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.

Wednesday, August 28, 2013

America Warming Up to Bankers

The financial sector was widely seen as the chief culprit behind the economic collapse of a few years ago, but has been much stronger in recent years lately. That could explain why, according to Gallup, banking has shown the greatest improvement this year in its public image rating of any industry. It still has a net negative rating, at -10 percent, but that's 18 percentage points better than it was last year.

Other industries showing strong improvement in their public image this year include the travel industry (up 14 percentage points), the real estate industry (up 13), and the airline industry (up 12). The biggest loser was the health care industry, which had a neutral ranking in 2012, but now has a net negative image of  -13 percentage points.

Overall, the sector viewed most positively by the American public is the computer industry, with a net positive image of 54 percentage points, followed by the restaurant industry at 48 points. The industry with the worst image? Oil and gas, at negative 31.

Tuesday, August 27, 2013

Tracking Americans' Income

The economy has recovered in many ways from the recession, but one area in which is still lags is household income. As of June of this year, median household income was at $52,100, which is 6 percent below where it was in December 2007, the beginning of the recession.

But it's also well above where household income bottomed out in the post-recession years. The low for that mark in recent years was $50,700, in August 2011. We've rebounded 2.8 percent since then.

As that date shows, household income continued to decline even after the recession ended. At the technical end of the recession, in June 2009 - when the economy went from contracting to expanding - median income was at $54,500. After that point, the figure still dropped another 7 percent before starting back upward.

Monday, August 26, 2013

Americans' Tiny Retirement Savings

What do you think is the average amount of money an American has saved for retirement? It's probably lower than you think. According to the National Institute on Retirement Security, the median retirement savings balance for working households is just $3,000.

Now, that's skewed, because it includes younger families that are just starting out. But for households in the age range between 55 and 64, that figure is still just $12,000.

The biggest difference comes for people who have set up a retirement savings account, an IRA or a 401(k). For those households, the median retirement savings is $100,000. That's not nearly enough, but it's a step in the right direction.

Friday, August 23, 2013

Closing Down the Market

As you probably know, the Nasdaq stock market was shut down for three hours yesterday afternoon due to software problems. The big fear after one of these is that the market might take a sudden downward lurch once everything is back online, but that didn't happen yesterday; the Nasdaq index finished up a quiet 1.1 percent for the day.

This isn't the first time an exchange has had to shut down. Last October, Superstorm Sandy forced the closure of the New York Stock Exchange for full two trading days. Between 1995 and 2001, the NYSE had to shut down three separate times over electronic problems.

And a generation ago, the Nasdaq had to deal with even more embarrassing issues. On two separate occasions, in 1987 and 1994, a squirrel chewed through power lines near the exchange's headquarters in Connecticut, creating power outages that caused the market to close down. Near as anyone knows, there were no squirrels involved in yesterday's shutdown.

Thursday, August 22, 2013

A Tough Time for Hedge Funds

It’s been another tough year for hedge funds, according to researched compiled by Goldman Sachs. The typical hedge fund is up by about 4 percent this year through August 9. By contrast, the S&P 500 Index, including dividends, has risen by about 20 percent over that same period.

The trends we saw last year have only gotten worse for the hedge funds in 2013. In 2012, hedge funds posted an average gain of 8 percent, while the S&P with reinvested dividends posted a return of 16 percent.

Goldman’s research looked at more than 700 hedge funds. Among that group, less than 5 percent of them have outperformed the S&P 500 so far this year. But 25 percent of them have actually lost money in 2013.

Wednesday, August 21, 2013

Bonds Headed for a Fall?

There's been a lot of talk lately about the four-year-plus bull market in the American stock market, which is still rolling along. But another bull market may be drawing to a close, the one in the 30-year U.S. Treasury bond. The bull market for the so-called long bond has been going on for more than 13 years, but it may not have much further to go.

A bear market is technically defined as a 20 percent decline in an index's value. The value of the 30-year bond peaked on July 24 of last year, but it has now declined by nearly 15 percent in the year-plus since that date. If it loses another 6.14% in value, the Treasury will enter bear market territory.

Even if it does, though, this will have been a remarkable run for the long bond. Since the bull market began in 2000, the value of the bond has risen 71 percent in value. The 13 years is by far the longest bull run for the 30-year Treasury in the past 40 years.

Tuesday, August 20, 2013

Europe on the Rebound

There was good news out of Europe last week, when the Eurozone - the 17 nations united under the euro – finally emerged from the recession it has lived with for six straight quarters, or a year and a half. Still, the Eurozone posted growth of just 1.2 percent, which wasn’t even as strong as the disappointing 1.7 percent second-quarter growth here in the United States.

 Leading the way out of the recession were the two strongest economies in Europe, Germany and France. Germany posted 2.8 percent growth in the second quarter, while France posted 2.0 percent.

Not surprisingly, the European stock markets have begun to perform better as well. Over the past month, European stocks have outperformed U.S. equities by about 10 percent.

