What the Fed Rate Cut Means for Investors

Yesterday, the Federal Reserve lowered the federal-funds target rate for the third straight meeting by a quarter percentage point, to between 1.5 percent and 1.75 percent. The Fed also signaled it is likely to pause to see whether these cuts are enough to sustain the economic expansion.

If this is indeed the final cut for a while, it might be very good news for investors. Between 1995 and 1996 and in 1998, the Fed cut interest rates three times and then stopped. In each of these cases the S&P 500 returned 24.76 percent and 19.39, respectively, over the next year.

Historically, the danger for stocks is when the third cut is not the last and the Fed needs to jolt the economy further. In 2001 and 2007, during the dot-com bubble and the financial recession, the Fed cut interest rates three times and kept cutting in order to boost the economy. During those cutting cycles, the S&P 500 had dropped 12.64 percent and a stunning 42.37 percent one year later.

Third Quarter GDP

The Commerce Department said this morning that economic activity in the U.S. grew at an annualized rate of 1.9 percent in the third quarter, down slightly from the 2 percent pace in the second quarter.  Personal consumption spending by American households rose at a 2.9 percent annualized rate while government spending grew at a 2 percent rate.

Foreign trade, on the other hand, was a small drag on the economy. Exports rose 0.7 percent after a big drop in the second quarter, but imports rose somewhat faster than that, at 1.2 percent.

Overall, the numbers show an economy that is continuing to slow at a slight pace. GDP had increased by 3.1 percent in the first quarter of this year, and by 2.9 percent for all of 2018. It is on track to grow by 2.3 percent for all of 2019.

The New Record-Setters

Thanks to a handful of favorable earnings reports, the S&P 500 index rose 0.6 percent yesterday, to close at 3,039, finishing above its previous record of 3,028, set on July 26. The gains were widespread, with the following S&P components all setting new highs at the close yesterday:

• Allegion
• Alphabet Inc.
• Apple
• CDW Corp.
• Charter Communications 
• Dover Corp.
• First Republic Bank
• JPMorgan Chase 
• KLA Corp.
• Lam Research 
• Microsoft 
• Sherwin-Williams 
• United Technologies Corp.
• Xylem 

For Alphabet, Google's parent, the record high was short-lived. After reporting that it missed analysts' earnings estimates, the stock dropped by 2 percent in after-hours trading.

The Changing Face of Retirement

It's a true generational shift: A new Wells Fargo survey of American retirees found that 86 percent live primarily on income from Social Security or a pension. By contrast, only 25 percent of millennial workers expect their primary source of retirement income to come from Social Security or a pension.

Just 5 percent of the retirees say their main source of income is a 401(k), IRA, or other personal savings vehicle. But things are changing fast: 45 percent of millennials say their future retirement will be funded by personal savings. Among baby boomers still working, 22 percent say they'll use personal savings.

Those younger generations are beginning to save for retirement much earlier than those before them. Today's retirees started saving around age 40, on average, while baby boomers still working started around age 36, Gen Xers at age 31, and millennials at age 25.

Amazon Misses

Have we reached peak Amazon? Amazon.com's profit fell for the first time in more than two years in the third quarter, the Internet giant reported yesterday. Moreover, the company expects another earnings decline in the holiday-shopping season.

Amazon reported third-quarter profits of $4.23 a share on sales of $69.98 billion. Sales rose from $56.58 billion a year ago, but earnings declined from $5.75 a share, the first time Amazon earnings have shrunk year-over-year since June 2017.

The company had reported profit of more than $10 billion in 2018, more than triple its previous annual record, and had reported record quarterly profit totals for four consecutive quarters before breaking that streak with its new second-quarter results. Looking to the future, Amazon’s forecast for the holiday quarter came in short of analysts' estimates for both profit and sales.

Saving the Children

According to a new study out yesterday from the Pew Research Center, about six in 10 parents admit they’ve given at least some financial help to their adult children ages 18 to 29 in the past year. That jibes with a recent study by Merrill Lynch, which found that 79 percent of parents say they give some financial support to their adult children.

The Pew study found that the share of young adults who could be considered financially independent from their parents by their early 20s  has gone down in recent years. In 2018, 24 percent of young adults were financially independent by age 22 or younger, compared with 32 percent in 1980.

All in all, nearly three in four parents (72 percent) say that they have put their children’s interests ahead of their own need to save for retirement. About two in three (63 percent) say they have sacrificed their financial security for the sake of their children.

Why Do Older People Stay on the Job?

A third of older people are still hard at work, with 45 percent putting in full-time hours on the job and 55 percent working part time. A new study from Provision Living asked seniors 65 and older why they’re still laboring away in the workforce, when they could be enjoying the fruits of retirement after years of employment.

According to the respondents, 62 percent say they’re still on the job for financial reasons, while 38 percent cite personal reasons for sticking with the nine-to-five. The average retirement savings among those working seniors is a pretty clear indication why they can't afford to retire; it’s just $133,108.

