provided to you as a matter of interest. Please click on the links below to leave and proceed to the selected site.
How might this September play out for stocks?
Markets stayed fairly flat last week ahead of Friday’s highly anticipated speech by Ben Bernanke but stumbled on news that the Fed wasn’t going to immediately roll out another round of quantitative easing. The S&P fell 0.32%, the Dow lost 0.51% and the Nasdaq lost 0.09% for the week.
Bernanke spoke during the Jackson Hole Economic Symposium, an annual meeting of elite economists and central bankers. His speech highlighted that the stagnant job market was of “grave concern” to central bankers and emphasized that the Fed remains ready to take action should economic conditions worsen. Although his language reiterated the Fed’s commitment to further quantitative easing, he stopped short of announcing the timing or structure of any further action. Many analysts don’t believe the Fed will make any major moves before November, preferring to remain apolitical during the hotly contested election. However, if next week’s jobs report disappoints, there is a chance that the FOMC could vote at its mid-September meeting to buy more Treasury bonds or government mortgage-backed securities to lower long-term interest rates and ignite economic activity.
Many analysts suspect the next round of quantitative easing (QE3) will arrive as a coordinated blitz between the Fed, European Central Bank, and other central banks around the world who hope to sort out the economic doldrums in one fell swoop. There’s been a lot of talk by central bankers at the Fed, ECB, People’s Bank of China, and the Bank of England about the need for further easing, and it makes sense for bankers to coordinate their actions to get the biggest bang for their buck. This wouldn’t be the first time central banks have worked together; the PCOB, ECB, and BOE lowered rates in tandem as recently as July 2012.
With a crucial ECB meeting this week and a ruling on the legality of Europe’s permanent rescue fund later this month, September is crunch time for the Eurozone. In order to satisfy markets, the ECB will have to announce very detailed and very aggressive plans to buy up Spanish debt. At this point, anything less would be a tacit affirmation that the Eurozone crisis is beyond central banker control.
Though September is notoriously the worst month of the year for stocks, a combination of important economic meetings and the remaining bullish exuberance of investors could mean this month won’t fit the mold. Despite the mild retreat last week, markets are still hovering close to highs not seen since 2007/2008, when markets reached their peak. Only time will tell what is ahead as traders assimilate additional economic reports and the Fed finally shows its hand.
ECONOMIC CALENDAR:
Monday: Markets closed for Labor Day holiday
Tuesday: Motor Vehicle Sales, ISM Mfg. Index, Construction Spending
Wednesday: Productivity and Costs
Thursday: ADP Employment Report, Jobless Claims, ISM Non-Mfg. Index, EIA Petroleum Status Report
Friday: Employment Situation
HEADLINES:
Retail sales jump on back-to-school shopping. August retail sales beat expectations with a 5.4% gain over last year’s numbers. Retailers are optimistic about the rest of the year as, historically, a strong back-to-school season foretells robust holiday shopping.
U.S. job recovery uneven across states. Although some states have recovered the majority of jobs lost during the recession, many states still face significant unemployment. While some states are expected to return to peak employment by 2013, 23 states may not fully recover until 2015.
Eurozone manufacturing sector declines. The Eurozone manufacturing sector retracted despite factory price cuts as demand stalled across the EU. Factories in Germany and France, Europe’s largest economies, saw activity fall for the sixth straight month. Since manufacturing is a core driver of European economies, weak demand will make it harder for the Eurozone to climb out of recession.
Fed Beige Book: Economy growing gradually. The Federal Reserve reported the economy grew moderately in July and early August, and hiring was stronger than in the previous six-week period. Strong auto and home sales, and tourism offset weakness in manufacturing.
QUOTE OF THE WEEK:
“Most people are searching for happiness outside themselves. That’s a fundamental mistake. Happiness is something you are, and it comes from the way you think.”
Dr. Wayne Dyer
Share the Wealth of Knowledge!
Please share this market update with family, friends, or colleagues. If you would like us to add them to our list, simply click on the "Forward email" link below. We love being introduced!
If you would like to opt-out of future emails, please reply to this email with UNSUBSCRIBE in the subject line.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
Diversification does not guarantee profit nor is it guaranteed to protect assets
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
The Housing Market Index (HMI) is a weighted average of separate diffusion indices based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. Each resulting index is then seasonally adjusted and weighted to produce the HMI.
The Pending Home Sales Index, a leading indicator of housing activity, measures housing contract activity, and is based on signed real estate contracts for existing single-family homes, condos and co-ops. The PHSI looks at the monthly relationship between existing-home sale contracts and transaction closings over the last four years. The results are weighted to produce the index.
The Chicago Board Options Exchange Market Volatility Index (VIX) is a weighted measure of the implied S&P 500 volatility. VIX is quoted in percentage points and translates, roughly, to the expected movement in the S&P 500 index over the upcoming 30-day period, which is then annualized.
The BLS Consumer Price Indexes (CPI) produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. Survey responses are seasonally adjusted and weighted to produce a composite index.
The Conference Board Leading Economic Index (LEI) is a composite economic index formed by averages of several individual leading economic indicators, which are weighted to produce the complete index.
Google Finance is the source for any reference to the performance of an index between two specific periods.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
Past performance does not guarantee future results.
You cannot invest directly in an index.
Consult your financial professional before making any investment decision.
Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.
By clicking on these links, you will leave our server as they are located on another server. We have not independently verified the information available through this link. The link is provided to you as a matter of interest. Please click on the links below to leave and proceed to the selected site.