What I’m Watching This Week – 29 September 2014

The Markets

Volatility was the name of the game last week. In addition to a multination campaign of airstrikes against terrorist targets in the Middle East, a decline in U.S. durable goods orders and an upward revision to U.S. GDP sent equities yo-yoing. Friday’s rally couldn’t overcome earlier losses, particularly those suffered by the Nasdaq and Russell 2000. Meanwhile, increases in the price of the benchmark 10-year Treasury sent its yield lower.

Market/Index 2013 Close Prior Week As of 9/26 Weekly Change YTD Change
DJIA 16576.66 17279.74 17113.15 -.96% 3.24%
Nasdaq 4176.59 4579.79 4512.19 -1.48% 8.04%
S&P 500 1848.36 2010.40 1982.85 -1.37% 7.28%
Russell 2000 1163.64 1146.92 1119.33 -2.41% -3.81%
Global Dow 2484.10 2605.20 2551.32 -2.07% 2.71%
Fed. Funds .25% .25% .25% 0% 0%
10-year Treasuries 3.04% 2.59% 2.54% -5 bps -50 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • The U.S. economy grew faster during the second quarter than previously thought. The Bureau of Economic Analysis’s final estimate showed gross domestic product rising 4.6% rather than 4.2%; exports and business investment were responsible for much of the upward revision.
  • Durable goods orders plummeted 18.2% in August, according to the Bureau of Economic Analysis. However, the decline followed a 22.5% increase in July and was largely the result of a 74% drop in orders for commercial aircraft and parts, which had hit a record high the previous month. Aside from the decline in transportation-related equipment, new orders actually rose 0.7%.
  • New home sales were up 18% in August; the Commerce Department said that was 33% higher than the previous August. However, sales of existing homes fell 1.8% during the month, in part because there were fewer cash buyers. Though the National Association of Realtors® said August’s number represented the second-best pace of 2014, it was 5.3% lower than a year earlier.
  • Treasury officials announced new rules designed to make so-called “tax inversions” more difficult. (Inversion is a practice in which domestic corporations merge with foreign firms and reincorporate overseas, which reduces the U.S. corporate taxes owed.) The regulations could affect several pending mergers of U.S. corporations with overseas companies.
  • Legendary bond mutual fund manager Bill Gross stirred up the relatively placid bond world by resigning from Pacific Investment Management Co.–reportedly after internal conflicts at the firm–to take a position at Janus Capital Group.

Eye on the Week Ahead

Next week will paint a broad-brush picture of the current state of the U.S. economy, including housing, manufacturing, and consumer spending. As always, unemployment data will be assessed for its potential impact on the timing of future Federal Reserve action. And given recent weak data on overseas growth, any stimulus measures announced by the European Central Bank likely would be welcomed by international investors.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK);www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Deadline Approaching for Undoing a 2013 Roth IRA Conversion

If you converted a traditional IRA to a Roth IRA in 2013 and your Roth IRA has sustained losses, you may want to consider whether it makes sense to undo (recharacterize) your conversion. You have until October 15, 2014, to undo your 2013 conversion. (If you’ve already filed your federal income tax return for 2013, you need to file an amended return by the tax filing deadline if you recharacterize.) A recharacterization can help you avoid paying income tax on IRA assets that have lost value since the conversion. When you recharacterize, your conversion is treated for tax purposes as if it never happened.

For example, assume you converted a fully taxable traditional IRA worth $100,000 to a Roth IRA in 2013. Further assume that your Roth IRA is now worth only $60,000. If you don’t undo the conversion you’ll pay federal (and possibly state) income tax on $100,000, even though the current value of those assets is only $60,000. If you recharacterize, your IRA administrator will make a direct transfer of the assets from your Roth IRA back to your traditional IRA. For tax purposes, you’ll be treated as though the conversion never happened, and you’ll wind up with no resulting tax bill (or a tax refund if you already filed and paid taxes on the conversion).

