Originally published in the Daily Journal of Commerce, Portland OR
Published Aug 11, 2014

The second quarter of this year, U.S. equity markets returned 5.2 percent, as measured by the Standard and Poor’s 500 indexes, and outperformed most other developed markets.

This was the sixth straight quarter of positive returns posted by the S&P 500 through June 30, 2014. Because of growing turbulence in the Middle East, the prices of energy stocks were bid up. U.S. Growth and Value stocks posted identical returns at 4.9 percent. Commercial property real estate investment trusts posted stellar returns of 7.1 percent, the 17th consecutive quarter in the black.

However on the last day of July, the Dow Jones industrial average dropped 1.9 percent. After weeks of complacency, the volatility index spiked up, although not to alarming levels. For the past several years, these spikes in the volatility index have been followed by market rallies.

This past bull market has been a lesson in “don’t fight the Federal Reserve.” With central banks throughout the world working to support the economy, it would not be wise to bet against them. For the past several years those who have bet against the Fed and the equity market have lost.

That the equity market has taken a breather should be no surprise. The gloom-and-doom prognosticators have been predicting a market crash for years. A stopped clock is right twice a day. However, the markets marched steadily upward, much to the distress of the doomsayers.

Now they can say, “I told you so,” but it is not doom yet. Nor is it likely to be. For instance, David J. Kostin, strategist for Goldman Sachs Group, sees a strong divergence between […]

Originally published in the Daily Journal of Commerce, Portland OR
Published June 9, 2014
One of the oldest market timing indicators on Wall Street is “sell in May and go away.” This mantra is supposed to identify seasonality in the market. History shows that the weakest part of the year for stocks is the period from May to November. But critics think this theory confuses correlation and causation. This year should be especially bad, according to the pundits, because it is an election year – when there is more market uncertainty.

However, this was not the year to sell in May. This May, like the last several, was an up month for the market. Indeed, it was an up month for bonds as well. The Dow finished the month up 0.8 percent and the S&P was up 2.1 percent, its biggest monthly advance for the year. Both the Dow and the S&P notched their fourth straight month of gains. During the month, both indices traded at all-time highs.

The Dow is up 0.9 percent on the year, after a difficult January, and the S&P is up 4.1 percent on the year to date. Utilities, health care and energy led the way. Utilities alone are up 11.09 percent year to date, as investors sought yield. Transports are up 9.5 percent year to date. Transports are thought to be a leading indicator of market action, so their strong showing is a positive indicator for the market.

The Nasdaq rose 3.1 percent in May after two months of losses. The Nasdaq is up 1.6 percent year to date.

Safe haven government bonds also rallied in May, making it a clean sweep for the markets. […]

Originally published in the Daily Journal of Commerce, Portland OR

Published May 12, 2014

Off to a slow start for the year, the market climbed, but not steadily, to a new all-time closing high. The S&P reached its new high on April 2; the Dow followed suit on April 30. Along the way, results were decidedly mixed as the markets went through a rotation after the very strong 2013 gains.

Profit taking, rebalancing and sector rotation made the market lumpy. Companies that fared best in 2013 were sold by portfolio managers, and their prices were therefore affected negatively, even though fundamentals did not change. This does not make them bad companies, and we may yet see growth in those stocks. It remains to be seen whether all this reshuffling is good for portfolios, because now the portfolio managers have to find stocks that will do as well or better than the ones they sold.

According to the government, gross domestic product grew in the first quarter at a very low one-tenth of 1 percent, as a severe winter affected industrial output, exports and retail sales. While we had record snows, rainfall and flooding in parts of the Midwest and East, we had severe drought in parts of the West. This drought portends higher food costs.

Subsequently, JP Morgan and other economic forecasting firms said the GDP was actually in the minus column for the first quarter. Despite the soft conditions, the Federal Reserve stayed to its course of tapering quantitative easing. Interest rates were only marginally affected as investors moved from equities to bonds, because of the outstanding equity returns in 2013 and the flight to safety caused by events […]

Originally published in the Daily Journal of Commerce, Portland OR
March 10, 2014

After an uncertain start to the new year, the S&P gained 4.3 percent in February to reach 1,859.45 and close the month at a record high. The February performance was the S&P’s best since 1998 and second best since 1991. The Dow Jones average gained 4 percent to 16,321.71, still down 1.5 percent on the year and short of its all-time high.

After a dramatic year for the markets in 2013, in which the indices ranked within the top 15 percent of all time returns, the markets took a breather in January 2014. This was not unexpected after the 2013 run-up. But what was not clear was what direction would follow.

