By now you are probably aware that the U.K. has voted to leave the European Union (EU). The vote came as a shock to the markets even as it was known that the margin go or remain was razor thin.

What began as an experiment after the Second World War has run aground in a very short time from a historical perspective. For centuries Europe has had a history of turmoil with major wars following about every fifty years. After World War I an attempt was made for a lasting peace with the League of Nations, but that did not last long. After the carnage of World War II, Konrad Adenauer and Charles DeGaulle set about avoiding yet another major war on the continent. If the countries of Europe could be united economically, it was reasoned, maybe they could avoid future wars. Beginning with small agreements, initially about coal, and later about tariffs in general, the seeds of the European Union were planted. Out of that initial effort came an economic union, a common currency and the ability to travel and ship goods freely throughout Europe. No longer were hours long waits at borders necessary to cross the borders. No longer did you need a different currency in each country. Young people in Europe began to think of themselves as European, not Germans or Poles. Military conflict was almost unknown, except for the breakup of countries like Yugoslavia or the Russian invasion of Crimea. The example of Western Europe was so strong that Eastern European counties wanted to be part of the EU and use the Euro currency.

But this all fell apart when the crisis in the […]

Published June 13, 2016
Last month I asked a rhetorical question: Should we sell in May and go away as the old market saw suggests? I pointed out that what was once a predictable market event has shown, in recent years, to be unreliable.

This May turned out to be no exception, as the markets once again confounded the experts. If you sold in May, you left the party too soon. The Standard and Poor’s index rolled up a 1.53 percent gain in May – 1.8 percent with dividends reinvested. For the three months ending in May, the blue chip index was up 9.12 percent with dividends. The markets were expected to decline because the Federal Reserve was expected to raise rates in June or July.

Once again the Fed has egg on its face, as the most recent jobs report showed that only 38,000 jobs were created in May. The consensus forecast of economists was 160,000 new jobs. This was the worst job growth number in five years. Jobs growth for previous months was also revised downward. Even 160,000 new jobs is a paltry number, because the economy needs to create 250,000 jobs each month to absorb the new workers. Furthermore, for the past several months, the new jobs created have declined sequentially. The unemployment rate fell 0.3 percent, as over 664,000 workers left the workforce; the labor participation rate declined.

Fed speakers had been out in force on the rubber chicken circuit declaring that rates were going up and that the economy was strong and growing stronger. The economy was gaining steam, they said, with employment near capacity. That scratching sound you hear is the Fed members rewriting […]

Published May 9, 2016

Sell in May and go away. This mantra has been a market staple for years. It used to have a solid basis, but not so much anymore. For instance, the market has been up in May for three of the past five years, so what will this year bring?

This year a disappointing start was followed by a strong rally to get the market to essentially break even by March 11. The market as of May 3 is 3.2 percent off of its all-time highs reached on May 21, 2015, but doesn’t seem to be able to mount a breakout. Telecommunications and utilities have been the best performing sectors year to date, and health care and financials the worst.

Various headwinds have stalled the markets: This recovery is long in the tooth. It is the second longest bull market in U.S. history, surpassed only by the boom after World War II. From its low in March 2009, the recovery is now over 2,600 days old and counting. It has been a weak recovery with GDP recently barely growing more than 1 percent. Indeed, GDP growth was 0.5 percent in the first quarter of 2016 – the lowest in two years as consumer spending disappointed. Consumer spending makes up about 70 percent of the economy, so it’s very important. Inflation has been missing Federal Reserve targets.

The market is fully priced at around 23 times earnings versus a normal price to earnings ratio of 15.59 percent.

Earnings are weak. Including energy, expectations are for an earnings decline of 8.9 percent for this year’s first quarter. That certainly is not encouraging; however, Thomson Reuters reports that Q1 earnings are […]

Published April 11, 2016

In the fourth quarter of 2015, investors were losing confidence in the Federal Reserve. The Fed speakers were out on the rubber chicken circuit spouting all kinds of opinions. “More rate hikes” would say one Fed President, “no rate hikes” would say another, and so it went.

The markets were dizzy with the contradictions. The global economy was weak, with China particularly unnerving. The price of oil was declining, along with other commodities; loans to commodity producers looked risky; and the banks, once again, looked shaky. The dollar was strengthening on the belief that the Fed was about to raise rates again. Multinational companies and emerging markets were hit. The dark clouds were everywhere. Albert Edwards, global strategist for Societe Generale, warned that the U.S. market could fall 75 percent. The voices of other market bears grew louder.

