Weekly Advisor Analysis: April 6, 2016

Domestic equity markets were pushed higher last week by dovish comments from the Federal Reserve and cooperative economic data that didn’t change expectations for future rate hikes. The Dow Jones Industrial average rose 1.6 percent while the S&P 500 climbed 1.8 percent. The NASDAQ gained 3 percent. This closed out a first quarter where the S&P 500 appreciated 0.8 percent – a small miracle given its collapse during the first several weeks of 2016.

Goldilocks Gets a Job

The Labor Department released March jobs figures on Friday. This is the last report before the Federal Reserve’s next meeting in late April. According to the figures, U.S. employers added 215,000 jobs in March, slightly above consensus expectations and roughly in line with the average monthly gain for the past year. The unemployment rate ticked up slightly to 5 percent, but this is largely the result of more Americans looking for jobs. For the month, the participation rate rose to 63 percent, a good sign as an improving economy and slightly rising wages encourage out-of-work Americans to begin looking for jobs again. The average hourly earnings rate rose 2.3 percent year-over-year to $25.43.

IPO Market Dries Up

The volatility in the equity markets during 2016 has taken a toll on initial public offerings. So far this year, only nine companies have gone public raising just $1.2 billion. This is the lowest number of deals since the depths of the financial crisis when two firms raised $830 million in the first quarter of 2009. Interestingly, while nine deals were completed, more than twice as many companies shelved plans at the last minute due to the market turbulence. This marks only the 15th quarter since 1995 where the number of withdrawn public filings exceeds the number of completed listings. This is extremely unusual given markets are hovering near all-time highs.

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Gold Shines During First Quarter

Gold surprised several investors during the start of 2016 with a 16.5 percent rally during the first three months of the year. This marks the largest quarterly gain in three decades. Most of the rise was recorded during the first few weeks of the year, which is not unusual given the slump in stocks. However, the precious metal added to its gains even as stocks rallied in the back half of the quarter. Is this a sign the recent stock rally isn’t sustainable? A precursor to pending uncertainty given the U.S. election trajectory? Or, simply a response to the continued dovish stance by most central banks? Only time will tell. The rise in the commodity has also pushed gold mining equities higher. Some of the largest players have witnessed stock appreciation of around 50 percent so far in 2016.

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Fun Story of the Week

Have you ever wanted to change your name? Perhaps you are tired of it, your parents saddled you with something you just don’t like, or the combination of your newly married name sounds silly. Some people have a very different reason for wanting to do so: their name breaks the internet. Jennifer Null has this problem. Whenever she fills out an online form to buy books or a plane ticket, she is greeted with a message to fill in her last name and try again. Most programmers know that “null” is the default database entry when a field is left blank, so her last name is fooling the computer and won’t let her proceed with her transaction. She must call and complete the transaction by phone. These types of problems are called “edge cases” by programmers; the one in a millionth example that doesn’t work. But, as the world becomes more global, they are occurring more frequently. For these people, however, there is hope as serious discussions among programmers to improve support for “edge case” names have occurred.

Idled Workers Return to U.S. Labor Force

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Michael Mulvey of USA Today

Hundreds of thousands of Americans are streaming back into an improving labor market as employers raise wages and hire less skilled job candidates to cope with an intensifying worker shortage.

The portion of the U.S. population working or looking for jobs — known as the labor force participation rate — has risen to 62.9% from 62.4% since September, Labor Department figures show. The rate had been falling since 2008, mostly because of baby boomer retirements, and that’s still expected to be the long-term trend.

Yet part of the decline was caused by a bruising post-recession job market that prompted discouraged workers to drop out of the labor force and many other unemployed Americans to retire, go on disability or return to school.

At least some of those idled workers are returning to work or looking again now that the jobless rate has fallen to 4.9%, a level many economists consider full employment. They’ve been drawn back by employers who are raising pay or becoming less selective..

“We’re just hearing a lot more openness” from employers, says Tim Gates, of staffing firm Adecco.

Wells Fargo said recently the rebound appears to be driven by the less educated, including discouraged workers who had been on the sidelines. Since September, the participation rate for college graduates with at least a Bachelors degree has dropped to 73.8% from 74.4%. The rate for other groups, including high school graduates and those with less than a high school diploma, has climbed at least half a percentage point.

