What Does This Volatility Mean?

That was some ride in the stock markets last week, wasn't it? Here's how wild it was: The Dow Jones industrial average went six straight days with moves of at least 200 points. That had never happened before.The S&P 500 had six straight days with 1 percentage moves, which hadn't happened since 2009.

Is there anything we can learn from this? According to the market research firm Convergex, these volatile stretches tend to occur at two distinct points: at the beginning of a bull market, or toward the end of one. For example, there were 82 moves in the S&P of more than 1 percent in 1982, when that bull market was just beginning. That declined to 28 by 1985, then picked back up to 61 in 1986 and 95 in 1987 as the bull ended its run.

We saw similar moves at the beginning of this bull market: There were 118 plus or minus 1 percent moves in 2009, but just 38 in 2014. We're at 40 already in 2015.

The Big Bonus

There's an interesting effect in American compensation trends, uncovered by a new study out from Aon Hewitt, an international human capital and management consulting company. Companies are spending more than ever on compensation - but with a twist. While the pay raises are impressive, bonuses are growing at a much faster rate.

Aon Hewitt predicts that base pay for salaried exempt employees will increase by 2.9 percent in 2015. That means base salaries will roughly be keeping pace with the growth of the U.S. economy. But variable pay increases - which includes bonuses and other incentives - will increase 12.9 percent.

Companies have long budgeted more money to  bonuses than across-the-board pay raises, but the trend has sharpened greatly in recent years. A similar survey in 1996 showed a much closer relationship -  salaries rose by 3.9 percent while bonuses rose by 7.5 percent.

GDP Moves Up

After a tumultuous week in the stock markets, there was some surprisingly good news out this morning from the Commerce Department. Following its initial estimate of second quarter GDP growth at 2.3 percent, Commerce has now revised that upward to a robust 3.7 percent.

What changed in the new revisions? Businesses increased investment by 3.2 percent increase of a drop of 0.6 percent, with spending on structures such as office buildings rising by 3.1 percent instead of the initial estimate of a drop of 1.6 percent. Consumer spending, the main driver of U.S. economic activity, was revised up slightly to 3.1 percent instead of 2.9 percent.

There were also upward revisions to state and local government spending and inventories. Also fueling the rise: Corporate profits rose an estimated 2.4 percent in the second quarter, after declining by 5.8 percent in the first quarter.

A History of Corrections

It's been a rough couple of days on the stock market, but as any experienced investor will tell you, you have to expect these kinds of things. A correction - a 10 percent drop in value - is a regular occurrence in the markets.

Stock researcher Ed Yardeni has compiled a decade-by-decade record of how often these drops happen. This is the second correction since 2010, which is about par for the course. And barring a total meltdown like we had in 2008-09, the numbers usually don't get much worse than what we've already seen. Here's Yardeni's full chart:

The S&P Corrects Itself

Yesterday we noted that the S&P 500 hadn't tumbled into correction territory - meaning it wasn't yet down 10 percent or more from its recent peak. But that situation ended on Monday, when the index lost 3.9 percent, to close 11 percent below its May 21 record close of 2,131. That ended the S&P 500’s fifth-longest correction-free streak ever.

What does that mean for the future? If history is any guide, that means there is a good chance that a 20 percent selloff is coming, which would put it into bear market territory. Following the last correction-free streak, which ended after a record of about 84 months in October 1997, the S&P 500’s decline peaked at 10.8 percent, which would seem to bode well for this sell-off.

However, the other three streaks that were longer than the current one ended with eventual declines of 22 percent, 34 percent and 57 percent. The average overall decline of the those declines was 31 percent. Let's hope history does not repeat itself.

What Happened on Friday?

Friday was a disaster day on Wall Street, especially for the Dow Jones industrial average. The Dow lost 3.1 percent on Friday alone, sending it down to 10.1 percent off the high it set back in May. That puts the index officially into correction territory.

In addition to the Dow, the S&P 500 and and the Nasdaq indexes also had their worst single-day percentage declines since 2011 on Friday, although the other two indexes aren't in correction territory - yet. Indexes in France, the Netherlands, Spain and Belgium are also now officially in correction, down more than 10 percent from recent highs.

The carnage could also been seen at the level of individual stocks. Among the S&P 500 companies, 492 of them lost value on Friday. Some 328 have dropped 10 percent to be in correction, and 147 have fallen 20 percent from recent highs, putting them in bear-market territory.

Airlines Getting Busy

If you've traveled this summer, you may have noticed that airfares have been declining. Airline fares fell 5.6 percent in July from a month earlier, the biggest decline since late 1995, according to the Labor Department’s consumer-price index. That's the biggest single monthly drop in airfares since 1995.

The biggest factor in this is that jet-fuel prices have declined nearly 35 percent over the year, tracking the drop in oil prices, according to the Labor Department’s producer-price index. Since 35 percent is much larger than 5.6 percent, the decline has helped airlines produce their best-ever profits.

It's also produced some of the busiest times for airlines in the industry's history. It's been forecast that some 14.2 million passengers will be flying over the long Labor Day weekend, an increase of 3 percent over last year's number.

