Tuesday, December 31, 2013

2013's Biggest Winners and Losers

In a very good year for stocks, some stocks of course benefited more than others. According to the Wall Street Journal, these were the five top-returning large-cap stocks of 2013, through last Friday's close:

  • Tesla, up 346 percent
  • Netflix, up 296 percent
  • Best Buy, up 239 percent
  • Twitter, up 145 percent
  • Herbalife, up 138 percent

But in any year, there have to be stocks that are down sharply as well. These are the Journal's top five losers of the year:

  • Peabody, down 28 percent
  • Abercrombie & Fitch, down 30 percent
  • BlackBerry, down 39 percent
  • Newmont Mining, down 50 percent
  • JC Penney, down 54 percent

Monday, December 30, 2013

A Comfortable Market

While 2013 has been a very good year for returns in the equity market, it's also worth noting how safe it felt for stock investors. As the S&P 500 index was advancing more than 25 percent on the year, it had only three days in which it moved by more than 2 percent.

Meanwhile, the Volatility Index continues to reach now lows. As recently as 2011, the so-called fear index spent much of the year above 30, but it spent almost all of 2013 below its long-term average of 20. That suggests that investors aren't expecting a lot of dramatic moves out of this market, either up or down.

And small investors are definitely feeling more comfortable. Stock mutual funds are on track to add $60 billion in net inflows this year. That would be the first annual gain for such funds since way back in 2005.

Friday, December 27, 2013

Home for the Holidays

Many of us take time at this part of the year to gather with our families. And while it may seem as if family life has become a thing of the past for many Americans, a new Gallup survey shows that most American families - 53 percent - with children under the age of 18 sit down for dinner together six or seven times a week.

According to the survey, American families average 5.1 dinners together per week. That figure has remained unchanged since 2001, although it was slightly higher in the first such survey, from 1997.

Interestingly enough, the figures don't really change with different lifestyles. Gallup asked people about their religious habits, political beliefs, and income, and within all the groups, the number of family dinners remained right around five per week.

Thursday, December 26, 2013

A Tough Year for Bonds

This has been a terrific year for the stock market, as we've pointed out on several occasions. The S&P 500 is up by a very impressive 25 percent so far in 2013. But it has been an equally disappointing year for the bond market.

The Barclays Aggregate Capital Index functions as an S&P 500 Index for bonds. It's a broad measure covering corporate bonds, government bonds and mortgage securities. And it's down 1.8 percent for the year. This will almost certainly end up as only the third down year for the Barclays Agg since 1976.

Most bond investors, however, don't have it quite that bad. According to Morningstar, 55 percent of all bond funds have still managed to beat the index so far in 2013.

Wednesday, December 25, 2013

Thoughts for Christmas

“Christmas is a necessity. There has to be at least one day of the year to remind us that we’re here for something else besides ourselves.” ~ Eric Sevareid

"Remember, if Christmas isn't found in your heart, you won't find it under a tree." ~ Charlotte Carpenter 

 “Christmas waves a magic wand over this world, and behold, everything is softer and more beautiful.”  ~ Norman Vincent Peale

Tuesday, December 24, 2013

The Right Kind of Revisions

There was some good news about the economy released last week, when the Commerce Department's final revision for third-quarter GDP was revised upward to 4.1 percent. That was up from an initial reading of 2.8 percent, and marks the strongest growth for the economy in two years.

Just as important was the nature of the revisions. Economists don't get excited about business spending that goes toward simply replenishing inventories, since that doesn't reflect economic growth. And the revised numbers showed very little change in inventory spending.

What the revisions did show was that consumer spending was higher than first reported, going from an increase of 1.4 percent to 2.0 percent. Exports were also revised upward, from 3.7 percent to 3.9 percent. That's the kind of growth that economists like to see.

Monday, December 23, 2013

A Time to Give

Unsurprisingly, this is the most charitable time of the year: According to Charitynavigator.org, 50 percent of all donations to charity are made between Thanksgiving and the end of the year. Americans are a very charitable people. A Gallup survey indicated that 83 percent of us donated money to a charitable institution in the past year.

That breaks down as 55 percent who donated to a religious organization, 75 percent to another type of nonprofit, and 47 percent who donated to both. Interestingly enough, the number of people donating to religious institutions is down nine percentage points since 2005.

In addition, 65 percent of American say they have volunteered their time over the past year. That number has been rising in recent years, and is up from 59 percent in 2004.

Friday, December 20, 2013

Facebook in the S&P 500

At the end of the day today, Facebook officially becomes part of the S&P 500 index. This might seem to fall under the category of trivia for Facebook shareholders, but it actually might be kind of a big deal. Many index funds are invested in the S&P 500; the venerable Vanguard 500, which is wholly invested in the S&P, is still one of the biggest mutual funds in the world. Facebook’s entrance into the index means its stock is going to get bought up by all those funds.
Facebook is now planning to sell more stock to satisfy the needs of index funds - a new offering of a whopping $39 billion. They're not the first company to execute such a plan: Back in July, when GM re-entered the S&P 500, the company issued a similar special stock offering.

But there’s also a question of how much more of a pop Facebook’s stock can get. The share price has more than doubled already this year. We'll see if there's much more juice in it today.

Thursday, December 19, 2013

The Taper Arrives

The much anticipated taper from the Federal Reserve was finally announced yesterday, when outgoing Fed chair Ben Bernanke said he would cut back the monthly asset purchase program from $85 billion per month to $75 billion. The reduced amount will start in January.
Whether because the taper was so modest, or because it has been long expected by Wall Street anyway, the market surged on the news. Both the Dow Jones industrial average and the S&P 500 marked their best single-day gains since October 10, and both finished at all-time highs.
Bernanke also reiterated his belief that inflation was running lower than he’d like, below his target of 2.0 percent. For that and other reasons, the Fed is likely to keep interest rates near zero for some time to come – at least until unemployment, now running at 7.0 percent drops to 6.5 percent. Added together, it looks like the taper, for the moment at least, will be fairly uneventful.

Wednesday, December 18, 2013

Airfares Soaring Higher

Are you traveling this holiday season? If so, you might have noticed that plane tickets are getting increasingly expensive. The cost for a domestic round-trip ticket was about $356 last year, up 3.6 percent from the year earlier.

But that doesn’t tell the whole story for holiday travelers. Tickets for this time of the year are rising in cost even faster. Airfare for travel between December 21 and January 1 increased 7.5 percent from the year earlier.

And the rate at which airfare is rising is speeding up in the post 9/11 world. The average ticket price rose by 24 percent between 2009 and 2012, whereas it had risen by 16.4 percent between 2005 and 2008. Even adjusting for inflation, airfare increased by 10.3 percent between 2005 and 2012.

Tuesday, December 17, 2013

Banks Bounce Back

A bank in The Woodlands, Texas, was closed by the FDIC on Friday, marking the 24th such bank to be shut down by federal regulators this year. It is a sign of how much progress the banking sector has made that those 24 closed banks are less than half of what we had last year.
Bank closures were a massive problem as recently as 2010, when there were 157 financial institutions shut down by the government. If no more banks close this year, 2013 will mark the fewest shut-downs since 2007, when the FDIC shut down just three banks.

Even 24 closed banks is a lot for more normal times, though. In both 2005 and 2006, the FDIC didn’t close down any banks at all.

Monday, December 16, 2013

The Court Takes On 401(k)s

On Friday, the U.S. Supreme Court agreed to hear what could be a landmark case involving 401(k) investors. The suit was brought on behalf of employees of Fifth Third Bancorp, a bank-holding company based in Cincinnati. Like a lot of banks, Fifth Third had a terrible time during the recession, when our financial sector almost completely melted down, and its stock at one point lost 74 percent of its value.

The employees charge that they shouldn't have been allowed to continue to fund their 401(k)s with Fifth Third stock. Administrators should have known that it was too risky. The question for the court is whether the employer violated its obligation to run a prudent retirement plan.

The most important lesson here is that a good retirement savings plan should be well-diversified. No matter how much loyalty we feel to our employer, we owe it to ourselves to invest in far more than just our company's stock in saving for retirement. That will remain true no matter how the Supreme Court rules.

Friday, December 13, 2013

Retail Up in November, but Not Gift-Buying

The numbers for retail sales in November, which came out from the Commerce Department yesterday, looked impressively strong. Sales were up 0.7 percent over October, which was the biggest one-month gain since June.

