Monday, October 28, 2013

Market Week: October 28th, 2013

The Markets

Domestic equities continued to recover from their Washington-induced slump. Once again, the week saw fresh records for the S&P 500 and the small-cap Russell 2000; the S&P has now risen more than 6% since its October 8 shutdown low. The Dow saw the week's biggest gains for a change.

Last Week's Headlines

The unemployment rate continued to inch downward, hitting 7.2% in September, according to the Bureau of Labor Statistics. That's the lowest unemployment rate since November 2008. However, the 148,000 jobs added during the month was lower than the monthly average for the past year, and including underemployed and discouraged workers would put the unemployment rate at 13.6%, slightly lower than August's 13.7%.
Sales of existing homes slid almost 2% in September, the National Association of Realtors® said, but were still 10.7% above September 2012. The NAR attributed the slump to the fact that according to mortgage lender Freddie Mac, the 30-year fixed rate hit almost 4.5%, its highest level since July 2011 and more than a full percent higher than in September 2012. The median sales price of $199,200 represented the 10th straight double-digit year-over-year increase.
Durable goods orders were up 3.7% in September, but according to the Commerce Department, a 57.5% increase in orders for aircraft was responsible for almost all of that. Non-transportation orders were down 0.1%, though business spending on capital equipment rose almost 7%.
JPMorgan Chase & Co. reportedly has negotiated a $13 billion settlement of federal civil lawsuits over mortgage securities sales leading up to the 2008 financial crisis. Earlier in the month, JPMorgan had reported a loss for Q3 caused largely by increasing to $23 billion the reserve it has set aside to cover legal expenses. Also, a jury found Bank of America Corp. liable for defrauding Fannie Mae and Freddie Mac through bad mortgages sold by Countrywide Financial, which BofA acquired in mid-2008. A judge will decide the bank's penalty later.

Eye on the Week Ahead

Investors will find out Wednesday whether the impact of the government shutdown was enough to postpone any Fed tapering. Earnings season also continues, while release of the initial estimate of Q3 economic growth has been postponed until November 7.

Key dates and data releases: home prices, retail sales (10/29); Federal Open Market Committee monetary policy announcement (10/30).

Data sources: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: U.S. Treasury (Treasury yields); WSJ Market Data Center (equities); Federal Reserve Board (Fed Funds target rate); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold, NY close); Oanda/FX Street (currency exchange rates). Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Monday, October 21, 2013

Market Week: October 21st, 2013

The Markets

Near-debt experience: The ceasefire in Washington that put federal employees back to work and averted a debt ceiling disaster also brought relief on Wall Street. One-month Treasury yields had skyrocketed in October as investors abandoned them; that sell-off reversed after a deal was announced, cutting the yield in half overnight and to one basis point by week's end. Long-term debt saw less impact, but equities rallied strongly. The S&P 500 built on a 1.4% gain on the day of the announcement by hitting a new all-time closing record on Friday. The small caps of the Russell 2000 also set a fresh record, and along with the Nasdaq gained roughly 3% over the three post-announcement closes. However, the Dow was hampered by disappointing earnings reports from a couple of its key components.

Last Week's Headlines

After 16 days of partial government shutdown and debt ceiling gridlock, a last-minute agreement broke the impasse the day before the Treasury was scheduled to begin running out of cash to pay the nation's bills. The legislation suspends the debt ceiling until February 7 and provides funding to reopen the government through January 15. The deal to end the stalemate also established a congressional budget conference that must report by December 13 on ways to address longer-term budget issues.
Growth in the world's second-largest economy accelerated in the third quarter, according to China's National Bureau of Statistics. The 2.2% increase from Q2 on an annualized basis would represent a 9.1% annual growth rate, higher than the actual 7.8% increase seen over the past year. The increase was attributed to the effects of massive lending in the first two quarters as well as government spending on urban infrastructure in an attempt to counteract a slowdown earlier in the year.
Manufacturing reports from the Federal Reserve's Philadelphia and Empire State regions were mixed. The Philly Fed index edged down to 19.8 in October from September's 22.3, and the Empire State's outlook on general business conditions fell 5 points to 1.5. However, new orders were up in both regions.
The Federal Reserve's beige book report, based on data collected before October 7, showed "modest to moderate" expansion. Businesses were said to be cautiously optimistic about future activity, but the report registered an increase in uncertainty because of the government shutdown and debt ceiling debate. Several of the Fed's 12 districts noted caution about expanding payrolls because of uncertainty about implementation of the Affordable Care Act and fiscal policy in general, but demand for skilled labor remained high in many districts.
The lack of government data meant that the Conference Board's index of leading economic indicators and the Federal Reserve's industrial production numbers for October were not available.

Eye on the Week Ahead

With the debt debacle temporarily resolved, investors are free to turn their attention to an onslaught of earnings reports and begin speculating about whether the shutdown's economic impact, estimated by Standard & Poor's at $24 billion, will delay any Fed tapering. October's delayed unemployment report for September is now scheduled for release on Tuesday; concerns about the anticipated impact of the shutdown could amplify any disappointment with September's numbers.

