New Highs for the Pleasure Index

Are you feeling financial pleasure? The American Institute of CPAs has reported that its pleasure index was up two points from the second quarter to 73.9, setting an all-time record for the seventh quarter in a row. The largest factor is the stock market index, but the big driver was The Job Openings Per Capita Index, the pleasure index’s second largest contributor, which increased 1.1 points over the previous quarter. With 7.1 million job openings for 6.2 million job seekers, the tight labor market saw 3.6 million workers voluntarily leave their jobs in August, the fastest pace in 17 years, according to the Bureau of Labor Statistics.

The other two components of the pleasure index also rose. The AICPA Economic Outlook Index, which captures CPA executives’ expectations in the year ahead for their companies and the U.S. economy, was 3.5 percent higher than the prior year level.

The Real Home Equity Per Capita index, which measures the wealth we have in our homes, was 6.5 percent above the prior year value and 2.1 percent ahead of the previous quarter level. However, it is still 11.6 percent below its record high, set back in 2006.

Economic Snapshot

Inflation, incomes and spending are all still growing - but slowly. According to the monthly report published yesterday by the Bureau of Economic Analysis, the Personal Consumption Expenditures (PCE) price index in September rose 0.1 percent on a monthly basis to match August's reading. On a yearly basis, PCE  edged down to 2 percent from 2.2 percent. Meanwhile, core PCE, which strips volatile food and energy prices, increased 0.2 percent in September.

Meanwhile, the Commerce Department reported that income recorded its smallest gain in more than a year on moderate wage growth. All told, personal income increased $35.7 billion, or 0.2 percent, in September.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.4 percent last month. The growth came as households bought more motor vehicles and spent more on health care. Personal consumption expenditures increased $53.0 billion for the month, or  0.4 percent.

Third Quarter GDP Report

Gross domestic product decelerated a bit to a 3.5 percent annual pace in the third quarter, down from a torrid 4.2 percent pace in the prior three months, the Commerce Department said Friday.  But expansion in the last two quarters is still the fastest six months of growth in four years.

What caused this? Consumer spending rose 4 percent in the third quarter, even stronger than the prior three months. This was offset somewhat by a slowdown in business and residential investment. Household investment has fallen for three straight quarters.

The value of unsold goods - or business inventories - added 2.1 percentage points to growth, as companies stocked up. A significantly larger trade deficit took 1.8 points off top-line growth. Government spending picked up, expanding 3.3 percent after a 2.5 percent gain in the second quarter.

Bear Market? Not So Fast

A market correction is often defined as a 10 percent pullback from a recent peak. Using that as a yardstick, after yesterday's stock market plunge, the S&P 500 is about 2 percentage points away from joining the Nasdaq Composite in correction mode.

But a correction doesn’t necessarily mean that a bear market is lurking around the corner. In fact, history and data make for a strong case that this recent selloff is nothing out of the norm. Data from the Schwab Center for Financial Research showed that there have been 22 market corrections since 1974 and only four of them, occurring in 1980, 1987, 2000 and 2007, eventually ended up as bear markets.

Even in the current bull market. which started in 2009, there have been six corrections that avoided turning into bears. Most recently, a dive in February was followed by stocks getting back to record territory by late summer.

The Big Drop

You've heard about it by now: Yesterday the Dow and the S&P 500 index wiped out all their hard-fought gains over the past 10 months to turn negative for 2018. October is shaping up to be a brutal month, with the S&P falling 8.9 percent month-to-date, the Dow down 7.1 percent, and the Nasdaq down 11.7 percent.

Indeed, the S&P 500 has had 14 down days so far in October, the highest number of losing days for the index since May of 2012 when it fell 14 days, according to Dow Jones Market Data. One more loss, and it will mark its highest number of down days since October of 2008.

Meanwhile, the Nasdaq Composite Index shed 329.14 points, or 4.4 percent, to 7108.4, which put the index more than 10 percent below its August 29 all-time high, meeting the widely used definition of a market correction. The loss also marked the worst day for the Nasdaq since August 18, 2011.