Even so, their unemployment rate has declined, indicating that many of those returning are landing jobs despite increased competition from their peers.

Other groups are also coming bac, including retirees, the disabled and people in school, according to a Goldman Sachs analysis. Many are enticed by rising wages. Although average wage growth across the economy has been tepid at about 2% nationally, average earnings for private-sector employees in the same job at least 12 months jumped 4.1% in the fourth quarter, according to payroll processor ADP.

Companies are also getting creative. Adecco’s Gates says some manufacturers unable to find experienced workers are splitting jobs into two positions and hiring less skilled candidates for the simpler tasks. Others are bringing on unskilled workers and training them, a strategy rarely deployed when unemployment was elevated after the recession, says Becca Dernberger, of Manpower’s Northeast division.

Written by Paul Davidson of USA Today

(Source: USA Today)

Three Financial Facts of the Week: March 10, 2016

Japan
Wikimedia

Fact #1
Growth in “labor quality,” a measure of the skill set of the average worker, has declined in the last few years, according to a recent research note from J.P. Morgan Chase. In 2015, the growth in overall workforce skills contributed less than 0.1 percentage points to GDP growth, the smallest contribution of labor quality to growth since 1979.
Source: Wall Street Journal

Fact #2
Among industrialized economies, only the U.S. and Japan are growing at similar rates compared with their pre-financial crisis growth rate, after adjusting for changes in the working-age population, but both economies have still grown more slowly than expected.
Source: JobMarketMonitor.com

Fact #3
As tighter border controls are continuously put into place across Europe, the European Union could face up to 18 billion euros, or $19.6 billion, each year in lost business, steeper freight costs, and interruptions to supply chains, according to a recent report by the European Commission.
Source: New York Times

Study: Wages are growing faster than believed

The entry Into the workforce of new employees earning below the median wage has held down earnings growth, a study says.
Ted S. Warren/AP

Wages aren’t growing so slowly, after all.

A new study by the Federal Reserve Bank of San Francisco found growth in the median weekly pay of workers continuously employed in full-time jobs picked up sharply in 2015 to nearly 4% on an annual basis.

By contrast, the 12-month rise in average hourly earnings reported by the Labor Department has hovered around 2% for most of the nearly seven-year-old recovery. Annual wage growth accelerated to 2.5% in January but slipped back to 2.2% last month.

The report blames the sluggish aggregate gains on changes in the makeup of the labor force, particularly the entry of low-wage workers as the recovery gained steam and the retirement of higher-paid baby boomers.

“While high-wage baby boomers have been retiring, lower wage workers sidelined during the recession have been taking new full-time jobs,” study authors Mary Daly, Bart Hoblin and Benjamin Pyle wrote.

USA Today reported similar findings last fall based on data from payroll processor ADP, but this marks the first formal report of the trend by a government agency.

The tepid overall pay increases have puzzled economists because the sharp drop in unemployment to 4.9% from 10% in 2009 should have led to faster pay hikes as employers competed for a shrinking pool of available workers. From 1983 to 2015, the study notes, yearly wage gains averaged 3 ¼%. With monthly job growth averaging well over 200,000 the past couple of years, the failure of worker paychecks to swell more rapidly has been considered the chief missing element of the labor market’s recovery.

The report separated the median weekly wage growth of full-time workers who stayed employed from changes in earnings due to movements into and out of the labor force. The median pay gains of the full-time workers spiked from about 2% in 2010 to 4% in 2012, then edged down to about 3% in 2014 before gradually rising to nearly 4% by the end of 2015, the study shows.

By contrast, many other Americans enter or exit the labor force each month. Those outside the labor force — including many in school as well as laid-off workers who stopped looking because they grew discouraged — have returned in greater numbers as the labor market has improved. About 80% of those new full-time employees started “at below-median wages,” the study says.

Similarly, the number of part-time workers switching to full-time jobs has increased as well, with about 80% doing so at below-median wages.

At the same, several million Baby Boomers have been retiring each year. The departure of those older, higher-paid workers also has held down wage growth.

During the recession, the study says, the opposite dynamic occurred. Employers fired low-wage workers first and kept those with higher skills and earnings, tempering the decline in average wages.

