A Blah Third Quarter

The third quarter of 2019 comes to a close today, and it’s been a pretty blah quarter for most of the market indexes. After a very strong start to the year, the last three months have seen little movement in the markets.

For the third quarter, the S&P 500 is on track for a 1.1 percent gain, after rising 3.8 percent in the second quarter and 13 percent in the first quarter. The Dow also rose 1.1 percent in the third quarter, after rising 2.6 percent in the second and 11 percent in the first. The Nasdaq had the biggest reversal, falling 0.4 percent between July and September, compared with a 3.6 percent increase in the second quarter and a 16.5 percent rally in the first.

But don’t lose sight of the bigger picture. The S&P 500 is up 18.6 percent on the year; the Dow Jones industrial average is up 15.4 percent, and the Nasdaq is up 20 percent.

Falling Off the 500

What does it take to get dropped from the S&P 500? S&P Dow Jones Indices announced late yesterday that it was booting Nektar Therapeutics, which has been testing a treatment for breast cancer, from the S&P 500 index. Nektar was the worst performing stock on the index in the past 12 months, dropping more than 70 percent.

Nektar's earnings fell 112 percent in the second quarter. How do you lose more than 100 percent of your earnings? The company had recorded earnings of $5.33 per share in the year-ago period, thanks to a billion-dollar payment from Bristol-Myers. But that turned into a loss of 63 cents per share for the second quarter of 2019.

More recently, Nektar tested a combination of its drug, NKTR-214, with Bristol-Myers' Opdivo in breast cancer patients. Across 38 patients who could be evaluated, just five responded. As a result, Nektar stock fell 6.6 percent in one day yesterday - and S&P took its action.

Where Do You Work?

Do you leave home and go to work every morning? The option to work from home has become an increasingly desired perk for a lot of employees. In 2017, a Gallup poll found that 43 percent of Americans worked remotely “at least sometimes.”

The next wave in this: Working from anywhere (WFA), in which workers can live and work wherever they choose, whether it be in the U.S. or even a different country. A new study shows that work from anywhere may even help people delay retirement.

In a study of U.S. patent examiners, the researchers noted that workers “who had been on the job longer — that is, those older and closer to retirement age — were more likely to move to retirement-friendly coastal areas of Florida and Texas than their lower-tenured peers.” The research suggests that offering a WFA policy could end up encouraging valued senior employees to remain in the workforce longer.

The Latest Consumer Report

September's consumer confidence report posted the biggest drop since the start of the year, as Americans’ expectations for the economy and the job market deteriorated. Both the present situation and expectations gauges declined, with the latter dropping to the lowest level since January.

Some of the findings:

• Confidence among those earning $125,000 or more a year suffered the largest one-month decline since April 2015.
• The share of consumers who see business conditions getting worse six months from now climbed to the highest level since November 2013.
• The share of those respondents who say incomes will increase six months from now dropped from 25 percent to 19 percent, the lowest since January.
• Buying plans for motor vehicles, homes and major appliances also declined in September.

The Key to Long-Term Savings

What's the best way to save money over the long haul? Housing is the biggest part of most Americans’ budgets; the average American household spends a total of roughly $60,000 per year; nearly $20,000 of that spending is on housing, government data shows.

And now, new research from TD Ameritrade — which looks at people who save 20 percent or more of their incomes, called “super savers” — shows that the single biggest difference between what super savers spent less on was housing. Super savers spent just 14 percent of their incomes on housing, while regular folks dropped 23 percent.

What’s more, research released this week by the Principal found that more than four in 10 people who fully funded or were very close to fully funding their 401(k)s said that one of the sacrifices they made to save so much was that they lived in a modest home.

Defining the Upper Class

Do you define yourself as "upper income"? According to a 2018 report from the Pew Research Center, 19 percent of American adults live in “upper-income households.” The median income of that group was $187,872 in 2016.

Pew defines the upper class as adults whose annual household income is more than double the national median. That’s after incomes have been adjusted for household size, since smaller households require less money to support the same lifestyle as larger ones.

Here’s the minimum amount you’d have to earn each year to be considered upper-class, depending on the size of your household:

• Household of one: Minimum of $78,281 
• Household of two: Minimum of $110,706
• Household of three: Minimum of $135,586 
• Household of four: Minimum of $156,561
• Household of five: Minimum of $175,041 

Working Past 65

Are you planning to stop working at age 65? That may be a thing of the past. According to Northwestern Mutual’s new 2019 Planning & Progress Study, 46 percent of Americans expect to work past the traditional retirement age of 65.

On the positive side, 53 percent of Americans who said they expect to work past the age of 65 have noted that it will be by choice. This is slightly higher than the 47 percent who reported they expect to beyond retirement age out of necessity.

Why keep working? These are the most popular answers:

• 58 percent believe they will still enjoy their career by age 65 and wish to continue.
• 46 percent believe they will want additional disposable income.
• 39 percent believe working is a social outlet that will help them stay active and prevent boredom.

