This Morning's GDP Report

American economic growth was slightly higher than expected in the second quarter, according to figures released by the Bureau of Economic Analysis this morning. GDP grew at 1.7 percent for the quarter, above the consensus estimate of around 1 percent. The figure is also not far from the normal growth rate in post-recession America, where GDP growth has been at 2.2 percent annually.

The most positive signs from the report were probably the indications that consumers are confident enough to make long-term investments again. Spending on residential fixed investment (i.e., housing) increased by 13.4 percent, and spending on durable goods was up 6.5 percent.

The biggest downside to the report was probably the revision of first-quarter GDP down from 1.8 percent to 1.1 percent. This was the final revision to that GDP estimate, so it will go into the books forevermore as 1.1 percent growth.

Why Do Fund Managers Love Cash?

Many mutual fund managers have been jumping into an unlikely asset class lately: Cash. According to figures compiled by Bloomberg, the Yacktman Focused Fund is holding 19 percent cash, the IVA Worldwide Fund has 28 percent of its assets in cash, and the Weitz Value Fund is about 30 percent cash. The average U.S. stock fund has less than 5 percent of its assets in cash. 

Those funds aren’t exactly the biggest names in the business, but they’re all funds with at least a billion dollars in assets. They’re also all value funds, which means that they look for companies to be that they believe the market has underpriced. So these fund managers think the market is overpriced at current levels.

The same trend doesn't appear to be in vogue with growth fund managers. So growth funds – those who invest in companies they think have more capability to grow than the rest of the market – tend to be more invested in this market than value funds. That may be a hint as to where stocks are headed. 

The Case for IRAs

One of the hottest vehicles in retirement planning continues to be the humble IRA. Fidelity Investments came out with a study last week showing that the average IRA had more than $81,000 in it at the end of the last tax year, up from just $52,900 in 2008. That's an increase of 53 percent in just four years.

Of course, a lot of that is the result of the bull market we've experienced over the past four years. But people are also putting more away into their IRAs. Account holders contributed an average of $3,920 to their IRAs last year, an increase of 7.5 percent since 2008.

Within the world of IRAs, the Roth is an increasingly popular option. Fidelity reported that in 2012, conversions from traditional IRAs to Roths were up 11 percent from the year earlier. Remember, a regular IRA  is funded with tax-free dollars but is taxable upon withdrawal, while money that goes into a Roth is taxable, but can be withdrawn tax-free.
 

College Trends

College savings plans, in particular the 529 plans, have become much more popular in recent years. A new study from Sallie Mae confirms that more people used 529 plans in 203 than ever had before. Still, it's only 17 percent of families with college students who are using them, although that's up from 11 percent in 2011.

Borrowing is also on the upswing. The study found that loans made up 18 percent of college costs in 2013. About 30 percent of students took out student loans, with another 10 percent using private loans to help pay college costs. Parents, meanwhile, are paying less: They covered 27 percent of college costs in 2013, down from 37 percent in 2010.

Still, there are a lot of parents out there flying by the seat of their pants. Just 50 percent of parents with children under the age of 18 say they are currently saving for college.

Reasons for Optimism

The economic confidence of business owners isn't necessarily growing - but it isn't really slipping, either. That's the upshot of the latest survey from the National Association of Business Economics, which found that 39 percent of business expect to hire more workers in the next six months. For the first quarter of this year, that figure was just a tick higher, at 40 percent, which was the high mark for the past two years.

Looking backward, there's even better news. The survey found that nearly a third of companies added jobs in the just-ended second quarter, which was the best percentage in almost two years.

They're also more optimistic about overall economic growth. Last quarter, only two thirds of the economists forecast 2.1 percent GDP growth for the ensuing 12 months. In the more recent survey, nearly 75 percent expected growth to be that strong.

The Dominance of the Financials

The results from second-quarter earnings season have been fairly good so far, with more than 70 percent of reporting companies exceeding Wall Street's estimates. But almost all of the earnings growth is coming from one corner of the economy: financial institutions.

As the Wall Street Journal reports, six big financials - JP Morgan, Bank of America, Citigroup, Capital One, Goldman Sachs, and Wells Fargo - make up more than 80 percent of the S&P 500's second-quarter profit growth. Altogether, the financial sector is expected to show 26 percent profit growth this quarter, while the S&P 500 as a whole is expected to show just 3.3 percent growth.

