Category Archives: Investments

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Time for a Quarterly Review

Week / Month / Quarter in Review

First quarter 2017 is in the books. The final week was very positive for small cap stocks (measured by the Russell 2000), The index was up 2.4% for the week. You may recall that the post-election rally was fueled by small company stocks, but momentum had waned–that is, until last week.  The Russell 2000 gained only 0.1% for the month and has been 2.5% for the entire quarter. Without last week, the story would have been dramatically different. The large U.S. stock market (as defined by the S&P 500) lost 0.23% on Friday, was up 0.80% for the week, and gained 5.5% for the quarter. Nevertheless it still remains 1.39% below the record close set on January 6, 2017.  This leads some to wonder if the Trump rally is a bit over-extended.   Longer term U.S. Treasury Bonds (as measured by the 20+ year ETF) lost 0.7% for the month but remains up 1.74% for the quarter. REITs (measured by the Wilshire REIT Index) lost 3.3% for the month.  The moral of this story is that the markets are a mixed-bag at the moment.

One thing that is not confused is investor confidence. The University of Michigan studies the level of confidence in its sentiment survey.  They ask respondents to give their opinion about the probability that the stock market will increase over the next year.  In the latest survey, a near-record 11% of the respondents answered that there is a 100% chance of an increase in the stock market in the next year.  These folks believe that there is a 0% chance that it will be lower than it is now. Based on this survey, investor sentiment is at an extreme reading. Bear in mind that this sentiment reading, like most, is a contrary indicator. In other words, the market usually goes in the opposite direction to the consensus belief.

On a different stage, U.S. real GDP growth was revised upward for the 4th quarter 2016 to an annual rate of 2.1% according to the third estimate released by the Bureau of  Economic Analysis. While an increase over earlier posts, it is hardly something to get excited about.  In the third quarter of 2016, real GDP increased 3.5%.

Looking ahead

This will be a fairly light week for economic data. Focus will likely be on Wednesday’s release of the Fed’s Open Market Committee (FOMC) minutes from its March meeting. Pundits and analysts alike look to the minutes for nuances to the press conference that was held by Ms. Yellen immediately after the meeting. Employment data for March will be released Friday.

The post-election rally is riding on the expectation that the Trump administration can deliver on lower taxes and less regulation. See earlier post on Trumponomics. While the successful rollback of some regulation by executive order has certainly added fuel to that fire, the failure to pass modification to the Affordable Care Act has many wondering if tax reform can actually get passed. It has been more than three decades since major tax reform. There are many reasons why it is difficult. The ACA setback could put a damper on the narrative of deal-making by the administration and paints a risk to markets that are arguably already overbought and expensive.

If, like me, you enjoy but maintain a healthy skepticism of statistics, you will have to like this. Georgetown University’s Sahlil Mehta is a statistician with an impressive resume. In a recent blog post he analyzed and reported on the probability of stock market drops of various amounts between now and year end (a nine month period).  He concluded that there is a 71% chance that (before year-end) we will see at least 1 correction that is 5% or worse. (Remember that the S&P has grown by 5.5% this year so far.) Of course, that also means that there is a 29% chance that we won’t get such a correction. Further, he has concluded that there is a 32% chance that we will see at least one correction before year end that is 14% or worse. Some will see that as a problem, others an opportunity.

A positive for the market is the continued infusion of capital by the European Central Bank (ECB). Money is flowing from the ECB into the markets in the effort to stimulate the economy.  There is still much uncertainty about whether and when this will stop. This is something to keep an eye on.

Attention will soon turn to the 1st quarter earnings season. Meanwhile, I hope that you are enjoying Spring.

I am still planning to alternate articles posted here between investment updates and relevant financial planning topics. If you like this sort of thing, I would be grateful if you would share it with your friends. Also, let me know what topics are important to you.

 

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The Fed thinks the economy is doing well

Is it really?

The week in review

Just as was expected last week, the news focused on Ms. Yellen’s press conference.  The announcement of a 0.25% increase came on Wednesday afternoon and the markets reacted favorably.  The S&P 500 almost made it back up to its high set at the beginning of the month but is still down a bit for the month and appears to be stuck in a fairly narrow range at the moment. Of course, Ms. Yellen said that the economy is improving and used that as the rationale for the increase.  The Fed left unchanged the expectation that we will likely see a couple more increases this year, but the language is contingent enough to leave some wiggle room. It is important to recall that the Fed has a mandate to  control inflation (and they usually raise rates to trim inflation) but in recent years have been working hard to try to get it up to 2.0%.  That remains their target.

