What I’m Watching This Week – 31 March 2014

The Markets

Ouch: Last week was large-cap stocks’ time to shine (or at least outperform). The Nasdaq’s 2.8% loss represented its worst week since early October 2012, and the small caps of the Russell 2000 suffered even more; both were hurt by selling in the tech and biotech sectors. Meanwhile, the Global Dow rebounded into positive territory year-to-date.

Last Week’s Headlines

  • And then there were seven: The largest industrialized nations of the world suspended Russia’s 16-year-old membership in the G8 in retaliation for the annexation of Crimea.
  • U.S. economic growth slowed in the fourth quarter of 2013, according to the Bureau of Economic Analysis. The 2.6% annualized increase in Q4 gross domestic product was lower than Q3’s 4.1% gain. That helped cut inflation-adjusted GDP for all of 2013 to 1.9% compared to the previous year’s 2.8% growth. Meanwhile, after-tax corporate profits were up 2% for the quarter–slightly less than in Q3–and a 3.7% drop in corporate taxes last year left corporate after-tax profits up 6.9% for all of 2013.
  • After two months of declines, durable goods orders were up 2.2% in February. According to the Commerce Department, a 1.8% increase in commercial aircraft and parts was a key factor in the nearly 7% increase in transportation orders, which led the overall improvement.
  • New home sales fell 3.3% between January and February, and were 1.1% lower than in February 2013. However, the Commerce Department said the average sale price rose for the third straight month, though the $317,500 average price was still below the $335,600 seen in November.
  • For the third month out of the last four, personal incomes rose 0.3%, and the Bureau of Economic Analysis said personal consumption rose at the same rate.

Eye on the Week Ahead

Unemployment data will be of even more interest than usual as a potential indicator of any rebound–or lack thereof–from the effects of winter weather. A speech on Monday by Fed Chair Janet Yellen will be closely watched for any follow-up on her “six months after tapering ends” remark about the potential timing of Fed interest rate changes. The European Central Bank also is scheduled to meet, and global investors will want to know whether any additional steps will be taken to fight less-than-desirable inflation. Additional data on manufacturing and services also is on tap.

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What I’m Watching This Week – 24 March 2014

The Markets

The Fed taketh away and the Fed giveth: After domestic equities fell in the wake of Wednesday’s Federal Reserve announcement, encouraging manufacturing data, also from the Fed, helped stocks rebound to end the week with a gain. The Dow, which has generally been bringing up the rear in recent weeks, led the pack, though it remained solidly in negative territory for the year, along with its overseas counterpart. Meanwhile, bonds took a hit because of questions about the timing of an increase in short-term interest rates.

Last Week’s Headlines

  • As expected, the Federal Reserve’s monetary policy committee once again reduced its bond purchases by $10 billion a month. However, the committee’s statement said that rather than focusing primarily on a 6.5% unemployment rate to determine when to begin raising its target interest rate, policymakers would look at a variety of economic measures. The statement also forecast that an increase wouldn’t occur for “a considerable time” after the end of the bond-buying taper. When pressed about what that term might mean, new Chair Janet Yellen raised eyebrows by saying it could mean as soon as six months after tapering ends. A survey of Federal Open Market Committee members showed most expect the target rate, now close to zero, to end 2015 at 1%.
  • Frigid weather across much of the country also seemed to freeze both new residential construction and sales of existing homes in February. According to the National Association of Realtors®, the weather plus ongoing low inventories and restricted credit availability cut home resales 0.4% during the month. And while building permits–an indicator of future activity–were up 7.7%, the Commerce Department said housing starts fell 0.2% in February.
  • Food prices, especially those for food eaten at home, rose 0.4% in February, which the Bureau of Labor Statistics said accounted for roughly half of the 0.1% increase in all consumer prices during the month. The overall increase put the consumer inflation rate for the last year at 1.1%, approximately where it’s been for most of the last seven months.
  • <?ff_pagebreak >Data from the Philly Fed manufacturing survey showed a strong rebound to a reading of 9 from February’s -6.3. And while the Fed’s Empire State survey showed little change in overall conditions, new orders and shipments were both up.
  • Two major automakers hit speed bumps last week. General Motors issued its second major recall in two months, this one for 1.8 million cars; the company is already under investigation for ignition defects involved in a 1.6-million-car recall last month. Also, Toyota agreed to pay a record $1.2 billion criminal penalty to settle a Justice Department investigation of previous safety problems, and admitted it had misled consumers about a defect that caused cars to speed up when customers tried to brake.

Eye on the Week Ahead

After managing to shake off the Fed and the Crimean conflict last week, investors will likely pay extra attention to speeches by several members of the Fed’s monetary policy committee to see if they shed additional light on last week’s statements. Final U.S. GDP numbers for the fourth quarter and all of 2013 will be out, plus data on housing, manufacturing, and consumer spending.

What I’m watching This Week – 17 March 2014

The Markets

Disappointing economic data across the board from China plus the escalating tug-of-war over Crimea helped send equities south last week. The S&P 500’s decline put it back into negative territory for the year, while the instability in Ukraine sent investors scrambling for the relative security of U.S. Treasuries, sending the benchmark 10-year yield down as prices rose.

