Wednesday, April 30, 2014

Very Disappointing Growth

There was a lot of excitement over the economy's growth prospects in the first quarter of this year, as several figures had come back looking pretty positive. But the figure released by the Commerce Department this morning was a real stinker: GDP grew at just 0.1 percent in the first quarter. That's the slowest growth we've seen since the end of 2012.

The primary reason for the early optimism had been consumer spending, which was up 3 percent in the first quarter. But nearly everything else dropped. Business investment, construction spending, and exports all came in lower, as did government spending.

If there's any reason for optimism, it's that this is just the preliminary figure, and these are almost always revised in future months. Commerce will revisit first quarter growth at the end of this month; we'll see if things look any brighter then.

Tuesday, April 29, 2014

The High Cost of Prom

It's prom season, and while for high school kids, that means a memorable night out on the town, for parents, it means a huge bill. The good news is, prom spending is starting to dip down. According to a new survey from Visa, the average American family will spend $978 on prom this year, which is down 14 percent from last year.

The biggest drop is here in the Northeast, where families plan to spend 27 percent less than they did last year. On the other hand, spending tends to be higher in this part of the country. The average family says they will spend $1,104 on prom this year - but that's down from more than $1500 last year.

If you're a parent about to drop that kind of money on prom this year, there's another small silver lining: At least the Northeast is no longer the most expensive area of the country in this category. For this year at least, the Western region will outspend us - to the tune of $1,125 per family.

Monday, April 28, 2014

Value Overtakes Growth

For the past five years or so, growth stocks have strongly outpaced value stocks in the market, but that appears to be starting to turn around. The Russell 1000 Value Index of large-cap stocks is up 3.6 percent on the year, while the Russell 1000 Growth Index is up just 1.1 percent.

Growth stocks, remember, are those that investors expect to build equity by showing strong sales and market-share growth. Value stocks are those that investors think are currently undervalued by the market, and expect their share price to increase over the long haul.

Recent years were very kind to high-flyers like Amazon and Apple that are considered growth stocks. The current environment, though, may be more beneficial for safer, more defensive stocks, like those in the utilities and health care sectors - classic growth picks.

Friday, April 25, 2014

A New Look at Growth Data

The Commerce Department has unveiled a new way to look at the growth of the economy. Now, in addition to an overall GDP number, we will also get a quarterly breakdown of how each industrial sector contributed to that economic growth.

The data takes a while to compile. so today's report covers up through the fourth quarter of 2013. But it makes it more possible to see what caused the turns our economy has taken. For example, as the recession was hitting in the third quarter of 2008, nearly every industry sector was down, led by the financials, which alone contributed 2 percentage points of contraction. The wholesale trade, agriculture and mining, and health and education were the only segments to continue to show growth.

By the fourth quarter of 2009, though, nearly every segment aside from the financials had returned to growth. At that point, only construction and agriculture and mining were also still showing losses. This data had previously been available annually, but at times like the recession, when the economy was changing rapidly, it will be invaluable to have a more detailed snapshot.

Thursday, April 24, 2014

Apple Pays It Forward

Apple is no longer quite the titan it was five years ago, when its every move drove not only the high-tech world but the stock market as well. But even in the post-Jobs era, it is still the largest company (by market cap) in the world, and its decisions are closely watched. 
Yesterday’s earnings report was no exception. In addition to beating the Wall Street consensus on both sales and earnings, the company made several other announcements:
  • The stock, which had been trading at a little over $500 a share, will split seven for one.
  • Apple will buy back an additional $30 billion of its own shares, raising the current plan to $90 billion.
  • The stock’s dividend was raised to $3.29 a share, or about $11 billion a year in dividends.
Apple has a reported $160 billion in cash on hand, the most of any American corporation. It’s good to see them putting that money to some use.

Wednesday, April 23, 2014

A Hill of Beans

If you’re a serious coffee drinker, you may have heard about the alarming rise in the price of coffee bean futures as a result of a horrible drought that has been affecting Brazil throughout most of the year. The cost of Arabica beans – the type used most often in gourmet coffees – has risen 95 percent this year.
But if you’re a serious coffee drinker, you may also have noticed that your morning cup hasn’t risen in price at all. During the four weeks that ended March 23, the average price of ground coffee in the U.S. actually fell by 30 cents from a year ago to $6.26, according to IRI, a Chicago-based market research firm.
The reason: Big coffee wholesalers generally have bought their beans long before they make it to your local Starbucks or grocery store. So there’s typically at least a month’s lag between the rise in the wholesale cost of beans and an increase for the end user. And even then, experts say it won’t be that 95 percent jump tacked on to the retail price – but don’t surprised if the cost of a cuppa joe goes up by 25 to 30 percent in the coming months.