Of the group that said they work for financial reasons, 37 percent say they simply can’t afford to retire. Another 23 percent say they’re supporting family, 19 percent are paying off debt, 13 percent are paying off a mortgage, 4 percent are saving up for a big expense and 3 percent have some other reason.

The Incredible Shrinking Trade Volume

The major stock market indexes are nearing their all-time highs. But surprisingly enough, not many issues are trading hands. Trading volume is lower than it's been in a long time.

In fact, average daily trading volume in S&P 500 stocks over the previous 90 days is nearing a 10-year low. It declined to just 7 percent of total market capitalization during the three months that ended at the end of last week. By contrast, it averaged 21 percent between 2010 and 2013.

One factor is that trades aren't nearly as large as they used to be. Data from ModerIR shows that the average number of shares per trade has fallen from 248 in 2015 to  just 133 today.

The Easy Earnings Beat

So far, more than 14 percent of S&P 500 companies have reported results for this earnings season. Of those companies, 81 percent have posted earnings that beat analyst expectations.

That's the good news. The bad news is how low the bar has been for success: Analysts polled by FactSet expected third-quarter earnings to have fallen by 4.6 percent.

We'll know a lot more this week, when about 120 S&P 500 companies, or around 24 percent, are scheduled to release their quarterly results. Among the big names reporting this week: Amazon, Intel, McDonald’s, Chipotle Mexican Grill, Caterpillar and Boeing.

Retail, Car Sales Slip

Retail sales fell 0.3 percent in September, the Commerce Department said yesterday. That ended a streak of six straight strong monthly gains that helped to fuel economic growth in the middle of the year.

Sales receipts fell almost 1 percent at auto dealers even though they reported a strong increase in the number of new vehicles sold. That means the dropoff likely reflects end-of-summer discounting and more corporate-fleet sales. Sales also declined 0.7 percent at gas stations, reflecting lower prices at the pump.

Retail sales were flat if gasoline and auto dealer receipts are excluded, but households also slashed spending on building materials and online purchases. Meanwhile, receipts at clothing stores rose by 1.3 percent, while furniture sales climbed by 0.6 percent.

Worries About Global Growth

The International Monetary Fund is growing more pessimistic about the global economy. The IMF’s latest World Economic Outlook trimmed its global growth forecast for this year by 0.2 percentage points and 0.1 percentage point next year, compared with the organization’s view from July.

That means global economic growth is expected to fall to 3 percent rate this year. That would be the slowest pace since the 2008 financial crisis, and down from a 3.8 percent pace seen in 2017.

Global trade growth reached just 1 percent in the first half of 2019, the weakest level since 2012. After expanding by 3.6 percent in 2018, the IMF now projects global trade volume will increase just 1.1 percent in 2019, which is 1.4 percentage points less than it forecast in July.

The Humble but Hot Money Market Fund

What's one of the hottest investment vehicles these days? The humble money market fund. Investors are flocking to the relative safety of money market funds at the highest level since the financial crisis began in 2008.

The industry has pulled in $322 billion over the past six months, the fastest pace since the second half of 2008, bringing assets to nearly $3.5 trillion, according to data from FactSet and Bank of America Merrill Lynch. Total money market assets are now at their highest level since September 2009.

This trend is more about safety than about returns. Money market funds are now yielding about 2 percent, down from the 2.47 percent they delivered at the beginning of 2019.

Nervous About Earnings

U.S. companies start reporting third-quarter results this week, and S&P 500 earnings for the July-September period look set to mark the weakest performance in about three years. Analysts are forecasting a 3.2 percent decline in earnings for the quarter from a year ago,

Banks will be in the spotlight this week, with J.P. Morgan Chase, Citigroup and Wells Fargo scheduled to announce on Tuesday, and Bank of America following up the next day. The financial sector is expected to show earnings growth of just 1.73 percent, according to S&P Global Market Intelligence.

And that's the second-strongest sector. The only sector projected at greater earnings growth is health care, at 1.83 percent. Seven sectors are forecast to produce negative earnings growth, with the worst being energy, expected to drop a whopping 31.58 percent.

How Americans Spend Their Money

Are you aware of how much you spend on various things each year? The folks at a website called How Much looked at census data to figure out where the average American family spends its money.

The average American "consumer unit" earns $78,635 in income each year, $11,394 of which goes to taxes. Then the rest goes to:

• Shelter - $11,747
• Pensions & Social Security - $6,831
• Food at Home - $4,464
• Utilities - $4,049
• Vehicle Purchases - $3,975
• Food Away from Home - $3,459
• Health Insurance - $3,405
• Entertainment - $3,226
• Other Vehicle Expenses - $2,859
• Other Housing Expenses - $2,270

The Fed's Forecast

Federal Reserve officials were more worried about the U.S. economy by the time they met in mid-September, according to minutes of the central bank’s meeting that were released yesterday. They even noted that the probability of a recession had increased "notably" in  recent months.

“Participants generally judged that downside risks to the outlook for economic activity had increased somewhat since their July meeting,” the minutes said. "Particularly those stemming from trade policy uncertainty and conditions abroad.”