With powerful snow and ice storms walloping the East Coast, a rerating of profit expectations, and turmoil in Europe, the Middle East and Asia, the factor of risk came to the forefront. As fourth quarter earnings reports were announced, profits were better than expected, but not strong enough to raise valuations. Revenue growth disappointed and forward guidance was muted. With price earnings ratios at 15.1 times next years’ earnings, the P/E level is above the 13.9 percent average rate of the 10 years.

International events in China, Ukraine and the Middle East did nothing to calm fears. Even the euphoria of the Olympics was transitory. Not surprisingly, investors paused.

But, with fourth quarter earnings up 9.6 percent from a year ago, the market resumed its upward trend – a nice recovery from 2007, when fear abounded. The market tends to (but not always) look to the future. It tends to look six to nine months […]

Originally published in the Daily Journal of Commerce, Portland OR
Published February 10, 2014

After 2013, when the markets packed three years’ of returns into one, they stumbled out of the gate in 2014. In January, the Dow Jones industrial average was down 5.3 percent, the S&P was down 3.6 percent and the NASDAQ was down 1.7 percent.
The four biggest stock markets – U.S., U.K., Europe and Japan – all were down. It was the first time they have had simultaneous declines for January since 2010, when the eurozone debt crisis was at its highest. Some investors warned that the shaky start to 2014 meant that the markets were in for a down year. According to the stock trader’s almanac, when the S&P drops in January, it finishes the year up about half the time; that means January is no better than a coin flip as an indicator.
Emerging markets were the hardest hit, with huge withdrawals from the markets of developing countries. This withdrawal was the result of the confluence of several factors. With the U.S. Federal Reserve tapering its bond purchases, allowing interest rates to rise, U.S. debt markets became more appealing to investors seeking yield even as bonds’ values declined. As a result, money was repatriated back to the U.S., which put pressure on emerging market debt.
With capital outflows, emerging market currencies suffered, which in turn put pressure on emerging market equity markets. It was simply too much for these smaller economies. As investors withdrew money from emerging markets, repatriation fed on itself.
Investors sought a safer, and better yielding, investment in the U.S. While Treasurys rose, yields in the U.S. declined. U.S. equity markets declined because of fear. Short-term investors headed for the exits. There was no sign of […]

Originally published in the Daily Journal of Commerce, Portland OR
Published January 13, 2014
In 2013, the broad market gained 32.39 percent. A 20 percent market gain in a single year is considered the best of all market possibilities. All 10 S&P sectors scored double-digit gains on a total return basis for the year. It was a remarkable gain considering all the difficulties in the economy.

In addition, political maneuvering brought the government to a standstill; we came very close to exceeding our borrowing limits. The Federal Reserve hinted at tapering of its bond purchases,
precipitating a sell-off, and later did reduce its buying.

We are in the midst of a Fed chairman transition, after President Obama unceremoniously showed Ben Bernanke the door. Bernanke’s sacking occurred despite his masterful handling of a very difficult economic situation with limited tools and an uncooperative Congress and executive.

In the words of Pope Francis we need to “argue less and accomplish more.”

Slow growth economic policies, hostile to business, have taken a toll. Even as the president complains about income disparity, his policies stoke that disparity. The Obama recovery is the weakest since the Great Depression. GDP growth has been far below the average recovery since World War II.

If the Obama recovery had been merely average, the economy would be 8 percent, or $1.3 trillion larger than it is today. Every American alive, working or not, child or adult, would be $4,100 better off if the recovery had been only normal. The anti-growth policies from Congress and the executive have stalled the U.S. growth machine.

While the reported numbers from the Bureau of Labor Statistics show declining unemployment, the total employment numbers show 1.3 million fewer […]

Originally posted in the Daily Journal of Commerce, Portland OR

Published December 9, 2013

The broad market ended the month of November just below record highs, having logged its longest streak of weekly gains in nearly a decade. The Dow’s weekly gain was its eighth straight. It finished up 3.5 percent in November for its third consecutive monthly rise. The S&P 500 finished the month up 2.8 percent for its longest stretch of weekly gains since a nine-week run ending Jan 23, 2004. The Nasdaq added 3.6 percent in November to reach 4,049.89.

For the year to date the Dow is up 22.6 percent, the S&P 500 is up 26.8 percent and the Nasdaq is up 34.3 percent. Growth portfolios outperformed value portfolios; the largest gains came in small cap growth stocks, which are up 38.65 percent year to date.

J.J. Kinahan, chief strategist for TD Ameritrade says there is still room for the market to move higher. “Everyone wants to be the one to call a top, but many individual investors and funds remain underinvested,” he said. “The only bubble is in the number of people calling a bubble.”

