Market Update & Perspectives

After days like these in the markets we know people are concerned.  So hopefully these thoughts can help add a little light to something that may seem very “dark” and confusing.

I could bore you with details and go on and on about the possible cause (China’s economy slowing, a strong U.S. dollar, the Federal Reserve possibly raising interest rates in September, the collapse in the oil sector as well as other raw materials, etc.) but remember there typically is not just “one” event that causes this much volatility.

So you may ask what these events (external factors) might have to do with the U.S. stock market.  First, investors and market prognosticators are worried that individual companies that make up the stock market may begin to suffer lower earnings and slower revenue growth causing their stock prices to drop even more.  Additionally, there are some views that these events could cause our economy to enter another recession.

In terms of the U.S. our economy is currently in the best condition around the world.   Economic growth is not robust, but as economist Brian Wesbury says, “we are seeing a steady ‘plow horse’ type of growth.”  And though our oil industry is in the “doldrums” the U.S. consumer and our banking system is in much better financial condition (since 2008).  Other economic sectors such as retail sales, wages and housing starts are experiencing good growth.

In terms of the U.S. consumer we haven’t paid just $2/gallon for gasoline since March 2012, and unemployment is much lower with more Americans back at work today.  And regarding China… keep in mind that our exports to China only amount to 0.7% (less than 1%) of our economy.

As I am writing this today, the U.S. stock markets have just rallied to close up over 600 points (almost 4% on the day) from recently being down approximately 12.5% from their annual highs.  History tells us on average that we experience a 10% correction every 18 months (although the last was in October 2011) and 5% corrections occur as much as 4 times every 12 months.  Also, looking at the calendar August through early October is typically a bad time in the market.

So is there a positive in all this… yes!  There has been lots of money sitting on the sidelines waiting for lower prices to enter the markets.  These type of swings in the stock market are “buying opportunities” for new money that has been waiting for a good entry point.  During times like these investors can step in and “buy bargains” which also brings new money in to help support stocks.  After a period of time markets typically recover and go on to set new highs.

Our suggestion?  Step away from all this “clutter and noise” and try not to react.  Remember what you voiced when you started investing… a long-term perspective and that you realized markets would fluctuate (go up and also go down).  Research tells us when volatility kicks in, this is typically the time investors make “poor” investment decisions and suffer the consequences for years.  If you simply have the urge to try to “fix it” or you can’t handle what’s going on, then get professional investment advice now.

Remember we are here to help.  Please call us if we can help you or someone you know.

Millennials Choosing to Rent

According to several recent studies the younger generation today would rather rent than own their home.  True, the recession has done a number on their job opportunities.  Plus, many are busy paying down debt and working hard to make themselves ready to own one day.  But unfortunately we all know tougher mortgage credit requirements are eliminating “too many” good, potential home buyers.

What’s alarming is that a greater number that can buy are simply choosing to rent.  And the main reason… well, you guessed it: they are saying that they aren’t ready to settle down.  They possess a strong desire to travel and explore before they get more “serious” with life.

So what’s the concern? Well, a couple things come to mind.  First, the obvious negative effects on our economy from less Americans owning homes.   Second, if this group chooses to rent for a long period of time before they purchase a home their personal wealth could suffer long-term.   With the time-value of money principles working against them and delaying this traditionally effective form of saving (building equity) through home ownership at young ages, some of this generation may never replenish the cost of such a delay.

Economists See Growth Rebound

After a very slow 1st quarter, partially due to weather, signs are showing the U.S. economy is improving.  For instance, according to the Bureau of Labor Statistics, April added 288,000 jobs.  Also, of the 150 companies tracked by the Wall Street Journal, as much as 75% reported positive earnings compared to earnings projections.  Though stock markets correct from time to time (like recently), don’t bet against the U.S. economy.  Listen to this WSJ Video: Economists See Growth Rebound and decide for yourself.

