Monday, July 1, 2013

Market Week: July 1, 2013

The Markets

Investors seemed to regain some perspective last week. After a rocky Monday, equities began reclaiming some of the territory that had been surrendered the previous week, helped by a revision to economic growth and reassurances from Fed officials who reiterated that any tightening would depend on future economic data. The S&P 500 once again managed to top 1,600, while the Dow briefly surpassed 15,000 but couldn't hold on to it. The Nasdaq and the small caps of the Russell 2000 substantially outperformed the other two domestic indices for the week, while statements from China's central bank helped reassure investors in the Global Dow.

Bonds also saw volatility as investors continued to pull money out of bond funds, though a midweek spike in yields seemed to stabilize a bit by week's end. Gold plummeted once again, losing roughly $60 an ounce to end near $1,220 an ounce.

Last Week's Headlines

The U.S. economy grew more slowly during the first quarter than previously thought; the final figure for the increase in Q1 gross domestic product was 1.8% rather than 2.4%. The Commerce Department said that despite an improvement in residential construction, consumer spending on services rose less than expected and businesses invested less in buildings and plant facilities. Also, both exports and imports fell instead of showing gains.
In a landmark ruling that struck down the Defense of Marriage Act, the U.S. Supreme Court paved the way for same-sex couples to claim the same federal tax and other benefits as other married couples in states that recognize same-sex marriages. Some of those benefits include survivor's/spousal Social Security and military benefits, the ability to inherit a spouse's estate tax-free, family medical leave rights, spousal visas and IRA contributions, joint federal income tax filings, and certain private pension benefit options.
April home prices in the areas measured by the S&P 500/Case-Shiller 20-city index were up 12.1% over last year--their largest year-over-year gains in the last seven years. Also, April's 1.4% increase was the biggest monthly gain in the index's history.
China's central bank attempted to calm turbulent markets there by saying it would help banks with any cash shortfalls, but continued to warn against reckless lending.
Consumer spending rose 0.3% in May, almost completely reversing April's 0.3% decline, and incomes rose even more. The Commerce Department said the 0.5% gain in incomes, fueled by higher wages, investment income, and entitlement payments such as Social Security, helped push the personal savings rate up as well; the 3.2% savings rate was the highest since December.
May sales of new homes were up 2.1% and were 29% higher than in May 2012; according to the Commerce Department, that's the greatest annual increase since the summer of 2008. The increase occurred despite rising mortgage rates. Freddie Mac said the average rate for a 30-year fixed mortgage hit 4.46% last week. That was its highest level in almost two years, and represented the biggest weekly gain since 1987.
European finance ministers took an important step toward unifying banks there by agreeing on a joint framework for dealing with failing banks. The agreement provides that regulators will look to bank creditors and investors first, followed by depositors with more than €100,000, to share in the cost of any bank failures--so-called "bail-in" measures--before turning to governments for financial assistance. The agreement must win approval from the European Parliament.
New durable goods orders followed a strong April with an equally strong May; according to the Commerce Department, new orders were up 3.6% for the month. Business orders for new capital equipment were up 9.3%, with defense-related spending accounting for much of the gain.
The Commodity Futures Trading Commission charged former MF Global Holdings CEO Jon Corzine and a former assistant treasurer for the company with misdirecting more than $1 billion from customer accounts to cover corporate shortfalls shortly before the firm's 2011 collapse.

Eye on the Week Ahead

After recent gyrations in multiple markets, investors may welcome an abbreviated trading week, though light trading volumes around the July 4 holiday also could exaggerate market movements. In light of the Fed's recent announcement, the unemployment rate is likely to be of even more interest than usual, since good economic news has tended to bring down markets lately (and vice versa). Also, Thursday brings a European Central Bank meeting on interest rates.

Key dates and data releases: U.S. manufacturing (7/1); factory orders, auto sales (7/2); balance of trade, U.S. services sector (7/3); European Central Bank meeting (7/4); unemployment/payrolls (7/5).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. 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, June 24, 2013

Market Week: June 24, 2013

The Markets

After the Federal Reserve laid out its blueprint for tapering off its economic support, financial markets promptly went into what was quickly dubbed a "taper tantrum." The Dow followed a 206-point loss the afternoon of the Fed announcement with a 354-point drop the next day, its worst loss of the year. The S&P 500 is now down 4.6% from the record high set on May 21, while the Dow and Nasdaq are down 3.9% and 4.1% respectively in the same time. However, the small caps of the Russell 2000 actually managed to close a point above May's high before joining the other indices in the post-Fed retreat. The Global Dow took the worst beating, hurt not only by Fed anxiety but by concerns about liquidity problems and weaker manufacturing reports in China as well as renewed worries about aid for Greece. Combined with the quadruple witching options expiration at week's end, it all made for a perfect storm for financial markets.

Investors who had poured money into bonds in recent years continued to reverse that trend. The 10-year Treasury yield soared almost four-tenths of a percentage point last week alone, topping 2.5% for the first time since August 2011, and bond prices generally fell sharply across the board, since bond prices tend to move in the opposite direction from yields. Gold, which has been suffering for months because of a stronger dollar, plunged roughly $80 an ounce after the Fed announcement, ending at just under $1,300.