The study concludes that the impact of its wage-growth findings on inflation are unclear. Even though raises have been more robust than believed, employers’ ability to keep their overall wage bills low “by replacing or expanding staff with lower paid workers” still could keep a lid on inflation. The Fed, which raised its benchmark interest rate for the first time in nine years, is looking for inflation to pick up to move ahead with further hikes.

Written by Paul Davidson of USA Today

(Source: USA Today)

Weekly Advisor Analysis: February 1, 2016

Last week was a busy week in terms of data releases and news. Estimated U.S. gross domestic product (GDP), unemployment data, and the Federal Reserve were just a few headlines that grabbed investors’ attention. U.S. indexes enjoyed another week in the black as domestic indexes surged on Friday. The S&P 500 was up 3.2 percent while the Dow Jones Industrial Average and the NASDAQ were up 3 percent and 2.8 percent, respectively. Internationally, the picture was quite different. The Euro Stoxx 600 index was up 3.77 percent but Chinese equities, as measured by the Shanghai Composite Index, were down 5.63 percent.

Unemployment Figures

The job market continues to look strong here in the United States. The most recent release by the Labor Department indicated initial jobless claims fell 16,000 to 278,000. Economists surveyed by The Wall Street Journal were expecting 280,000 claims. Economists pay close attention to the initial jobless claims because, if they are falling, it frequently means less companies are laying employees off and more are hiring. This is typically good for wages which can lead to more consumer spending and domestic growth. More generally, unemployment numbers usually fall during the fourth quarter of the year as temporary hiring picks up for the holidays. The number then tends to rise in the first quarter of the following year as those temporary jobs are no longer needed.

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U.S. GDP

GDP slowed in the last quarter of 2015. Economists were expecting 0.8 percent growth but the first estimate of fourth quarter GDP was 0.7 percent. GDP results typically go through a number of revisions as the preliminary estimate includes incomplete data. The final figure can be meaningfully different than the first estimate. According to the results, business inventory investment, personal consumption, and trade were the main detractors. The drop-in trade is likely due to the stronger U.S. dollar and uninspiring global growth while the lagging inventory investment and slowing personal consumption could indicate a decelerating domestic economy. On the positive side, residential investment jumped 8.1 percent in the fourth quarter and, by some measures, the housing market in 2015 was the most robust since the recession.

Fun Story of the Week

A team of physicists appear to have cracked a significant roadblock in quantum computing, paving the way for quantum computers that can solve “insolvable” problems. If the physicists are correct, then they have solved the causality problem by using quantum particles that are moving along “open timelike curves.” Theoretically, quantum computers using “closed timelike curves” create causality problems. A more practical (or relatable) example of a causality problem takes place in the Back to the Future movie. Since Michael J. Fox’s Marty McFly went back in time and tampered with the past, he almost caused a new future in which he didn’t exist. The same type of problem happens at the particle level, too. With the “open timelike curves,” the physicists hypothesize, as long as they entangle the time-traveling particles with one in the present, they won’t interact with anything in the past, thus preventing causality problems. Think of this as Marty McFly going back in time, still tied to his present-day “self,” and being able to use that information, but not being allowed to speak with his teenage mother and father or interact with anyone else during his trip. According to their report, while these particles never interact, the nature of quantum mechanics and computing still allows for the solving of impossible calculations. Confused? So am I.

Three Financial Facts of the Week: January 13, 2016

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Chris Potter/Flickr

Fact #1
47.2% of the jobs added by the U.S. economy in 2015 came from low-paying sectors including retail, professional services and food services, leading to wage growth to rise at a slower pace than the overall jobs number would indicate.
Source: CNBC

Fact #2
According to a report by the Institute of International Finance, from 2008 to mid-2015, corporate debt in the BRIC countries (Brazil, Russia, India, and China) jumped from $8.9 trillion to $24.5 trillion.
Source: Investor’s Business Daily

Fact #3
The Labor Department announced that the number of job openings and hires both rose in November, indicating the highest worker confidence in the jobs market since the start of the recession.
Source: MarketWatch

Company Ordered to Pay Back Wages for Bathroom Breaks

  
Stuart Dee/Getty Images 

A publishing company near Philadelphia has been ordered by a judge to pay back wages – possibly up to $1.75 million — to more than 6,000 employees after it neglected to pay for bathroom or other short breaks, according to a statement released by the Department of Labor Monday.

