Now What: A Guide to Retirement During Volatile Times: August 2013

Markets Mixed Over Tapering Fears

by ken | 07:23 in |

Markets Mixed Over Tapering Fears

Markets ended the week mixed, showing an upward trend after the previous week’s losses, but still subject to investor nerves. For the week, the S&P 500 gained 0.46%, the Dow lost 0.47%, and the Nasdaq gained 1.53%.[i]

Uncertainty around the Fed’s tapering schedule drove much of market activity last week. While many Fed speakers have suggested that tapering may begin after the September FOMC meeting, they have cautioned that the Fed’s plans remain data dependent. Mixed housing data, unconvincing jobs growth, and low inflation may argue for a delay in tapering, but policy direction is under heavy debate within the Fed and it’s hard to know which date the Fed will choose.[ii] What we do know, based on FOMC minutes and Fed speeches, is that unwinding will be gradual and policy changes will be slow, giving markets time to adapt to the new environment. As the days tick down to the September 17 FOMC meeting, we can expect additional market volatility. However, investors have had significant time to digest the eventual end of quantitative easing, and we can hope that any negative market reactions will be short-lived.

On the jobs front, though weekly claims edged upward, the fewest workers in five years applied for unemployment benefits for the month ending August 17, indicating that the labor market slowly continues to improve. However, regional data shows a mixed picture, with the jobless rate still climbing in 28 states and major employers announcing job cuts. [iii] Fed watchers have indicated that the August jobs report will be a major factor in any decisions made at the September FOMC meeting.[iv]

A technical glitch caused the Nasdaq to shut down for three hours on Thursday, halting trading in thousands of stocks. The shutdown was the longest in recent history, and exchange officials are investigating the origins of the technical fault. Despite rattled trading desks, investors shrugged off the shutdown and the Nasdaq still closed up for the week.[v]

Looking at the week ahead, investors will be closely watching the release of important housing, consumer, and manufacturing reports as well as additional speeches by the St. Louis Fed President James Bullard. Fed watchers will also be analyzing several reports as they wait for the much-anticipated August jobs report, which will be released on September 6. The jobs plentiful/jobs hard-to-get component of Tuesday’s consumer confidence report and the employment component of the Chicago PMI will hopefully give clues about general job trends this month.[vi]

ECONOMIC CALENDAR:

Monday: Durable Goods Orders, Dallas Fed Mfg. Survey

Tuesday: S&P Case-Shiller HPI, Consumer Confidence

Wednesday: Pending Home Sales Index, EIA Petroleum Status Report

Thursday: GDP, Jobless Claims

Friday: Personal Income and Outlays, Chicago PMI, Consumer Sentiment

HEADLINES:

Existing home sales up, but new home sales down. Sales of new single-family homes dropped in July to their lowest level in nine months. This is a sharp contrast to existing home sales, which rose to their highest level in three years in July. A possible explanation is the flood of private equity investors that are buying up old foreclosures.[vii]

Oil spikes on refinery closure. Oil prices rose last week, settling above $106 per barrel following a major unit shutdown at a Canadian refinery. The unit is responsible for producing 70,000 barrels per day and will be closed for a week for repairs.[viii]

U.S.

household income below 2009 levels. Median real household income (adjusted for inflation) fell 4.4% between June 2009 and June 2013, indicating that American families are worse off now than at the end of the recession.[ix]

Consumer spending probably rose in July. A preview of the official GDP report showed that improvements to the labor and housing markets underpinned an increase in the largest segment of the economy. The official GDP report will be released on August 29 and may show an upward revision in second-quarter economic activity.[x]

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[i] http://briefing.com/investor/markets/weekly-wrap/weekly-wrap-for-august-19-2013.htm

[ii] http://www.reuters.com/article/2013/08/24/us-usa-fed-lockhart-idUSBRE97M0H720130824

[iii] http://www.bloomberg.com/news/2013-08-22/jobless-claims-in-u-s-decrease-to-five-year-low-over-past-month.html

[iv] http://www.businessinsider.com/fed-tapering-depends-on-august-jobs-data-2013-8

[v] http://www.reuters.com/article/2013/08/22/us-nasdaq-halt-tapec-idUSBRE97L0V420130822