The Future of Rate Cuts

As was widely expected, the Federal Reserve reduced its benchmark short-term rate to a range between 1.75 percent and 2 percent yesterday afternoon. That’s the second rate cut in as many months.

The big question now is if there will be another rate cut this year. Seven Fed officials said they believed there would be one more rate cut this year, while five indicated they thought this move would be the year’s last.  So they're nearly evenly split.

Five more members thought no move was needed after July, including at Wednesday’s meeting. While the seven who see another easing yet this year is not a majority, it is a sizable block.

The Economy's Mixed Signals

The risk of a global recession is at its highest since August 2009, according to the new Bank of America Merrill Lynch Fund Manager Survey for September. Some 38 percent of investors polled expect a recession over the next year. That figure was 34 percent in its August survey, which had been the highest response since October 2011.

But the same survey showed fund managers are buying America more than they have in over a year. Allocation to U.S. equities soared 15 percentage points to a net 17 percent overweight, the biggest monthly increase since June 2018.

On top of that, the Federal Reserve said yesterday that manufacturing production rose 0.6 percent last month, following  on the heels of a drop of 0.4 percent in July. Manufacturing accounts for about 11 percent of the U.S. economy,

Is the Oil Shock Good for Stocks?

Oil futures on Monday marked the sharpest daily rise in more than a decade after a weekend attack on major crude facilities in Saudi Arabia threatened to create a supply crunch. West Texas Intermediate crude gained 14.7 percent, to $62.90 a barrel, representing the largest daily gain since September 22, 2008.

But that might be good news for stocks. History shows that past oil shocks haven’t always caused much harm to stocks. While one-day crude-oil price jumps of more than 10 percent are usually accompanied by market losses on the same day, they have been, on average, followed by better-than-usual performance six months out, according to Dow Jones Market Data.

The S&P 500 has, on average, risen 10.2 percent in the six months following one-day, crude-oil price spikes of 10 percent or more, nearly 4 percentage points higher than the 6.3 percent average growth of the S&P 500 during other periods. The Dow has risen 8.7 percent six months after a 10 percent crude surge, versus a typical 6.1 percent rise, while the Nasdaq has seen a 15.5 percent rise compared with a typical 8.2 percent rise.

The Shock to Oil Prices

Are we headed for an oil shock? Oil prices soared last night after a drone strike disrupted Saudi Arabia's oil facilities, leading to a possible disruption of the world's supply of crude. The attacks knocked out more than half of Saudi oil output, or more than 5 percent of global supply.

U.S. crude futures jumped as much as 15 percent before settling back at around an 11 percent increase. Brent crude, the benchmark used in European oil markets, rose by 18 percent before trading up about 12 percent.

Gasoline futures were also up 11 percent, according to market data source Refinitiv. That would counteract a long-term trend: The average U.S. price of regular-grade gasoline has dropped 3 cents per gallon over the past three weeks to $2.63, and is 20 cents lower than what it was in mid-July.

The Latest Inflation Reading

The core consumer price index rose 0.3 percent in August and was up 2.4 percent from a year earlier, the Labor Department said yesterday. While those figures are unexceptional, the more important news was the rise in medical costs.

August saw the biggest monthly rise in medical-care costs since 2016 as well as record increases in health-insurance prices. There was a 1.9 percent monthly rise - and an 18.6 percent annual increase  - in health-insurance prices, along with increases in hospital services and nonprescription drugs.

Also driving the core inflation gain were used-car prices, up 1.1 percent for a third straight increase, while shelter costs, which make up about a third of total CPI, rose 0.2 percent from the prior month. Energy prices fell 1.9 percent from the prior month as gasoline dropped 3.5 percent, but apparel was up 0.2 percent.

Small Caps Make a Comeback

This has been a rough year, comparatively speaking, for small-cap stocks, but they may be making a comeback. The benchmark small-cap Russell 2000 index has far outperformed both the Dow Jones Industrial Average and the S&P 500 index this week.

The Russell 2000 has gained 4.6 percent so far this week and rose at least 1 percent in three consecutive sessions. That may not sound like much, but it is its first time doing so since last January.

More significantly, the Russell’s weekly gain marked a 3.81 percentage-point spread between its increase and that of the S&P 500. If that holds, it would mark the widest margin of underperformance between the large-cap index and the Russell on a weekly basis since November of 2016.

Signs of Cooling in Housing

Even though mortgage rates are around the lowest they've been in three years, buyers are suddenly much more cautious about purchasing a home. Competition is cooling, and consequently sellers can no longer command any price.

Consumer sentiment in housing did improve in August, according to a monthly survey from Fannie Mae. But that's only because of a big jump in the share of those who think mortgage rates are going to continue to fall. There are other signs that the housing market is cooling.

For instance, just more than 10 percent of offers written by Redfin in August faced a bidding war, according to the brokerage’s monthly survey. That is down from 42 percent a year ago. The supply of homes for sale is growing in the midrange and higher end, but it is still tight at the entry level.