Obamacare and the Markets

What will the Affordable Care Act do to the markets?  Although no one can tell you with accuracy, some sources believe Obamacare may slow the pace of growth in the US.  No matter where you look, you are likely to find contradictory views being expressed.  In his latest commentary, economist Brian Wesbury explains why national health care reforms may not bring on economic or market armageddon… so we thought you may like to listen.  To do so, click on the link below for the latest First Trust video:

Wesbury 101 – Obamacare

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Tax Increases in the New Year

 

The Heritage Foundation recently summarized a list of the 13 tax increases that started January 1, 2013.  Seven resulted from the deal that Congress and President Obama struck at the end of 2012 to help avoid the fiscal cliff, and the other six are tax increases from Obamacare that also began this year.  Here is the list summarized by Charles Dubay:

13 Tax Increases That Started January 1, 2013:

Tax increases the fiscal cliff deal allowed:

1)      Payroll tax: increase in the Social Security portion of the payroll tax from 4.2 percent to 6.2 percent for workers. This hits all Americans earning a paycheck—not just the “wealthy.” For example, The Wall Street Journal calculated that the “typical U.S. family earning $50,000 a year” will lose “an annual income boost of $1,000.”

2)      Top marginal tax rate: increase from 35 percent to 39.6 percent for taxable incomes over $450,000 ($400,000 for single filers).

3)      Phase out of personal exemptions for adjusted gross income (AGI) over $300,000 ($250,000 for single filers).

4)      Phase down of itemized deductions for AGI over $300,000 ($250,000 for single filers).

5)      Tax rates on investment: increase in the rate on dividends and capital gains from 15 percent to 20 percent for taxable incomes over $450,000 ($400,000 for single filers).

6)      Death tax: increase in the rate (on estates larger than $5 million) from 35 percent to 40 percent.

7)      Taxes on business investment: expiration of full expensing—the immediate deduction of capital purchases by businesses.

Obamacare tax increases that took effect:

8)      Another investment tax increase: 3.8 percent surtax on investment income for taxpayers with taxable income exceeding $250,000 ($200,000 for singles).

9)      Another payroll tax hike: 0.9 percent increase in the Hospital Insurance portion of the payroll tax for incomes over $250,000 ($200,000 for single filers).

10)   Medical device tax: 2.3 percent excise tax paid by medical device manufacturers and importers on all their sales.

11)   Reducing the income tax deduction for individuals’ medical expenses.

12)   Elimination of the corporate income tax deduction for expenses related to the Medicare Part D subsidy.

13)   Limitation of the corporate income tax deduction for compensation that health insurance companies pay to their executives.

Consumers Plow Ahead

In spite of negative news on the Fiscal Cliff issues, the economy is showing continued improvement.  Here is the latest economic commentary from Brian Wesbury and Bob Stein of First Trust that shares more detail…

The Pouting Pundits of Pessimism have been in a froth over the “fiscal cliff,” but US consumers seem to be ignoring them. Shoppers hit stores in droves over the past four days, both in person and, increasingly, on-line. It’s not an economic boom, but it sure isn’t a recession, either.

Sales for the full first weekend of holiday shopping – Thursday through Sunday – are up 13% versus a year ago according to the National Retail Federation. On average each customer spent 6.3% more than last year.

ComScore says online Black Friday sales were up 26% from a year ago and surpassed $1 billion for the first time ever. Online sales on Thanksgiving Day itself were up 32%. This strength was confirmed by Coremetrics, an online data-gatherer affiliated with IBM, which says Black Friday internet sales were up 20%.

The weakest report was from ShopperTrak, a Chicago-based firm that has monitoring devices at 40,000 retail outlets and malls around the country, measuring foot traffic, which reported a 1.8% decline for Black Friday. However, when they add back Thanksgiving Day, the total for both days was up 1%.

The calendar is interesting this year. Thanksgiving always falls on the fourth Thursday of November, and because November 1st was a Thursday in 2012, the shopping season will be the longest possible. In addition, the Internet is making shoppers savvier, while retailers have more data. As a result, we think the middle and latter stages of the shopping season will be stronger than the early stages.

While some wonder how sales can be up, it is clear that more jobs, higher earnings and smaller debt burdens are all positive forces.

In the past twelve months, the unemployment rate is down a full percentage point, payrolls are up 162,000 per month, and total private wages and salaries are up 4.6% from a year ago. Meanwhile, consumers have whittled down their debts, so that monthly financial obligations – mortgages, rent, car loans/leases, and other debt service – are now the lowest share of after-tax income since 1984.