I turn our attention to four other indicators of the economy: the dollar (measured by Symbol:UUP), Gold (measured by GLD), Oil (measured by USO), and longer term treasuries (measured by TLT).  So how did each of these react to Ms. Yellen’s comments? The dollar dropped by 1% within an hour of her press conference implying that the currency market doesn’t think the economy is doing a lot better. In response, the price of Gold was up 2.56% by Thursday’s open. This could have been caused by the fear that the Fed will actually let inflation go to levels well above 2%; or simply a reaction to increased uncertainty. Oil had actually already seen a sharp decline in the previous week and continued to float sideways.  Finally, we saw a bit of rally in the price of bonds as the long term rates ticked lower after the Fed’s announcement–the prices of the bonds went higher. TLT, the 20+ year Treasury ETF, has perhaps found some support this week after falling a bit. The difference in short term rates and long term rates, referred to as “the spread,” had begun to widen in the fall, indicating that the bond market felt that the economy was improving. That appears to no longer be the case as we have seen spreads between 2 and 10 year Treasuries begin to narrow. Maybe the Fed committee can see things that we cannot, but none of these other factors indicate a strengthening economy in my book.

As also expected, news pundits focused last week on job creation and were quick to point out that “wages are on the rise.” But where?  On Wednesday, the Bureau of Labor Statistics reported that real average hourly earnings were unchanged from February 2016 to February 2017. That combined with a decrease in the average workweek spells a 0.3% decrease in real average weekly earnings. Finally, the Atlanta Fed reported a drop in its first quarter GDP forecast to 0.9% from 1.2%.

On Friday, I visited The HomePlace at Midway and enjoyed a delightful St. Patrick’s Day luncheon with some wonderful people there. I believe that the HomePlace is a clear example of how long term care should be provided.  It is a Green House Community and worth your look if you or a loved one will need long term care. Sadly, the waiting list is long.

A look ahead

This week enjoys a fairly light week of economic reports. We will see some real estate reports on Tuesday, Wednesday, and Thursday. Durable goods orders will be reported on Friday.  Many managers are looking toward the end of the quarter and are already making adjustments to their portfolios in anticipation. The stock market begins the week looking to find some direction, having been in a narrowing up-trend in recent weeks. The 50 day exponential moving average is above the 200 day on all the major indices, but momentum seems to struggling a bit.  We will watch these things as they unfold this week.

Later in the week, I plan to release a bit of research that I have been doing on the lack of wage growth and how that relates to spending as inflation picks up. Since the largest percentage of the GDP is comprised of consumer spending, I think this can be a significant macro development, but it affects us all very personally and has implications for our financial plans. I will let you know when it is ready.

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No time for complacency

Investment Update 3-13-2017

The week in review

 

The Dow Jones rose 0.21% on Friday but ended the week down 0.49%. The S&P 500 rallied 0.33% on Friday but also posted a weekly loss, losing 0.44%. The stock market is close to where it was a month ago after hitting a new high at the beginning of March. It has attempted to move higher, but has failed. As we all know, it can move aggressively up or down from here. The rally seen since the election has been largely riding on the expectation of tax cuts and infrastructure spending–both viewed as stimulative to the economy. See my post from November on Trump-o-nomics.

On Friday, the official February jobs report from the Labor Department showed that non-farm payrolls rose by 235,000 last month from January. The consensus was looking for 200,000, so this was interpreted as a positive and gives added impetus to the Fed to raise rates next week. The unemployment rate ticked down to 4.7%, on both increased employment and an increase in the workforce participation rate. Oil had another bad day on Friday, with crude oil futures dropping 1.6% to below $49/barrel. OIL (the ETN) has been very volatile for the past year.

Real estate, as marked by the REIT ETFs (VNQ and IYR), have fallen this month to levels that give concern, but we have been here before, as recently as the end of January. The dividend rates (4.94% and 4.43% respectively on these ETFs) help investors to maintain interest in real estate.

The week ahead

 

This week is chocked full of economic reports. Inflation for February will be reported by the producer’s price index on Tuesday and the consumer price index and retail sales on Wednesday. Crude oil inventories are also due out on Wednesday.  Undoubtedly, much of the news this week will focus on the Federal Reserve meeting and whether they will raise interest rates.  Fed-funds futures now peg the chance of a rate increase at the FOMC meeting next week at 93%.  The announcement is scheduled for 2:00 PM on Wednesday. A small increase (probably 0.25%) has likely been priced into the market already. They could raise rates even more which would upset the markets, but that is not likely. It is helpful to remember that the Fed only controls short term rates. The bond market controls longer bond rates.  (In fact, I have recently remarked that someday President Trump will learn that the bond market is truly the one in charge, not him.)  I expect that we will find out more about Trump’s budget proposals later this week. He is expected to cut many government programs; except military spending, which could see a substantial increase. Other programs are likely to be cut to keep the proposal revenue-neutral. Expect an increase in activity from special interests that want to protect their favorite program, but their efforts might fall on deaf ears. We will also likely hear more turmoil as Congress continues its attack on the Affordable Care Act.

As noted above, the market is riding on the expectation of infrastructure spending and tax cuts. Since clarity on either is not likely to be forthcoming, markets could be disappointed on many fronts. This week could be pivotal. Alert levels should have been moved up in the recent rally. Close scrutiny is a must in this market. This is not a place or time for complacency.

I make an effort to be clear, but our industry is full of jargon. Be sure to let me know if I use terms with which you are unfamiliar. Let me know if there are financial planning or investment topics that you would like to see covered in this blog.  Scroll down and leave a comment.