Now, it might seem intuitive that retail sales were up in November because that marked the beginning of the holiday shopping season. But it turns out that gift-type sales - electronics stores, online retailers, clothing and department stores - were actually the weaker part of the month's reports. Those retailers were up 2.8 percent from the previous November, while total retail sales were up 4.7 percent.

The retail areas showing the most strength were things like car dealers, gas stations and restaurants. So it appears that the overall economy showed more strength than the gift-giving segment did.

Thursday, December 12, 2013

Tough News on Retirement

There's a rather disturbing new study out from the Society of Actuaries, showing that Americans have less control of the date of their retirement than we'd like to believe. While most workers target 65 as the age at which they'd like to retire, the actual current median age for retirement is just 58.

Most of those workers also have an eye toward keeping a job of some kind during retirement; according to the study, only 41 percent of pre-retirees expect to stop working entirely after they retire. But in the event, 78 percent of retirees hang it up for good.

Obviously, it's disappointing to be forced out of a job you want to continue, whether that's because of health reasons or layoffs or something else. But it's important to recognize these things can happen, and note that your retirement plan should take those possibilities into consideration.

Wednesday, December 11, 2013

MasterCard Does the Split

We've noted before that stock splits have gone largely out of fashion, but MasterCard announced a whopper yesterday: The credit card company is splitting its shares ten for one. Although MasterCard is a longtime familiar name, it just had its IPO in 2006, at a share price of $47. Since then it's risen by more than 1500 percent to its current, unwieldy level of $781 a share.

MasterCard becomes just the 12th company in the S&P 500 this year to announce a split. That makes 2013 the year with the fourth-lowest number of splits on record. In the 1990s, there were an average of more than 60 splits a year.

But there are many more stocks still ripe for the splitting. Five other stocks in the S&P 500 have share prices of more than $500, including Google at $1,084 and Priceline.com at $1,188. As recently as the end of 2011, Google was the only stock in the S&P 500 with a share price of more than $500.

Tuesday, December 10, 2013

Cash to Burn

One reason to be optimistic about the markets going forward: Corporations are still sitting on an inordinate amount of cash, and wondering what they're going to do with all that money. According to a report by the Federal Reserve, American companies held $1.93 trillion in cash or cash equivalents, up from $1.81 trillion the prior quarter. As a percentage of total assets, that's the highest that figure has been since the 1960s.

What are they going to do with all that money? There are three outlets to look for, all of which are good for investors: share buybacks, dividends, and mergers & acquisitions.

While dividends show the most immediate profits for investors, buyback programs can be just as important. In the four years after the market bottomed out in March 2009, American companies bought more than $1 trillion in their own shares. The 100 stocks in the S&P 500 with the highest buyback ratios have returned 42 percent over the past year.

Monday, December 9, 2013

Saving for the Train Just Got Harder

Tax planning has grown to encompass many different types of savings plans. Most people are familiar with health savings plans that allow them to set aside money for medical expenses, tax-free, and you may also be aware of plans for funding things like child care with tax-free dollars. There's also a plan for commuters whereby they can set aside tax-free dollars for the money it costs them to take transit systems into work.

That's obviously a very big deal for people here in New Jersey who take public transportation into New York City. Unfortunately, Congress has cut the maximum allowable for monthly transit, from $245 down to $130. That's not going to cover many monthly train passes in our part of the world.

On the other hand, if you drive to work, your savings plan is getting marginally bigger. The monthly tax-free savings plans for driving has been increased from $245 to $250. For more information on any of these transit savings plans, contact your employer.

Friday, December 6, 2013

Unemployment Drops to 7.0 Percent

This morning's jobs report from the Bureau of Labor Statistics wasn't much more positive than the ones we've seen recently, but it had enough going for it to get some excitement going. The economy added 203,000 jobs in November, crossing that semi-magic 200,000 line. That's up a tick from the 195,000 jobs we've averaged over the prior 12 months.

More importantly, the unemployment rate dropped to 7.0 percent, down from the previous month's figure of 7.3 percent. Outgoing Fed chair Ben Bernanke had noted that he wouldn't begin to taper off the Fed's monthly asset purchasing program until the unemployment rate was down to 7.0 percent, a signal that the economy was strong enough to stand on it own without Fed intervention.

Bernanke will almost surely leave that decision for his likely successor, Janet Yellen, who is slated to take over as Fed chair when Bernanke's term expires on January 31. That's now the date to watch to see if the taper will take effect - and to see how the markets react.

Thursday, December 5, 2013

Holiday Shopping Tips

If you're heading out to do some Christmas shopping, you probably know it can be very easy to end up spending more than you intended. Martin Lindstrom, the author of a book called Brainwashed: Tricks Companies Use to Manipulate Our Minds and Persuade Us to Buy, offers up the following hints to stay within your budget:

  • Don't take your kids with you. Studies show that shoppers with children in tow end up spending 29 percent more than they had budgeted.
  • Don't take your spouse, either. They'll make you spend 19 percent more than you expected to.
  • Carry your purchases rather than loading them into a shopping cart. A shopping cart leads to an 8 percent increase in expenditures.
  • Pay with hundreds. The bigger the bills you have, the less willing you'll be to break them.

Wednesday, December 4, 2013

Slow and Steady Wins the Race

One of the remarkable things about this year in the stock market has been how little volatility we've experienced in a time of such strong growth. A lot of bull markets are characterized by exceedingly bumpy rides, as stocks lurch backward and forward along their upward path.

We saw a lot of that in the early days of this bull market. Between 2007 and 2012, the median number of days per year in which the Dow Jones industrial average moved by more by 2 percent was 42. This year, there have been only four such days. There have been just 24 days when the Dow has moved by even 1 percent or more, which is the fewest since 2006. In 2011, there were 89 such days.

Perhaps most thankfully, we haven't had one of those really terrible days in a long while. The markets haven't seen a 10 percent drop since the summer of 2011.

Tuesday, December 3, 2013

Happy December!

Simply put, December is the best month of the year for the stock market. Over the past 30 years, the S&P 500 has gained an average of 1.9 percent in December; simple math tells you that if we saw that kind of performance every month, the market would return more than 20 percent every year. The S&P has been positive in December 80 percent of the time.

The Dow Jones industrial average shows a similar effect. Looking back even further, we can see that over the past 100 years, it has averaged a 1.42 percent gain, and it's been positive in 73 percent of those Decembers.

The best may be yet to come. Some research shows that the real gains for December come in the last five trading days of the year, as well as in the first two trading days of the new year. That late-December uptick has become known as the so-called "Santa Claus Rally."

Monday, December 2, 2013

The New Nasdaq

The Nasdaq stock index crossed the 4000 barrier last week, reaching that height for the first time since 2000. But unlike the S&P 500 and the Dow Jones industrial average, it's not anywhere close to setting new all-time highs. On March 10, 2000, in the midst of the dot-com craziness, the Nasdaq peaked at more than 5000.

It's a very different index now. The tech companies that fueled the Nasdaq back then have become less of a component since those heady days. In 1999, traditional technology stocks constituted 66 percent of the Nasdaq, whereas they've dropped to less than half now, at just 45 percent.

What's been replacing those tech stocks? Since 1999, health-care stocks have jumped from 6 percent of the Nasdaq to 14 percent now, while consumer stocks have jumped from 5 percent to 17 percent.

Friday, November 29, 2013

When Black Friday Comes

Are you shopping today? You might notice the crowds being a little smaller than normal, despite the fact that a relatively late Thanksgiving has shortened the holiday shopping season this year. According to a Gallup poll, Americans say they will spend about $706 on gifts this year. That's down about 8 percent from last year's figure.

Despite the fact that the economy has been officially in recovery for a couple of years now, people still feel spooked. Nielsen's holiday shopping survey found that 68 percent of American consumers still feel like they're living in a recession.

If you are thinking about braving the crowds, here's a trip from the market-research firm ShopperTrak: Wait till next week. The crowds will be much lighter than this weekend, and the Black Friday deals will mostly still be in force.

Thursday, November 28, 2013

Thoughts for Thanksgiving

“Thanksgiving is the holiday that encompasses all others. All of them, from Martin Luther King Day to Arbor Day to Christmas to Valentine's Day, are in one way or another about being thankful.” ~ Jonathan Safran Foer

“Thanksgiving is an emotional holiday. People travel thousands of miles to be with people they only see once a year. And then discover once a year is way too often.” ~ Johnny Carson

“Not what we say about our blessings, but how we use them, is the true measure of our thanksgiving.” ~ W.T. Purkiser

Wednesday, November 27, 2013

The Challenges of Being Self-Employed

For most American workers, saving for retirement has become easy, something you don't even have to think about. We have automatic deposits made to our 401(k)s, taken out of every paycheck. For the self-employed, though, the process is not so easy.