Tuesday, April 22, 2014

The Long Recovery

The National Bureau of Economic Research recently noted that our current recovery is in its 58th month. That ties it with the expansion that lasted from 1975 to 1980 for the fourth-longest economic recovery since World War II. The longest recovery was the high-tech boom that lasted from 1991 to 2001; it ran for 120 months, or exactly 10 years.

Following that one, we had:
  • The expansion from 1961 to 1969, lasting 106 months
  • The Reagan-era expansion from 1982 to 1990, lasting 92 months
  • The Bush II-era expansion from 2001 to 2007, lasting 73 months

This recovery has been unusually sluggish in terms of growth, but that slow pace could bode well for its continued existence. The Fed forecasts the current expansion to go on for a total of 90 months, while the Congressional Budget Office forecasts it to go on for 102 months.

Monday, April 21, 2014

Shades of 2000?

With the stock market stumbling a bit early in 2014, some investors are wondering if we're in for a repeat of 2000, when after years of growth, the markets flamed out spectacularly. After rising by nearly 30 percent last year, the S&P 500 has barely poked its head above water this year, increasing by just 0.89 percent.

Like that year, the tech-heavy Nasdaq index has been suffering the worst of all the major indexes, down 6 percent since peaking in early March. In 2000, the Nasdaq dropped 15 percent in a single week.

But there are some key differences as well. The market doesn't appear to be as overheated as it was in the 1990s. So far during the Obama administration, the S&P 500 is up 95 percent; at a similar time during the Clinton administration, it was up almost twice as much, at 180 percent. History might repeat itself in some measure, but it will never repeat itself exactly.

Friday, April 18, 2014

IPOs Hit a Snag

It's been a good week generally for public companies - despite the fact that there were only four trading days, the S&P 500 just posted its best week since last July. But companies just coming to the market are having a tough time of it. The IPO market, which appeared to be heating up, took a real beating last week.

In the initial months of the year, we've seen roughly twice as many initial public offerings as at the comparable period in 2013. Ten more companies had their initial public offerings last week. All ten of them either sold fewer shares than expected or traded at a lower price than expected - or both.

Part of the problem is that more and more companies are coming to the market without showing a profit. According to Sundial Capital Research, 83 percent of the IPOs this year have been for unprofitable businesses. That's frighteningly reminiscent of the latter stages of dotcom-mania; in the first quarter of 2000, some 84 percent of all IPOs were for companies that hadn't shown a profit.

Thursday, April 17, 2014

The Beige Book Is Back

The Federal Reserve’s eight-times-a-year Beige Book was issued earlier this week, with its on-the-ground look at economic activity in the various areas of the country. New Jersey, as always, is divided between the reports from the New York office and the Philadelphia office, so the differences between the two are always interesting to see.

That unusually harsh winter weather was a hindrance to New York’s tourism activity, but it helped in Philadelphia’s, which covers ski resorts and other winter tourist destinations in the Poconos. But one common denominator in both areas was that economic activity has started to bounce back after the bad weather. A key difference: Lending activity appears to be stronger in the New York area, where it is reported improved, while it is just up slightly in the Philadelphia area.

The biggest bounceback in that southern region was that auto sales were up “robustly.” Meanwhile, in the northern region, manufacturing and service-sector firms showed the most improvement over the past couple of months. All told, both areas reported that the economy continues to improve steadily but moderately.

Wednesday, April 16, 2014

Retail Sales Fueling Stronger Growth

We often hear that consumer spending constitutes 70 percent of the American economy, so any rise in retail sales ought to be considered good news indeed. The Commerce Department announced on Monday that retail spending increased by 1.1 percent in March - the biggest such monthly increase in a year and a half.

On top of that, Commerce also revised February's retail figures upward. Add all that up, and economists now think the U.S. economy will grow at around 3 percent in the second quarter of 2014 in a survey conducted by the Wall Street Journal. That would be double the 1.5 percent we had in the first quarter,

Over the course of the recovery, now about five years old, GDP growth has averaged of 2.5 percent per quarter, so this quarter has the potential to exceed that. The same economists also predicted that 3 percent growth rate to prevail through the second half of 2014.

