Published May 5, 2017
Equity markets have reached noteworthy new highs year to date. The Dow was up 5.96 percent, the S&P up 6.7 percent and the NASDAQ an unusually strong 12.34 percent through April 28.
The highs came with rising volume and lowered volatility. The highs came in spite of weak GDP numbers and personal consumption numbers. The GDP for the first quarter of the year increased an anemic 0.7 percent, and personal consumption was the weakest in seven years.
Additional burdens on the market were the threat of rising interest rates and storm clouds regarding North Korea. Also, U.S. factory activity eased in April, leaving growth on solid ground, but slowing the growth trajectory. Optimism about the Trump agenda had buoyed the markets after the election, but that optimism found limits as parts of the agenda failed or were stalled.
The rising markets reflected an increased appetite for risk, which in turn is now supporting consumer spending and investment. Business investment is expected, by some analysts, to increase 5 percent over the next two years. Personal consumption is expected to increase 2 percent over the same time frame. Core inflation is expected to reach the Federal […]
Published April 7, 2017
Amid the longest bull market rally since 1928, there has been much concern about risk and how far the rally can go. The slow, grinding increase has been universally doubted by investors, and yet the rally has continued with occasional pauses and setbacks. Should investors stay in the market and experience the inevitable pullback, or get out and miss the rally?
Another possibility is that the market could pause and let the fundamentals catch up. Currently, the market’s price-earnings (P/E) ratio is about 22 times earnings versus its five-year average of 18.2. Such a lofty P/E points to a correction, but if earnings were to increase, the P/E would go down. Earnings can increase if the economy is strong and profits rise. Right now, optimism prevails.
However, there is a sharp divide among Democrats and Republicans in outlook. A recent survey by the University of Michigan showed that respondents who identified as Democrat expect an imminent recession, a higher unemployment rate, lower income gains and faster inflation. Conversely, Republicans expect strong growth in incomes and job prospects, coupled with lower inflation.
Another catalyst for a market updraft would be a tax […]
Published March 13, 2017
That question in the headline is one that I have been receiving from clients lately. From what I read and see, the stock market’s future is on a lot of people’s minds, and with good reason.
First of all, the market has a history of crashing from time to time – often without warning, like the time Alan Greenspan 72 days into his term as Federal Reserve chairman unexpectedly raised interest rates by a quarter point in October 1987. The market dropped 22.6 percent in one day and dropped more in ensuing trading sessions. The dot-com bubble and the 2007-08 crash are other examples. These events have seared investors’ minds, and so they are wary, as they should be. In a series of slow-grinding moves, this market recovery has gone on for the second-longest time since 1928. Investors begin to wonder if it will continue. Should you be in the market as it climbs to new highs, or drop out of the market in anticipation of a drop? To be in the wrong place at the wrong time can be expensive.
Let’s look at what we know. The long-term trajectory […]
Published February 10, 2017
Way back in what now seems like the dark ages, the world experienced a financial crisis. The crisis slammed every portion of the globe, and it persisted. From governments down to the bottom of the socioeconomic structure, both assets and jobs were lost. At about this same time, the Middle East was imploding in revolution. These two events would coalesce at a later date in worldwide turmoil.
The recovery from the economic crisis was slow and uneven. Many people who lost their jobs remained unemployed. The percentage of the workforce actually working stayed low. People at the upper end of the economic spectrum found that their assets recovered, as the Federal Reserve kept interest rates low by historical standards and kept them low for a long time. People out of work noticed the disparity. Those with good jobs and their own homes did not notice so much.
As the Middle East disintegrated, with country after country attempting to throw off repressive dictatorships, vast numbers of refugees were created. Many of these refugees sought new lives in countries with stable governments in Europe and elsewhere. Some countries said they would accept […]
Published January 9, 2017
The year 2016 started poorly, with the market dropping more in January than any other time in history. The equity market struggled throughout the year, continuing a trend which saw the S&P gain 1.9 percent from the end of 2014 through the first half of 2016. The California Public Employees Retirement System, the largest public pension fund in the U.S., with all its access to the best investment advisors, gained only 0.06 percent for the trailing 12 months ending June 30, 2016.
It’s no wonder that investors were unhappy with returns. They flocked to low-cost index funds in the belief they were better off, as low interest rates and no-growth policies sucked the gains out of the markets. Once interest rates start to rise and earnings return to the markets, stock pickers will regain the upper hand.
Fixed-income markets, coming off a 35-year bull market, saw massive drops after the election and two trillion dollars in market value in bonds was lost. So much for “low risk” fixed-income investments. Despite the poor performance of the equity markets, they were still the best place to be.
Everything appeared to change with the […]
Published December 12, 2016
November began with the impending U.S. election pitting Hillary Clinton against Donald Trump. Clinton was the odds-on favorite and the favorite of the market too. Investors had largely made their bets on a Clinton win. When Trump pulled the upset of the century, investors had to quickly redirect their investments. Equity investors switched from a risk-off scenario to a risk-on scenario.
As President-elect Trump gave a speech outlining his plans, the bond market had a heart attack. Two trillion dollars were wiped out within days. The Financial Times called it the worst bond rout since 1990. Interest rates jumped over 50 basis points within days – an astonishing move for a bond market, culminating in a move of almost 100 basis points since Sept. 1.
Additionally, the Federal Reserve had been signaling a rate hike of 25 basis points, with the futures market suggesting that the increase was more probable than not. Immediately after the Trump talk, the futures market’s certainty of a rate hike rose to 100 percent. The market did the Fed’s work for the Fed. Indeed, with the increase in interest rates of nearly 100 basis points, […]