A new survey from TD Ameritrade brings this problem home. Only 12 percent of American workers who are employed by someone else are not saving regularly for retirement, but that situation applies to 40 percent of the self-employed. And 28 percent of the self-employed aren't saving anything for retirement.

The biggest challenge for the self-employed is that they fear their income isn't steady enough to be putting aside regular amounts for retirement. Some 61 percent of those surveyed said that was keeping them from fully funding their retirements. But aside from the ubiquitous 401(k), there are several options for self-employed people to fully fund their retirements. If you'd like to know more about them, feel free to give me a call.

Tuesday, November 26, 2013

The Meaning of Thanksgiving

Thanksgiving is traditionally the kickoff of the holiday shopping season, and a significant indicator for the health of our economy. But it also presents a bit of a turning point for the stock market as well. In recent years, the market has consistently risen during the three weeks starting with the Friday before Thanksgiving.

Each of the past ten years, the S&P 500 index has increased over that time period. The average increase for that three weeks has been 3.2 percent - which may not sound like a lot, but is pretty significant for about 5 percent of the trading year.

Oddly enough, the strongest of those three-week periods came when the market was, overall, in free-fall. In November and December of 2008, as the S&P was on its way to bottoming out in March of 2009, the index rose by nearly 10 percent.

Monday, November 25, 2013

The S&P's Perfect 10

We've talked a lot about how strong the S&P 500 has been so far this year, but maybe the most remarkable thing about this rally is how broad-based it has been. There remains the possibility that each of the ten sectors within the S&P 500 could increase by 10 percent or more this year.

The only sector falling short of that 10 percent mark so far is Telecommunications, which is up 8 percent. Meanwhile, Health Care and Consumer Discretionary are both up by a whopping 36 percent.

We haven't seen all ten sectors rise by 10 percent in a year since 1995, when the index rose by 31 percent overall. In 2003, the S&P 500 was up by 26 percent on the year, but both Telecoms and Consumer Staples fell short of the 10 percent mark.

Friday, November 22, 2013

Confidence Inches Up

The government shutdown back in early October had an unsurprising dampening effect on most Americans' view of our economy. Gallup's Economic Confidence Index dropped to -39 in mid-October, its low point for the year. So it's probably to be expected that confidence is now rising again, back up to -24 in the latest reading.

But the slowdown may still be having lingering effects. The confidence gauge is still lower than it was all year prior to October; it had bottomed out at -22 at the beginning of March. The high point for the year came in early June, when the confidence reading hit -3.

You may have noticed that all those numbers are negative, but that doesn't mean that 2013 has been unusually dour. In fact, this year is shaping up to have, in aggregate, the highest economic confidence of any year since 2007, before the recession.

Thursday, November 21, 2013

Problems of the Superwealthy

The impression most people get of the superwealthy is that they're fantastically good at managing their money - or at least they can hire the best people to manage it for them. But a new study from several major universities looked at the portfolios of the 115 wealthiest families in the U.S., with an average net worth of $90 million, and found that they make many of the same mistakes that ordinary investors do.

Their asset allocation isn't much different from the rest of us. The superwealthy families put 50 percent of their assets in stocks and 30 percent into bonds, although they also put 10 percent into private equity and 10 percent into hedge funds. Hedge funds turned into an investment fad around 2005, which is when so many of these wealthy investors put money into them - and just before they turned south during the financial meltdown.

Poor timing seems to be their biggest mistake. When the stock market started collapsing in 2008, the wealthy investors were very slow to sell their shares, then didn't take advantage of the low stock prices to scoop up bargains. Oddly enough, the median member of the superwealthy group had just as much in cash in 2007 as they did in 2009 - in two very different market environments. Fortunately, they had plenty to lose.

Wednesday, November 20, 2013

New Jersey's Burden

One of the distinctions of our state that most people in New Jersey would rather forget is our legendarily high property taxes. A new study from the Tax Policy Center confirms what we all fear: The highest average property tax burden as a share of home prices belongs to New Jersey, at 2.0 percent. We're followed in that distinction by Texas and New Hampshire, each at 1.9 percent.

New Jersey also ranks among the highest property taxes at the county level. The study found only nine counties in the entire nation with average property tax burdens above $8,000 per year, and six of them are in New Jersey: Bergen, Essex, Hunterdon, Morris, Passaic and Somerset. The other three are in New York.

Where can you go to escape these property taxes? The U.S. county with the lowest property tax burden as a percentage of home values is Maui County in Hawaii, at just 0.2 percent. That sounds like a pretty nice place to live.

Tuesday, November 19, 2013

The Meaning of Narrowing Valuations

This year's soaring stock market has created some unusual problems for investors. It's not just that rising prices have made stocks more expensive. The valuations of stocks have been narrowing, creating an environment where it's getting more difficult to find stocks that might be undervalued.

According to statistics compiled by Goldman Sachs, the dispersion of price-to-earnings ratios is down to 41 percent, which is the lowest on record. That may sound hopelessly technical, but it actually reveals something significant about the state of the market. At any time, some stocks will be overvalued compared to their earnings, like LinkedIn, with a price-to-earnings ratio of about 1,000. Others will be undervalued compared to their earnings, like the homebuilder Pulte, with a price-to-earnings ratio of just 2.9. Investors use those ratios to choose the types of stocks they want to be.

What the low dispersion number means is that many stocks are trading at roughly the same price-to-earnings ratio. Investors look to those figures to determine which stocks are growth stocks and which are value stocks. But when those figures converge for the market as a whole, it makes stock-picking even harder than it ordinarily is.

Monday, November 18, 2013

Christmas Comes Early

Friday of next week is Black Friday, traditionally the kickoff point for the holiday shopping season. Except that in recent years, the opening time for many retailers has been moved back to Thursday night, the evening of Thanksgiving. The question is, how may shoppers are willing to fight off turkey overload and start shopping Thursday night?

According to a survey from the National Retail Federation, there's a sizable amount of shoppers willing to do just that. In 2012, some 28 percent of Black Friday shoppers got to the stores before midnight on Thanksgiving night. That's up from just 10 percent shopping before midnight in 2010.

And of course, the starting time gets earlier every year. In 2012, 10 percent of holiday shoppers reported being in the store by 8:00 p.m. on Thanksgiving night, which was the first time that number was higher than zero.

Friday, November 15, 2013

How to Be a Millionaire

There’s an interesting new study out from Fidelity, analyzing the performance of people in its 401(k) program. It found that 50,000 people have amassed a million dollars or more in their Fidelity 401(k). And a lot of them weren’t even high earners; 18 percent reported an average income of less than $150,000 a year.

Here are the traits Fidelity found were common for its 401(k) millionaires:

·         Start saving early.

·         Contribute large amounts, typically 14% of annual pay.

·         Take full advantage of company matches.

·         Allocate a significant portion of their assets to stocks — typically 88% by age 45 and 54% at 70.

The formula is actually pretty simple. Fidelity estimates that if you earn $40,000 and save 16 percent a year starting at age 25, get a 1.5 percent annual raise and earn a 7 percent annual return – that adds up to $1 million by age 67.

Macy's Rings In the Holiday Season

 Yesterday was a really good day for Macy’s stock – a result that may end up having ramifications for the larger economy over the remainder of this year. In its third-quarter earnings report, Macy’s reported overall profits were up 22 percent from a year ago. More importantly, the store predicted a strong fourth quarter, saying it would be hiring an additional 83,000 workers for the holiday shopping season.

Investors had worried that the government shutdown and a still-sluggish economy might lead to a miserable shopping season this year. It didn’t help that Macy’s actually missed Wall Street’s earnings expectations in the second quarter. While many analysts expected Macy’s to guide its overall earnings for the year downward yesterday, instead they reinforced the higher number.

That means Macy’s is expecting its strength to continue through the end of the year. With holiday sales accounting for somewhere between 20 and 40 percent of a retailer’s annual sales, the rest of the year will be critical for that area of the economy. 