Monday, August 19, 2013

Those Disappearing Earnings

Second quarter earning season is almost behind us now. As of the close of business on Friday, 462 out of the 500 companies in the S&P 500 Index had reported their earnings. What kind of season was it? Well, that depends on which numbers you look at. Two thirds of the reporting companies, exactly 67 percent, have beaten the analysts' estimates for their earnings, which is pretty good. On the other hand, the overall earnings growth rate has been just 4.9 percent, which is fairly weak.

Part of the reason for this discrepancy is that, as Thomson Reuters has found, companies tend to talk big on their first earnings forecast, then ratchet down expectations over time. Thomson Reuters' first iteration of consensus earnings for the second quarter of 2013, compiled way back during the second quarter of 2012, forecast growth of 14.4 percent. Over time, companies scaled that back severely, to the point that the final consensus numbers, issued on July 1 of this year, predicted just 2.9 percent growth. That was the number that most of the reporting companies were able to beat.

Friday, August 16, 2013

A Shocking Number for Housing

As the housing market continues its recovery, there was a bit of a shocking study out from Goldman Sachs yesterday: More than half of all the homes that were sold in 2012 and that have been sold in 2013 have been all-cash transactions, without a mortgage. That's a huge change from before the housing market crash, when only 20 percent of transactions were all-cash.

Before the market collapsed, the average home buyer financed about 67 cents for every dollar spent on the transaction. Now that figure has dropped to just 44 cents for every dollar.

Given that the number of homes sold has also fallen off sharply since the housing market peaked, the total volume of mortgages is now much less than it was less than a decade ago. In 2005, purchase-mortgage origination volumes were $1.5 trillion, according to the Goldman Sachs study; for the past two years, that number has been closer to $500 billion.

Thursday, August 15, 2013

This Uncorrelated Market

Sometimes the market as a whole goes up because the economy as a whole is going strong, and sometimes the market goes up because individual stocks are doing really well. According to data compiled by the ConvergEx Group, we appear to be in one of the latter times.

The correlation among the ten sectors in the S&P 500 was just under 70 percent in July. That was down from 89 percent the previous month, and is at the lowest level that figure has been in two years. In other words, different parts of the market are moving more independently of one another than they normally do.

What does that mean for investors? In a more correlated environment, investors can just put their money in the market and expect the rising tide to lift all boats. In a less correlated environment, stock picking becomes more important, as investment managers must make smart selections. That makes actively managed funds - of the type we use here at Echelon Wealth Strategies - a wise choice in this landscape.

Wednesday, August 14, 2013

Bull Market Makes History

The current bull market - meaning the S&P 500 index has risen continuously without ever suffering a 20% drop - has now lasted for more than four years since it started in March 2009, or nearly 54 months. With an overall increase of 153 percent, that makes it the fifth-strongest bull market in modern history.

The four stronger ones:

  • April 1942 through May 1946, the S&P rose 158 percent
  • August 1982 through August 1987, the S&P rose 229 percent
  • June 1949 through August 1956, the S&P rose 267 percent
  • December 1987 through March 2000, the S&P rose 582 percent
As you can see, they fall into two groups, where one bull market followed closely behind another. So even if we do run into a 20 percent slide, it doesn't mean the good times are over. 

Tuesday, August 13, 2013

What's So Great About Philanthropy?

Most of us have as part of our estate planning goal to leave a legacy behind us, something that gives back to the country that has given so much to us and leaves the world in a better place. The purpose behind this is to be generous to others, but studies have shown that philanthropic activities are also very good for the giver. According to research cited by the philanthropic strategist Bruce DeBoskey, among people who participate in philanthropy:

  • 68 percent report better physical health
  • 73 percent report lower stress levels
  • 77 percent report enhanced emotional health
  • 89 percent report an improved sense of well-being
  • 92 percent report an enriched sense of purpose in life
  • 96 percent report increased happiness

That's a lot of good being done - on behalf of someone who isn't even the primary recipient of the giving.

Monday, August 12, 2013

The S&P's Streak

At the beginning of 2012, the S&P 500 Index opened at 1259. And for the past 19 months, over a grand total of 84 weeks, it has never once fallen below that level, as Jeff Sommer pointed out in yesterday's New York Times.

How unusual is that? According to an analysis performed by the Bespoke Investment Group, there has only been one such longer streak since 1928. That one started on the first trading day of 1975, and lasted for two years; the S&P finally finished below that level on the first trading day of 1977.

Perhaps one reason this streak has garnered so little notice is that we're still a long way from record highs in inflation-adjusted terms. The S&P's all-time high in 2013 dollars came back in March 2000, at an adjusted 2,093. At the moment, the S&P is at 1691, after peaking at 1710 earlier this month.

Friday, August 9, 2013

Rumblings in the Macroeconomy

There's more good news on the macroeconomy out this week, as the number of people filing new jobless claims dropped to its lowest level since before the recession. The Labor Department said that 335,500 people filed for unemployment in the four weeks that ended on August 3rd. That figure - essentially a count of the number of people losing jobs - is the lowest it's been since November 2007.

Perhaps not coincidentally, one of the major consumer confidence readings is also getting stronger. The Bloomberg Consumer Comfort Index, although it's still in negative territory, is now at its highest level since January 2008.