American Future Systems, also known as Progressive Business Publications, violated the Fair Labor Standards Act by docking its telemarketers’ wages “for virtually all time not spent making sales calls, sometimes bringing their wages below the federal minimum wage,” the DOL said. The federal minimum wage for nonexempt employees is $7.25 per hour for all hours worked, plus time and a half for hours worked beyond 40 per week.

While the exact amount has not been determined, the DOL estimates that Progressive and its president, Edward Satell, “are liable for at least $1.75 million in back wages and liquidated damages to more than 6,000 employees who worked in 14 call centers” for violations occurring through June 2013.

“Our company has a liberal break policy of allowing our telemarketers to choose unpaid breaks anytime, for any reason, for as long as they want,” Satell said Tuesday. “This flex work policy was greatly valued by many of our employees to handle their personal needs.”

Satell said he will appeal the decision, issued by a judge in the U.S. District Court for the Eastern District of Pennsylvania on Dec. 16, 2015. “If upheld, we’d have to discontinue this generous policy,” Satell said. “We have very good legal reasons to be hopeful that the court will reverse the ruling.”

“For far too long, American Future Systems penalized its employees for taking breaks to meet the most basic needs during the work day — stretching their legs, getting a glass of water or just using the restroom,” said Jim Cain, district director for the department’s Wage and Hour Division.

Investigators from the division found that PBP telemarketers had to clock in and out for every break, “even those as short as two to three minutes,” the DOL said. PBP deducted the break time from the total hours worked each week.

The Fair Labor Standards Act does not require lunch or coffee breaks. “However, when employers do offer short breaks (usually lasting about 5-to-20 minutes), the law considers the breaks compensable work hours that must be included in the sum of hours for the work week and considered in determining overtime,” the DOL said.

Progressive Business Publications, founded in 1959 and based in Malvern, Pa., publishes and sells primarily business newsletters.

Written by Roger Yu of USA Today

(Source: USA Today)

Chart of the Week: December 7, 2015

Screen Shot 2015-12-07 at 2.57.43 PMThe European Central Bank (ECB) eased further last week, extending the timeframe of quantitative easing and pushing deposit rates even lower. Despite the aggressive easing, markets in Europe and the U.S. sold off at first and then calmed down as investors digested what was ultimately some very positive news. While the ECB has committed to easing policy through March 2017, the Federal Reserve is on the verge of tightening here at home. The November employment report provided further evidence of U.S. labor market improvement, putting the Fed on track to tighten policy at its December meeting. This rate hike has been well telegraphed and is expected by the market, with market-based odds of a hike approaching 90%. As the Fed raises rates, the divergences in global monetary policy will grow even starker. Despite the market’s initial reaction, this clear divergence in monetary policy highlights the need for investors to have a plan for addressing global monetary policy divergence; U.S. investors may want to look for investment opportunities overseas where asset prices might benefit from the easy money policies.

For more information please visit the Source below.

(Source: JPMorgan)

3 Economic Trends Investors Should Watch over the Rest of 2015

© Tim Rue/Bloomberg/Getty Images
© Tim Rue/Bloomberg/Getty Images

The U.S. economy is on the mend. Finally, the global economic crisis of 2008 and recession appear to be in the rearview mirror.

The Federal Reserve’s latest policy meeting revealed that Chair Janet Yellen and team remain on track to begin interest rate hikes this year. The Fed’s ultra-loose monetary policy stance, with near-zero percent interest rates, has served its purpose, and the central bank is signaling the economy is strong enough to handle a gradual move higher in interest rates.

There are several economic trends the Fed is monitoring in regards to the timing of the first interest rate hike, which many economists expect to come at the September 16-17 Fed policy meeting.

1. GDP growth rate.

Overall total gross domestic product growth for 2015 will likely be 2.5 percent, according to The Haverford Trust Co., a Philadelphia-based wealth and advisory firm. The 2.5 percent forecast follows a 2.4 percent GDP rate in 2014, but it still remains below a more historically normal 3.5 percent growth rate. A key driver of this year’s growth is the consumer – after all, consumer spending accounts for roughly 70 percent of U.S. economic growth.

