Market Update: June 5, 2017

MarketUpdate_header

Last Week’s Market Activity

  • Solid Friday and holiday-shortened week for stocks… and more record highs. S&P 500 gained +0.36% on Friday, +0.96% for the week to end at a record high (2439.07). Nasdaq led major averages Friday (+0.94%) and for the week (+1.54%). Small caps beat mid and large (Russell indexes).
  • Tech drove Friday’s gains, led by semis and software. Financials hit by lower rates and yield curve flattening post jobs miss. Energy was the biggest decliner on falling oil prices.
  • Weaker dollar helped COMEX gold Friday (+0.8%) but not WTI crude oil (-1.4%)
  • 10-year yield dipped 0.06% to 2.15%, lowest closing level of 2017 and lowest since just after the election
  • Friday miss on U.S. nonfarm payrolls unlikely to sway Fed next week (details below)
  • Defensive tilt to weekly performance. Telecom topped weekly sector rankings, followed by healthcare. Oil fell > 4%; 10-year Treasury yield dropped 0.10%.

Overnight & This Morning

  • Stocks in Asia mostly lower amid relatively light news
  • In Europe, shares down (Euro Stoxx 600 -0.2%), continuing Friday slide
  • Weak sentiment after more terrorist attacks in London over the weekend
  • Euro up 0.3% to $1.12
  • Commodities – Mostly lower, led by weakness in industrial metals and energy, with WTI oil near $47/bbl. COMEX gold (0.3%) adding to Friday’s gains at $1283, copper (-0.7%)
  • U.S. stock, Treasury yields up slightly.
  • U.S. dollar mixed vs major currencies

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Key Insights

  • Goldilocks environment. Steady but not booming job gains and inflation leveling off suggests economy is not too hot, not too cold. Wage gains are benign-average hourly earnings +2.5% YoY in Friday’s May jobs report. We’ve seen a mixed set of data recently: soft Q1 GDP, Q2 tracking near +3%, and earnings looking good. The Fed Beige Book cited most Fed districts continue to expand at a modest or moderate pace. Sounds like Goldilocks.
  • Any concern that the Fed may be behind the curve are misplaced, at least for now. The market is only pricing in a 44% chance of another rate hike in 2017 (after one in June), and just one hike in 2018.
  • An expensive stock market can stay expensive. The 17.7 times forward price-to-earnings (P/E) multiple, where it stood in early 2015, is more reasonable than the trailing PE (20.7) for the S&P 500 but is still at the high end of the historical range. We reiterate valuations are not good predictors of near-term stock market moves, an important message for clients.

Macro Notes

  • Jobs miss doesn’t mean Fed pause. The economy added 138K new jobs in May, well below consensus expectations of 185K, with additional downward revisions for March and April; unemployment rate edged lower to 4.3% from 4.4% on lower labor participation rate. The report may give the Fed some pause, but given the overall backdrop a June hike remains far more likely than not.
  • The China Caixin Manufacturing PMI index was below 50 when reported last week, but overnight the services PMI was 52.8, much better than last month’s 51.5. The overall composite number of 51.5 suggests a continued, but slowing, expansion in the Chinese economy. We expect the government to continue to try to reduce leverage in the economy, but not to engage in any major reforms until after the Communist Party meeting this fall.

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  • Politics and central banks highlight the week ahead. Politics and central banks highlight the coming week, with Thursday, June 8 of particular importance as it brings the U.K. general election, the European Central Bank (ECB) meeting, and testimony of former FBI Director James Comey. Data of note in the U.S. includes durable goods and Services Institute for Supply Management (ISM). Overseas, Eurozone and Japan Gross Domestic Product (GDP), and Chinese inflation and money supply data are due out.

Monday

  • Nonfarm Productivty (Q1)
  • Unit Labor Costs (Q1)
  • ISM Non-Mfg. Composite (May)
  • Factory Orders (Apr)
  • Durable Goods Orders (Apr)
  • Cap Goods Shipments & Orders (Apr)
  • UK: Markit/CIPS UK Services PMI

Tuesday

  • Eurozone: Markit Eurozone Services PMI (May)

Wednesday

  • Eurozone: GDP (Q1)
  • Japan: GDP (Q1)
  • Japan: Current Account Balance (Apr)
  • Japan: Trade Balance (Apr)