That index, incidentally, has some serious divisions in it depending on which income level the respondents are at. While it's negative overall, for households whose income is $100,000 or greater, the confidence level has been in positive territory for more than half a year now.

Thursday, August 8, 2013

The Economics of Sandy

A new study out from the New York Office of the Federal Reserve asks a provocative question: Could the economic benefits of rebuilding after Superstorm Sandy end up being a net positive for the New York/New Jersey economy? There are two huge sources of funds from the storm, $60 billion in federal disaster relief and $20 billion in insurance payouts. Could that be worth more than the devastation of the storm has cost us?

The Fed's economists end up answering no. The biggest reason is that, although those amounts sound significant, they total just over 6 percent of the economic activity in the metropolitan area, which is $1.3 trillion. So it's not going to make that much of a dent.

On the other hand, the improvements may end up boosting productivity beyond just bringing our infrastructure back to what it had been before the storm. For instance, the MTA is receiving $3.8 billion to upgrade damaged electrical equipment, much of which was old and frail to being with. That should help our transit systems run even better than they did prior to the storm.

The New York Fed's entire report can be found here.

Wednesday, August 7, 2013

America's Aging Automobiles

How old is your car? If you're like most Americans, you haven't had to replace your primary automobile in a very long time. According to the Polk market-research firm, the average car on the road is now 11.4 years old, which is the oldest it's ever been.

The increases in engineering that have kept cars on the road longer were accentuated by the recession, when people held back on buying new vehicles. The average age of a car was just 8.4 years in 1995, and and had grown to 9.6 years in 2002.

If those advanced ages are bad news for America's automakers, they're good news for auto parts dealers and repairs shops. And the trend is only expected accelerate; by 2018, Polk says, the number of vehicles on the road that are 12 years or older is expected to grow another 20 percent.

Tuesday, August 6, 2013

An Earnings Reality Check

Earnings season is coming to a close, now that 393 of the companies in the S&P 500 have made their reports. And it's been a superficially successful one, with 74 percent of the reporting companies having surpassed the Wall Street estimates for their earnings.

But there are plenty of disappointing numbers as well. The earnings growth rate for the S&P 500 companies is 1.7 percent, which is positive but not impressively so. It's almost identical to the earnings growth rate for those 393 companies in the first quarter, and down from 2.7 percent growth for those companies in the fourth quarter of 2012.

An even bigger problem is that all those earnings are coming from one place: the financial sector. Among the financial companies in the S&P 500 that have already reported, earnings are up 28 percent. For all the other S&P 500 stocks, earnings are down by 3.9 percent.

Monday, August 5, 2013

Summer Spending

As another summer winds its way toward its conclusion, you may have found yourself spending more money than you had expected to. An American Express poll of parents around the country has found that our kids cost us a lot more money in the summer of 2013 than they had in 2012.

The biggest culprit was camp. The average American parent who sent their children to sleepaway camp in the summer of 2013 spent $329, up from $252 in the summer of 2012. Parents spent an average of $314 on day camps, but that increase for 2013 was even wider, up from an average of $219 last year.

But only 26 percent of all parents sent their kids to day camp this year, and only 23 percent sent them to sleepaway camp. Perhaps the biggest source of parents’ summer funds was sports teams: 44 percent of us with kids under 18 spent money on those, at an average of $228 per child.

Friday, August 2, 2013

Jobs Still Sluggish

Job growth in America keeps moving along at a consistent but hardly spectacular pace, with 162,000 new jobs added to the economy in July. This figure follows on the heels of 188,000 jobs that were added in June and 176,000 that were added in May. The headline unemployment figure dropped a notch to 7.4 percent.

Retail trade was the strongest sector, with 47,000 new jobs created in the month. Food services and drinking establishments added 38,000 jobs, and the financial sector added 15,000.

Even though July was the 34th consecutive month in which the economy added new jobs, the pace of growth remains too sluggish to move the unemployment rate by more than a tick. The economy needs to add approximately 125,000 jobs per month just to keep up with population growth. Even with the new jobs we've seen added recently, the unemployment rate is still higher than it's been since December 2008.

Thursday, August 1, 2013

The Fed's Outlook

Coincidentally, the Federal Reserve had a meeting scheduled this week, with plans to make its latest announcement about the health of the economy on the same day that the Bureau of Economic Analysis released its first estimate of GDP growth for the second quarter. Their outlook seemed to parallel the GDP report, which at 1.7 percent growth was better than many expected but far short of exciting. The Fed, meanwhile, changed its assessment of our economic growth from "moderate" to "modest."

Perhaps most interesting, the Fed noted that there may be problems from an inflation rate that is running lower than desired. The Fed's target for inflation is 2 percent, but it's been closer to 1 percent in recent months. It also said that it expected both that inflation rate and overall GDP growth to increase in the second half of the year.

The Fed had said earlier that one of the conditions under which it will raise interest rates is if the inflation rate reaches 2 percent. As long as it's comfortably under that figure, we could see the Fed keep its foot on the gas for a while longer.