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 […]

Published September 21, 2015
In its long awaited rate decision, the Federal Reserve Open Market Committee held short-term rates near zero. Citing lack of inflation and international turmoil, the Fed put off its anticipated rate increase. Leading up to the decision there was a great deal of uncertainty. Economists were almost evenly divided on whether or not the Fed would raise rates, but the dollar, commodity markets and Treasury and equity markets all pointed to no increase; they were right.

The Fed has long said that its decision would be data driven; it looked into its data and decided it was just not the time, even though pressure has built for a rate increase. The Fed has long wanted to raise rates, and at every meeting an increase is on the agenda; however, each time the Fed has decided that this time is not the right time.

Others think that there will never be a perfect time, and raising rates is the right thing to do. But many felt the Fed would be risking too much in raising rates. Christine Lagarde, head of the International Monetary Fund, warned against a rate increase. Larry Summers, former Secretary of the Treasury, joined Lagarde as did many notable bond managers.

The Fed was placed in a position that if it raised rates, and the weak economy suffered, it would have to reverse course and then lose all credibility. In addition, it had not prepared the market for an increase. Chairwoman Janet Yellen had not made a public comment about rates for 60 days. Members of the Open Market Committee had made conflicting statements regarding rates. During the June 15 meeting, 15 of […]

Published August 18, 2015
Eager to get the controversy regarding a Federal Reserve interest rate increase behind them, the market and economists seized upon the latest job growth numbers.

Most economists are expecting – even calling for – a rate increase. The Federal Funds Futures have tipped into expecting a September rate increase. Fed speakers are calling for a rate increase. The Federal Reserve Board and its chairman, Janet Yellen, want an increase. Clearly the consensus is developing for a September one-quarter point increase.

We have been close (to an increase) before, but the Fed has not made the leap. Economic data keep getting in the way. Now, the recent jobs report shows that the economy added 215,000 new jobs in the past month. This positive report seemed to clear the way for a rate hike.

The problem is that the recent job report is really a tepid report. For years it has been thought that 250,000 was the minimum number needed to absorb the new participants in the work force. We are in the midst of the worst expansion since World War II. Second quarter GDP growth was a modest 2.3 percent. Unemployment remains at 5.3 percent; however, the labor force participation rate is stuck at 62.6 percent, the lowest since 1977. The rate is low in part because baby boomers are reaching retirement age and because of “structural changes” in the labor force. More people have learned to live without jobs; most often income from work is replaced by government entitlement programs. As more people look to the government for their income, the political center of gravity in the U.S. changes (think Greece).

The Federal Reserve predictions about […]

Published June 24, 2015
The Federal Reserve decided at its June meeting not to raise interest rates. The vote was 10-0, with all but two members of the 17 full board expecting a rate rise by the end of the year. Four who previously wanted two rate increases this year now favor one rate increase. It is believed that the chairwoman, Janet Yellen, was one of those. If so, Yellen’s shift would be an important change in the center of gravity for the board, because it tends to support the chairwoman’s views. In this manner, the Fed has prolonged its push-me, pull-you teasing of the market about rate increases.

The Fed has long signaled a desire to raise rates, but facts keep getting in the way. The Fed has proven overly optimistic about its efforts to heal the economy. Indeed Yellen in May expected the economy to improve and that the Fed would be able to begin “normalizing monetary policy.” At the June meeting, she described the labor market as still cyclically weak, and that while they might see data that would justify a rate increase this year, there were no guarantees.

The Fed sharply lowered its forecast for growth this year from a range of 2.3 to 2.7 percent in March to just 1.8 to 2.0 percent now.

The Fed also predicted that unemployment would be 5.2 to 5.3 percent by year end. Three months ago the Fed thought that unemployment would drop to a range of 5.0 to 5.2 percent by the end of the year. The current rate is 5.5 percent.

The Fed has kept rates at or near zero since December 2008. The economy has grown […]

Published May 13, 2015
The month of April continued its winning ways in the equity market. For the month, the market was up just 0.9 percent. But up it was. It was a photo finish, as the market dropped dramatically at the end of the month into negative territory for the month and year, only to get a small burst at the end, to finish up for the month and just into positive for the year. Expectations are that revised numbers later this quarter will show the economy in reverse.

For the month of April, the indices were: DOW up 0.4 percent, NASDAQ up 0.8 percent, and the aforesaid S&P up 0.9 percent. Year-to-date, the indices were DOW up 0.10 percent, NASDSQ up 4.3 percent, and S&P up 1.3 percent. Transports year-to-date are off 6.0 percent, a worrisome sign. International benchmarks registered impressive gains. Germany is up 16.8 percent, Italy is up 21.2 percent, France is up 18.1 percent, Japan is up 11.9 percent, and China (Shanghai) is up 37.3 percent. However, with respect to international holdings, dollar investors have to adjust for the increase in the dollar versus the foreign currency.

The downdraft was triggered by a weak economy. First quarter GDP managed a meager 0.2 percent growth, well below expectations. This slow growth caused the Federal Reserve to pull back from expected plans to raise interest rates, perhaps postponing the expected increase until fall. Fed futures forecast only a 6 percent chance of a rate rise in June, setting the stage sometime in the future for the weakest tightening ever, according to Mohamed A. El-Erian, chief economist for Allianz. The waning of interest rate expectations caused a […]

Published April 13, 2015

The Federal Reserve has been teetering on the brink of raising interest rates for the first time since the financial crisis. Officials have hinted at raising rates, but qualified any increase with such words as “patient” and “data driven.” On March 18, they removed the word “patient” from their statement, but said that it would be a few meetings before they raised rates and that they would examine the data before doing so.

For the first time, the Fed indicated that it would also review foreign markets and economies. For a while it appeared that a rate rise was imminent – maybe even this summer. The interest rate futures market seemed to indicate that the rate increase could come in the fall. Some Fed speakers argued energetically for a prompt rate increase. But in the meantime, the data kept getting in the way of an increase.

World economies seem to be slowing. To be sure, Germany is doing “OK” in Europe, but most of Europe and the UK seem to be experiencing slow to no growth. In addition, deflation threatens. While the German equity market was strong, much of that gain has been eroded by the declining euro.

China has been experiencing slower growth. Earnings are under pressure, bank loans are souring and the property market is suffering, but the government is making monumental efforts to shore up the economy. In addition, China has allowed the yuan to weaken to help its export markets. The Chinese equity markets have been showing strength.

The Japanese equity market has reached its highest point in 15 years, but still at a level only half of its alltime high. […]