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. […]

Published March 9, 2015
After a slow start for January, U.S. equity markets finished February on a strong note. U.S. indices showed the NASDAQ leading the way with a 7.1 percent gain for the month, the best since January 2012. The Dow was up 5.6 percent, and the S&P up 5.5 percent. Year to date, the Dow was up 1.74 percent, the S&P up 2.21 percent and the NASDAQ up 4.8 percent.

The drop in gas prices drove the U.S. into deflationary territory, as consumer prices declined 0.1 percent year over year. Prices fell 0.7 percent from December.

However, the U.S. is not expected to join Europe in a deflationary economy. Consumer prices in January, aside from energy, showed a healthy gain of 1.8 percent, in line with the Federal Reserve’s desired goal. Food costs were up 3.2 percent, shelter up 2.9 percent, and health care 2.3 percent. John Williams, president of the Federal Reserve Bank of San Francisco, said he believes that inflation will rise to the Fed’s desired level by the end of 2016. Janet Yellen, chairwoman of the Federal Reserve, indicated in testimony to Congress that weak inflation was due to the transitory effect of lower energy prices. Policy makers think the steep fall in energy prices will abate. We are already seeing price increases at the pump, with the cost of a gallon of gas increasing about 30 cents since the beginning of February.

Meanwhile, the easing of inflation has added to inflation adjusted wages, which have posted their largest gains since November 2008. Real average hourly earnings moved up 1.2 percent from December. A tightening labor market has also added to wage increases, with […]

Originally published February 9, 2015 in The Daily Journal of Commerce
U. S. equity markets rose 4.71 percent in the fourth quarter of 2014, as measured by the S&P 500. Strong earnings overcame a sharp mid-October correction. Coupled with disinflation fears in Europe, political turmoil, fear of a Greek exit from the European Union, and about a 40 percent drop in oil prices, economic uncertainty led to a slowing economy. GDP annual growth slowed in the fourth quarter to 2.6 percent – down from 4.5 percent in the previous quarter.

Consumers led the increase in GDP, with a 4.3 percent increase in spending – the largest since the first quarter of 2006. Lower gas prices and new hiring no doubt contributed to this increased consumption. The University of Michigan consumer sentiment increased to its highest level since 2004. The consumer sentiment increase was as high for those with incomes of less than $75,000 per year as those with more than $75,000 per year.

Other factors contributing to the decline in GDP were a build in inventories, which could signal a drag on future growth, and a huge drop in defense spending, although that may just be a timing factor. However, more troubling was continued ambivalence toward capital spending, which declining oil prices will not help, and a slowdown in foreign demand, which a stronger dollar will not help. All things considered, GDP growth may not exceed 3 percent in 2015.

The U.S. was the standout performer in equities for the year and the quarter, with most other parts of the world underperforming. Even so, for January the S&P was down 3.12 percent, the Dow down 3.7 percent, and the […]

Originally Published January 15th, 2015 in The Daily Journal of Commerce
U. S. equity markets rose over the course of 2014 as the U.S. economy continued to strengthen. In December the Dow was flat, the S&P was down 0.4 percent, and the NASDAQ was down 1.2 percent. For the year the Dow was up 8 percent and the S&P was up 11 percent – 13.7 percent when dividends were reinvested; the NASDAQ was up 13 percent.

The best sectors among S&P stocks were utilities (up 25 percent), health care (up 24 percent) and information technology (up 19 percent). Energy was the worst performing S&P sector. In late 2014, the S&P finally rose to a new inflation-adjusted high.

Stocks in 2014 as represented by the Russell 3000 were worth 143 percent of gross domestic product, the highest since year end 1999. Increase in household wealth is over $7 trillion over the past three years, according to the Federal Reserve.

Third quarter GDP was revised upward to 5 percent – stronger than expected. Consumer spending rose .06 percent from October to November with the effects of lower prices for gas at the pump taking hold. Oil and natural gas prices both dropped as moderate weather and slowing world economies created a supply glut in those commodities. Crude oil fell to $53.30, the lowest price since May 2009.

Personal income increased .04 percent over October. The strengthening dollar has made investments in the U.S. more attractive. The dollar might well be headed to parity with the euro, where it has not been since 2002.

The only dark spot in the U.S. numbers was that the consumer sentiment declined slightly to 93.6 percent from 93.8 percent […]

Originally Published December 8, 2014 in The Daily Journal of Commerce
The United States economy is strengthening.

November is historically one of the best months in the year for equities, and U.S. equity markets continued their upward trend in November. The broad market index, the S&P, gained 2.48 percent for the month while the Dow gained 2.52 percent.

Consumer prices held steady. The gross domestic product for the third quarter was revised upward from 3.5 percent to 3.9 percent. The GDP growth for the period from April to September was the strongest for a six-month period since 2003. This growth indicates that the U.S. economy is growing into the year-end shopping season. However, consumer confidence slipped from an estimate of 96.5 percent to 88.7 percent. Most of this seems to be because of downbeat job prospects.

Furthermore, the Chicago Purchasing Manager Index showed an unexpected decline of 8.1 percent while the Philadelphia Fed manufacturing index reached its highest level since 1993.

Oil prices continued their decline as oil traded as low as $66 per barrel. Oil prices are down in part because of more output in the United States from fracking, and because of reduced demand and the strong dollar. Oil prices are inversely related to dollar strength or weakness because oil contracts are typically priced in dollars. (There have been brief efforts to price in other currencies, to no avail). An OPEC meeting to manage the price decline did not produce an agreement because Saudi Arabia said it would not reduce production. Since there is an oversupply of oil in the world combined with softening demand, we can expect the price of oil to continue under pressure.

In the past, […]

Published November 6, 2014
In my previous column, I predicted that September and October would be volatile months. In October, the S&P 500 slid to a low of 1,820, temporarily erasing all of this year’s gains. The market volatility index soared 51 percent in just eight days. At its low, the S&P was down 9.1 percent from the beginning of the month. The S&P crossed below its 200-day moving average.

Fears of a slowdown in China, deflation in Europe, plus Ebola fed the market decline. Additionally, the Fed decided to end its quantitative easing program, but suggested that low interest rates might continue “for a considerable time.” Encouraged by a supportive Fed, the market began its ascent.

In its statement, the Fed took credit for “solid job gains” and a falling unemployment rate. It said that a range of labor market indicators suggest that labor market slack is “gradually diminishing.” In the process it struck from its statement an earlier assessment that “labor market slack was substantial” – a phrase investors have been watching closely for signs that the Fed was becoming more confident about the economy.

Of course, one of the reasons that the unemployment rate has fallen is that the participation rate (those looking for work) has fallen to multiyear lows. Furthermore, real median household income has fallen six years in a row and is at its lowest level since 1996. However, during this time transfer payments and other government programs, funded by massive fiscal stimulus in the form of U.S. government debt, has kept consumer confidence robust.

Twice before, Fed officials declared that the Fed would stop bond buying, only to restart the effort later when growth, […]