To Have or to Have Not

Do you consider yourself a "have" or a "have-not"? Gallup recently asked that question of Americans, and a solid majority, 58 percent, consider themselves to be "haves" in U.S. society. Just 38 percent put themselves in the "have-not" group.

The percentage of Americans perceiving themselves to be have-nots rose in the 10 years between the initial 1988 survey and 1998, and more than doubled between 1988 and 2006, when it reached 35 percent. Meanwhile, the "have" percentage has settled into a tight range between 57 percent and 60 percent.

Oddly, it doesn't take a whole lot of wealth to put someone in the "have" category. While 77 percent of Americans with annual income of $90,000 or more consider themselves haves, so do more than half of those - 59 percent - who earn between $36,000 and $90,000 per year.

Buybacks Reach a Record

Corporate buybacks have been surging since the financial crisis, with the S&P 500 companies spending nearly $2.3 billion on them since 2009,  according to a new report from Aranca Investment Research. Last year’s $553 million in buybacks fell just short of the peak reached in 2007, while the $904 million spent on buybacks and dividends combined set a new record.

This year looks even better: The companies in the S&P 500 are poised to spend more than $1 trillion on buybacks and dividends in 2015, breaking the record set last year. Buyouts and dividends totaled $237 million in the first quarter alone.

This is all of particular interest to investors. Over the past decade, the S&P 500 buyback index — which measures the performance of the 100 S&P stocks with the highest buyback ratios – delivered 11.3 percent annualized returns, easily beating the overall 7.8 percent annual returns from the entire S&P 500.

Standing Still

Does it feel like the stock market hasn't moved a whole lot this year? That has certainly been the case: The Dow Jones industrial average’s closing high for this year is just 6.7 percent above its closing low. Through the middle of August, that is the smallest range in the index’s entire history. The next-narrowest range through the middle of August was 7.7 percent, which happened in 1992.

The story is similar for the S&P 500 index. For the S&P, this year’s closing high is 6.9 percent above its closing low. That is the second-smallest such spread for the index, behind 1993, when the spread at this point of the year was 6.4 percent.

But even that understates the case. As long as the S&P 500 doesn’t set a new closing high or low this week, 2015 will become the smallest spread on record, since the index began a series of yearly highs in late August 1993.

Looking to a Bright Future

More Americans are optimistic about their financial future today than they were in 2011, according to a new survey from the Lincoln Financial Group. The turnaround has been staggering – 81 percent of those surveyed said they feel optimistic about their financial future, up from just 13 percent who felt that way in 2011.

In addition, 83 percent feel their lives are headed in the right direction, a significant increase from the 66 percent who felt that way in 2011. And 59 percent report they are optimistic that their financial situation will improve in the next year, nearly twice the 33 percent that felt that way in 2011.

One downside: the feeling of “preparedness” for the financial future has not improved. Only 1 in 5 Americans feel “very prepared” for their financial future, including retirement, protecting their wealth and “handling income disruptions of varying durations.”

For Social Security, an Unhappy Birthday

Today is the 80th anniversary of Franklin Roosevelt signing the Social Security Act into law, but for most Americans, it's not a very happy birthday. Most Americans under 50 doubt that they will ever get their Social Security benefits.

Among those Americans aged 30 to 49, just 32 percent think Social Security will eventually pay them a benefit. Younger people are slightly more optimistic; 34 percent of those aged 18 to 20 expect to receive benefits, although 64 percent said they don't expect to receive anything.

While the vast majority of Americans aged 65 and older who are still working do believe they will get their Social Security benefits, 43 percent of current retirees predict that eventually there will be cuts in their benefits. This figure tends to move with the strength of the economy; 56 percent expected such cuts in 2010, but just 32 percent did in 2005.

Behind the Hiring Trends

The number of job openings in the U.S. fell slightly in June - but that might not be a bad thing. After peaking at a record 5.36 million in May, job openings slipped to 5.25 million in June, according to the  Labor Department’s Job Openings and Labor Turnover Survey, known as Jolts.

That's in part because more people are getting hired. Hires climbed to their highest level of the year in June at 5.12 million, and the number of Americans voluntarily quitting their jobs climbed to 2.75 million, up slightly from 2.73 million in May.

According to the Labor Department, the number of people voluntary quitting jobs tends to rise when people are confident about job prospects.  In recent months, while the number of quitters has held fairly steady, a gap between job openings and hires has opened, which suggests employers haven’t been able to find workers with the desired skills at the salary they're offering.

The Great Productivity Slowdown

Although we've seen fairly solid employment gains recently, there's a troubling measure that hasn't kept pace: The productivity of nonfarm business workers, or the output of goods and services per hour worked, increased at just a 1.3 percent seasonally adjusted annual rate in the second quarter, the Labor Department said Tuesday. The long-term average for productivity growth is 2.2 percent.

But the longer-term prognosis is even worse. That 1.3 percent gain followed two consecutive quarterly declines. From a year earlier, productivity was up just 0.3 percent.

On top of that, the Labor Department also revised some earlier numbers downward. It's now believed that labor productivity was flat in 2013, down from an earlier estimate of 0.9 percent improvement. Over the past five years, productivity has grown at just 0.4 percent annual pace—the weakest growth we've seen since the early 1980s.