Into this mix, stepped the Fed with a December rate hike, ill-timed and not well received. Because of all the Fed speaker chatter, the markets believed the Fed was about to raise rates again in January. Clearly the Fed and the markets were out of synch. Not surprisingly the market took a nose dive.

The market began 2016 with the worst start in history, and then went down. At the peak of the pessimism, all indices were down more than 10 percent on the year, and the Dow was down 15 percent from its May 2015 record high.

In January, the Fed, perhaps realizing it was out of step with the economy, declined to raise rates again. The market began its recovery. On February 11, the same day the market bottomed, Jamie Dimon, CEO of JP Morgan, purchased $25 […]

Published March 14, 2016

After the markets hit their high on May 21, 2015, they began a steady decline due to the low price of oil, the weak Chinese economy and the threat of imminent interest rate increases. After a brief uptick in the last two weeks of December, the decline continued into 2016. The start to the New Year was the eighth-worst decline on record and the worst for a new year since 2009. At 10.5 percent off its high, the market appeared to be forecasting a recession.

It is often said that market tops are a process, but bottoms are an event. Was the recent low reached on Feb. 11 a bottom? With the decline cut to just 2 percent for the year recently, it appears for the moment, at least, that we have dodged a recession.

Market signals are definitely mixed, but indicators seem to suggest a bottom has been entered. The Chicago PMI clocked in at 47.6 against an expected 52.8. Consumer confidence in January declined from 97.8 to 92.2. Manufacturing rose to 49.5. Jobless claims rose slightly, but the jobs numbers remained strong by recent standards. Total job growth totaled 242,000, which cheered the Fed. However, overall unemployment remained high, especially among the young and minorities.

It is no wonder that many people feel left behind by our meager growth. For the past 10 years our economy has not grown more than 2.75 percent annually – a first in our nation’s history. Working people suffer from meager opportunities and meager wage growth. Democrats turned to mandated wage growth and legislated higher wages. Business, especially small business – the largest provider of new jobs in the […]

Published February 8, 2016

On Dec. 16, 2015, the Federal Reserve decided to raise interest rates by one-quarter percent. Never mind that signs of a lowering global economy were evident. Never mind that Christine Lagarde, managing director of the International Monetary Fund (IMF), and others warned against a rate increase. Never mind that the Chinese economy was slowing and the Chinese yuan was falling in value, causing commodity prices to fall worldwide. Never mind that emerging economies were struggling and become weaker because of a strong dollar. Never mind that a strong dollar was creating problems for U.S. businesses.

In fall 2015, the Fed set the table for a rate increase and then backed away at the last minute, losing credibility. In December the Fed felt it had to raise rates to restore credibility. Fed speakers took to the rubber chicken circuit to preach the gospel of rate increases; four was the number most mentioned. So having backed itself into a corner, the Fed felt compelled to raise rates. Fed officials cited job growth and inflation expectations as the catalyst. Never mind that the new jobs were mostly for young and old job seekers, suggesting that they were temporary. Only a small portion of the new jobs benefited the 25-45 age group. Inflation remained benign.

Equity and bond markets reacted almost immediately to the Fed decision, with the equity markets going on a sustained rout; the broad market fell into correction territory and some sectors plummeted into bear market territory (down 20 percent or more). The bond markets shook off the rate increase, and bond yields dropped instead of increasing. Expectations for rate increases were pushed off once more, […]

Published January 11, 2016
2015 offered very little return to investors no matter what asset class they chose to invest in. After reaching an all-time high on May 21, 2015, the equity markets plunged in August as China devalued its currency in a surprise move and commodities’ prices fell. Investors became very concerned over weakness in the Chinese economy. Oil prices were down 30 to 35 percent on the year.

In September, Hillary Clinton tweeted that she would crack down on high drug prices if she were elected president and pared $162.4 billion off of the NASDAQ biotech index ETF (NBI). The drug sector, one of the best performing ones of 2015, became a political football, and fell dramatically when the prospect of “Hillarycare” triggered a rout.

The S&P broad market index closed the year down 0.7 percent – hardly the returns that investors have come to expect, and not enough to keep up with even subdued inflation. The consumer discretionary sector in which we are overweighed led the S&P, up 8.4 percent.