Wednesday, November 13, 2013

The Small-Cap Dilemma

The S&P 500 Index, as we’ve noted many times, has been having a terrific 2013, increasing in value by 24% so far this year. But that’s not been the most impressive asset class in the stock market. The S&P 500 consists solely of large-cap companies, but small-cap companies – as measured by the Russell 2000 index – are up a blazing 30 percent this year.
Investors have responded to those kinds of numbers. They’ve poured $22 billion into small-cap mutual funds and ETFs this year. That’s on pace to set a record for inflows into small-cap funds for a single year.
But they’ve started to slow down. The Russell 2000 is down about 2 percent in the month of November so far. That’s while the larger-cap stocks have continued to make gains; since October 1st, the S&P 500 is up 4.5 percent, but the Russell 2000 is up just 1.3%.

Tuesday, November 12, 2013

Jobs From Another Angle

Last week’s relatively strong employment report from the Bureau of Labor Statistics prompted an economist named Bill McBride to wonder: Has America's job situation returned to pre-recession levels? And if not, when would it likely get there?

The short answer is: Sometime in the middle of 2014, payrolls should reach the same level they were prior to the recession. We’re still down 1.5 million jobs from where we were when the recession started in November 2007 – including a total of 976,000 private sector jobs. At current growth rates, we are about eight months away from making up that much ground.

On the other hand, the population and workforce has been growing all that time, too. Even the previous level of jobs would leave us with an unemployment rate higher than we had before the recession. According to one estimate, returning us to pre-recession employment rates, at the current level of job growth, would take another five years.

Monday, November 11, 2013

Americans Love Their Cash

This has been a great year for investors, with the S&P 500 Index up by 24 percent already. It might make sense that this would draw people back into the stock market, but according to a new survey from BlackRock, more than half of Americans' liquid assets are in cash or cash equivalents.

The survey found that 48 percent of the respondents' investable assets were in cash or in savings accounts. Another 12 percent is in money-market accounts or CDs. That leaves just 40 percent in return assets.

Furthermore, the survey respondents aren't rethinking their strategy in the wake of the market's strength. Half of those surveyed said that they had no plans to alter their asset allocations in the coming year - and a third said they planned to increase their cash holdings.

Friday, November 8, 2013

Jobs and GDP

October's employment figure, which came out this morning from the Bureau of Labor Statistics, was surprisingly strong, at 204,000 new jobs added. That slightly better than the average of 190,000 for the previous 12 months, despite the effects of the government shutdown at the beginning of the month. The private-sector increase of 212,000 jobs was the highest that number has been since February. The federal government shed 12,000 jobs in October.

The headline unemployment figure actually ticked up a notch, to 7.3 percent, but that appears to be temporary. That figure includes furloughed federal workers, who were classified as unemployed for purposes of the BLS's household survey.

In other good news, the government also released its first estimate of third quarter GDP yesterday. That figure came in at 2.8 percent, which was a notch up from the second quarter's growth rate of 2.5 percent, and the best figure we've seen in a year.

Thursday, November 7, 2013

Investors Still Feel the Fear

Even five years out from the stock market meltdown, Americans still haven’t regained their appetite for risk. According to a study published by the ICI, the percentage of mutual fund owners who say they have above-average risk tolerance dropped from 36 percent in 2008 to 30 percent now. Those saying their risk tolerance is below average rose from 14 percent to 22 percent.

The age group showing the biggest drop in risk tolerance was those investors aged 35 to 49. But the change in attitude may be best seen in younger investors, 25 percent of which say they have below-average risk tolerance.

Consider this: In 2007, before the crash, investors in their twenties had 48 percent of their 401(k) assets invested in pure stock funds. But by 2011, that figure had dropped to 33 percent.

Wednesday, November 6, 2013

Split Decisions

One of the most common decisions for a high-flying stock used to be a stock split, which was regarded as a real feather in a company's cap. But since the number of stock splits peaked way back in 1986, the strategy has fallen out of vogue. Just 11 of the 500 stocks in the S&P index have split their shares this year.

But those stocks have done very well. Since their splits, eight of the eleven have outpaced even the red-hot S&P 500, which is up 24 percent this year. Three of the stock splitters - Noble Energy, Flowserve and Gilead Sciences - have doubled in price.

The index appears to be ripe for more splits. The average share price in the S&P 500 is now a lofty $74, and there are roughly 75 companies with share prices of more than $100.

Tuesday, November 5, 2013

The Incredible Shrinking Bond Fund

What's the biggest mutual fund in the world? Until very recently, the answer would have been the Pimco Total Return Fund, managed by bond guru Bill Gross. It notched the distinction of having the most assets of any mutual fund back in 2008, and more than doubled in size between then and 2012. As of the beginning of this year, the fund boasted $285.4 billion under management.

But this has been a rough year for bond funds, as investors have been rotating back into stocks. The Pimco Total Return Fund has seen redemptions of $33.2 billion so far in 2013. The fund's performance has been deserving of losing that kind of money; it's lagged 56 percent of its peers in the bond-fund universe this year.

So what's overtaken it? The Vanguard Total Stock Market Index has $251 billion in assets as of the end of October. That edges it past Pimco Total Return, which now stands at $247 billion.

Monday, November 4, 2013

Foreigners Fleeing for the Exits

The U.S. stock market has been roaring this year, with the S&P 500 up 24 percent for the first ten months of 2013. But there's one group of investors who have been pulling out of this market: Foreign investors. For four straight months up through August, foreign investors have withdrawn money from American stocks, including $16.9 billion in August alone.

It's both private investors and official government accounts that have been pulling out of the U.S. Private foreign investors withdrew $13.8 billion in August, while governments and other official investors pulled out $3.1 billion.

It's a wonder where all that money is going to end up. The MSCI EAFE index, the benchmark index for the leading foreign stock markets for the developed world, has had a good year with overall returns of 20% - but it still lags the S&P 500.

Friday, November 1, 2013

Buffett's Wisdom

The Wall Street Journal reminded us yesterday that it was five years ago when Warren Buffett wrote an op-ed for the New York Times, urging investors that it was time to buy stocks. This is a controversial and much-derided opinion at the time; the market was in the midst of a frightening collapse that had started earlier in 2008 and showed no signs of letting up.

Most investors didn't follow Buffett's wisdom. Americans have taken nearly $450 billion out of equity mutual funds over the past five years, and removed $150 billion from mutual funds in 2009 alone.

And as it turns out, the market was not done dropping when Buffett wrote his op-ed. It wouldn't bottom out until five months later, in March 2009. But even after withstanding those losses, an investor who followed Buffett's advice would have gained nearly 90 percent on his investments in the S&P 500 over the last five years.

Thursday, October 31, 2013

Scary Spending Numbers

Happy Halloween! If you're like most Americans, you've spent a lot of money on decorations, candy, and costumes this year. All told, we'll spend about $7 billion on Halloween, or $75 per person actually participating in the holiday.

We'll spend roughly $2.8 billion on candy to hand out to trick-or-treaters this year. That's actually down a bit from last year; a third of those surveyed by the National Retail Federation said they'd be buying less candy than they did in 2012. The most popular candy this year: Reese's peanut butter cups.

The other sizable expense is for costumes. Americans will spend about $2.5 billion on Halloween costumes this year. That includes about $330 million that we'll spend on costumes for our pets. Boo!

Wednesday, October 30, 2013

Looking Toward the Rest of the Year

With the S&P 500 already up by 24 percent in 2013, it may seem greedy for investors to expect much more out of the year. But according to research compiled by Bespoke Investment Group, that success so far may indicate a continued bull market through November and December.

Since 1928, there have been 35 other years in which the S&P was up by at least 10 percent through the end of October. Those years have tended to extend those gains through the end of the year. In those years, November saw an average gain of 2.6 percent, and there's been a 5 percent average increase of the final two months.

Perhaps even more notable is how consistent the increases have been. Three quarters of those Novembers saw a rise in the S&P 500, and combining November and December, there was an increase 82 percent of the time.

Tuesday, October 29, 2013

The Apple Report

Apple now longer towers over the rest of the stock market, like it did a year or two ago when it became the biggest company in the world, but it's still a very big deal. The stock is down 24 percent from its high last September, when it briefly traded at over $700 a share, but all eyes were on Apple for yesterday's post-closing earnings announcement.

And the news was mixed. Apple it earned $7.5 billion for the quarter, exceeding Wall Street's consensus estimate of $7.2 billion. But on the other hand, Apple had earned $8.2 billion in the same quarter a year earlier, so earnings are down 8.5 percent since then.

In after-hours trading, Apple stock slipped by 2.3 percent; apparently, investors were more concerned about the earnings decline than they were impressed by the earnings beat. But it's still up 23 percent from late June, when the stock bottomed out at just under $400 a share.