If you recharacterize your 2013 conversion, you’re allowed to convert those dollars (and any earnings) to a Roth IRA again (“reconvert”) but you must wait 30 days, starting with the day you transferred the Roth dollars back to a traditional IRA. Keep in mind that even though the amount you recharacterized (and any earnings) is subject to a 30-day waiting period, any additional amounts in your traditional IRAs are not subject to the waiting period, and you can convert all or part of those dollars to a Roth IRA at any time. If you reconvert in 2014, then all taxes due as a result of the conversion will be included on your 2014 federal income tax return.

(You can also recharacterize a 2014 Roth conversion. However, the deadline for doing so isn’t until October 15, 2015.)

Whether it makes sense to recharacterize your Roth conversion depends on several factors, including the extent of the losses in your Roth IRA and your expectations of where the markets may be headed.

Top Year-End Investment Tips

Just what you need, right? One more time-consuming task to be taken care of between now and the end of the year. But taking a little time out from the holiday chores to make some strategic saving and investing decisions beforeDecember 31 can affect not only your long-term ability to meet your financial goals but also the amount of taxes you’ll owe next April.

Look at the forest, not just the trees

The first step in your year-end investment planning process should be a review of your overall portfolio. That review can tell you whether you need to rebalance. If one type of investment has done well–for example, large-cap stocks–it might now represent a greater percentage of your portfolio than you originally intended. To rebalance, you would sell some of that asset class and use that money to buy other types of investments to bring your overall allocation back to an appropriate balance. Your overall review should also help you decide whether that rebalancing should be done before or after December 31 for tax reasons.

Also, make sure your asset allocation is still appropriate for your time horizon and goals. You might consider being a bit more aggressive if you’re not meeting your financial targets, or more conservative if you’re getting closer to retirement. If you want greater diversification, you might consider adding an asset class that tends to react to market conditions differently than your existing investments do. Or you might look into an investment that you have avoided in the past because of its high valuation if it’s now selling at a more attractive price. Diversification and asset allocation don’t guarantee a profit or insure against a possible loss, of course, but they’re worth reviewing at least once a year.

Know when to hold ’em

When contemplating a change in your portfolio, don’t forget to consider how long you’ve owned each investment. Assets held for a year or less generate short-term capital gains, which are taxed as ordinary income. Depending on your tax bracket, your ordinary income tax rate could be much higher than the long-term capital gains rate, which applies to the sale of assets held for more than a year. For example, as of tax year 2013, the top marginal tax rate is 39.6%, which applies to any annual taxable income over $400,000 ($450,000 for married individuals filing jointly). By contrast, the long-term capital gains rate owed by taxpayers in the 39.6% tax bracket is 20%. For most investors–those in tax brackets between 25% and 35%–long-term capital gains are taxed at 15%; taxpayers in the lowest tax brackets–15% or less–are taxed at 0% on any long-term capital gains. (Long-term gains on collectibles are different; those are taxed at 28%.)

Your holding period can also affect the treatment of qualified stock dividends, which are taxed at the more favorable long-term capital gains rates. You must have held the stock at least 61 days within the 121-day period that starts 60 days before the stock’s ex-dividend date; preferred stock must be held for 91 days within a 181-day window. The lower rate also depends on when and whether your shares were hedged or optioned.

Make lemonade from lemons

Now is the time to consider the tax consequences of any capital gains or losses you’ve experienced this year. Though tax considerations shouldn’t be the primary driver of your investing decisions, there are steps you can take before the end of the year to minimize any tax impact of your investing decisions.

If you have realized capital gains from selling securities at a profit (congratulations!) and you have no tax losses carried forward from previous years, you can sell losing positions to avoid being taxed on some or all of those gains. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 for a married person filing separately) or carried forward to reduce your taxes in future years. Selling losing positions for the tax benefit they will provide next April is a common financial practice known as “harvesting your losses.”

Example:  You sold stock in ABC company this year for $2,500 more than you paid when you bought it four years ago. You decide to sell the XYZ stock that you bought six years ago because it seems unlikely to regain the $20,000 you paid for it. You sell your XYZ shares at a $7,000 loss. You offset your $2,500 capital gain, offset $3,000 of ordinary income tax this year, and carry forward the remaining $1,500 to be applied in future tax years.