[vi] http://www.businessinsider.com/three-datapoints-to-watch-this-week-as-we-wait-for-the-crucial-august-jobs-report-2013-8

[vii] http://www.cnbc.com/id/100983583

[viii] http://www.cnbc.com/id/100982718

[ix] http://www.cnbc.com/id/100980411

[x] http://www.bloomberg.com/news/2013-08-25/consumer-spending-probably-climbed-in-july-u-s-economy-preview.html

Will the Market ‘cool off’, the rest of the summer?

by ken | 08:34 in |

Ken’s market discussion with Maria Bartiromo on the closing bell, CNBC on Friday:

http://video.cnbc.com/gallery/?play=1&video=3000189349

Will the Market ‘cool off’, the rest of the summer?

Markets ended a slow trading week in the red, posting the biggest weekly decline since June. Stocks were pushed down by low volume and investor concerns about when the Federal Reserve will wind down its stimulus program. For the week, the S&P 500 lost 1.07%, the Dow fell 1.49%, snapping a six-week winning streak, and the Nasdaq slid 0.80%.^{^[i]}

Last week was light on economic data and investors focused on whether or not the Fed is going to start tapering bond purchases after the September FOMC meeting. With a number of Fed officials going on record as supporting a September taper, it’s looking increasingly likely that, if economic data continues to look optimistic, the Fed will pull the trigger next month. While Fed Chairman Ben Bernanke has reassured investors that no official date has been set, a chorus of top Fed policymakers suggested last week that they would like to start trimming back quantitative easing next month if economic reports turn out as expected, indicating that there may be some dissension in the Fed ranks.^{^[ii]}

Although recent macroeconomic reports have been largely upbeat, some economists are disappointed by the mediocre July jobs report. The net gain of 162,000 new jobs fell well below forecasts of 180,000 (and market rumors of gains of 200,000.) Digging deeper into the data, some analysts suggest that the job gains came largely from the volatile (and low-paid) part-time employment category. Other forward-looking indicators suggest that, though the headline unemployment rate dropped to 7.4% from 7.6%, it may tick upward in the near term.^{^[iii]} The unemployment rate is one of the major economic indicators that the Fed uses to guide policy, meaning a fickle labor market could throw a wrench into the Fed’s tapering plans.

Looking ahead at this week’s ticker, analysts and investors will be paying close attention to a raft of economic data, including July retail sales, the Philadelphia Fed Survey, and housing data for clues as to which way the Fed may jump next month. Two high-ranking Fed officials are scheduled to give speeches on Tuesday and Wednesday, meaning we may get more hints about how Fed economists feel about the economy and how likely a September taper may be.

As we’ve mentioned in recent commentaries, we usually do not view minor pullbacks as cause for alarm. Healthy markets do not move up in a straight line; they move up and down. For this reason, we do our utmost to keep focused on long-term trends rather than short-term movements. If you have any questions about how the tapering of QE, or how recent market moves may affect you, please feel free to reach out to us. It is our pleasure to be of service.

ECONOMIC CALENDAR:

Monday: Treasury Budget

Tuesday: Retail Sales, Import and Export Prices, Business Inventories

Wednesday: Producer Price Index, EIA Petroleum Status Report

Thursday: Consumer Price Index, Jobless Claims, Empire State Mfg. Survey, Treasury International Capital, Industrial Production, Housing Market Index, Philadelphia Fed Survey

Friday: Housing Starts, Productivity and Costs, Consumer Sentiment

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES:

U.S. wholesale inventories fell in June. Wholesale inventories, an important measure of business spending, unexpectedly fell in June for the second straight month, pulled down by a drop in automobile inventories. The 0.2% drop caused economists to trim their Q2 GDP growth estimate slightly to 2.4%.^{^[iv]}

Retailers boost July sales with promotions. U.S. retailers reported higher July sales, but relied heavily on discounts and promotions to lure shoppers into stores. Thus far, consumers remain frugal during the back-to-school season, the year’s second-largest retail period.^{^[v]}

China’s industrial production beats expectations. The country’s industrial production grew in July, showing a 9.7% increase over the same period last year. Manufacturing and industrial activity are big components of the Chinese economy, and these results could indicate that the world’s second-largest economy is on the mend.^{^[vi]}