Women's Worries

Women have a more negative view of their financial health than men, even if they’re in good shape financially. That’s according to Prudential’s new Financial Wellness Census, which finds that among financially healthy women, 10.1 percent have a negative view of their money situation, compared with just 6.3 percent of financially healthy men. The same holds true, with no statistically significant difference, among women who aren’t financially healthy.

Prudential defined “financially healthy” as doing better than average, based on income levels, savings and debt. On average, women have saved 43 percent less for retirement than men. In addition, 46 percent say they have no retirement savings at all.

The data shows women and men on average expect to retire at age 67. But women have saved an average of only $115,000 compared with an average of $203,000 for men. That may be contributing to their negative views of their finances.

The New Charitable Landscape

It looks like we're in for a giving year. Eighty-two percent of Americans who itemized charitable deductions on their 2017 tax returns plan to maintain or increase their giving this year, according to a survey released this week by Fidelity Charitable.

The downside is that the poll also found that 58 percent of donors still planned to itemize in 2018, even though in the new tax landscape, that's not always appropriate. Many donors may not have fully worked out how the increased standard deduction in the revised tax code affects them.

For example, half of households with incomes of less than $100,000 currently plan to itemize their 2018 taxes, the survey showed. Fidelity Charitable said most of these donors will likely discover that their itemizations, including charitable donations, will not push their total deduction amount past the newly enacted standard deduction thresholds, of $12,000 for singles and $24,000 for married couples.

Housing Sales Are Slowing

Has the housing market run out of gas? Existing-home sales ran at a seasonally adjusted annual rate of 5.15 million in September, the National Association of Realtors said last week, which was a 3.4 percent decline from August. It was the lowest pace of sales since November 2015.

Sales of previously owned homes had stabilized in August after declining for four straight months, so September’s drop came as a bit of a surprise. Sales were 4.1 percent lower than year-ago levels.

On the other hand, the median sales price in September was $258,100, which was 4.2 percent higher than a year earlier. Inventory is ticking up gradually: At the current pace of sales, it would take 4.4 months to exhaust available supply, up from 4.3 months last month. And it’s taking properties longer to get snatched up: Homes stayed on the market for 32 days in September, up from 29 days in August.

Manufacturing Is Booming

Another sign of a still-strengthening U.S. economy: American manufacturers increased their capacity for the 16th straight month in September. In that month, manufacturing was up 1.4 percent from a year earlier, according to data out from the Federal Reserve this week. 

The Fed's report suggests investment in U.S. manufacturing has been increasing at a steady pace over the past three years. In June of this year, it finally passed its prior peak from 2008. Manufacturing capacity began recovering from a steep decline in 2011, faded in 2014 and resumed a modest march higher in mid-2015. 

The latest Fed manufacturing report showed factory output also rose in September, helping drive overall industrial production up 0.3 percent for the month. And that's in spite of being “held down slightly” by Hurricane Florence, which reduced output by less than 0.1 percentage point.

The Fed's Wary Outlook

The Federal Reserve released the minutes from its September meeting yesterday, and it looks as if we will be in an environment of rising interest rates for some time to come. A majority of top Federal Reserve officials believe that interest rates will have to continue to increase until the economy slows down.

The length of these interest rate hikes was a matter of some debate. A “few” officials thought policy would have to remain “modestly restrictive for a time,” while an additional “number” thought policy would need to be restrictive only “temporarily.”

At the September meeting, Fed officials voted to lift their benchmark federal-funds rate to a range between 2 percent and 2.25 percent. Fed officials have said that a 3 percent fed funds rate would be the “long-run” neutral level of interest rates, neither boosting nor slowing growth.

College Costs Are Actually Coming Down

After decades of hearing how college costs were spiraling out of control, here's some good news: The average net cost of a year at a four-year public college or university, including tuition, fees, room and board, fell to $14,880 in 2018–19.

That's down slightly from $14,910 in 2017–18, although the trend isn't in place for all schools. The net price for four-year private schools was $27,290, which was up slightly from $27,160 last year.

The reason for this is that the sticker price for higher education continues to inch up even though fewer students actually pay it, according an annual pricing-trends report by the College Board. Grants and tax benefits climbed to $21,220 this year, up from $13,860 in 2008 (in 2018 dollars) at private schools. At public institutions they rose to $6,490 this year, from $4,970 in 2008.