Thursday

  • Germany: Industrial Production (Apr)
  • UK: General Election, 2017
  • ECB: Draghi
  • Japan: Machine Tool Orders (May)
  • China: CPI & PPI (May)

Friday

  • Wholesale Sales & Inventories (Apr)
  • France: Industrial Production (Apr)
  • UK: Industrial Production (Apr)
  • UK: Trade Balance (Apr)
  • China: Money Supply and New Yuan Loans (May)

 

 

 

 

 

Important Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better. Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. This research material has been prepared by LPL Financial LLC

Market Update: April 3, 2017

MarketUpdate_header

  • Stocks search for direction to begin Q2. After closing out a solid first quarter amidst Brexit and Trump-trade uncertainties, equities are modestly lower in early trading. Friday’s session saw the S&P 500 (-0.2%) and the Dow (-0.3%) finish in the red, ending the quarter without enthusiasm despite an overall increase of 5.5% for the S&P. Rate-sensitive real estate (+0.5%)  and utilities (+0.3%) won the sector battle for the day as a number of Federal Reserve (Fed) presidents expressed interest in potentially reducing the Fed’s balance sheet; financials (-0.7%) was the worst performer. Overseas, the Hang Seng (+0.6%) and Nikkei (+0.4%) gained ground on strong regional Purchasing Managers’ Index (PMI) data; China’s Shanghai Composite was closed for a holiday. In Europe, the STOXX 600 Index (-0.2%) and most markets are lower. Meanwhile, WTI crude oil ($50.46/barrel) is down slightly, COMEX gold ($1253/oz.) is near flat, and the yield on the 10-year Treasury is down to 2.36%.

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  • Checking in on so-called Trump trades. Recent underperformance of small caps, financials, and industrials likely reflects some loss of confidence in the Trump agenda, although we believe small caps and financials may have enough going for them that the recent weakness may be a buying opportunity, even with a scaled-back policy path. Industrials, on the other hand, may need more help from the macroeconomic environment should policy disappoint.
  • Just missed five in a row. The S&P 500 lost 0.04% last month, after a late-day drop on Friday. This was the first monthly decline since October, just missing the first five month win streak since March-July 2016. It was still a great first quarter as the S&P 500 jumped 5.5%; the best return since Q4 2015 and the best Q1 since 2013. For the quarter, technology and consumer discretionary led, while telecom and energy lagged.
  • April is usually strong. Over the past 20 years, no month sports a higher monthly S&P 500 average than April at 2.0%. Going back to 1950[1], the average monthly return is 1.5%, with only the historically strong months of November and December better. Post-election years are also strong, up 1.6% on average. Lastly, after a big first quarter gain of 5% or more (like 2017), April actually does better at up 2.0% on average.
  • April is a big month. There are multiple potential market-moving events in April: the start of Q1 earnings season, elections in France, and a potential government shutdown head the list of things we are watching closely. To get ready for the big month, we will examine these events more closely.

MonitoringWeek_header

Monday

  • ISM (Mar)
  • Eurozone: Markit Mfg. PMI (Mar)
  • Eurozone: Eurostat PPI Industry Ex-Construction (Fed)

Tuesday

  • Eurozone: Eurostat Retail Sales Volume (Feb)

Wednesday

  • ISM Non-Mfg. (Mar)
  • Eurozone: Markit Services & Composite PMI

Thursday

  • Initial Jobless Claims (Apr)
  • Eurozone: Market Retail PMI (Mar)

Friday

  • Change in Nonfarm, Private & Mfg. Payrolls (Mar)
  • Unemployment Rate (Mar)
  • Average Hourly Earnings (March)

 

 

 

 

[1] Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.

Important Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better. Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. This research material has been prepared by LPL Financial LLC.

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.

Weekly Market Recap: April 5, 2016

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The week in review

  • Consumer spending rose slightly, but the January numbers were revised lower
  • Consumer confidence improved in March
  • Jobless claims rose to 276,000
  • The ISM Manufacturing Index rose to 51.8
  • Private payrolls increased by 215,000
  • The unemployment rate inched higher to 5.0% on the back of stronger participation

The week ahead

  • International trade
  • ISM Non-manufacturing index
  • JOLTS
  • FOMC minutes
  • Jobless claims

For more information please visit the Source below.

(Source: JPMorgan)

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)

Is Janet Yellen Blind to the Rebound in Inflation?