Last Week’s Headlines

  • Retail sales rose 0.3% in February, according to the Commerce Department, putting them 1.5% higher than in February 2013. The strongest gains were seen in sporting goods/hobby/music stores, which were up 2.5% for the month, nonstore retailers (up 1.2%), and health/personal care stores, also up 1.2%.
  • Multiple signs that China’s economic growth slowed in January and February raised concerns that demand for many emerging markets’ exports could decline. Figures from the country’s National Bureau of Statistics continued to show growth year-over-year; retail sales were up almost 12%, investments in fixed assets rose almost 18%, and industrial production was up 8.6%. However, all of those numbers were lower than in previous months, even after being adjusted for the impact of the Lunar New Year’s vacation time. And sales of commercial buildings, which have helped fuel China’s overheated economy in recent years, have fallen 3.7% since December.
  • U.S. wholesale prices continued to give the Federal Reserve plenty of leeway to keep interest rates low. According to the Bureau of Labor Statistics, the wholesale inflation rate fell by 0.1% in February, its lowest level since last November. Most of the 0.3% decrease in prices for wholesale services was attributed to a 9.3% drop in margins for sales of clothing, footwear, and accessories. Demand for wholesale goods actually rose 0.4% during the month, led by a 0.9% increase in pharmaceutical prices.
  • Shares of Fannie Mae and Freddie Mac plunged after bipartisan leaders of the Senate Banking Committee announced plans to phase out the mortgage giants, which have been operating under government conservatorship since the 2008 financial crisis. If adopted, the legislation would establish government-backed mortgage insurance administered by a new Federal Mortgage Insurance Corporation. Insurance payments would be triggered only after private lenders had suffered a loss of 10% or more on the loans involved. The measure also would require homeowners to put up at least a 5% down payment (3.5% for first-time buyers) to qualify for an FMIC loan, and would create a mechanism for standardizing mortgage-backed securities based on such loans.

Eye on the Week Ahead

Markets will assess Crimea’s vote Sunday to secede from Ukraine, which could mean economic sanctions against Russia that could affect oil prices and threaten Europe’s economic recovery. Wednesday’s announcement by the Fed’s monetary policy committee–its first guided by Janet Yellen–will be monitored for any shred of guidance on the timing of changes in the Fed’s target interest rate.

What I’m Watching This Week – 10 March 2014

The Markets

Fab five: The S&P 500 marked the fifth anniversary of the stock market’s post-2008 low by recording another all-time record close. Once again, the Dow couldn’t quite manage to break even for the year, though it came close, while the small caps had the week’s strongest gains. The benchmark 10-year Treasury yield rose as investors seemed to place more importance on better-than-expected domestic economic data than on potential fallout from the tension over Ukraine.

Last Week’s Headlines

  • The unemployment rate edged upward to 6.7% and away from the 6.5% that would have led to increased speculation about the Federal Reserve possibly accelerating an increase in interest rates. According to the Bureau of Labor Statistics, the increase–the first since December 2012–occurred despite the U.S. economy adding 175,000 jobs in February. The BLS noted that severe weather could have had an impact on its survey results.
  • Spending rose faster than personal incomes in January, according to the Bureau of Economic Analysis. Personal income was 0.3% higher for the month, while consumption was up 0.4%.
  • Construction spending was up 1% in January, primarily because of gains in the housing sector, but gains were much lower than December’s 2.2% increase. The Commerce Department said residential building was led by a 2.3% gain in construction of single-family homes, while nonresidential construction was down 0.2% and government construction fell 0.8% during the month.
  • U.S. manufacturing rebounded a bit in February as the Institute for Supply Management®’s gauge rose by 1.9% to 53.2%. Meanwhile, the ISM’s services survey showed growth slowing by 2.4%, though the 51.6% reading still represented growth.
  • The European Central Bank declined to adopt fresh stimulus measures to combat a less-than-desirable 0.8% inflation rate there. The ECB left its key interest rate unchanged at 0.25% and the rate on overnight bank deposits at 0%. Meanwhile, economic recovery accelerated in both the 18-member eurozone and Europe as a whole; European GDP rose 0.3% during Q4 2013 and was up 0.4% in the eurozone.
  • China announced a 2014 target growth rate of 7.5%–slightly lower than 2013’s 7.7%–and a target inflation rate of 3.5%. Also, China’s General Administration of Customs said exports fell 18.1% in February, leading to a nearly $23 billion trade deficit; the sharp decline in exports was surprising given January’s 10.6% increase.
  • The frigid weather that socked in much of the nation in February made an accurate assessment of economic data more difficult, according to the Federal Reserve’s “beige book” report. However, the report expressed optimism that the economy will show improvement once the weather does. 

Eye on the Week Ahead

In a week that’s light on economic data, the Ukraine situation could assume greater importance in market psychology. Investors also may begin anticipating the following week’s Federal Reserve monetary policy meeting.