What Killed Sears?

You have probably heard that Sears, an American retailing icon for more than a century, is filing for bankruptcy. While Sears certainly has problems of its own, this is part of a larger trend for department stores. U.S. retail sales for September grew 0.1 percent from the prior month, sales specifically at department stores fell by 0.8 percent.

Those numbers have been diverging for a long time. Since 2000, overall U.S. retail sales have grown by more than 300 percent. But sales at department stores have declined by about 35 percent.

Sears is much diminished from the retailing giant it once was, but even today, it still was a significant force among department stores. In the first half of its current fiscal year, its merchandise sales were equal to about 6.5 percent of all U.S. department-store sales.

Assessing Last Week in the Market

The S&P 500 closed up by 1.4 percent on Friday, but that wasn't enough to erase the concerns over its worst two-day slide in eight months on Wednesday and Thursday. Even with the uptick, nearly three quarters of the S&P 500's components in correction territory, or worse.

Following Wednesday and Thursday’s 5 percent drop, the S&P is down nearly 7 percent from its record high close on September 20. But that doesn't tell the whole story, because the downturn has been incredibly widespread.

About 380 S&P 500 stocks have fallen 10 percent or more from their 52-week highs, putting the vast majority of the index in correction territory. In addition, 164 stocks have fallen by 20 percent or more from their highs, putting roughly a third of the market in bear territory.

Yesterday's Rout

It was a very rough day on Wall Street yesterday. The Dow Jones Industrial Average lost more than 800 points, and the S&P 500 had its worst day since February. Technology stocks were the worst offender, as even the biggest names went into a freefall.

The Dow Jones Industrial Average lost 3.2 percent of its value yesterday, logging its worst one-day drop since February. All 30 Dow stocks finished in the red. The S&P 500 index lost 3.3 percent, falling for its fifth straight day, its longest losing streak since November 2016.

The S&P’s losses were topped by the technology sector, which slid 4.8 percent, the steepest percentage drop since August 2011. The tech-heavy Nasdaq dropped more than 4 percent for its worst percentage decline since June 2016. Apple and Amazon both had their worst day in two and a half years.

Small Caps Meet the Bear

Most people who watch the markets carefully have noticed that the recent weakness in stocks has been especially tough on the small-cap space. One good measurement of that trend is to look at the distance that stocks are currently trading from their 52-week highs. And by that measure, smaller stocks are getting hammered.

Within the large-cap S&P 500, the average stock is currently 13.2 percent below its 52-week high.  Moving down the market cap spectrum, though, the numbers get progressively worse.  In the S&P 400 midcap space, the average spread is 16.9 percent,

But members of the S&P 600 Small Cap index are down an average of 20.7 percent from their high over the past 52 weeks.  Using the standard bear market definition of a 20 percent decline from a high, that means that the average small-cap stock is in a bear market.

The Cost of Being Retired

What do people really spend in retirement? According to the latest Bureau of Labor Statistics data,  “older households” — defined as those run by someone 65 and older — spend an average of $45,756 a year, or roughly $3,800 a month. That’s about $1,000 less than the monthly average spent by all U.S. households combined.

In some categories, spending does indeed decrease, even in surprising ones like food. In others areas, like health care, life becomes more expensive as you age. Here’s the data shown as a monthly breakdown of how households headed by a retirement-age person spend money, on average, in seven major categories:

• Housing: $1,322 Housing is the biggest spending category for all age groups — retirees included.
• Transportation: $567 The average outlay is about one-third less than the average for households of other ages.
• Health care: $499 
• Food: $483  Retirees spend nearly 20% less than the average household does on food.
• Personal insurance/pensions: $237
• Cash contributions: $202
• Entertainment: $197 Older households spend about as much on fun stuff as do those ages 25 to 34.

Inside the Bond Market

In the midst of a strong year for stocks, bonds continue to suffer. The Bloomberg Barclays U.S. Aggregate Bond index, maybe the most prominent benchmark among bond indexes, is on track to post its second-worst showing in history.