Is Janet Yellen blind to the rebound in inflation?
Provided by MarketWatch

The U.S. economy, by all indications, is near full employment, and, according to the inflation hawks, that means inflation rates should start rising again.

In fact, the hawks say, inflation is already bubbling, and, if Janet Yellen doesn’t cool things fast, inflation will be at a full boil. Very soon, the hawks say, the inflation rate will exceed 2%, which is the Federal Reserve’s target rate.

Inflation has been below 2% for four years, which is one reason the Fed is keeping money so easy. Most Fed officials don’t think inflation will get back to 2% on a sustainable basis for two more years.

But the data are troubling. Six months ago, inflation barely had a pulse, rising at just 0.2% year-over-year. But now the personal consumption expenditure price index (the Fed’s preferred measure of inflation) is at 1.25%, even as energy prices continue to drop.

What’s behind this recent uptick in inflation? One theory is that we have too many jobs. That is, economic theory suggests that when the unemployment rate gets very low, workers gain bargaining power and are able to command higher wages because the demand for labor is higher than the supply. Bosses must raise wages to keep good workers, and then they must raise their selling prices in order to pay those wages.

This relationship is known as the Philips Curve, and it’s been the main theory behind the Fed’s monetary policy for more than 50 years: The Fed tries to keep the unemployment rate just above the level that would fuel inflation. That level is known as the nonaccelerating inflation rate of unemployment, or NAIRU.

There’s only one problem. Although the theory seems quite reasonable on a chalkboard, the empirical evidence shows that it doesn’t work in the real world. NAIRU seems to change over time. Sometimes it seems that NAIRU is above 6%. But right now, NAIRU seems to be below 5%. It could be below 3%. Recent research cited by the Council of Economic Advisers suggests NAIRU could be zero. No one really knows. And no one has a better theory to explain inflation.

So far, Fed officials are doing what seems most practical: They are letting the economy run. Before they feel obligated to slam on the brakes, they’ll want actual evidence of higher prices and higher wages. They’ll cautiously raise rates away from zero but maintain accommodative policy for a while longer, especially with risks of global contagion rising.

But what about the spike in the PCE price index in the past few months? Surely that indicates that NAIRU has been breached! Isn’t it time to get serious about raising rates?

Fed Chairwoman Janet Yellen was asked about that at her latest press conference on Wednesday and she said she wasn’t convinced.

“Given that the economy is now close to our maximum employment objective, hopefully inflation is moving up,” Yellen said, before switching to the other hand. “As you mention, recent readings on inflation have moved up. There may be some, you know, I want to warn that there may be some transitory factors that are influencing that.”

In other words, just as transitory declines in oil prices and the one-time strengthening of the dollar have pushed the PCE price index far below the Fed’s target, transitory increases in other prices are now pushing the index higher. But Yellen doesn’t think it’ll last, in either case. Oil prices and the dollar will stabilize, and the transitory price increases seen over the past few months will also fade away.

Now, this may seem like cherry picking the data: Yellen picks which prices matter to her, and disregards the rest. But there is a method to her madness.

Remember, inflation is a general and sustained increase in prices, not just temporary increases or decreases for a few goods and services. What the Fed cares about, what we care about, is the pace of underlying inflation. Transitory spikes or dips aren’t generalized inflation; that’s just the markets working out the ebbs and flows of supply and demand.

Economists have a lot of tools to help them figure out whether the underlying rate of inflation has changed or whether it’s just temporary factors. One method is to use core inflation measures, which automatically ignore volatile food and energy prices. Core inflation does a pretty good job of predicting future inflation rates, but it offends people who think food and energy prices matter in the real world.

Another method has been devised by the Dallas Fed. Its trimmed mean PCE index strips out whatever prices are rising or falling most in a given month, ignoring the outliers on the theory that the biggest price changes are reactions to shocks in individual markets, not part of a general trend.

Researchers at the Dallas Fed point out that the recent spike in the PCE index has been driven by unusually large price increases for goods such as apparel, jewelry, motor vehicles, and drugs, and for services such as air fares, school lunches, tickets for spectator sports and banking fees.

Apparel prices, for instance, are up at a 14% annual rate in the first two months of the year, compared with a 0.9% decrease in 2015. Jewelry and watch prices are up at a 62% annual rate, compared with a 0.7% drop in 2015. Motor vehicle prices are up at a 3.2% rate, compared with a 0.2% rise last year. Drug prices are up at an 11.5% rate, compared with a 1.7% increase last year.