Monday, October 28, 2013

College Costs Inch Upward

Here's some good news for parents who have just sent children off to college: According to the College Board, the rate of increase for college tuition has finally started slowing down. It hasn't started decreasing, but at least it's growing at the smallest rate since 1975-76.

For private universities, tuition and fees rose by just 3.8 percent this year. That's an overall increase of just $700, up to an average of $23,290 for tuition, room and board, after adjusting for dropping government aid.

The news at public colleges was even better: There, tuition and fees increased by 2.9 percent for in-state students. The increase was just an average of $220, and has now reached an average of $12,620 for tuition, room and board.

Friday, October 25, 2013

The Sector Race

What’s been the top-returning sector in the S&P 500 so far this year? Up until very recently, the answer would have been health care, which is up 32 percent on the year. But yesterday, the consumer discretionary sector slipped into the lead with a return of 32.5 percent.

Those sectors have both had very strong earnings seasons so far. Among health care stocks, 18 out of 23 stocks, or 78 percent, have beaten their earnings consensus this quarter, while 23 out of 30, or 77 percent, of consumer discretionary stocks have done so. Those figures both outpace the S&P 500 as a whole, in which 74.5 percent of companies have beaten estimates.

Health care stocks have slipped a bit lately in response to the faltering implementation of ObamaCare. But consumer discretionary stocks are strongly driven by holiday sales, so there’s still plenty of time for this race to turn around again.

Thursday, October 24, 2013

Slowing Down the IRS

We generally only think about the Internal Revenue Service between January and mid-April, but the agency is busy the whole year-round. And because it was closed for a couple of weeks during the government shutdown at the beginning of this month, it won’t be ready to accept returns starting January 21, 2014, as previously announced. That date has been pushed back to either January 28 or February 4.

The people who file that early are generally those expecting big refunds. Last year, the IRS handed out $135 billion in refunds prior to March 1. That’s more than it distributed between March 2 and May 10, even though many more taxpayers filed returns in that period.

This will be the second year in a row in which the IRS has gotten a late start. At the beginning of this year, there was a delay when haggling over the fiscal cliff left everyone unsure of what the federal tax rates would be. Just like in 2013, though, one date hasn’t changed: Your taxes are still due on April 15.

Wednesday, October 23, 2013

The Remarkable Consistency of the S&P 500

Noting the consistency of the stock market’s rise over the past couple of years, the Bespoke Investment Group pointed out yesterday that the S&P 500 has now gone 515 trading sessions without a drop of 10 percent. That’s nearly three years’ worth of trading days.

That may sound like a long time to go without a correction, but we’ve had a couple of longer periods in the recent future. From March 2003 to October 2007, the S&P 500 went 1,153 days without a 10 percent drop. And from October 1990 to October 1997, the S&P went 1,767 days without such a correction.

The fact that the market hasn’t taken a serious tumble in a few years now has led some observers to opine that we’re due for a correction. But on the other hand, if the current streak lasts as long as the 1990-97 streak did, we won’t see that 10 percent drop until October of 2018.

Tuesday, October 22, 2013

The Belated Jobs Numbers

Because of the federal government shutdown, the Bureau of Labor Statistics wasn't open to release its monthly unemployment figures at the usual scheduled time, on the first Friday of the month. So we belatedly got new jobs numbers this morning. And they weren't really worth waiting for: The economy created just 148,000 jobs in September.

That's a pretty tepid figure, down somewhat from the average of 185,000 jobs per month over the past year. On the other hand, August's figure was revised upward, from 169,000 to 193,000, and the headline unemployment figure dropped another notch, from 7.3 percent to 7.2 percent.

One result of the unexciting number of new jobs is that it makes the Federal Reserve less likely to begin tapering its asset purchases any time soon, which is good news for the stock market. The next Fed meeting is at the end of this month, and it's hard to see them considering this economy robust enough to warrant tapering.

Monday, October 21, 2013

The Economists' Take

Businesses continue to be mostly optimistic about the economy going forward. According to the latest survey of the National Association of Business Economists, most economists expect U.S. GDP to grow at a rate of 2 to 3 percent over the next year. GDP grew at 2.5 percent in the second quarter of this year.
Even more optimistic was the report on sales growth. Some 42 percent of the economists said sales were up at their companies through September. That was in increase from the 35 percent who reported the same the last time this survey was taken in July.
One trouble spot remains: unemployment. Only 27 percent reported that employment was rising at their companies, which was actually down from 29 percent who had said that in July.

Friday, October 18, 2013

Watching 401(k) Balances

There's a new report out from the Investment Company Institute showing dramatic gains in 401(k) accounts in recent years. Between the start of the financial crisis in 2008 and 2011, the most recent year for which we have figures available, the average 401(k) balance nearly doubled.

At the end of 2008, shortly after the Lehman Brothers bankruptcy and just after the onset of the recession, the average 401(k) had $49,932 in it. By the end of 2011, that same figure had vaulted up to $94,482.

On the other hand, this study also shows how you can play with statistics. In 2007 - before the financial sector melted down and the recession hit - the average 401(k) balance was up at $76,534. Obviously, the Wall Street crash drove that down in a hurry. From 2007 to 2011, that balance increased by 23 percent - a healthy figure, but a long way from doubling.

Thursday, October 17, 2013

Wall Street Likes the Deal

As it became clear throughout the day that the Congress was going to resolve both the government shutdown and the looming debt-ceiling crisis, Wall Street began feeling its oats. The S&P 500, Dow Jones industrial average and Nasdaq all rose more than 1 percent on the day.

The rally was remarkably broad-based. All ten of the SP 500's industrial sectors were up at least 0.6 percent on the day, with the financials leading the way. For the year, a whopping 443 of the S&P 500 companies have shown gains. If that holds up, it would be the highest number since that figure was first compiled 23 years ago; the highest on record so far is 1997, when 436 companies increased in share price.

And of course, the key volatility gauge, which had been spiking up earlier this week, made a sharp downward move. The VIX index dropped by 21 percent in a single day, its biggest one-day drop in more than two years.

Wednesday, October 16, 2013

Do Investors Fear Default?

The prospect of the U.S. defaulting on its debts, which could happen if Congress can't reach an agreement to lift the debt ceiling later this week, doesn't seem to have had a huge effect on the stock markets yet. The S&P 500 is up 1.7 percent for October, through yesterday's close. That's very good for half a month.

But we can see some turmoil lurking underneath. The second-most-traded ETF in the market yesterday was the iPath S&P 500 VIX Short-Term Futures ETN, which tracks the market's volatility. (The most-traded ETF, as it almost always is, was the SPDR S&P 500 ETF.) Traders are apparently hedging their bets against higher market volatility in the very near future.

After spiking early last week, the VIX volatility measure was actually dropping through the end of the week, when it looked like Congress might reach some sort of agreement on the shutdown and debt-ceiling issues. But for the first two days of this week, it jumped 17 percent.

Tuesday, October 15, 2013

Optimism for the Fourth Quarter

We are now two weeks into the fourth quarter of the 2013 investing year, and we could be headed for good days ahead. Certainly, the history of the stock markets shows that, in the long run, the fourth quarter is the best time of the year.

Consider that the S&P 500 index, since 1945, has returned an average of 0.7 percent per month. But in just the fourth quarter, the months of October, November and December, it has returned an average of 1.3 percent per month, nearly double the normal rate.

This phenomenon isn't confined to the United States. The MSCI EAFE index, which tracks the world's developed markets, shows exactly the same figures: an 0.7 percent average return in all months, but 1.3 percent in the fourth quarter. The MSCI Emerging Markets index is even stronger, with a 1.0 percent monthly return overall, but 1.9 percent in the fourth quarter.

Monday, October 14, 2013

A Return to the '90s?

The IPO market has been hot recently, with the number of new companies going public on pace to produce their highest yearly total since 2007. But that's not the only way the current landscape resembles the go-go late '90s, when all those dotcoms launched one high-flying IPO after another. According to a new study, the majority of tech IPOs this year have been by companies that are losing money.

Of the 28 tech IPOs that have taken place so far in 2013, 19 of them, or 68 percent, have been companies that reported a loss over the previous 12 months. The most prominent one, Twitter, promises to keep up this trend: It lost $79 million in 2012. In 1999 and 2000, a stunning 86 percent of tech IPOs were from money-losing companies.

Many of these companies will eventually turn it around, of course, but research shows that it's a significant headwind. From 1990 to 2011, money-losing tech companies that went public returned 21.5 percent in their first three years, but those that were already profitable before going public returned 55.2 percent.