Detroit bankruptcy puts the heat on local bond issuers. Michigan bond issuers that wish to tap the muni bond market are feeling the effects of Detroit’s debt default as

[i] http://briefing.com/investor/markets/weekly-wrap/weekly-wrap-for-august-5-2013.htm

[ii] http://www.reuters.com/article/2013/08/08/us-usa-fed-fisher-cnbc-idUSBRE97714920130808

[iii] http://blogs.reuters.com/macroscope/2013/08/09/why-the-mediocre-u-s-july-jobs-report-was-worse-than-it-looked/

[iv] http://www.reuters.com/article/2013/08/09/us-usa-economy-idUSBRE9770K220130809

[v] http://www.reuters.com/article/2013/08/08/us-usa-retail-july-idUSBRE9770KH20130808

[vi] http://www.cnbc.com/id/100952156

Can the market continue to go higher?

by ken | 13:10 in |

Can the market continue to go higher?

Markets closed out another positive week, driven upward by a better-than-expected GDP report and a reminder that the Fed won’t be pulling the plug on bond purchases this month. Nervousness ahead of a Fed policy meeting and the monthly jobs report contributed to volatility, but the rally pushed the S&P 500 to a new historic high.[i]

The big economic news last week was the July jobs report and a first look at second quarter GDP. The initial GDP report shows that the economy grew 1.7% in Q2, handily beating economists’ estimates of 1-1.1% growth. A buildup of business inventories was enough to offset the effects of sequestration, thus accounting for the surprising jump. On the whole, we view the report as a positive, showing that the economic recovery is gaining momentum. Although it’s too soon to make any accurate predictions about future growth, some economists expect expansion to accelerate to 2.3% in Q3 and 2.6% in Q4, for a strong finish to the year.[ii]

The jobs report was a mixed bag; hiring slowed in July, with the addition of only 162,000 new jobs, the smallest gain in four months. However, July employment numbers are notoriously unreliable, due to seasonal factors like factory closings. All things considered, it is worth noting that the month’s job gains were enough to drive the headline unemployment rate down to 7.4%. These mixed signals could make the Fed cautious about tapering bond purchases too soon, and some analysts now believe it could be October or December before we see tapering begin.[iii]

The Federal Reserve FOMC met last week but announced no policy changes, meaning that current quantitative easing programs will continue for the near future. The meeting announcement (which provides a brief summary of the meeting) offered little additional guidance about future Fed moves.[iv] In a separate interview, a top Fed official stated that the recent drop in the unemployment rate took the country one step closer to the 7% unemployment threshold set by Fed chairman Ben Bernanke as the point around which the central bank would likely end its QE bond purchases.[v]

With earnings season wrapping up, a light calendar of economic data, and a few solid weeks of growth behind us, it’s possible that we may see a short-term decline as traders take profits and wait for news from the Fed. In any case, we hope you enjoy your week, and that you don’t spend too much time focusing on every Fed announcement and piece of economic news.

ECONOMIC CALENDAR:

Monday: ISM Non-Mfg. Index

Tuesday: International Trade

Wednesday: EIA Petroleum Status Report

Thursday: Jobless Claims

HEADLINES:

Chinese service sector improves. Despite a slowing manufacturing sector, state-sponsored small business measures are helping the Chinese services industry. A government index shows that the non-manufacturing sector, responsible for 46% of Chinese GDP, is growing.[vi]

U.S.

factory orders increase in June. Boosted by a surge in transportation orders, new orders for U.S. factory goods increased in June for the third straight month. Analysts believe that the recent manufacturing sector slowdown may have run its course.[vii]

Consumer spending jumps in June. Consumer spending increased by 0.5% in June, fueled by automobile purchases and higher gasoline prices. Since consumer spending accounts 70% of GDP, the fact that consumers feel optimistic enough to spend money on big-ticket items like automobiles is good news for future growth.[viii]

69% of new jobs may be low wage. According to one analysis, a significant percentage of the new jobs created in Q2 were in low wage categories such as fast food. This may help explain why retail sales and consumer spending remain relatively low despite job growth and why many Americans believe the economy is still in recession.[ix]

“It is always wise to look ahead, but difficult to look further than you can see.”

- Winston Churchill

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