Most likely, the recent spike in the PCE index is due to temporary shocks, not to an acceleration in underlying inflation. There’s no urgency to raise rates on account of hyperinflation lurking right around the corner. In reality, the Fed would be ecstatic if it could get inflation back to 2% any time soon.

Written by Rex Nutting of MarketWatch

(Source: MarketWatch)

 

Weekly Advisor Analysis: February 9, 2016

Investors were hoping for a fresh start to February given the previous tumultuous four weeks. Overall, the results were mixed. The Dow Jones Industrial Average was up 0.84 percent for the week and the S&P 500 was down 0.70 percent. The tech-heavy NASDAQ Composite ended the week down 3.18 percent as technology and biotech companies weighed on the index. International markets didn’t fare much better. The Stoxx Europe 600 Index ended the week down 4.78 percent and Japan’s Nikkei 225 closed down 3.99 percent. Oil finished the week lower in uneven trading as investors wrestled with global growth concerns and a possible deal between the largest producers.

Government Bonds

The U.S. 10-year Treasury bond hit 1.80 percent, the lowest in nearly 10 months, last week. This marks a sizeable drop from the 2015 year-end yield of 2.27 percent. Fears of slowing global growth have driven investors into government bonds and, as one of the only central banks raising rates, U.S. government bonds are very attractive. Indeed, nearly 25 percent of global government bonds outstanding have below-zero yields. As the demand increases, the price on bonds goes up, pulling yields down. Possibly exacerbating the issue, the U.S. Treasury has announced it will cut the issuance of Treasury bonds maturing in five or more years for the first quarter of 2015 by $18 billion. While the amount is relatively small compared to the $13 trillion in outstanding debt, the recent increase in demand and lower supply could push bond prices even higher. It is important to note if yields drop sharply, investors that are taking negative bets on those bonds may be forced to buy to cover their bets. Known as a short squeeze, the rapid buying of bonds by short sellers covering their bets could move prices even higher and yields even lower.

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Jobs, Jobs, Jobs

According to the Bureau of Labor Statistics, non-farm payrolls increased 151,000 in January, nudging the unemployment rate down to 4.9 percent but missing market expectations. Despite unemployment hitting the lowest level since February 2008, markets reacted negatively to the miss on Friday. The U-3 unemployment figure, the more widely reported number the government releases, measures the total number of those unemployed as a percent of the civilian labor force. Many economists instead choose to focus on broader measures, such as the U-6 unemployment rate. The U-6 includes those covered in the U-3 measure but also those still looking for work, but discouraged, as well as those employed part-time for economic reasons. This figure was flat for January, holding still at 9.9 percent. On the bright side, there was a slight increase in wage growth which is something economists welcome as it indicates slack in the labor market may be tightening up and inflation expectations may rise.

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Central Banks

Central banks across the world are indicating additional monetary actions could be required to boost inflation and spark growth. The European Central Bank, the Bank of England, and the Bank of Japan are just a few that have either hinted at or already taken additional stimulative actions. The Bank of Japan, for example, surprised the markets last week indicating it would begin setting negative interest rates. While both the European Central Bank and the Bank of England have committed to keeping rates low, the European Central Bank has recently hinted more stimulus may be needed to boost inflation in the Eurozone. A reasonable amount of inflation is generally a good sign for an economy. As consumers debate purchases, the thought about whether the good or service will be more expensive in the future may lead them to buy now rather than wait. Slowing inflation could signal a lack of economic growth as fewer goods and services are bought and sold. What central banks desperately want to avoid is a deflationary situation. Whereas consumers may buy now if they believe prices will be higher in the future, the opposite is true when there is deflation. When this occurs, consumers may delay their purchases with the belief prices may continue to slide, further exacerbating an economic slowdown.

Fun Story of the Week

A man named Carl Reese set a new record for driving from Los Angeles to New York City, or 2,829 miles, in just under 39 hours. As remarkable as that may sound, the way he did it is what’s especially noteworthy. Reese broke the record riding on a motorcycle, alone. Only five other people have completed such a feat with Reese doing it in the shortest amount of time. Preparation for such an undertaking involves painstaking planning and some more unorthodox training methods. Reese began working with a therapist to strengthen his back while taking cycling classes to condition his body for the extended bouts on a motorcycle seat. To break the record, Reese averaged 73 miles per hour and, occasionally, exceeded 110 miles per hour while taking just an hour-long nap and bringing easy-to-eat food such as sandwiches and nuts. Known as the Cannonball Run, the less-than-legal “race” from Los Angeles to New York City began in 1914 with Irwin Baker who rode his Indian® motorcycle between the two cities in 11 days, setting the bar for those who have come after him.

