What's Going to Turn Stock Funds Around?

We’ve mentioned at several points this year that domestic stock funds have been losing assets at a horrific rate lately; they saw another $14.2 billion in net outflows in the month of August. The mutual fund news source Ignites has asked its readership a simple question: When will this trend reverse? 

This question has implications not only for the mutual fund industry but for the wider stock market as well. More money flowing into the market, all other things being equal, would be good for stock prices.

The answers were fairly mixed. Roughly 31 percent, the highest figure for any response, said that steady employment and income growth is what will bring investors back to equities. Another 27 percent said the most important thing was government progress on taxes, spending and the deficit. Other answers getting some solid support include rising interest rates and several quarters of strong GDP growth.

Renewed Confidence in the Housing Market

There was another step forward for the housing industry this week, as confidence among home builders rose to its highest level since before the onset of the recession in 2007, according to the National Association of Home Builders. After rising for the fifth consecutive month, the confidence index hasn't been stronger than this since June of 2006.

All three facets of the index rose in September: builders' expectations for sales over the next six months, current sales conditions, and traffic from potential buyers. And regionally speaking, the biggest jump in the index was right here in the Northeast.

That's not a surprise, because we have seen some improvement in the market here in New Jersey. In the second quarter of this year, home prices in our state rose for the first time in five years, dating back to the first quarter of 2007. It has been a long time coming, but the housing market may finally be getting its legs under it.

Manufacturing Stumbles

There was some discouraging - and unexpected - economic news for our area yesterday, as the New York office of the Federal Reserve announced that its index of business conditions for manufacturers dropped sharply in September, after a previous drop in August. OVerall, this was the sixth consecutive month that the reading fell.

The New York Fed covers, among other areas, northern New Jersey, so this is a local story for us. The readings for both new orders and shipments both fell for the month. A panel of economists surveyed by Dow Jones had forecast that the overall manufacturing index would hold steady in September, but instead it fell by 6 points.

There is some optimism about the future, though. The reading covering general business expectations for the next six months, which was already in positive territory for August, rose even further in September. The employee expectations index rose for the month as well.

The Rise of the Smartphone

Got yourself a smartphone? These products were unheard of five years ago, but now many people find they can't live without them. The iPhone 5 was unveiled last week, and will be available at Apple stores at the end of this week. They will be part of an estimated 674 million smartphones that will be sold around the workd this year, according to figures compiled by Credit Suisse.

One remarkable thing about all this is how receptive people are to high-priced smartphones. Back in 2010, less than 20 percent of all smartphones cost more than $500. Last year, that number was up to 25 percent, and this year it's expected that up to 28 percent of smartphones will sell for more than $500.

The biggest benefactors of this will be Apple and Samsung. Their iPhone and Galaxy brands account for a whopping 87 percent of the high-priced smartphone market.

QE3 Is Here

To no one's surprise, Federal Reserve chairman Ben Bernanke announced a third round of quantitative easing yesterday. The Fed's plan isn't as broad as earlier rounds of easing have been - Bernanke says they expect to buy $40 billion worth of mortgage bonds every month for as long as it seems necessary to do so. Earlier rounds included buying as much as $600 billion worth of Treasury bonds.

While it's always dangerous to read too much into single-day swings, it appears that the market liked this move. The Dow Jones Industrial Average and the S&P 500 index both gained more than one and a half percent on the day. The S&P had its highest close since December 2007.

And of course investors should get excited, if the effects are anything like those of the earlier rounds of quantitative easing. During the first QE, from March 2009 to March 2010, the S&P rose by nearly 73 percent. And during the second round, from the end of November 2010 until the beginning of June 2011, the S&P 500 rose by 11 percent.

The Shrinking Middle Class

Do you think of yourself as middle-class? If so, your slice of the pie has probably gotten smaller in recent years. According to figures released by the Census Bureau yesterday, median household income for the middle class declined by $777 last year, to $50,054. That's a decline in real household income - adjusted for inflation - of 1.5 percent.

The middle 60 percent of American households now take in 46.6 percent of American income, down from 50 percent in 1990. But the people on either side of the middle class are doing all right. The bottom 20 percent saw its income say stable over the past year, while the top 20 percent saw its income rise by 1.6 percent.

The best news was for those at the top of the ladder, the top 10 percent, which includes households making $162,000 or more. Their share of the nation's income rose by 5 percent in 2011.

The Market Finds Separation

This summer's rally in the stock market was accompanied by an unusual phenomenon: Stocks became highly correlated to one another. When one stock or sector moved up or down, it was likely that they were all moving up or down.

But that seems to be dissipating now. The correlation among the S&P 500's ten sectors was at 89 percent in July, but that figure dropped to 85.7 percent in August, according to the ConergEx Group, a market-analytics firm. Now it's dropped even further, down to 83.7 percent.

This is generally considered a good sign for the market. It's healthier for investors when company fundamentals drive a stock's price as opposed to macroeconomic trends. It also provides an opportunity for  actively managed funds - such as the kind we use here at Echelon Wealth Strategies - could really add a lot of value to individual portfolios.