Time any trades appropriately

If you’re selling to harvest losses in a stock or mutual fund and intend to repurchase the same security, make sure you wait at least 31 days before buying it again. Otherwise, the trade is considered a “wash sale,” and the tax loss will be disallowed. The wash sale rule also applies if you buy an option on the stock, sell it short, or buy it through your spouse within 30 days before or after the sale.

If you have unrealized losses that you want to capture but still believe in a specific investment, there are a couple of strategies you might think about. If you want to sell but don’t want to be out of the market for even a short period, you could sell your position at a loss, then buy a similar exchange-traded fund (ETF) that invests in the same asset class or industry. Or you could double your holdings, then sell your original shares at a loss after 31 days. You’d end up with the same position, but would have captured the tax loss.

If you’re buying a mutual fund in a taxable account, find out when it will distribute any dividends or capital gains. Consider delaying your purchase until after that date, which often is near year-end. If you buy just before the distribution, you’ll owe taxes this year on that money, even if your own shares haven’t appreciated. And if you plan to sell a fund anyway, you may minimize taxes by selling before the distribution date.

Note:  Before buying a mutual fund, don’t forget to consider carefully its investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund. Read the prospectus carefully before investing.

Know where to hold ’em

Think about which investments make sense to hold in a tax-advantaged account and which might be better for taxable accounts. For example, it’s generally not a good idea to hold tax-free investments, such as municipal bonds, in a tax-deferred account (e.g., a 401(k), IRA, or SEP). Doing so provides no additional tax advantage to compensate you for tax-free investments’ typically lower returns. And doing so generally turns that tax-free income into income that’s taxable at ordinary income tax rates when you withdraw it from the retirement account.

Similarly, if you have mutual funds that trade actively and therefore generate a lot of short-term capital gains, it may make sense to hold them in a tax-advantaged account to defer taxes on those gains, which can occur even if the fund itself has a loss. Finally, when deciding where to hold specific investments, keep in mind that distributions from a tax-deferred retirement plan don’t qualify for the lower tax rate on capital gains and dividends.

Be selective about selling shares

If you own a stock, fund, or ETF and decide to unload some shares, you may be able to maximize your tax advantage. For a mutual fund, the most common way to calculate cost basis is to use the average cost per share. However, you can also request that specific shares be sold–for example, those bought at a certain price. Which shares you choose depends on whether you want to book capital losses to offset gains, or keep gains to a minimum to reduce the tax bite. (This only applies to shares held in a taxable account.) Be aware that you must use the same method when you sell the rest of those shares.

Example:  You have invested periodically in a stock for five years, paying various prices, and now want to sell some shares. To minimize the capital gains tax you’ll pay on them, you could decide to sell the least profitable shares, perhaps those that were only slightly lower when purchased. Or if you wanted losses to offset capital gains, you could specify shares bought above the current price.

Depending on when you bought a specific security, your broker may calculate your cost basis for you, and will typically designate a default method to be used. For stocks, the default method is likely to be FIFO (“first in, first out”); the first shares purchased are considered the first shares sold. As noted above, most mutual fund companies use the average cost per share as your default cost basis. With bonds, the default method amortizes any bond premium over the time you own the bond. You must notify your broker if you want to use a method other than the default.

Prepare Now for a Year-End Investment Review

Getting organized for your year-end investment review with your financial professional may help make the review process more efficient. Here are some suggestions for making your meeting as productive as possible.

Decide what you want to know

One of the benefits of a yearly investment review is that it can help you monitor your investment portfolio. A key component of most discussions is a review of how your investments have performed over the last year. Performance can mean different things to different people, depending on their individual financial goals and needs. For example, an investor who’s focused on long-term growth might define “performance” slightly differently than an investor whose primary concern isn’t overall growth but trying to maintain a portfolio that has the potential to produce current income needed to pay ordinary living expenses.

Consider in advance what types of information are most important to you and why. You may want to check on not only your portfolio’s absolute performance but also on how it fared compared to some sort of benchmark. For example, you might want to know whether any equity investments you held outperformed, matched, or under-performed a relevant index, or how your portfolio fared against a hypothetical benchmark asset allocation. (Remember that the performance of an unmanaged index is not indicative of the performance of any specific security, and indices are not available for direct investment. Also, asset allocation cannot guarantee a profit or eliminate the possibility of loss, including the loss of principal.)