In the near term, jobs and incomes may take a hit from Hurricane Sandy. But, any hit would be temporary. For example, the recent spike in unemployment claims suggests zero net change in payrolls for November. However, weekly unemployment claims have already started to recede, so a rebound in jobs will come in December or very early next year.

Autos sales were doing well until Sandy hit in late October. Next Monday we get November auto sales, which were probably held down by Sandy as well. However, all the storm did was postpone sales. That, plus the need to replace vehicles damaged in the storm, will cause a surge in car and truck sales in December and early 2013.

Meanwhile, housing keeps picking up steam, with housing starts up 42% from a year ago, new home sales up 27% and existing home sales up 11%. We expect these gains will continue in the year ahead as the pace of home building still has a long way to go to get back to normal (so inventories stop falling) and more workers qualify for mortgages. In turn, this means more growth for consumer spending.

The bottom line is that for the fourth year in a row, consumer spending is on an upward path. Unlike some economists, we don’t think this causes economic growth. Instead, we take it as a sign that the economy continues to leave the wreckage of 2008-09 further behind. It’s a Plow Horse economy, still, with consumers taking the reins.”

– First Trust Economic commentary by Chief Economist, Brian Wesbury, and Senior Economist, Ben Stein, 11/26/12.

Market Update 7/5/2011

Since our last Blog on June 7, the market has moved positively in spite of many predictors. This is while news headlines have reported repeatedly on Greece possibly defaulting on their debt, a possible slowdown in the US economy, as well as the U.S. debt ceiling problems in Washington. In fact, just last week the market was up 4%. And since our last post (June 7), see the changes below…

DOW Jones +1.1%
S&P 500 +0.3%
Nasdaq +1.8%
Note: June 7 close through July 1 close; Source: Yahoo! Finance

There is a saying that many times proves itself true… ”The stock market climbs a wall of worry”. What this means is that the stock market can go up in spite of lots of bad news. Since June 7 this appears to be the case.

Going forward on a short-term basis it’s impossible to predict the stock market. However, as far as the economy we could see some slow improvements caused by increased supply shipments from Japan since the earthquake (helping manufacturers such as auto, technology, etc.), and declining gas prices. Just this morning we have seen that Factory Orders released today for May showed a +0.8% improvement over April. We will keep our fingers-crossed hoping this slow-down is just a temporary “soft patch”.

Summer Update

With mid-2011 upon us, now may be a good time to provide an update on key economic issues and the market outlook. So let’s review the “macro” view of things.

If you will remember, last August the Federal Reserve announced their next strategy (QE2) to help support and possibly kick-start our slow economy. The markets read the potential positives of QE2, at least to the stock markets, and we saw the “best” September in years. The markets continued to rally through the end of the year and the mood of the consumer was more positive.

After the first part of 2011 we started getting more positive indicators such as increased retail sales (a good Christmas and consumers spending a little more), some signs of job improvements (even reports of companies hiring), and consumer confidence increasing. However mortgage interest rates rose and the housing sector was still showing signs of no improvement. Additionally gasoline prices at the pump jumped almost $1 approaching $4/gallon. It’s believed all the new money “sloshing” around in the economy created by QE2 found its way into the stock, commodities, and energy markets creating a “playing ground” for short-term speculators.

Now we are in the first of June, and we are hearing the economy isn’t doing as good as we had thought. For instance, economic growth (GDP) in the first quarter was only 1.8% (much slower than what the economy should be emerging out of a recession). Next, the jobs picture deteriorated again in May. And then finally the housing sector is extremely weak with some new price declines in some of the major markets (Florida, California, etc.). Remember up to this point we have been trying to restart our economy without any help from the Housing Sector, which is a very important part of our economy (construction, building materials, appliances, home furnishings, etc.).

So with all this being said, expect some version of the following this summer:

1) More, intense political wrangling and blaming from both sides. With Congress and the White House pushing the deadline to August to raise our nation’s debt ceiling expect more blaming and whining from our “adolescents” in Washington. When the deadline finally comes more than likely the debt ceiling will be increased with some compromise on government spending (but less than we need).

2) Gasoline prices. With the economy starting to signal a soft-spot, Europe continuing to have problems, and the emerging economies (China, India, Brazil, etc.) trying to contain their growth to minimize their inflation, it’s possible you may see noticeable gasoline price declines at the pump. In fact that appears to be starting to happen even now.