Year to date, the index year is down around 2.5 percent on a total return basis, which takes into account both the value of bonds held in the basket and the yields derived from those assets. The Barclays Agg's weakest returns came in 1994, when the index slipped around 2.9 percent, so it wouldn’t take much for the index to log its worst yearly performance. 

What is the Barclays Agg? It is largely composed of U.S. government bonds and mortgage-backed securities backed by government-sponsored enterprises, including Fannie Mae and Freddie Mac, and underweights the riskier corners of the bond market, including high-yield corporate debt or collateralized loan obligations. Ultra-safe Treasury notes represented around 36 percent of the index in 2017.

September's Jobs Report

The employment outlook slowed slightly in September: The economy added 134,000 jobs over the month, compared with an average monthly gain of  201,000 over the prior 12 months. Nevertheless, the headline unemployment rate ticked down to 3.7 percent from 3.9 percent in August.

It's worth noting that we have now reached a remarkable eight straight years of monthly job growth. That's double the previous record. The unemployment rate is the lowest it's been in nearly 50 years, since 1969.

The key industries: Employment in professional and business services increased by 54,000 in September and has risen by 560,000  over the year. Health care employment rose by 26,000 jobs in September. Construction employment continued to trend up in September  with 23,000 new jobs. and has now added 315,000 jobs over the past 12 months.

Surprisingly Tough Times for Asset Management Stocks

You would think that financial services firms would be doing well in this lengthy bull run, but that's not necessarily so. The shares of America's biggest asset managers have been trampled during this year's market rise.

A selection of 10 large publicly traded asset-manager stocks put together by CNBC are off an average of more than 25 percent from their 52-week highs. Some of the biggest names are the worst off:

• Legg Mason, down 34 percent this year
• Franklin Templeton, down 34 percent
• Janus Henderson, down 36 percent
• AMG, down 37 percent
• Invesco, down 40 percent

The Dangers of a Cyberattack

Are you prepared for a cyberattack? Not if you're like most Americans. According to the new 2018 Chubb Cyber Risk Survey, a whopping 86 percent are clueless not only about what to do, but about how vulnerable their data is, in case of cyber threats.

The drained bank account actually isn’t the biggest risk people face, although that’s what 80 percent of respondents are most worried about. Bigger threats that insinuate themselves further into people’s lives involve Social Security numbers (60 percent), medical records (30 percent), email addresses (18 percent) and public WiFi exposures (12 percent).

People might think they’re safe as long as they have a password, but the report points out that only 40 percent reported using cybersecurity software and just 30 percent regularly change online passwords and use multifactor authentication to log into their accounts. Besides, 67 percent said they “always” or “often” use the same password for multiple sites.

What the Past Six Months Mean

The U.S. stock market has been on a roll the past six months, and it can keep on rolling if the past is any indicator. The S&P 500 rose for six months between April to September, something that has only happened six times since 1928. And each of those times, the stock market has gone on to notch strong gains for the remainder of the year, according to Bespoke Investment Group.

In the previous years that this has happened, the S&P 500 has risen four out of five times in October. The average gain in those October has been 2.38 percent, compared with 0.61 percent for all Octobers.

A solid April-to-September performance also has been a positive signpost for market performance in the fourth quarter. In the previous years when that has happened, stocks have notched an average rise of 9.2 percent in the final three months of the year.

The Big Third Quarter

The S&P 500 soared more than 7 percent in the third quarter, which ended on Friday. That's the strongest quarter for the S&P since the fourth quarter of 2013. The Dow spiked more than 2,100 points, or 9 percent, in the quarter.

Health care was the best-performing sector of the third quarter, surging 14.1 percent, its best quarterly gain since the first quarter of 2013. Industrials and tech, meanwhile, rose 9.7 percent and 8.5 percent.

The strong third quarter on Wall Street could also be a good omen for the rest of the year. When the S&P 500 rises in the third quarter, it has advanced an average of 3.8 percent in the fourth quarter of all years since 1945, according to CFRA Research. In midterm election years, the S&P 500 rallies an average of 7.1 percent in the fourth quarter following a third-quarter gain.