Key dates and data releases: home resales (10/21); unemployment/payrolls (10/22); new home sales (10/24); durable goods orders (10/25).*

*Some data releases postponed by the government shutdown are being rescheduled and may not be available.

Monday, October 14, 2013

Market Week: October 14th, 2013

The Markets

Deal or no deal: If there was any doubt about whether Washington has been driving equities lately, it vanished on Thursday when a glimmer of hope for an end to the fiscal stalemate emerged. After stocks started the week with a swoon, the two-day rally that followed let the Dow reclaim 15,000 and the S&P 500 edge above 1,700. Meanwhile, the Nasdaq, which had demonstrated some resilience the week before, couldn't quite manage to turn positive.

Last Week's Headlines

Global growth this year is expected to be more sluggish than previously thought, according to the International Monetary Fund's latest report. The new 2.9% figure for 2013 is lower than the 3.2% forecast in July and would be the slowest growth in four years. The IMF cited as key threats the potential impact of reduced Federal Reserve quantitative easing, slowing growth in China, high global debt, and the continuing eurozone credit problem. The IMF's growth forecast for 2014 is 3.6%, with most of that acceleration coming from advanced economies rather than emerging markets. However, the IMF said its forecasts assume a short-lived U.S. government shutdown and timely resolution of the debt ceiling conflict.
President Obama nominated Federal Reserve vice chairman Janet Yellen to replace Ben Bernanke when the Fed chairman's term expires January 31. Her confirmation hearings could provide clues to Fed sentiment about future tapering of economic support. Minutes of the Fed monetary policy committee's September meeting showed that most committee members continue to favor a start to tapering sometime before the end of the year. However, with one exception, they voted not do so in September because of concerns that it could bring on "unwarranted tightening of financial market conditions."
Data on the U.S. balance of trade, wholesale inflation, and retail sales were unavailable because of the federal government shutdown.

Eye on the Week Ahead

With government data nonexistent and the clock ticking down toward Thursday, when the Treasury says it will start running out of cash to pay all its bills, very little outside Washington is likely to matter to financial markets (unless the debt debacle prompts another U.S. credit rating downgrade, which would get plenty of attention). Options expiring at week's end could prompt a scramble to adjust portfolios.

Key dates and data releases: Empire State manufacturing survey (10/15); consumer inflation, Fed "beige book" report, international capital flows (10/16); housing starts, industrial production, Philly Fed manufacturing survey (10/17); leading economic indicators (10/18).*

*Because of the government shutdown, some data releases may not be available.

Monday, October 7, 2013

Market Week: October 7, 2013

The Markets

The Washington impasse continued to take its toll on the Dow industrials, which fell for the second straight week. However, the S&P 500 ended the week essentially flat despite some volatility, while the Nasdaq and small caps of the Russell 2000 managed to eke out slender gains. After hitting its lowest point in two months, gold rebounded roughly $34 before falling back slightly to $1,310 an ounce.

Last Week's Headlines

The government shutdown left investors with more question marks than usual about the state of the economy, since reports from the Commerce Department, Census Bureau, and Bureau of Labor Statistics--all of which supply data on economic activity--weren't available. Worries about the economic impact of the shutdown began to merge with worries about whether an agreement on the debt ceiling would be reached in time to avert default on the nation's bills. A Treasury report warned that a default after October 17 could not only weaken the dollar and lead to a credit freeze as well as higher interest rates, but also could be worse than the 2008 financial crisis.
With government unemployment statistics unavailable, the Automatic Data Processing, Inc. jobs report (which covers only the private sector, not government jobs) assumed greater importance. According to the ADP survey, companies added 166,000 jobs in September. That's slightly better than the 159,000 jobs added in August or the 162,000 monthly average for the last three months, but much weaker than the 220,000 new jobs seen by ADP in January. Employment indices compiled by the Institute for Supply Management (ISM) for the manufacturing and services sectors also rose (see next item).
Growth in U.S. manufacturing activity accelerated in September as the ISM's manufacturing index hit 56.2%--the highest reading of the year and slightly better than August's 55.7%. However, the ISM's gauge of the services sector grew more slowly during the month. Though the index was at 54.4% and represented the 45th straight month of growth, that was lower than August's 58.6%. The ISM's index of manufacturing employment hit its highest level year-to-date, increasing to 55.4% from August's 53.3%, while growth in services employment slowed from 57% in August to 52.7% in September.
The European Central Bank kept its key interest rate at 0.5%, saying that lending in Europe remains relatively weak. ECB President Mario Draghi also warned that a protracted U.S. government shutdown could undercut global growth.

Eye on the Week Ahead

The Washington wrangling will continue to be the focus of investor attention, as little economic data may be available to influence markets. However, third-quarter earnings season gets under way with Alcoa's after-hours report on Tuesday, and the U.S. Treasury is scheduled to auction 3-, 10-, and 30-year securities on Tuesday, Wednesday, and Thursday. Minutes of September's Fed meeting could shed light on the likelihood of an "Octaper" of economic support.

Key dates and data releases: balance of trade (10/8); Federal Open Market Committee minutes (10/9); wholesale inflation, retail sales (10/11).*

*Because of the government shutdown, some data releases may not be available.