3) Mortgage rates. Mortgage rates have dropped again about 0.75% and credit-worthy people can now find 4.5% on 30-year fixed mortgages and 4.0% on 15-year fixed mortgages. This can actually become a great time for people to buy a home or refinance.

4) Volatile markets. Since the Federal Reserve’s QE2 program the markets have been very stable with lower volatility. In other words we haven’t seen many days where the DJIA dropped greater than 200 points. As the Federal Reserve unwinds QE2 you may see more volatile swings in the stock markets. So don’t be surprised and try not to let that scare you.

How are the markets going to respond to all of this? Well, no one knows. Remember everyone thought this past September would be horrible and it was the best single-month September ever for the stock market. Also keep in mind after the major crash of 2008-2009 and in a very, unprecedented scary time in our economic history the DJIA has gained 92.0% (3/9/2009 – 5/31/2011, WSJ).

Now I could speculate and you will hear others who will tell you “exactly” what they believe the markets will do. Further, you can go out and buy all the books you want telling you what’s going to happen both now and later. In fact if you like “horror or fiction” there are plenty new books written about America’s doom days ahead. But understand that we’ll only know “for sure” after it’s happened!

Yes, your investment allocation needs to be correct and needs to be reviewed and adjusted periodically which we will continue to do for our clients. But please try to not let this stuff scare you or cause you to “derail” from a well thought out investment plan. And if you feel the need to “time” your investments (in and out of the market), then let me direct you back to our blog to an earlier post titled “A Crash Overhang”.

So in summary, go about your life and enjoy it. Try not to try to react to what you are going to hear (or even try to fix). And this summer may be a good time to avoid the Business and News TV channels as they hype all the negatives.

Market Update March 17th

We hope things are starting off well for you in the beginning of Spring. Due to all the recent events I thought it best to update you on what we are hearing.

The markets have given back a portion of the growth we have seen since the market bottom March 9th of 2009. According to the Wall Street Journal, remember the S&P 500 index has increased 85.8% from this low through last night (March 16). Keep in mind it’s typical for markets to consolidate and lose some ground when they gain so much in this type of time frame. Now with the recent Mid-east tensions and the Japan earthquake some market volatility has reappeared and uncertainty has risen.

On a conference call yesterday with Fidelity Investments we learned the following regarding Japan. First, the next couple days are critical as Japan struggles to get control of their nuclear reactors. Assuming the outcome improves and avoids a horrific outcome we could see the market rally fairly quickly.

Next, with Japan considered a Tier 1 supplier to global manufacturers in the auto, tech, and electronic businesses, supply interruptions are still unknown. As global manufacturers scramble to offset Japanese components we could see time delays to product production. It appears there are alternative suppliers stepping-up and offering supplies to offset most Japan delays.

As time goes by and Japan begins to rebuild this could prove stimulative to Japan’s economy as well as globally as they buy steel, wood, concrete, industrial equipment, etc. Keep in mind this can create more inflation as well as higher interest rates.

In terms of the oil situation, as of late, we have seen the oil markets calm down and give back some of their gains. It appears other OPEC countries are stepping up and offsetting the Libyan supply interruptions. The real question is can Saudi Arabia avoid the political unrest experienced in Egypt and Libya. We sure hope so. All of this heightens the need for an effective energy policy here in the U.S. Who knows, these recent events could force Congress and our Administration to deal with our long-term energy problems.

In the terms of the U.S. economy we have seen some improvement since the latter part of 2010. Unemployment has declined and both the consumer and businesses are beginning to spend money. And other than higher gas prices, consumer’s attitudes appear to be more positive. Also, we are hearing that small investors are slowly re-entering the equity markets.

In summary, it almost never benefits an investor to react to these types of events and short-term trade in this financial environment. Keep in mind, for mutual fund investors, money managers and their analysts have a plan and make the necessary changes as they “objectively” see the need. They have much more information than we can imagine. As of recent we have heard mutual fund managers use this type of short-term fear to buy good stocks and bonds that become very attractive due to the market volatility.

We hope this helps and we pray for our Japanese friends. The effect on Japan’s people is so much more important than any of our financial concerns.