Monthly Market Review – February 2014

The Markets

Equities recovered from January’s losses in fine style. The Nasdaq continued to lead the pack year-to-date, but by the end of the month the S&P 500 had set a fresh all-time closing high. The small caps of the Russell 2000 also had a strong month, leaving the Dow industrials the only one of these four domestic indices down for the year despite its February gains. Unlike its domestic counterpart, the Global Dow barely managed to squeak into positive territory for 2014.

The second month of cuts in the Fed’s bond purchases seemed to have little impact on the benchmark 10-year Treasury yield. Meanwhile, gold saw a rebound from its recent losses, gaining almost $100 an ounce and hitting its highest level so far this year before settling back a bit to end at roughly $1,320.

The Month in Review

  • The U.S. economy grew a bit more slowly in Q4 2013 than previously thought (2.4%). According to the Bureau of Economic Analysis, that put growth for all of 2013 at 1.9%.
  • The 113,000 new jobs added to the U.S. economy nudged the unemployment rate down 0.1% to 6.5%. Meanwhile, the Bureau of Labor Statistics said the labor force participation rate rose slightly to 63%, and the number of long-term unemployed fell by 232,000 during the month.
  • Congress agreed to avoid renewed conflict over an increase in the debt ceiling by passing legislation that resolves the issue until March 2015.
  • Tokyo-based Mt. Gox, at one time the largest Bitcoin exchange, filed for bankruptcy after days of suspense after its website went dark. The company said hackers may have made off with roughly 750,000 bitcoins owned by customers and 100,000 of its own–the equivalent of nearly half a billion dollars’ worth of the virtual currency. Meanwhile, Federal Reserve Chair Janet Yellen told a congressional committee that the Fed has no authority to regulate Bitcoin but suggested that Congress could look into doing so.
  • Manufacturing showed signs of slowing in the United States, where durable goods orders were down for the third of the last four months thanks to a decline in transportation-related orders and the Institute for Supply Management’s gauge fell more than 5%. Meanwhile, Markit/HSBC’s survey of Chinese purchasing managers showed contraction there, though seasonal distortion may have played a role.
  • Housing suffered from frigid weather throughout much of the country. Housing starts, building permits, and sales of existing homes all saw declines, though new-home sales were up slightly for the month and construction spending also rose.
  • Inflation remained well within the Fed’s comfort level. The biggest monthly increase in the cost of electricity since March 2010 pushed up consumer prices by 0.1% for the month, putting the annual rate for the last 12 months at 1.6%. Meanwhile, the Bureau of Labor Statistics said the wholesale inflation rate was up 0.2% in January, but the annual rate was only 1.2% over the last year.

Eye on the Month Ahead

The Fed will meet again in March and may have to decide whether weaker economic reports in the last month or so were a function of bad weather or signs of something more significant. Also, the situation in Ukraine could affect the psychology of the markets.

What I’m Watching This Week – 4 March 2014

The Markets

After making several attempts at setting a new all-time record high, the S&P 500 finally managed it at the end of the week. Buoyed by the possibility of a slowdown in Fed tapering, domestic equities more than erased the previous week’s losses; it was the first week so far this year that the S&P has ended in positive territory year-to-date.

Last Week’s Headlines

  • The U.S. economy grew a bit more slowly in Q4 2013 than previously thought (2.4%). According to the Bureau of Economic Analysis, that put growth for all of 2013 at 1.9%.
  • Home prices saw a slight (0.1%) decline in December, according to the S&P/Case-Shiller 20-City Composite Index–its second straight drop–but were 13.4% higher than the previous December.
  • Despite the frigid winter weather in much of the country, the Commerce Department said sales of new homes were almost 10% higher than in December and more than 2% higher than the previous January.
  • Orders for durable goods fell 1% in January, according to the Commerce Department. Though it was the third month of the last four to see a decline, it wasn’t nearly as bad as December’s 5.3% drop, and most of the decline was due to the often volatile transportation sector. Excluding the 5.6% transportation loss, new orders were up 1.1%.
  • Tokyo-based Mt. Gox, at one time the largest Bitcoin exchange, filed for bankruptcy following days of suspense after its website went dark. The company said hackers may have made off with roughly 750,000 bitcoins owned by customers and 100,000 of its own–the equivalent of nearly half a billion dollars’ worth of the virtual currency. Meanwhile, Federal Reserve Chair Janet Yellen told a congressional committee that the Fed has no authority to regulate Bitcoin but suggested that Congress could look into doing so.
  • Yellen also told Congress that the Fed is keeping a close eye on signs of weakness in economic data over the last month and is prepared to slow its tapering efforts if necessary. The Fed wants to assess the extent to which the weakness was the result of a slowing economy or simply lousy weather.

Eye on the Week Ahead

In addition to Friday’s jobs numbers, investors will be watching the European Central Bank on Thursday to see if any additional monetary easing policies might be announced. On Wednesday, the Chinese government will announce its forecast for economic growth there in 2014. Finally, the tense situation in Ukraine could also factor into the psychology of the markets.