Zooming out from the financials, just 20 companies within the S&P 500 are on track to produce nearly 35 percent of the index's total earnings, according to the Journal. The biggest contributors to those earnings outside the financial category: Johnson & Johnson, IBM, and Exxon Mobil.

Hit the BRICs

The big story in emerging markets over the past decade has been the BRIC countries: Brazil, Russia, India and China. But their economies have been slowing down in the past couple of years, and since May, Brazil and China's stock markets are both down by double digits. The MSCI Emerging Markets Index is down 9 percent since then.

Investors have certainly noticed the turmoil affecting the BRICs. In the eight weeks that ended last Friday, more than $40 billion has been pulled out of emerging market stock and bond funds by nervous investors.

If the BRICs are starting to fade, what countries might replace them? One place to look would be South East Asia. That area of the MSCI Emerging Markets Index - including such countries as Malaysia and the Philippines - has bucked recent trends, rising 8.4 percent over the past year.

The Slowing Bond Market

The bond market has seen some hard times recently. The Barclays Aggregate Bond Index, sort of an S&P 500 for fixed-income investors, has been having a terrible year, losing 2.7 percent of its value as of the end of last week. Part of the reason for that is that companies have really slowed down in the amount of debt they're issuing.

In the month of June, companies worldwide issued $144 billion in new bonds, down from an average of $316 billion over the first five months of the year. The June figure for new issuances was the lowest since December of 2011.

It's not just one category or another of corporate bonds that have slowed. Investment grade bonds dropped from  an average of $169 billion over the first five months to $65 billion in June; high-yield (or "junk") bonds dropped from an average of $52 billion to $19 billion.

Disappointing Day for Tech Stocks

Two of the biggest high-tech companies in the world, Google and Microsoft, reported their earnings yesterday, and the news was not good. Microsoft's reported revenue of $19.9 billion, which was below the Wall Street consensus of $20.74 billion. Especially disappointing was the $900 million charge Microsoft was forced to take for "inventory adjustments" on its Surface tablet computer.

Meanwhile, Google reported revenues of $14.4 billion and earnings per share of $9.56. The Wall Street consensus had those figures pegged at $14.11 billion and $10.78. Weaker ad revenues were given as the primary reason for the shortfall.

The upshot of all that disappointment: Microsoft's shares dropped by 6.4 percent, and Google's by 4 percent. The third of the tech behemoth stocks, Apple, reports its earnings next Tuesday.

Auto Growth in New Jersey

The latest iteration of the Fed's Beige Book - which is published eight times a year - came out yesterday, and takes a surprising look at the automobile-sales market around the New Jersey area. The Beige Book consists of economic snapshots from each of the Fed's 12 regional offices, and New Jersey is divided between the New York City and Philadelphia offices.

Sales of used cars were reported to be soft in the New York City office, which covers the northern half of our state. But that's not necessarily bad news: The biggest drawback was that attractive deals and financing opportunities for new cars were leading more car buyers in that direction.

Meanwhile, in Philadelphia - and by extension in the southern part of New Jersey - car sales are reported to be "on fire," and apparently still growing, since "dealers are bullish for the next couple of years." Auto sales could well become a key driver of economic growth in our state.

The Meaning of Inflation

The Labor Department released its inflation figures for June yesterday, as well as its numbers for the previous 12 months as a whole, and it appears as if inflation is still under control. The Consumer Price Index rose by 0.5 percent in June, with two thirds of that figure attributed to higher gas prices. (Other energy prices were stable.) For the past 12 months, prices rose at 1.8 percent.

Much of that rise is due to energy prices. Over the past 12 months, energy costs are up 3.2 percent, while the core inflation index - for everything besides food and energy - rose 1.6 percent. That's the lowest core inflation reading for any 12-month period since June 2011.

These figures are significant beyond what we pay at the pump or at the grocery store. The Fed is watching the inflation rate closely as it considers ending its bond-buying program; the longer it stays below the avowed target rate of 2.0 percent, the longer that program is likely to continue.

A Grim Outlook for the Second Quarter

The second quarter ended a couple of weeks ago, at the end of June, and the first estimate of the U.S. gross domestic product will be out at the end of this month, on July 31st. GDP for the first quarter came in at 1.8 percent growth, but the prevailing wisdom now seems to be that the second quarter won't be even as strong as that modest growth.