Friday, October 11, 2013

Wall Street Breathes a Sigh of Relief

How big a day was it yesterday on Wall Street? Just the hint of a thawing in the debt-limit standoff sent stocks soaring. The Dow Jones industrial average climbed 323 points, its highest single-day point gain since December 2011. The S&P 500 gained 2.2 percent, enough to reclaim all the losses it has posted since the government shut down on October 1.

The rally was also remarkably broad-based. All 30 of the stocks in the Dow average showed gains, and all ten of the sectors that make up the S&P 500 also increased.

At the same time, the VIX index, the market's measure of upcoming volatility, spiked downward in its biggest one-day drop since April. That would indicate that traders think the long-term fears over the possibility of default have turned lower permanently.

Thursday, October 10, 2013

The Next Fed Chair

Yesterday, President Obama announced that Janet Yellen was his choice to replace Ben Bernanke as chair of the Federal Reserve, once his term ends in January 2014. The question most investors are wondering about is how her policies would differ from Bernanke's, especially since much of the investment community is anxious about the effect that tapering the Fed's asset purchases will have on the stock market.

But Bernanke's term extends past the end of the year, and most observers think the taper will come at some point around the end of 2013. Yellen has been a deputy under Bernanke for years, and is considered one of the architects of the quantitative easing program. A Wall Street Journal poll of economists found that 60 percent of them think Yellen's policies on QE will be no different from Bernanke's.

One potential area of difference: inflation. Yellen has signaled that she think it's worth running inflation of 2.5 percent in order to drive down unemployment, while Bernanke's inflation target has always been 2 percent. That could be something to watch in the years to come.

Wednesday, October 9, 2013

Signs of Default

The markets have been weathering the federal government shutdown without horrific losses, with the S&P 500 index losing just 1.1 percent of its value since October 1. The debt-ceiling showdown, though, may be a different story. We don't have any precedents to look at in this area, but there are some signals that investors are getting very nervous.

Consider the one-month Treasury bill, which is generally about the safest and lowest-yielding investment you can own. For almost the entire year, those bills have been paying less than 0.10 percent in yield, as befits a very short-term instrument. But yesterday, the yield popped up to about 0.34 percent, or three times where it normally sits.

By comparison, the two-year Treasury bill pays 0.38 percent. The investing community is roughly as confident of the U.S. government's ability to pay its bills over the next two years as it is over the next month. Clearly, investors think default is a real possibility.

Tuesday, October 8, 2013

The Bear Market in Bond Funds

One of the strongest trends in investing over the past few months has been the outflow of assets from bond funds. Over the three months that made up the third quarter, investors pulled a whopping $61.5 billion from bond funds. That's a record for any quarter since this record started being kept back in 2004.

U.S bond funds alone accounted for $41 billion of the total withdrawals for the quarter. Another $17.4 billion came out of emerging-market debt funds. TIPS funds - those that invest in Treasury Inflation-Protected Securities - have seen outflows for 25 straight weeks now.

Where is all that money going? The biggest beneficiary was stock funds, which took in $73 billion in the third quarter, according to EPFR Global. Another strong performer was funds invested in bank loans; they took in $21 billion in new assets.

Monday, October 7, 2013

Unprepared for Retirement

If you've made contributions to an employer-sponsored retirement plan, such as a 401(k), you're among the majority of Americans - but just barely. That's one result from a recent Harris poll on the retirement-savings habits of Americans aged 40 to 75, which found that just 51 percent of us are investing in an employee-sponsored plan.

The survey found that 48 percent contributed to their own retirement vehicle, such as an IRA, annuities, or a stock portfolio. But that doesn't mean you can add the two figures together, and estimate that 99 percent have set up a retirement savings plan. More likely, the people who are responsible enough to maintain a 401(k) are also making other retirement investments as well.

And certainly, not a lot of people have moved beyond those steps. Only 23 percent said they have consulted with a financial advisor, and just 11 percent have developed a written financial plan for retirement. Meanwhile, 28 percent say they haven't thought much about the whole thing.

Friday, October 4, 2013

The Growth in Emerging Markets

Where are the next world-shaking companies going to come from? A new report from the McKinsey Global Institute predicts that by 2025, most of the companies that achieve a market cap of $1 billion or more will be from emerging markets. Currently, 73 percent of such companies are based in the world's developed markets.

For a long time, the number of large companies in the emerging world remained dauntingly small. That percentage was tracked at just 5 percent in 1980, 1990 and 2000. By 2010, it was up to 17 percent, and McKinsey forecasts it will reach 46 percent by 2025.

The biggest driver of all of this is China, which dominates the emerging-markets landscape along with Brazil, India and Russia. As recently as 1990, only one of the world's 500 largest companies was based in China. The McKinsey report forecasts that by 2025, that number will be up to a whopping 120.

Thursday, October 3, 2013

Hottest Stocks of 2013

With the third quarter now in the books, it's been a banner year for the U.S. stock market. The S&P 500 index is up nearly 18 percent on the year, but within the index, many individual stocks have delivered spectacular results. Six S&P stocks have already doubled in share price this year.

Here's the full top ten:

  1. Netflix (NFLX), up 257.2 percent
  2. Best Buy (BBY), up 217.8 percent
  3. Micron Technology (MU), up 178.6 percent
  4. Boston Scientific (BSX), up 105.1 percent
  5. Delta Air Lines (DAL), up 104.3 percent
  6. GameStop (GME), up 100.6 percent
  7. Celgene (CELG), up 98.7 percent
  8. Trip Advisor (TRIP), up 90.0 percent
  9. E*Trade (ETFC), up 86.4 percent
  10. Pioneer Natural Resources (PDX), up 83.4 percent

Wednesday, October 2, 2013

A Different Look at Unemployment

The monthly ADP unemployment report is out this morning, indicating the economy added 166,000 jobs in September. With the federal government shut down, the monthly figures from the Bureau of Labor Statistics won't be coming out as scheduled on Friday, so this may be the only jobs indicator we have for a while.

Automatic Data Processing, a private firm, measures only the jobs added in the private sector, which is one reason its figures tend to differ from the BLS numbers. The public sector has been shedding jobs in recent months; factoring that in, September looks like a fairly normal month for job growth, although at the lower end of what we've seen recently as "normal." ADP doesn't release an overall unemployment rate, so for the moment, we can assume that stays at 7.3 percent.

The BLS, with many of its workers furloughed, has already announced it would not be releasing its customary economic reports during the shutdown. It's not clear if and when we'll ever get an "official" report on September's employment figures. For now, the markets will clearly be paying more attention to the ADP report.

Tuesday, October 1, 2013

Now for Some Brighter News

With our elected officials squabbling over the potential shutdown of the federal government, how about some good news instead? In addition to being the last day in which our government was funded, Monday was also the final day of the third quarter of 2013. Even though the markets took a hit yesterday, it's been a profitable year. Here's how the major indexes look:

  • S&P 500 Up 4.7 percent in the third quarter, up 17.9 percent for the year
  • Dow Jones Up 1.5 percent in the third quarter, up 15.5 percent for the year
  • Nasdaq Up 11 percent in the third quarter, up 24.9 percent for the year

Those are strong figures. And they've played a big role in another number released by the Federal Reserve last week: America's collective household wealth is now up to $74.82 trillion, the highest mark ever.

Monday, September 30, 2013

The Latest in Investment Scams

Have you ever been approached by someone offering a potentially fraudulent investment opportunity? According to a new survey from the Finra Investor Education Foundation, you probably have. Among the 2000 investors aged 40 and over they surveyed, fully 80 percent reported being given the chance to invest in something that smelled very fishy.

The sample pitch that Finra offered had investors getting 2 percent to 3.4 percent per day in a vehicle that lasted a minimum of 180 days, after which investors could pull their money out. That "2 percent a day" may sound modest at first blush, but it's outlandish when you consider that many assets currently pay out around 2 percent a year. When something sounds too good to be true, it almost always is.

It would be nice to report that it's mostly poorer, unsophisticated investors who fall for these kinds of schemes. But according to the Finra survey, it's the highest-earnings households who are most likely to fall victim to an investing scam.

Friday, September 27, 2013

How Would a Shutdown Affect the Markets?

As of next Tuesday, October 1st, the federal government of the United States will cease to be funded, unless the Congress and the White House can come up with a plan to keep it going. Political considerations aside, a federal government shutdown could have serious repercussions on the markets as well, and investors ought to be prepared for the outcome. 