Buffett's Biggest Deal

Even Warren Buffett’s smaller deals are worth following, but now he's made the biggest buy of his career. Buffett's investment vehicle, Berkshire Hathaway, said on Monday that it agreed to buy Precision Castparts, which furnishes parts such as fasteners and turbine blades to aircraft makers, for about $32 billion in cash. It's Berkshire’s largest takeover ever. 

The timing isn't really a surprise, since Berkshire has cash burning a hole in its pocket right now. Buffett has said he likes to have a cushion of $20 billion at all times, but Berkshire’s cash on hand totaled nearly $67 billion at the end of the second quarter.

The total cost of the transaction is $37.2 billion, which already looks like a steal for Buffett. Precision closed at $193.88 a share on Friday, but it was up 19 percent after the deal was announced on Monday morning.

Health Care Earnings Surging

Here's an interesting sidelight to the current earnings season: The sector showing the most strength, top to bottom, is undoubtedly health care. Among the S&P 500 stocks, 65 percent of the health care companies reported both earnings and revenue that came in higher than the analysts had expected.

None of the other S&P sectors reached even 50 percent by that measure. Consumer discretionary came closest, at 47 percent; technology and financials were close behind, at 46 percent and 45 percent, respectively.

In some sectors, very few stocks exceeded both revenue in earnings expectations.  In the consumer staples, energy, industrial and utility sectors, less than a third of all companies met those criteria.

July's Unemployment Report

July's employment report, released by the Bureau of Labor Statistics this morning, was very much more of the same: Total nonfarm payroll employment increased by 215,000 in July, which is almost exactly the average monthly increase we've seen over the past 12 months. The unemployment rate was unchanged at 5.3 percent. This keeps the Fed on track to raise short-term interest rates this year, maybe in September, since the jobless rate is already where Fed officials had forecast it to be by year-end.

Deeper in the figures, there's a little bit of worrisome news: The broader unemployment rate, including people stuck in part-time jobs and those who haven’t looked for work in at least a month, was still at 10.4 percent in July, down from 10.5 percent in June. That figure is still considerably higher than it was in November 2007, when the recession started; it was at 8.4 percent then.

In addition, the labor force participation rate remained stuck at 62.6 percent in July. Before touching that low in recent months, we hadn't seen that level since October 1977.

Superior Service

It looks like at least one part of the U.S. economy is in high gear: According to data released yesterday by the Institute for Supply Management, the service sector in July expanded at its fastest rate since the recession. The ISM’s non-manufacturing index is now at its highest point since August 2005.

Many of the underlying measures are at long-time highs. The gauge of service-industry orders climbed to the highest level since August 2005; the share of services companies boosting employment was the highest since ISM began keeping these records in 1997.

This is in strong contrast to the manufacturers’ side of the equation. The ISM’s factory index dropped in July to a three-month low of 52.7. The difference between the ISM’s non-manufacturing gauge and the factory index is now the biggest it's been since January 2009.

The High Cost of Health Care in New Jersey

A company called HealthView Services has just come out with its list of the ten most expensive states to receive health care during retirement. In a bit of a surprise, New Jersey is not at the top of the list – it’s actually just seventh.

 

According to HealthView, the average retiree in New Jersey will pay $148,865 worth of premiums for 20 years of health care during retirement. That’s a lot, but it’s below No. 1 Florida, where it will cost more like $152,184 for 20 years of health coverage.

 

These are the other states where your medical coverage in retirement will cost you more than right here in the Garden State:

1.       Florida

2.       Michigan

3.       Maryland

4.       Massachusetts

5.       Nevada

6.       Louisiana

Spending and Prices, Inching Upward

Americans curbed their spending in June, with personal spending up just 0.2 percent from a month earlier, according to the Commerce Department. That was the smallest monthly gain for that figure since February. In May, spending had risen 0.7 percent.

Personal income, which includes wages and government aid, did a little better in the month. That measure climbed 0.4 percent in June, the same rate at which it had risen in May.

And then there's inflation. The price index for personal-consumption expenditures, the Fed’s preferred inflation measure, rose 0.2 percent in June from a month earlier, the Commerce Department said. From a year earlier, prices were up just 0.3 percent. Inflation has now run below the Fed's 2 percent target for 28 straight months. Core prices, which exclude volatile food and energy costs, ticked up 0.1 percent from a month earlier and 1.3 percent from a year ago.

Going Up and Down with 401(k)s

The sluggish stock markets this year have meant that 401(k)s haven't been earning income as fast as most people would like. Through the first seven months of the year, the S&P 500 is up just 2.2 percent.

But that hasn't stopped people from putting money away into these retirement accounts. According to Fidelity, the average annual contribution to a 401(k) - counting both the employee's investment and the amount contributed by the employer - rose to $10,180 by the end of June. That's a record high for that figure.

They've need that just to tread water, given the difficulties in so many investment areas this year. Despite all those inflows, the average balance in a 401(k) dropped from $91,800 at the end of March to $91,100 at the end of June.