J.P. Morgan now estimates second quarter growth at 1.0 percent, and that's at the high end of the range. Goldman Sachs estimates it at 0.8 percent, and Barclays has it at 0.5 percent.

What's the problem? According to figures released yesterday, retail sales increased by just 0.4 percent in June, well below previous estimates, and the May figure was revised downward as well. The increase in business inventories was a similarly disappointing 0.1 percent in May. We shall see in a couple of weeks what this all adds up to.

Excited About the Second Half of 2013

It was a good first half of the year in the stock market, with the S&P 500 index increasing in value by 13 percent over that time frame. And if a new survey of financial advisors, conducted at the Morningstar Investment Conference in June, is any indication, we might be in for a strong second half as well.

More than half of the advisors surveyed – 53 percent - said they plan to increase their exposure to American over the next six months. And an even larger number, 57 percent, said they consider themselves to be bullish on U.S. equities.

A survey of money managers conducted by CNN also saw reason for optimism. That group saw a slight uptick for the S&P 500 over the remainder of the year, forecasting the index to finish 2013 at an overall increase of 14 percent.

How Not to Get Taken by a Mechanic

It probably didn’t take a detailed research study to figure this out, but a paper just out from the National Bureau of Economic Research has found that you’re far more likely to get taken by an auto mechanic if you’re a woman. The economists called 2,778 repair shops and asked how much it would cost to replace a radiator in a six-cylinder 2003 Toyota Camry LE. When the caller followed a script that said they had no idea how much such a thing would run, the female callers tended to get significantly higher estimates than the men.

But there was one interesting sidelight: When the men and women placing the call were instructed to act well-informed, and cited a specific, realistic price for the radiator, the gender difference disappeared. The lesson for drivers of either sex: Do your homework and know what the going rate is before you call the mechanic.

One other point worth noting: The researchers found that haggling really works, for men and women both. On average, the repair shops ended up reducing the price by 13 percent for customers who tried to talk them down.

The Temporary Economy

The news from the Bureau of Labor Statistics last week looked pretty good: The economy created 195,000 jobs in June. But there is a darker trend underneath the headline news. Many of those jobs are simply temporary ones. The temporary help service category added 10,000 jobs in June, the single biggest-gaining category among the professional and business services.

Since the end of the recession, the number of temp workers hired by American companies has increased by more than 50 percent, according to research by USA Today. The 2.7 million temporary workers now in the work force is the highest since the government began tracking that number back in 1990.

Combined with other unattached employees, we now have nearly 17 million people working in this country who are freelancers, temp workers or otherwise not officially connected to their employer. That’s about 12 percent of all people with a job.

Paying Our Debts

Here’s another sign of a consistently improving economy: Americans are getting better at paying down their debts. According to a study by the American Bankers Association that looked at eight different loan categories, just 1.7 percent of all accounts were delinquent in the first quarter of 2013. That’s down from 1.99 percent in the fourth quarter of 2012, and significantly down from the 15-year average of 2.37 percent.

Bank-issued credit cards, which weren’t one of the categories in the ABA study, look just as good. Their delinquency rate for the first quarter, 2.41 percent, was the lowest that figure has been since 1990. The figure had peaked around 5 percent in 2009.

Only one loan category that the ABA looked at showed an increase in delinquencies in the first quarter. That was loans taken out to purchase mobile homes.

Autos Picking Up Speed

The American auto industry has been making a very nice comeback in recent years. In 2012, the U.S. produced 10.3 million vehicles, which was an increase of 19.4 percent over the previous year. We're far from the world leader in that category, though: China produced 19.2 million vehicles last year.

The next big automaker, though, might be Mexico. Mexico manufactured just 3.0 million vehicles last year, placing it eighth in the world, but that is expected to grow strongly in the next three years. Germany and South Korea, meanwhile, seem to be on the decline, with their production numbers dropping by 10.5 percent and 2.1 percent respectively last year.

The biggest gainer last year: Thailand. Thailand produced 2.8 million automotive vehicles in 2012, which constitutes a staggering 90.9 percent increase over 2011.