Or would it be as serious as all that? We’ve lived through government shutdowns before, back in the mid-1990s. S&P Capital IQ has dug up the S&P 500’s performance during those two shutdowns, and the impact doesn’t appear to have been strong. During the first one, from December 13, 1995, to January 10, 1996, the S&P dropped by 3.7 percent. But during the second one, from January 10, 1996, to February 12, 1996, the S&P rose by 10.6 percent. 

So there is no predictable consistent effect on stock prices. It appears as though investors know a shutdown will be a temporary issue, and simply go on about their normal business. 

Thursday, September 26, 2013

The Wal-Mart Story

What moves markets? Sometimes, it’s not much more than rumors that may or may not be true. We saw a little bit of that yesterday, when the S&P 500 index was fighting a losing streak that dated back to last week, but was up as the end of the trading day neared.
Then Bloomberg News reported it had gotten its hands on an email sent from Wal-Mart to one of its suppliers, reading “We are looking at reducing inventory for Q3 and Q4.” The intimation that sales may be dropping made the market suddenly turn south, and the S&P, instead of posting a modest gain, ended up dropping 2 points.

But the whole story may have been over nothing. Wal-Mart later denied that it was trimming inventory for the latter part of the year. “We have thousands of buyers across thousands of categories,” a spokesman said. “We are increasing orders in some categories and decreasing in others." But even though everything may be hunky-dory at Wal-Mart, the afternoon’s damage had been done.

Wednesday, September 25, 2013

Movement in Manufacturing

Is America’s manufacturing sector on its way back? A recent survey from the Boston Consulting Group indicates that nearly 40 percent of U.S.-based manufacturing executives say they are either shifting some of their production back to the states from overseas, or are considering doing so. As recently as early 2012, a similar survey showed that more like 20 percent of manufacturing executives had those plans.

The manufacturing sector has a long way to go to get back to where it used to be. Employment in manufacturing reached a peak of 19.6 million in June 1979; it’s at just under 12 million at this point. Because of the overall growth of the economy, the percentage loss has been even greater, from 22 percent of all American jobs at the peak down to 8.8 percent now.

And those are good jobs that have been lost. The retail sector, which has added four times as many jobs as manufacturing since the end of the recession, pays its workers an average of $16.67 an hour, compared to $24.47 for manufacturing jobs.

Tuesday, September 24, 2013

The New Dow Debuts

Yesterday marked the first day of the new Dow Jones Industrial Average, with Nike, Goldman Sachs and Visa replacing Bank of America, Hewlett-Packard, and the old stalwart Alcoa, which had been part of the Dow since 1959. The changeover is intended to be as undisruptive as possible, with the new components being weighted to keep the Dow at precisely the level it had been with the old components.

The first day of the new Dow was not so positive: The index lost nearly 50 points. All three of the new Dow stocks were down, with Goldman Sachs and Visa being the biggest percentage losers among the 30 companies. On the other hand, only 11 Dow stocks advanced on the day.

There will be other, more subtle changes on the way. For one thing, Bank of America had been the Dow company with the strongest projected earnings growth over the coming year. So all of a sudden, the Dow’s collective earnings projection has dropped significantly.

Monday, September 23, 2013

Mortgage Movement

There were some very positive signs for the housing industry last week, starting with the fact that permits to build single-family homes reached their highest level since May 2008. With mortgage rates still at historic lows, mortgage lending has been booming as well. A new report from the Federal Reserve shows that mortgage origination reached a five-year high in 2012.

Part of that is the fact that we were starting from a very low base. There were 7.1 million mortgages originated in 2011, the lowest that figure had been in 16 years. The number jumped an impressive 38 percent in 2012, though, reaching a total of 9.8 million mortgages.

One thing driving that is refinancing existing mortgages. There were 6.6 million refinanced loans taken out in 2012, which was up 54 percent from 2011. That means about two-thirds of all mortgages in this country in 2012 were actually re-fis.

Friday, September 20, 2013

Reaching Four Digits

A long time ago, in the dot-com days, Priceline was one of the hottest stocks on the market. But when the bubble burst, Priceline lost 97 percent of its value in about a year and a half. After a decade or so of retrenching, it's back setting records: Priceline's share price has now  reached four digits, closing yesterday at $1000.62.

Priceline is the first stock on the S&P 500 Index to trade above $1,000, but there are other stocks at that level, including:

  • Berkshire Hathaway, Warren Buffett's company, at $175,825
  • Farmers & Merchants Bank of Long Beach, at $5,290
  • Seaboard Corp., which is oddly enough a Kansas-based meat processor, at $2,805
Next to crash the party: Google, which is trading at $898.

Thursday, September 19, 2013

Waiting for the Taper

There was some good news from the Federal Reserve yesterday afternoon, depending on how you look at it. Fed chair Ben Bernanke announced that they would not be tapering off their monthly bond purchases, which now consist of $85 billion worth of bonds bought every month. The purchases are generally seen as bolstering the markets as well as the larger economy.

On the other hand, the reason Bernanke gave for continuing the purchases was that the economy was still not strong enough to withstand their loss. He has given 7 percent unemployment as a gauge for when this economy is solid enough to stand on its own; we're currently at 7.3 percent.

But everyone realizes that the Fed will begin tapering off those asset purchases at some point, and reasonably soon. The question is, what effect will the loss of all those assets have on the market as a whole? We've explained the entire situation in a bit more depth in a new article on the main part of the Echelon Wealth Strategies Web site. Give it a read, and if you have any questions about it, feel free to give me a call.

Wednesday, September 18, 2013

Return of the IPO

The initial public offering for Twitter has gotten a lot of notice recently, as the highest-profile IPO since Facebook's flawed outing last May. But it's really at the forefront of a whole wave of IPOs, including such well-known names as Chrysler and Hilton. We've already seen 132 companies go public in 2013, after just 128 in all of 2012.

In part, that's because investors have begun to believe in the worth of newly public companies. Renaissance Capital, a firm that tracks IPOs, reports that the average return on those 132 new stocks has been 34 percent. That's a far cry from the IPO-mania of the late 1990s, but it also seems like a far more sustainable figure.

Even the much-maligned Facebook IPO has turned out all right. Although the stock lost half its value in the first few months of trading, it's now rebounded to the low 40s, well above the opening price of $38 a share.

Tuesday, September 17, 2013

Five Years After the Crash

As we noted last week, this weekend marked the fifth anniversary of the Lehman Brothers bankruptcy. Although the recession had technically started the previous November, that September was when the depths of the financial crisis really hit home. According to Gallup, Americans' economic confidence was already low before the crash, registering at -39 before the Lehman bankruptcy. But a month later, it had plummeted to -65. Today, that reading is still in negative territory, at -16, but it's well above where we were at the Lehman collapse.

Gallup's Standard of Living Index shows a similar trajectory. Standing at 25 before September 2008, it dropped to 12 immediately after the Lehman bankruptcy, but has since risen to 38, or much higher than it was five years ago.

But by some measures, we're still worse off than we were five years ago. In Septmeber of 2008, Americans reported spending an average of $113 on their daily consumer spending. The Lehman shock dropped that figure down to $85. Five years afterward, following a long and difficult recession, the figure has barely budged, at $86 per day.

Monday, September 16, 2013

The Market's Danger Zone?

We enter the last week of summer today. Are we also entering the danger zone for the stock market? An econometrician named Salil Mehta has analyzed the entire history of the Dow Jones Industrial Average, and found that the very worst days tend to happen in the autumn months.

Looking at the worst 1 percent of all trading days, Mehta found that the month with the highest number was October with 45. November was next with 43, then September with 33 and December with 30. Aside from those four months, the average number of disaster days for the other eight months of the year is just 17.9.

Within those dangerous months, the worst day would appear to be Monday. Nearly 30 percent of those bottom 1 percent trading days happen on a Monday. Mehta says all these figures are statistically significant.

Friday, September 13, 2013

The Dropping Price of Imports

Are we headed for a bout of deflation? The Labor Department reported yesterday that the price we paid for imports (excluding petroleum) over the past 12 months dropped by 0.9 percent. As recently as July of 2011, that same figure showed more than 5 percent inflation.

The biggest factor in that price drop has been Japan. Imports from Japan have dropped in price by 2.6 percent over the past year, as their political leaders have focused on devaluing the yen. Japanese import prices were steady as recently as six months ago, and showed about 3 percent inflation as of July 2011.

Will those lower import prices be reflected in lower prices overall? It might, but prices don't really have all that much room to drop further. The current annual inflation rate as measured by the Consumer Price Index is 1.9 percent.

Thursday, September 12, 2013

Five Years Ago...