Weekly Market Commentary: February 8, 2016

Provided by geralt/Pixabay
Provided by geralt/Pixabay

There was bad news and good news in last Friday’s unemployment report.

In the negative column, fewer jobs were created in the United States than economists had predicted, and January’s jobs gains were not as strong as December’s had been. In addition, the December jobs increase was revised downward from 292,000 to 252,000, according to Barron’s.

On the positive side of the ledger, more than 150,000 new jobs were added in January. The unemployment rate fell below 5 percent for the first time since February of 2008 and earnings increased. In total, average hourly earnings have moved 2.5 percent higher during the past 12 months.

Good news plus bad news equals uncertainty. As we’ve seen, that’s a state of affairs markets strongly dislike. In January, slower growth in China and low oil prices had markets in a tizzy. Last week, the Standard & Poor’s 500 Index gave back more than 3 percent as investors tried to decide whether employment news indicated a rising risk of recession in the United States, according to Barron’s.

When investors are emotional and markets are volatile, it can be helpful to remember the words of Ben Graham, author of The Intelligent Investor, who believed a company’s intrinsic value should be measured by its operating performance rather than its share value. Warren Buffett shared Graham’s thoughts on ‘Mr. Market’ in a 1987 shareholder letter. In part, it cautions:

“…Like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.”

So, how are companies performing? It depends on which you own but, during the current quarterly earnings season, most companies have reported earnings that exceed expectations. That’s not something that tends to happen during recessions, according to Barron’s.

Data as of 2/5/16 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) -3.1% -8.0% -8.9% 7.6% 7.3% 4.0%
Dow Jones Global ex-U.S. -1.1 -8.0 -16.1 -4.0 -3.2 -0.8
10-year Treasury Note (Yield Only) 1.9 NA 1.8 2.0 3.6 4.6
Gold (per ounce) 3.5 8.3 -8.7 -11.8 -3.1 7.3
Bloomberg Commodity Index -2.1 -3.8 -26.2 -19.1 -14.2 -7.8
DJ Equity All REIT Total Return Index -2.4 -5.7 -10.0 7.1 9.4 6.1

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Online Fashion Retailer Nasty Gal Cuts 10 Percent of Staff

Nasty Gal
Nasty Gal

Online fashion retailer Nasty Gal has laid off 10 percent of its staff, as the purveyor of edgy women’s clothing cuts costs amid an uncertain financing and retail environment.

CEO Sheree Waterson told the company in an email that the cuts were necessary as the “market in which we operate is changing, both in retail broadly and apparel specifically.” Nineteen employees across several departments were let go. Nasty Gal also laid off some staff in 2014.

The layoffs underscore the difficulty mature e-commerce startups can encounter as they transition from being a hot new brand to the long slog of building a more traditional retail business. In short, building a retail brand is really hard and technology can only afford you so many shortcuts along the way. Online beauty brand BirchBox announced layoffs of 15 percent of its staff last week, as startups in e-commerce tighten belts as investors become more wary of unprofitable growth.

Nasty Gal was founded by Sophia Amoruso in 2006 as a vintage shop on eBay. Over the years, she grew the Los Angeles-based company into an online business with more than $100 million in sales, fueled by a passionate customer base among millennial women and a strong social media presence where it boasts more than one million Facebook followers and nearly two million on Instagram. The company sells its own line of clothing as well as those of other brands and designers.

Amoruso turned over the CEO role to Waterson in early 2015, saying at the time that the company needed a more experienced leader. Re/code reported at the time that Amoruso had been telling potential investors that 2014 revenue growth would be flat or up slightly. She declined to give an update on 2015 sales figures when asked on Thursday.

Asked if it’s possible that Nasty Gal has hit its ceiling of growth, Amoruso toldRe/code, “We believe that future growth comes from being where our customer is, and that is not purely online. We have two stores and a lot of room to grow.”

The company has raised more than $60 million in venture capital from investors including Index Ventures and former Apple retail chief Ron Johnson.

Written by Jason Del Rey of Re/Code

(Source: Re/Code)

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.

WAAAAA

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.

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