Almost as important as knowing how your portfolio performed is understanding why it performed as it did. Was any over-performance or under-performance concentrated in a single asset class or a specific investment? If so, was that consistent with the asset’s typical behavior over time? Or was last year’s performance an anomaly that bears watching or taking action? Has any single investment grown so much that it now represents more of your portfolio than it should? If so, should you do a little profit-taking and redirect that money into something else?

Are any changes needed?

If your goals or concerns have changed over the last year, you’ll need to make that clear during your meeting. Your portfolio probably needs to evolve over time as your circumstances change. Making sure you’ve communicated any life changes will make it easier to adjust your portfolio accordingly and measure its performance appropriately next year.

If a change to your portfolio is suggested based on last year’s performance–either positive or negative–don’t hesitate to ask why the change is being recommended and what you might reasonably expect in terms of performance and potential risk as a result of a shift. (However, when looking at potential returns, remember that past performance is no guarantee of future results.) Don’t be reluctant to ask questions if you don’t understand what’s being presented to you; a little clarification now might help prevent misunderstandings and unrealistic expectations that could have a negative impact in the future.

Also, before making any change, find out how it might affect your investing costs, both immediate and ongoing. Again, a few questions now may help prevent surprises later.

Think about the coming year

Consider whether you would benefit next April from harvesting any investment losses before the end of the year. Selling a losing position could generate a capital loss that could potentially be used to offset either capital gains or up to $3,000 of ordinary income on your federal income tax return.

If you’ve amassed substantial assets, you could explore whether you might benefit from specialized assistance in dealing with issues such as taxes, estate planning, and asset protection. Finally, give feedback on the review process itself; it can help improve next year’s session.

Note: All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

What I’m Watching This Week – 22 September 2014

The Markets

Whether it was Fed-induced relief, anticipation of one of the world’s largest IPOs, or anticipation of the tech world’s largest iPhone ever (so far), something put equities investors back in a record-setting mood once again last week–at least those who were interested in large-cap stocks. The S&P 500 and Dow industrials hit their 34th and 18th all-time record highs of 2014 respectively, while the Nasdaq was basically flat and the small caps of the Russell 2000 saw a loss.

Market/Index 2013 Close Prior Week As of 9/19 Weekly Change YTD Change
DJIA 16576.66 16987.51 17279.74 1.72% 4.24%
Nasdaq 4176.59 4567.60 4579.79 .27% 9.65%
S&P 500 1848.36 1985.54 2010.40 1.25% 8.77%
Russell 2000 1163.64 1160.61 1146.92 -1.18% -1.44%
Global Dow 2484.10 2593.43 2605.20 .45% 4.88%
Fed. Funds .25% .25% .25% 0% 0%
10-year Treasuries 3.04% 2.62% 2.59% -3 bps -45 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

    • The Federal Reserve’s monetary policy committee reaffirmed its “considerable time” estimate for starting to raise interest rates once its bond-buying program ends in October (absent any economic surprises). However, increases could be steeper than previously thought. A majority of members expect the Fed funds interest rate (the rate at which banks lend to one another) to rise to almost 1.4% by the end of next year, almost 2.9% by December 2016, and 3.75% a year later. Only three months ago, the 2015 and 2016 rate forecasts were 1.125% and 2.5%. The Fed also will keep reinvesting the proceeds of its existing holdings until rates begin to rise, and will begin to test using so-called reverse repo agreements (essentially a type of money-market instrument) as part of its strategy for raising rates.
    • Falling energy costs in August, including gas prices, more than offset higher prices for food and shelter, leaving the consumer inflation rate down 0.2% for the month. According to the Bureau of Labor Statistics, that left the CPI-U index up only 1.7% for the last 12 months–well within the Federal Reserve’s target range. Meanwhile, the BLS said final-stage wholesale prices remained essentially flat for the month, with a 1.8% inflation rate for the last year.
    • As the summer wound down in August, housing starts and building permits slowed but remained higher than the previous summer. The Commerce Department said housing starts were down 14.4% for the month but were 8% higher than in August 2013, while despite a 5.6% decline in August, building permits were 5.3% higher than a year earlier.
    • U.S. manufacturing data was mixed. While the Philly Fed index continued to show growth, the pace retreated a bit from its three-year high of the previous month, slipping from 28% to 22.5%. Also, the Fed’s gauge of industrial production nudged downward 0.1% in August–the first decline since January–and its July gains were revised downward. However, the Fed’s Empire State index rose to its highest level since October 2009, going to 27.5% from 14.7%.
    • The Conference Board’s index of leading economic indicators continued to rise in August, though the 0.2% increase represented a more sluggish pace than during the previous two months. The Conference Board said housing permits and business spending on capital equipment held back the index.
    • (Still) a united kingdom: Scotland voted to remain part of the UK. After an initial relief rally, the British pound saw a post-vote pullback that left it little changed from before Thursday’s election.
    • Economic data from China showed slowing in some key areas of the country’s economy. Though industrial production was up 6.9% in August from a year ago, that was down substantially from July’s 9% increase. Also, housing sales were down nearly 11% since the beginning of the year. However, interest in Chinese economic data paled in comparison to the attention paid to the IPO of Alibaba, reportedly one of the world’s largest ever.