The Fed did not alter its official forecast that the economy would grow at a rate slightly above 2 percent this year. It also predicted that GDP would run slightly below 2 percent in both 2021 and 2022.

Producer Prices Continue to Slow

U.S. producer prices unexpectedly fell in September, leading to the smallest annual increase in nearly three years. The producer price index dropped 0.3 percent last month, the Bureau of Labor Statistics said yesterday. That was the largest decline since January and followed a 0.1 percent gain in August.

In the 12 months through September the PPI increased 1.4 percent, which is the smallest gain since November 2016. It had risen 1.8 percent in August; the Fed's target inflation rate is 2 percent. Excluding the volatile food, energy and trade services components, producer prices were unchanged in September.

Wholesale prices for goods fell 0.4 percent, with three-quarters of the decline reflecting the lower cost of gasoline. Wholesale food prices rose 0.3 percent, however.

A Lack of Retirement Info

Does your employer help you much with your retirement planning? Transamerica Center for Retirement Studies' 19th annual retirement survey found that while 64 percent of workers overall are confident they will be able to retire with a comfortable lifestyle, only 18 percent are “very confident.”

That may be, in part, because plan sponsors don't do enough to assist their employees with retirement transition. The organization found that few plan sponsors provide things like:

• Educational resources (30 percent)
• Information about distribution options (28 percent) 
• Retirement planning materials (25 percent) 

Moreover, 22 percent of plan sponsors say they do “nothing” to help employees transition their savings and finances into retirement, with 26 percent of small companies saying this compared with only 7 percent of both medium and large companies.

The Secret of Utilities

Through the first three quarters of 2019, which ended last week, the top-performing sector was information technology, which returned 30.3 percent. It was followed by real estate at 28.4 percent and utilities at 25.0 percent.

But if you zoom out a little further, to the 12 months that ended on September 30, the top performer was the usually sleepy utilities sector. It's returned 27.1 percent over the past year, outpacing real estate, at 24.5 percent, and consumer staples, at 16.6 percent.

Why have utilities been so strong? Along with real estate, utilities are considered a strong play when bond returns are low. Utilities and real estate are generally considered dividend-income investments. As the yield on 10-year U.S. Treasury notes has declined from 3.05 percent to 1.59 percent, utilities have thrived.

September Jobs Report

The headline unemployment rate dropped to 3.5 percent in September, matching a level it last saw in December 1969, the Labor Department reported this morning This happened even though the economy added just 136,000 jobs for the month, the slowest pace of job growth in four months.

One reason for this anomaly is that the previous two months saw upward revisions in jobs created. August rose sharply, from an initial estimate of 130,000 to 168,000, while July increased from 159,000 to 166,000, for a total net gain of 45,000.

The bulk of the hiring in September was concentrated in the services sector. Education and health care providers added 40,000 positions. Government added 22,000 workers in September, with only 1,000 of the jobs being due to temporary federal hiring for the 2020 Census.

Selling but Not Buying

There's a strange phenomenon in the stock market right now: Corporate share sales have surged to a  four and a half year high at the same time corporate buying has dropped.

Corporate executives unloaded $14.2 billion worth of their companies’ stock last month through September 26, according to a TrimTabs analysis. That’s the highest of any September in the past 10 years. September also marked the sixth month this year that insider selling has topped $10 billion, which is already the most months to cross that threshold since 2006.

Meanwhile, overall corporate demand for shares, in the form of stock buybacks and cash mergers and acquisitions, has dropped. Share repurchase volume was $145.9 billion in the third quarter, just a little over half the $281 billion worth of stock repurchased in the second quarter. It was the lowest quarterly total since the third quarter of 2017.

Manufacturing Takes a Step Back

Worrisome news from the manufacturing sector: The U.S. manufacturing purchasing managers’ index from the Institute for Supply Management came in at 47.8 percent in September, its lowest level since June 2009. Any figure below 50 percent signals a contraction.

The new export orders index was only 41 percent, its lowest level since March 2009. The ISM employment gauge for the sector showed its lowest reading since January 2016. New orders, backlog, raw materials, inventories, exports and imports also contracted across the board last month.

The sector had contracted for the first time in more than three years in August. That ended a 35-month expansion period where the PMI averaged 56.5 percent, according to ISM.

Low-Tech Security Issues

We're all worried about being the victim of a data breach - having a credit card or Social Security number stolen by a hacker. But a new report out from the information security service Shred-It notes that we need to pay attention to low-tech protection as well.

The report said that common workplace occurrences may be the cause of many security breaches. It found that 65 percent of managers expressed concern that their employees or contractors had printed and left behind a document that could lead to a data breach.

Seven in 10 managers said they had seen or picked up confidential documents left in a printer, and more than three in four managers admitted that they had inadvertently sent an email containing sensitive information to the wrong person. And 88 percent reported having received an email containing sensitive information they were not intended to receive from someone within or outside of their organization.