Tuesday, April 15, 2014

A Little Good News for Tax Day

Did you send your tax return in today? There might be less reason to be nervous about it than there has been in recent years. Because of budget cuts, the IRS says it has the capacity to conduct the fewest audits than at any time since the 1980s.

The number of audits being conducted was already pretty low. The IRS says it audited less than 1 percent of all returns it received last year. That was the lowest audit rate since 2005.

But don't think that gives you carte blanche to put whatever you want on your 1040. If you report much less income on your personal return than your employer has reported to the bureau, the IRS's computers will pick that up - without any personal intervention from an auditor.

Monday, April 14, 2014

Small Caps Fall Short

The turmoil in the market at the end of last week has now driven the S&P 500 down for the year, with a year-to-date loss of 1.77 percent. Oddly enough, it's small-cap stocks that have been suffering the most.  Through last Thursday, the Russell 2000 small-cap index was down 2.8 percent on the year, while the Russell 1000 large-cap index was nearly even, dropping by just 0.2 percent.

Last year, the large-cap index returned an astonishing 33.1 percent. But the small caps were even more impressive, returning 38.8 percent for the year.

That's the norm for these things. The small-cap index has outperformed the large-cap index in 10 of the past 16 years. And over the long haul, small cap stocks have returned slightly more than the large caps, although with much greater volatility.

Friday, April 11, 2014

Baby Boomers Get Nervous

We've heard reports of 401(k) balances reaching new record highs, but that hasn't translated into optimism on the part of upcoming retirees. According to a new survey from the Insured Retirement Institute, just 35 percent of Baby Boomers said they felt confident about their retirement. That's down from 44 percent in 2011.

Just 65 percent of those Boomers said that they were economically satisfied. That number is down from 77 percent who felt satisfied in the same survey a year ago, despite the fact that the stock market has been roaring over that stretch.

What's the issue here? It may simply be that more and more Baby Boomers are actually retiring - 10,000 of them turn 65 every day. Crossing that threshold may be enough to turn a once-confident worker into a nervous retiree.

Thursday, April 10, 2014

The Markets Love the Fed

Investors really liked the minutes the Federal Reserve released yesterday about its latest meeting. How much did they like them? Enough that the stock market doubled its gains for the day after the minutes were released late in the afternoon. The Dow Jones industrial average was up 76 points on the day before the minutes were released - and then jumped another 153 points.

What got everyone all excited? It turns out the Fed had discussed the prospect of raising interest rates, particularly in light of the fact that inflation has been running below the Fed's target rate of 2 percent. No matter what other effects inflation has on the rest of the economy, it is generally good for stock prices.

The late-afternoon jump was remarkable also because of the way the markets have reacted to previous releases of Fed minutes. According to research from Bespoke Investment Group, on the last ten days in which the Fed has released minutes, the S&P 500 has dropped on eight of those days.

Wednesday, April 9, 2014

Greece Is Back in the Bond Market

A sign that Europe is lifting out of its lengthy economic doldrums: Greece has announced it plans to sell long-term government bonds, for the first time since the European Union bailed the country out two years ago. The fact that Greece expects there to be a market for its debt is a very good signal for the health of its economy.

The country is likely to have to pay a high interest rate on those bonds, though. Existing ten-year Greek debt is currently paying about 6 percent. A more stable economy, like Germany, is paying closer to 1.5 percent. Here in America, the ten-year Treasury bond is currently yielding 2.69 percent.

Those rates are a long way from where Greece was just a few years ago, though. As recently as 2012, ten-year Greek bonds were paying more than 30 percent, and they didn't slip under 10 percent for good until late last year.

Tuesday, April 8, 2014

Inflation and the Poor

Has inflation had much of an impact on your purchasing power recently? Probably not, since it's been running at a fairly muted 1.1 percent over the past 12 months. But a fascinating new study by the Web site FiveThirtyEight shows that the impact of inflation also varies by where you stand on the socioeconomic scale.