Earnings Preview

Second quarter earnings season kicks off  today, with Alcoa being the first major company to report its earnings, as it traditionally is each quarter. According to research compiled by S&P Capital IQ, revenues for the S&P 500 are expected to be down slightly from a year ago, with an overall decrease of 0.3 percent.

First quarter revenue for the S&P 500 had been up 1.1 percent, and the fourth quarter of 2012 had shown  revenue growth of 4.7 percent. So this quarter's decline, if the forecasts are accurate, would be a clear step down from recent quarters.

There is a bright side to this though: S&P Capital IQ does predict that earnings per share this quarter for the S&P 500 are likely to be up by 2.9 percent over the year-earlier period. Earnings growth was 2.1 percent in the first quarter, so we could  very well exceed that, which would be good for stock prices.

Today's Jobs Report

The employment report for June, which came out this morning, presented a more encouraging figure than we'd seen in recent months. The Bureau of Labor Statistics reported that the economy added 195,000 jobs in June, which was up from an average of 155,000 jobs over the previous three months, and up slightly from the 182,000 over the previous 12 months. The unemployment rate was unchanged at 7.6 percent.

Investors will be watching these figures even more closely now, ever since Fed chairman Ben Bernanke indicated he would taper off the Fed's bond purchases once the unemployment rate reached 7.0 percent. Although that figure didn't budge in June, the strong number of jobs added provides more fuel for those who expect it to reach 7.0 by year's end.

The biggest gainer among the industry sectors in June was the leisure and hospitality category, which added 75,000 jobs. The BLS also revised upward the jobs numbers from the previous two months: May went from 175,000 to 195,000, and April grew markedly from 149,000 to 199,000.

Thoughts for Independence Day

In the truest sense, freedom cannot be bestowed; it must be achieved. ~Franklin D. Roosevelt

America was not built on fear. America was built on courage, on imagination, and an unbeatable determination to do the job at hand. ~Harry Truman

America is much more than a geographical fact. It is a political and moral fact – the first community in which men set out in principle to institutionalize freedom, responsible government, and human equality. ~Adlai Stevenson

Welcome to America

This is obviously a big week for vacation travel, and one thing we can all be proud of as Americans is how many people come from around the world to visit this great nation. All those tourists are a real boon to our economy, too.

The nation sending the most tourists to America is of course Canada, which spent $26.1 billion in tourist dollars here last year. But other nations make strong contributions as well. Following Canada, these are the nations with the most visitor spending in the U.S. in 2012:

Japan: $16.6 billion
Great Britain: $13.0 billion
Mexico: $10.1 billion
Brazil: $9.3 billion
China: $9.2 billion
Germany: $7.0 billion
Australia: $5.5 billion
France: $5.3 billion
India: $4.9 billion

2013's Strongest Sector

With half of 2013 in the books, the strongest sector in the stock markets has been Consumer Discretionary stocks, which include such companies as Starbucks and Home Depot. The S&P 500's Consumer Discretionary sector has returned 19.72 percent so far this year. That's just an inch ahead of the second-place sector, Health Care, which came in at 19.58 percent.

All ten of the S&P's sectors have been positive this year, which shows how broad-based this rally has been. Here are the returns for the other eight S&P sectors so far in 2013:

Financials, up 19.02 percent
Consumer Staples, up 14.42 percent
Industrials, up 13.53 percent
Energy, up 9.16 percent
Telecommunication Services, up 7.99 percent
Utilities, up 6.32 percent
Information Technology, up 6.19 percent
Materials, up 2.45 percent

A Strong First Half

Friday marked the close of the first half of 2013, and it was certainly a happy six months for the stock market. The S&P 500 returned nearly 13 percent, giving that index its best first-half returns since 1998, when the dot-com mania was just getting started.

In addition to the good news for the first half, this performance also bodes well for the second half. Since 1946, the S&P 500 index has risen at least 10 percent 23 times in the first six months of the year, according to data from S&P Dow Jones Indices. During those 23 years, the market also rose the second half of the year 19 times. In eleven of those years, the S&P 500 rose at least 10 percent over the second half of the year.

Three of the stocks in the S&P managed the difficult feat of doubling in value over the course of the past six months. They are:

• Best Buy, up 134 percent
• Netflix, up 128 percent
• Micron Technology, up 126 percent