Eye on the Week Ahead

With the Fed meeting, the Scottish independence vote, and Alibaba’s IPO now in the rear-view mirror, housing stats plus the final Q2 GDP number will give investors some economic data to focus on.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

What I’m Watching This Week – 15 September 2014

The Markets

The record-breaking march of the stock market faltered last week, as all indices posted losses. Perhaps the setback was due to a lack of economic influences, or because investors were nervously anticipating the results of next week’s Federal Open Market Committee (Fed) meeting, wondering whether Chair Janet Yellen will indicate a leaning toward higher rates. Or perhaps, as some observers believe, it was just time for a mild adjustment. Yields on the 10-year Treasury jumped to their highest point since early July.

Market/Index 2013 Close Prior Week As of 9/12 Weekly Change YTD Change
DJIA 16576.66 17137.36 16987.51 -.87% 2.48%
Nasdaq 4176.59 4582.90 4567.60 -.33% 9.36%
S&P 500 1848.36 2007.71 1985.54 -1.10% 7.42%
Russell 2000 1163.64 1170.13 1160.61 -.81% -.26%
Global Dow 2484.10 2631.64 2593.43 -1.45% 4.40%
Fed. Funds .25% .25% .25% 0% 0%
10-year Treasuries 3.04% 2.46% 2.62% 16 bps -42 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • Job openings remained near a 13-year high in July 2014, according to the Bureau of Labor Statistics (BLS). At 4.7 million, the number of open jobs changed very little from a month earlier. The hire rate (3.5%) held steady from June. The number of hires inched upward to approximately 4.9 million in July from nearly 4.8 million in June, reaching the highest level since December 2007.
  • In a prime-time address to the nation Wednesday night, President Obama announced an expanded effort to “degrade, and ultimately destroy” the Islamic State of Iraq and Greater Syria, or ISIS. Details included expanding airstrikes in Iraq, introducing airstrikes in Syria, and sending additional troops to Iraq for training and advisory missions.
  • The Commerce Department reported that sales by wholesalers rose 0.7% from June to July, and were up 7.5% from a year earlier. Inventories inched up 0.1% from June, and were up 7.9% from a year earlier.
  • Consumers shopped at their strongest rate since April, also according to the Commerce Department. Retail sales rose 0.6% from July to August, to a total $444.4 billion. Sales were 5% higher than one year ago.
  • The United States joined the European Union in imposing further sanctions on Russia Friday, with impacts on Russian interests in the energy, banking, and defense sectors.

Eye on the Week Ahead

This week promises to make up for last week’s trickle of economic data. Investors will have an eye on industrial production; inflation, manufacturing, and housing data; international capital flows; Wednesday’s Fed meeting; leading economic indicators; and any changes in trading volume due to this quarter’s quadruple witching options expiration at the end of the week.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK);www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

What I’m Watching This Week – 8 September 2014

The Markets

Amid a flood of mostly positive economic data and what at first blush appears to be good news from Ukraine, nearly all market sectors finished the short week in positive territory. Even surprises from the European Central Bank and Friday’s jobs numbers seemed to have minimal impact on investors, as the S&P 500 continued its record-breaking run.