Items that the poor spend a higher proportion of their money on have had some of the highest inflation rates in the past year. The cost of electricity is up 4.7 percent; the cost of cigarettes is up 5.8 percent. Meanwhile, things we think of as primarily the province of the affluent haven't risen nearly as much. The cost of a new vehicle is up by just 1.5 percent; the cost of airfare has actually dropped in the past year, by 0.3 percent.

Add it all up, and the poorest fifth of American households have experienced an inflation rate that is 0.2 percent higher than that experienced by the rest of us. That's not a huge difference, but it's a few bucks a month for families that can't really afford it.

Monday, April 7, 2014

The First Quarter's Surprising Leaders

We're starting to see more figures trickle in from the first quarter of 2014, and one of the most surprising turnarounds has been among the precious metals mutual fund sector. These funds got beaten up pretty badly in 2013, posting the worst performance of any fund sector, but in the first quarter of this year, they're leading the pack, with a 12.4 percent average return. Over the past 12 months, though, those funds are still down by 30 percent.

Here are the other sector leaders among funds from the first quarter:

  • Real estate, up 9.2 percent
  • Utilities, up 7.1 percent
  • Health care, up 6.7 percent
  • Energy, up 3.5 percent
  • Natural resources, up 3.1 percent
  • Technology, up 2.1 percent
  • Financials, up 1.5 percent
  • Industrials, up 1.1 percent

Friday, April 4, 2014

March's Employment Milestone

This morning's jobs report marked a significant milestone for the American economy. In March we added 192,000 jobs, for the second strong month in a row following February's revised number of 197,000 jobs. And that means the private sector has finally returned to its pre-recession peak in terms of total employment, with the economy now having gained back the more than 8 million jobs it had lost.

Despite all the new jobs, and the fact that January and February's figures were also revised upward, the headline unemployment rate didn't change in March, remaining at 6.7 percent. That's in part because the Bureau of Labor Statistics also reported that the American work force expanded during the month.

Obviously, it's taken a long time to get here. According to the Labor Department, this has been the slowest jobs recovery on record since they began tracking such data back in 1939. But it might actually be gaining steam - the 192,000 private sector jobs added in March were the most in four months. All of March's new jobs were in the private sector, as government hiring stayed flat.

Thursday, April 3, 2014

An Upside to Foreclosure

Here's an unexpected positive side to the foreclosure crisis: With so many American households going through drawn-out foreclosure processes, they were freed up to spend money on other things, like paying down other debts. The average foreclosure process lasted three years - meaning that many people weren't making any mortgage payments for that entire time.

The biggest benefit, according to new research from the Philadelphia office of the Federal Reserve, was that people paid down their credit cards. Credit card delinquencies for households in foreclosure declined during the recession, and card balances declined for six quarters while the foreclosures dragged on.

The Fed warns, however, that this is not likely to go on forever.The researchers expect that as people have to begin paying regular mortgages again, they won't be able to keep up with newly incurred credit card bills.

Wednesday, April 2, 2014

Home Sweet Homewnership

Recent research from the Federal Reserve has revealed a deep gulf in the wealth of Americans by age. The average family headed by someone under age 40 has recovered only about a third of the wealth it lost during the recession, while that of older families has recovered pretty much in full.

The Fed has identified the key reason for this: the housing crisis. So many younger families were caught up in the wave of foreclosures that the homeownership rate for this cohort has fallen dramatically. In 2005, 50.1 percent of young families owned homes, but that number dropped to 42.2 percent in 2013.

Since so much of our wealth is contained in our homes, the differences among the age groups have become staggering. The average real wealth of a family headed by someone under 40 was just $108,000 at the end of 2013, according to the Fed; for families headed by someone aged 40 to 61, that same figure was $691,000.

Tuesday, April 1, 2014

First Quarter Roundup

The first quarter of 2014 came to a close yesterday, and after some rocky going earlier on, the markets ended up turning in a respectable performance. The S&P 500 ended up increasing by 1.3 percent for the quarter, marking the fifth straight up quarter, which is its longest quarterly winning streak since 2007.

The Nasdaq similarly showed a modest gain for the quarter, rising by 0.5 percent. That index also marked a five-quarter winning streak. The Dow Jones industrial average was not so fortunate, dropping by 0.7 percent for the first quarter.

Even better is the performance of the Russell 2000 Small-Cap Index, which has now risen for seven consecutive quarters. But those small caps needed a last-second miracle - a 1.9 percent gain on the last day of the quarter - to bring the index above water.