Last Week's Headlines

The Federal Open Market Committee (FOMC) outlined a tentative game plan for reducing the economic support it has provided over the last few years. Assuming the current moderate economic expansion continues, the Fed may begin cutting back on its $85 billion a month worth of bond purchases by the end of the year and could end them entirely in 2014. Once the unemployment rate falls to around 6.5%, it will consider raising the target Fed funds interest rate above 0.25% for the first time in more than four years. The announcement raised investor concerns about whether the global economy would wobble once the training wheels known as quantitative easing are removed.
Home resales were up 4.2% in May, according to the National Association of Realtors®, and were almost 13% higher than in May 2012. Low inventories continued to constrain sales and helped send the median resale price to its 15th straight month of year-over-year increases.
The Federal Reserve's Empire State manufacturing index showed modest improvement, and the Philly Fed manufacturing index hit its highest level in more than two years. However, HSBC's survey of Chinese purchasing managers showed manufacturing there at its lowest level in nine months.
Consumer prices went up 0.1% in May, driven primarily by housing costs, according to the Bureau of Labor Statistics. That put the consumer inflation rate for the last year at 1.4%.
Housing starts increased 6.8% in May, and the Commerce Department said they were 28.6% higher than a year earlier. Residential building permits--an indicator of future construction activity--fell 3.1% during the month but were almost 21% higher than last May.
The Conference Board's index of leading economic indicators rose 0.1% in May, though at a slower pace than the month before. Three of the index's 10 indicators--stock prices, credit availability, and the interest-rate spread--were responsible for the increase.
China's central bank injected additional cash into the financial system there to ease concerns about liquidity between banks and bring down money market interest rates that had hit records.
A meeting of European Union finance ministers to set rules for dealing with failing banks was dominated by reports that the International Monetary Fund's aid payments to Greece could be in jeopardy later this summer because of a shortfall in funding for the aid package.

Eye on the Week Ahead

As the second quarter comes to a close, a number of Federal Reserve governors or board members are scheduled to make speeches that could elaborate on last week's Fed announcement. Housing data also is on tap, but investors may continue to focus on central banks around the globe and particularly in China.

Key dates and data releases: Dallas Fed manufacturing survey (6/24); durable goods orders, home prices, new home sales (6/25); final Q1 GDP figure (6/26); personal income/spending (6/27).

Monday, June 17, 2013

Market Week: June 17, 2013

The Markets

Investors already on edge about the future of central bank efforts around the globe seemed unnerved by the Bank of Japan's decision not to expand economic stimulus efforts there and arguments over a German court challenge to the European Central Bank's ability to aid weaker eurozone members. The Dow industrials continued to see triple-digit swings, and it was the third week out of the last four in which the S&P 500 has lost more than 1%. Bond markets, under pressure for the last six weeks, suffered from mood swings, especially abroad. The 10-year Treasury managed to rebound from midweek losses, though demand at an auction of 30-year Treasuries was weak.

Last Week's Headlines

A nearly 2% increase in auto-related sales helped drive up retail spending 0.6% in May, according to the Commerce Department; not counting autos, sales rose 0.3% for the month. Total sales were 4.3% higher than a year earlier.
After the Bank of Japan declined to inject further economic stimulus through further expansion of its bond-buying program, the yen rose strongly against the U.S. dollar. The BOJ's decision raised concerns that a stronger yen might make Japanese companies less competitive globally.
Wholesale prices rose 0.5% in May, according to the Bureau of Labor Statistics. The increase was driven largely by the prices of gas, trucks, and food (a 41.6% leap in the cost of eggs was responsible for 60% of the increase in food prices). The May figure brought the wholesale inflation rate for the last year to 1.7%.
U.S. industrial output was little changed in May. The Federal Reserve said utilization of the nation's manufacturing capacity slipped 0.1% to 77.6%, while industrial production was up 0.1% after declining slightly for two months. In China, factory output slipped slightly in May but was still up 9.2% year-to-date.
Standard and Poor's raised its outlook for the United States' credit rating from negative to stable, though it maintained its AA+ rating for U.S. debt. Meanwhile, the International Monetary Fund lowered its forecast for U.S. growth in 2014 to 2.7% from 3%, and cautioned that the Fed should be careful about withdrawing economic support too quickly.

Eye on the Week Ahead

Tale of the taper: All eyes will be on the Fed's Wednesday announcement and Chairman Ben Bernanke's press conference afterwards for any guidance on when economic support might begin tapering off. Coupled with key manufacturing and housing data as well as the quadruple witching options expiration at week's end, there's a lot of potential for the news to move markets.

Key dates and data releases: Empire State manufacturing survey, international capital flows (6/17); housing starts, consumer prices (6/18); Federal Open Market Committee meeting announcement (6/19); home resales, Philly Fed manufacturing survey (6/20); quadruple witching options expiration (6/21).