Market/Index 2013 Close Prior Week As of 9/5 Weekly Change YTD Change
DJIA 16576.66 17098.45 17137.36 .23% 3.38%
Nasdaq 4176.59 4580.27 4582.90 .06% 9.73%
S&P 500 1848.36 2003.37 2007.71 .22% 8.62%
Russell 2000 1163.64 1174.35 1170.13 -.36% .56%
Global Dow 2484.10 2618.91 2631.64 .49% 5.94%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 3.04% 2.35% 2.46% 11 bps -58 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • The manufacturing sector reported its strongest economic reading since March 2011. The Institute for Supply Management’s Purchasing Managers Index (PMI) came in at 59% for August, up 1.9 points from July’s reading of 57.1%. Part of the increase was due to record levels in the New Orders Index, which registered its highest reading in more than a decade.
  • The positive results in new orders was echoed by the U.S. Census Bureau, which reported that new orders for manufactured goods rose by a record-setting 10.5% in July, the highest reported increase in 22 years. Manufactured goods orders have risen in five of the last six months. Shipments, unfulfilled orders, and inventories also hit record levels. Transportation equipment saw a 74.1% increase, and was the reason for the unprecedented rise. Excluding transportation, new orders actually fell by 0.8%.
  • New records were also reported in auto sales, as manufacturers noted sales of nearly 1.6 million cars and trucks in August. Sales are on pace to reach 17.5 million this year, a level not seen since July 2006. Industry observers said that much of the increase was due to low interest rates and other incentives.
  • Construction rose by 1.8% in July to a seasonally adjusted annual rate of $981.3 billion, according to the U.S. Census Bureau. The figure is 8.2% higher than a year earlier. Through July, construction spending totaled $535.4 billion, nearly 8% higher than the $496.3 billion spent during the same time frame in 2013. Growth was led by nonresidential private construction and public construction, particularly highways.
  • The Federal Reserve’s beige book report was generally favorable, stating that economic activity had expanded since the previous report and noting that “none of the Districts pointed to a distinct shift in the overall pace of growth.” Notable areas of growth included consumer spending, auto sales, and tourism.
  • The Commerce Department announced that the trade deficit shrank to $40.5 billion in July, down from $40.8 billion in June. Exports rose by $1.8 billion, while imports rose by $1.5 billion.
  • The European Central Bank (ECB) surprised observers Thursday with the announcement that it would cut all interest rates, and launch programs to buy asset-backed securities and euro-denominated covered bonds. Details surrounding the new programs will be provided at the ECB’s October meeting. In announcing the moves, ECB President Mario Draghi said, “These decisions will add to the range of monetary policy measures taken over recent months,” adding that they reflect significant differences in monetary policy cycle among the eurozone’s major advanced economies. He also noted that the moves will “support the provision of credit to the broader economy.”
  • Labor productivity (output per hour) rose 2.3% during the second quarter of 2014, while the costs of labor edged down 0.1%. During the quarter, hours worked rose 2.6% and output increased 5%. Productivity increased 1.1% from second quarter 2013 to second quarter 2014. Unit labor costs increased 1.7% over the previous four quarters.
  • After months of positive news, the Labor Department reported disappointing job growth for August, and revised figures downward for earlier this summer. Despite an unemployment rate that continued to decline–down to 6.1% in August from July’s 6.2%–nonfarm jobs rose by just 142,000 in August. For the previous 12 months, nonfarm payrolls increased by 212,000, on average. After accounting for revisions in both June and July, the total number of added jobs in those months was 28,000 less than previously reported.
  • Ukraine and pro-Russian rebels signed a truce that took effect Friday evening, local time, in what observers hope will be the beginning of the end of the five-month conflict. Friday also brought news of a new “spearhead” force of several thousand land troops agreed to by NATO allies to address growing threats in the Middle East and other areas, if needed.

Eye on the Week Ahead

In a week that promises minimal influence in the way of economic data, investors may be watching events abroad, particularly to see whether the Ukrainian cease-fire agreement holds.