The fact that so many people are worried about a bubble is a good sign because it puts a brake on overexuberance. There are numerous matters to be worried about. Perhaps the biggest is the U.S. government, which appears totally dysfunctional. Confidence in our government is plumbing new lows.

However, consumer sentiment improved in November, according to the Thomson-Reuters/University of Michigan sentiment index, as jobless claims fell for the sixth week in the past seven. But unemployment remained at a stubbornly high 7.3 percent.

In contrast, the Conference Board Consumer Confidence Index, a […]

Originally posted in the Daily Journal of Commerce, Portland OR

Published November 12, 2013
Despite worries created by Washington politicians, October saw the S&P rally 4.5 percent. A 16-day shutdown of the government and a debate over the debt ceiling, which could have meant a default on U.S. bonds, were not enough to keep a resilient market down. The S&P is now up 23.2 percent on the year through Oct. 31, with both the S&P and the Dow sitting at just 1 percent below their all-time
highs.

Worries abound over the elevated market levels. This is good, because if there were not worries, we should be worried. If there were no worries in the market, an investor could conclude that we were on the verge of exuberance, which would be a worry. It is good for the market’s balance if investors are concerned.

However, just now the S&P is trading at 18.7 times trailing earnings and 15.93 times projected earnings. Against a historical backdrop of a 15.50 mean earnings, the market is fully valued, but not worryingly so. Still, valuations support increased exposure to emerging markets and foreign developed markets, and a slight reduction in exposure to the U.S. The markets have been fueled by profit gains, but also cheap money. The Fed has kept interest rates low and bond purchases high in order to support the economy and prevent deflation like the kind that racked Japan for 20 years and is creeping into Europe.

The latest numbers out of Europe show that dangerously low inflation is threatening Europe. In the eurozone, the annual inflation rate in October pulled back to 0.7 percent.

Because Congress and the president have failed […]

Originally posted in the Daily Journal of Commerce, Portland OR

Published October 15, 2013
Just as his approval numbers reached an all-time low for his presidential term, Barack Obama was rescued again. He painted himself into a corner with his “red line” in Syria that he couldn’t or didn’t want to back up. Vladimir Putin bailed Obama out.

Now, with Obama’s approval rating at 49 percent, the Tea Party Republicans have contrived to make the president look good. With no apparent ability to count votes, or knowledge of how government works (clue to Tea Party: there are three branches of government, and you control none), the Tea Party blunders on, bringing the operation of government to a halt.

The Republicans, who had a shot at improving their numbers in the midterm elections, once again see defeat snatched from the jaws of victory. The Tea Party has stymied the Republican Party, and all Republicans will be tarred. Like Don Quixote, they see themselves on a great crusade, while in reality they are tilting at windmills.

The Tea Party wants Obama to concede to the loss of his signature legislation, the Affordable Care Act. No matter whether the legislation is good or bad, it is the law of the land; Obama is not going to give it up, and, as president, he has the power of veto. Of course, the Tea Party does not have the votes to send a bill to the president anyway. It is all a simple numbers game, and the Tea Party does not understand that it doesn’t have them.

The markets are generally down from their all-time highs since the government shutdown began, but […]

Originally posted in the Daily Journal of Commerce, Portland OR

Published September 9, 2013

“It is hard to make predictions, especially about the future.” That quote has been attributed to a various number of folks – Winston Churchill, Will Rogers, Albert Einstein, Victor Borge and Groucho Marx, among others.

“It’s always something,” said Gilda Radner as a performer on “Saturday Night Live.” She later was diagnosed with ovarian cancer.

It appears that it’s always something with the U.S. economy and government. Often, it seems that the “somethings” are self-inflicted wounds.

Unemployment remains stubbornly high. Consumers are not spending. Bank bailouts did little for households, but a lot for bank executives as they paid themselves big bonuses for their fine work during the Great Recession. To defend themselves from the government and litigious former homeowners, the banks have had to pay more than $100 billion to their lawyers – more than they have paid out in dividends to shareholders.

Not just the United States, but other major powers have been supported by their central banks. The U.S. Federal Reserve struggles with the question of how and when to trim that support, and whether they can.

In another self-inflicted wound, it was not helpful that President Obama fired Fed Chairman Ben Bernanke while this debate was going on. Markets and CEOs are now confronted with a murky Fed policy with no knowledge of who the next Fed chairman will be and what her or his policies will be.

At this writing it appears that Obama’s favored candidate is Larry Summers. He would likely favor reducing Fed support of the economy and raising interest rates. The prospect is already having a chilling […]