The Dow Jones industrials lost 2.2 percent, with 1 percent of that loss coming on New Year’s Eve. The NASDAQ was the best performer – up 5.7 percent, with Netflix (up 134 percent) and Amazon (up 118 percent) leading the way.

It didn’t matter in what sector one invested; the results were about the same. Six of the 10 sectors in the S&P were down on the year. High-yield bonds were hit hard. Even Warren Buffett was down 11.5 percent on the year. The markets are up 63 percent in the past five years, but 2015 was certainly a year to remind investors that investing is risky.

With the […]

Published December 15th, 2015
Federal Reserve Chairwoman Janet Yellen and the Federal Reserve Board are about to end the waiting. After seven years of key interest rates being held extraordinarily low, Yellen and her colleagues are about to raise rates.

Yellen, expressing confidence in the U.S. economy, on Dec. 2nd gave the strongest indication yet that increases are on the way. She also cited falling unemployment and a small pickup in inflation; those markers support a rate hike.

The Fed has said that data will drive rate increase decisions, but the data has worked against it. Now, at the end of a long cycle, with growth slowing globally and at home, the Fed may be running out of time to increase rates. If the economy slows, as expected in 2016 and 2017, the Fed would have no justification to raise rates, and no dry powder necessary to boost a flagging economy. After repeatedly hinting at rate increases only to back off, and after the strongest statements yet about an increase, the Fed has painted itself into a corner. It must increase rates or face a loss of credibility. Of course, if it raises rates and the economy stutters or tanks, it will have lost credibility too. Is it just seeing what it wants to see in the data?

Yellen sees continued improvement in the labor market, which she believes will cause inflation to rise to more than the target rate of 2 percent over the medium term. However, in October, more than 2 million people who are out of the labor force indicated that they had not searched for work, even though they wanted jobs. These people could be drawn […]

Stock market experiences exuberant October; Fed still isn’t sure whether it will raise interest rates

Published November 9th, 2015

The markets in October had their biggest monthly gain since October 2011. Over the course of the month the Dow Jones rose 8.5 percent and the S&P rose 8.3 percent. Both turned positive for the year during the month. The S&P had a final closing price of 2,079.36 on the last trading day in October. The Stoxx Europe 600 climbed 8 percent and the Nikkei jumped nearly 10 percent.

For the quarter overall, however, equities plummeted. The U.S. was down 6.9 percent – nine out of 10 U.S economic sectors finished in the red, with energy the worst. All developed markets finished in the red, with the Pacific, except Japan, down the most at minus 16 percent.

Now, large U.S. companies warn of a slowing economy. The industrial environment is in a recession, according to Daniel Florness, chief financial officer of Fastenal Co. Transportation companies are generally thought to be a leading indicator of the economy, and the “… data is not good,” said Alex Vecchio, a transportation analyst at Morgan Stanley.

Profits and revenues fell in tandem for the first time in six years, with a third of S&P 500 companies reporting so far. Analysts expect the S&P index’s companies to book a 2.8 percent decline per share earnings from last year’s third quarter, according to Thomson Reuters. Much of the decline comes from the hard-hit energy sector, where sales are likely to plummet more than 65 percent. Basic material companies expect a 17 percent drop in profits, according to Thomson Reuters. The government reported a 1.2 percent drop in manufactured […]

Published October 12, 2015
The September employment report came in showing a meager gain of 142,000 jobs. This was much lower than the 200,000 expected. To make matters worse, the August numbers were revised down by 60,000 jobs. The Fed has been saying that it will rely on this data when it makes its decision to raise interest rates, and this report can’t be good.

The unemployment rate remained about even at 5.1 percent, largely because the labor participation rate continues its downward trend as people drop out of the workforce. In addition, many people are underemployed, working part time when they want full-time employment.

Of course, in utilizing these statistics, one has to factor in the unreliability of government reports, such as the downward revision of 60,000 jobs for August’s report. It is estimated that these reports can be off by 75,000 jobs in either direction, which is quite a wide swing when the reports usually track around 200,000.

The weak jobs report sent the market down, only to recover later in the day. The market had a 450-point round trip in one session, another example of the volatility that we have seen and as I have been forecasting to continue. This is a repeat of the bad-news-is-good and good-news-is-bad scenario that we have been following. The more bad news there is, the less likely the Fed is to raise interest rates, which keeps money cheap and the dollar weak. If news is good, the Fed is more likely to raise rates, which is bad for the market short term. If the news is bad, the Fed will likely leave rates low, which is good for the markets […]