The Decline of Younger Workers

Young people just aren't working these days. Between 2000 and 2018, the workforce participation rate for ages 16 to 19 fell from about one half of the population to one third, according to a new study from the Brookings Institution. The participation rate for ages 20 to 24 dropped from almost 80 percent to about 71 percent,

The drop in younger workers will continue into 2028, according to Bureau of Labor Statistics projections. The labor force participation rate for the 16- to 24-year-old age group is projected to shrink by 3.5 percent from 2018 to 2028, the agency said.

As a result, just over half of the young working population (51.7 percent) will be part of the workforce by 2028. That’s a 14 percent drop from the rate in 1998, when almost 66 percent of the 16- to 24-year old demographic had a job or was looking for one. It remains to be seen what effects these drops will have on our economy - and our society.

Stranded in Newark

If you’re flying out of Newark Liberty International Airport anytime soon, you may want to bring an extra book to read. According to a new study, our local airport ranked as the worst in the U.S. for having the highest share of flights that were delayed for over 15 minutes or cancelled. The air-passenger rights company AirHelp found that only 64 percent of flights departed Newark on time.

Passengers won’t do much better flying out of other New York City-area airports. LaGuardia’s on-time performance rate was only 66 percent, third-worst in the nation, and JFK came in at No. 8, with almost 74 percent of its flights leaving on time.

This comes on the heels of last month's study showing Newark airport at the top of security wait times across the country. The average TSA wait time at Newark Liberty is 23 minutes.

August's Jobs Report

The economy added just 130,000 new jobs in August, marking the smallest increase in three months, according to figures released by the Bureau of Labor Statistics this morning. Removing the temporary workers hired for the U.S. Census, the private sector added around 100,000 jobs last month. The headline unemployment rate was unchanged at 3.7 percent.

The federal government added 28,000 jobs last month, mostly temporary workers hired to help prepare the census that takes place every ten years. Professional and business services led the way in hiring by adding 37,00 new jobs; health-care added 24,000, and financial companies 15,000. But retailers and energy companies cut jobs.

One caveat: The government tends to undershoot its August jobs number. With so many people on vacation, the number of respondents to the government’s monthly questionnaire is often the lowest of the year. As more responses are returned, the government usually ends up revising job growth higher.

The Latest From the Beige Book

The Fed's latest Beige Book, compiling on-the-spot reports from around the country, suggests that the economy continued to expand at a modest pace through the end of August. Coverage of New Jersey's economy is split between the Fed's New York City and Philadelphia offices, so those are the reports that are of the most concern to us.

In New York, the labor market has remained very tight, with businesses reporting trouble finding qualified workers in a wide variety of roles, including engineers, teachers, construction workers, truck drivers, and retail clerks. Tourism has picked up noticeably, and banks reported a rebound in loan demand, though the financial sector overall showed signs of softening.

In Philadelphia, malls and convenience stores continued to report modest growth in retail sales. Some mall store operators reported modest increases in year-over-year sales and foot traffic. Tourism activity continued to grow at a modest pace; one contact noted that the Jersey shore season has been fine, with high occupancy, that restaurants and other retail are performing well, and that casino revenues in Atlantic City were up.

Cracks in Manufacturing

Are there serious problems in manufacturing? Yesterday, the Institute for Supply Management reported that its manufacturing index fell from 51.2 percent in July to 49.1 percent in August. Any reading below 50 percent indicates a contraction in activity.

August's mark is the lowest reading for this index since January 2016. The ISM Manufacturing Index has now declined for five straight months.

The new orders index fell to 47.2 percent and the production index fell to 49.5 percent. Only nine of the 18 manufacturing industries reported growth in August and only three reported gains in new orders. The ISM also noted “a notable decrease in business confidence” in August.

Summer's End

Now that we're past Labor Day, not only is summer coming to an end, but there's downbeat news for investors as well: September is, on average, the worst month for stock prices. Since 1937, the average September performance of the S&P 500 index and the Dow Jones Industrial Average is a 1 percent decline, while the Nasdaq Composite Index has seen an average fall of 0.5 percent, according to Dow Jones Market Data.

Such performance wouldn’t be welcome news for equity market investors, who just suffered through a 1.7 percent August decline for the Dow, a 1.8 percent loss for the S&P and a 2.6 percent drop for the Nasdaq. These are the worst August performances for all three benchmarks since 2015.

It’s not all bad news, however. According to an analysis by LPL Financial, the past 15 times that the S&P 500 lost ground in August, the rest of the year saw positive returns every single time.

Thoughts for Labor Day

“No work is insignificant. All labor that uplifts humanity has dignity and importance and should be undertaken with painstaking excellence.”  ~ Martin Luther King, Jr.

“Without ambition one starts nothing. Without work one finishes nothing. The prize will not be sent to you. You have to win it.” ~ Ralph Waldo Emerson

"One machine can do the work of fifty ordinary men. No machine can do the work of one extraordinary man." ~ Elbert Hubbard