It was exactly five years ago that our nation's financial sector was in the process of melting down, a collapse that crystallized around the bankruptcy of the venerable investment bank Lehman Brothers. That triggered the panic on Wall Street, the sale and closing of several other old-line financial institutions, and was in large part responsible for the depth of the recession.

Lehman Brothers was one of the heaviest investors in subprime mortgages, which means they had bought up a great number of loans that were never likely to be repaid. Not only that, but they borrowed huge sums of money to buy those securities - by 2007 they had a ratio of 31 to 1 in terms of their equity versus the amount of their own money they had put down. So when those mortgages went bad, they went really bad for Lehman Brothers.

On September 9, 2008, five years ago this past Monday, when a deal for Lehman to be bought by a Korean bank fell through, its stock lost half of its value. For the remainder of that week, it searched for someone to buy up its assets, but no white knight was forthcoming. On September 15 - five years ago this coming Sunday - Lehman filed for bankruptcy, with debts of more than $600 billion. And the American financial landscape would never be the same.

Wednesday, September 11, 2013

The New Dow

The Dow Jones Industrial Average is going to look a little bit different from now on: The venerable index has shedded three of its most sluggish performers in favor of three more dynamic, contemporary-feeling stocks. Gone are Alcoa, Hewlett-Packard, and Bank of America. Coming in are Nike, Visa and Goldman Sachs. The change takes effect on September 20.

This could have a strong impact on the Dow's performance. The Dow is weighted by stock price, not market cap, which means that Visa and Goldman Sachs - both trading above $165 a share- will become the second- and third-most impactful stocks on the index. The three stocks removed were the three Dow components with the lowest share prices.

Hefty share prices are the reason important stocks like Apple and Google are not part of the Dow. Trading at more than $500 a share, each of them would throw the index completely out of whack.

Tuesday, September 10, 2013

Are the Baby Boomers Slowing America's GDP?

There has been much discussion lately about how the U.S. economy has been growing at subpar rates - the 2.5 percent for the second quarter is about as good as it gets lately. But many economists think that 3 percent ought to be the historic norm for the American economy.

A new paper out from a firm called Research Affiliates is disputing that notion. They propose that the America's postwar growth was fueled by demographics, primarily the development of the Baby Boom generation. "The implications are clear: Real GDP growth of 3 percent was the 'old abnormal'; it is not, and never was, "normal," the authors write.

Now that the Baby Boomers are aging, they're making much less of a contribution to the economy. "The average contribution to GDP growth becomes negative between 55 and 60," the authors argue. That means what we're seeing now may be totally normal. The entire paper can be found here.

Monday, September 9, 2013

Watching the Treasury Yield

The benchmark ten-year U.S. Treasury bond crossed an important milestone last week, when its yield climbed above 3 percent for the first time since July 2011. The rate had been higher than 3 percent for decades before falling under that level, bottoming out at 1.4 percent in July 2012. As recently as May 1, it was at 1.6 percent.

This could be seen as another sign that our economy is returning to some semblance of normal. In addition to being the flagship safe-haven vehicle for investors around the world, the Treasury yield is used as a benchmark for things like corporate loans and mortgage rates.

But the milestone was short-lived. After investors were unimpressed by Friday morning's jobs report, the Treasury yield crept back down below 3 percent, finishing the day at 2.94 percent.

Friday, September 6, 2013

August's Employment Report

The August unemployment report, out this morning from the Bureau of Labor Statistics, was very much in line with what we've seen recently: The economy added 169,000 jobs for the month, as compared with an average of 184,000 per month over the previous year. And as has been happening recently, the headline unemployment figure ticked down slightly, from 7.4 percent to 7.3 percent.

One key, and troubling, difference is that earlier months saw their jobs numbers revised downward. More often recently, we've been finding out that previous months were better than first reported. But June's figure was revised down from 188,000 to 172,000, and July's was revised down from 162,000 to 104,000 - a loss of 58,000 jobs in that month alone.

The sector of the economy generating the most jobs continues to be retail, reflecting the fact that Americans' personal spending habits appear to be growing. Retail created 44,000 jobs in August, and has now added 393,000 jobs over the past 12 months.

Thursday, September 5, 2013

Cutting America's Oil Dependence

Cutting our dependence on foreign oil has been a key American goal for decades now, and new data suggests we've truly made a dent. The Energy Information Administration, a division of the Department of Energy, estimated that we imported a little less than 10 million barrels of oil a day in June of this year. That's down from more than 12 million barrels per day as recently as January 2011.

We've imported less than 10 million barrels a day in four of the past six months now, after having been above that 10 million figure every month since February of 1998. We're also exporting a lot more of the oil found here at home - that figure is up 50 percent over the past three years.

A big part of the reason for all this is that Americans have begun using less oil. From the early 1980s to the recession, the trend was toward more and more oil usage in this country, but it's finally started moving downward: After averaging more than 20 million barrels a day every year from 2003 to 2007, we're now down to around 18.5 million barrels a day.

Wednesday, September 4, 2013

Gallup Looks at the Consumer

It's an open question as to whether Americans are feeling more confident about this economy, but at any rate, they do appear to be spending more money. According to the results of a Gallup poll, Americans reported spending $95 per day in August, the highest that figure has been in five years.

The new figure hasn't been topped since September 2008, the month the financial sector collapsed, when Americans reported spending $99 per day. The number bottomed out in the summer of 2010, at $63 per day.

Still, Gallup also reports that Americans' economic confidence is not especially strong. After peaking at -3 in June - almost into positive territory - Gallup's poll on that measure has sagged back down to -14. On the other hand, that's up from where it started the year, at -21.

Monday, September 2, 2013

GDP Turns Upward

Some good economic news that passed somewhat under the radar last week: The gross domestic product for the second quarter was revised upward pretty sharply, from an initial reading of 1.7 percent up to 2.5 percent. That's more than double the growth we saw in the first quarter of 2013.

The biggest reason for the revision was that exports, which had initially been estimated to have been growing at 5.4 percent, are now thought to have grown at 8.6 percent. That kind of upward revision has been expected ever since the Commerce Department announced that June had been our best month for exports since September 2012.

Still, this is good news, not great news. The long-term average growth for the U.S. is 3 percent, so the revised number is still a bit below that. We haven't seen growth stronger than 3 percent since the first quarter of 2012.

Thoughts for Labor Day

“The dictionary is the only place that success comes before work. Work is the key to success, and hard work can help you accomplish anything.” ~ Vince Lombardi

“A hundred times every day I remind myself that my inner and outer life depend on the labors of other men, living and dead, and that I must exert myself in order to give in the same measure as I have received and am still receiving." ~ Albert Einstein 

“By working faithfully eight hours a day, you may eventually get to be a boss and work twelve hours a day.” ~ Robert Frost

Friday, August 30, 2013

A Small-Cap Anomaly

Small-capitalization stocks have been leading the market's rally this year: While the S&P 500 index, which is made up of large-cap stocks, has risen by 15 percent in 2013, the Russell 2000 index, which is made up of small-cap stocks, is up 21 percent. Small-cap stocks are typically defined is those with less than $2 billion in market capitalization.

But the stocks in the Russell index have grown so much that they've distorted what it means to be a small-cap stock. According to research from the trading firm Miller Tabak, there are now 35 stocks in the Russell 2000 that have blown past the traditional $2 billion limit and are now valued at anywhere between $3 billion and $4 billion.

And it's those larger stocks that have really driven the index's performance. The smallest group of small-cap stocks, those with market capitalizations below $200 million, actually lost 34 percent so far this year. But the ones that are growing themselves out of the index, stocks in the $3 billion to $4 billion range, have risen by a whopping 234 percent.

Thursday, August 29, 2013

Jobs Grow Here at Home

The Labor Department released a study of unemployment by city yesterday, and there was good news for our area: The largest year-over-year employment increase in the nation took place in the New York-Northern New Jersey metro area, where we added 189,400 jobs. Of course, we're also the largest metro area in the country to begin with.

Most areas did show improvement over the past year. All told, 320 of the nation's 372 metropolitan areas had more jobs this year than they did a year ago. Among the 37 metro areas with at least 750,000 jobs, 36 of them showed improvement, with the lone laggard being Cleveland, which saw employment drop by 0.4 percent.

The city with the lowest unemployment rate is Bismarck, North Dakota, with just 2.5 percent, a beneficiary of the natural gas boom that's going on in that state. The highest unemployment rate belongs to Yuma, Arizona, with a staggering 34.5 percent.