“The second half [of the year] should be decidedly stronger than the first half. We expect the consumer to begin spending more as job and wage gains continue,” says Hank Smith, chief investment officer at Haverford Trust. Car and truck sales have been strong, with 2015 sales forecast near 18 million units, the highest level since the early 2000s, Smith notes.

Lower gas prices this year have also been a boon to consumers. The national average price for a gallon of gasoline stood at $2.81 a gallon in mid-June, 86 cents per gallon lower than a year ago, which saves motorists $335 million each day, according to data from GasBuddy, a website that monitors retail gasoline prices. But not all of consumers’ savings have gone toward new purchases.

“A lot of the gas savings has been used by consumers to retire debt,” says Curtis Holdensenior investment officer at Houston-based financial planning firm Tanglewood Wealth Management. “This does not help the economy a lot today but will be beneficial in the future, as consumers will be better able to spend and borrow in the future since they have a healthier balance sheet.”

2. Inflation.

While low prices may sound good to consumers, they reveal a lack of demand in the overall economy. It’s Economics 101: Higher demand drives up prices and generally reflects strong underlying economic activity. This matters to the policymakers at the Federal Reserve because the central bank has been tasked by Congress with a so-called “dual mandate” of promoting maximum economic growth along with stable prices. In the past 12 months through May, the core consumer price index climbed 1.7 percent, which is below the Fed’s 2 percent target rate for inflation.

Experts expect inflation to remain subdued. “It might pick up a fraction of a percent. There are two secular forces that are very disinflationary: technology and an oversupply of labor worldwide,” Smith says.

The muted inflation levels are not expected to stop the Fed from raising interest rates this year, but could keep the number of rate increases to a minimum. “The Fed will be very slow in its interest rate increase. We think they will still hike rates, but it will probably be slow – to the tune of one hike every other meeting,” says Jason Pride, director of investment strategy at The Glenmede Trust Co., a Philadelphia-based investment and wealth management firm.

3. Labor market.

The employment picture has been improving in 2015, and most economists expect hiring to remain relatively strong. In May, the economy added 280,000 new nonfarm jobs, which followed 221,000 new jobs in April. The civilian unemployment rate stood at 5.5 percent in May, down from 5.7 percent in January.

“We’ve made great strides in improvement of the employment picture,” Pride says. “The most important thing is that we’re getting close to a key inflection point where the labor market is getting tight enough that businesses will have a hard time filling jobs. Therefore, they’re going to have to start compensating more, which will cause wages to rise.”

Market impact.

So what do these economic trends mean for investors?

The Federal Reserve has been broadcasting its intention to raise its key policy rate, the federal funds rate, this year, which will not be a surprise to the stock market. The central bank will be hiking interest rates in reaction to a stronger economy, and overall increases are likely to be minimal. The federal funds rate currently stands at zero to 0.25 percent, and analysts expect one or two 0.25 basis-point interest-rate hikes this year, at most.

“While we expect the Fed to modestly increase interest rates in late 2015, we do not believe this will have any meaningful negative impact on the economy or U.S. equity prices,” says Ernie Cecilia, chief investment officer at Bryn Mawr Trust, a Bryn Mawr, Pennsylvania-based wealth management firm.

He expects any interest rate hikes to move at a slow and deliberate pace. “In this environment, domestic equities can generate positive returns, albeit far less than what has been experienced over the recent past. Any increase in domestic equity prices is likely to be a function of increased corporate earnings,” Cecilia says.

Pride says stock investors should remain in equities but be selective. “Find individual values where you can take them, and tilt toward the international spectrum because that’s where the valuation opportunity is with economic improvement,” Pride says.

For long-term investors, asset allocation and diversification remain important.

“Today, bonds serve only one purpose, and that is to reduce near-term volatility. You can get more income from stocks than you can from bonds. Because bonds continue to be overvalued relative to stocks, investors should be at their maximum exposure to equities,” Smith says.

Written by Kira Brecht of U.S. News & World Report

(Source: U.S. News & World Report)