Manic Monday 09/28/15

The stock market is off to a rocky start on Monday September 28, 2015.  The catalysts this time seem to be continuing concern about the Federal Reserve interest rate policy, concern about a US government shutdown later this week, more weak economic data out of China, and a vote by the citizens of Catalan to separate from Spain.

I remain confident that, while the news is causing the wild swings, the financial markets are in a bottoming process that started with the big declines back in August.  I continue to watch the 1,867 level on  the S&P 500, which was the intra-day low on August 24, 2015.

Interestingly, the current bottoming process looks very similar to the declines back in 2011. That year the S&P 500 declined approximately 14% in the 3rdquarter, only to rally 12% in the 4th quarter and finish the year with no change.  So far this year, the decline from the high on 5/20/15 to the low on 8/24/15 was 12.5%. (source: Yahoo Finance)

As the chart below points out, I am seeing the similar pattern of panic selling.  Back in 2011 the main risk was the first Eurozone debt crisis which included countries like Portugal, Ireland, and Spain.  This year the main risk is the global economy slowing down, primarily China.

For now, I remain patient to see if we get a successful retest of the low in the 1,867 area.  I will keep you posted.

Manic Monday 9-28-15

Although information herein has been obtained from sources deemed reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful.  Past performance is no assurance of future results.

 Please consider the charges, risks, expenses and investment objectives carefully before investing. Please see a prospectus containing this and other information. Read it carefully before you invest or send money.

 

Information provided should not be construed as legal or tax advice.  You should discuss any tax or legal matter with the appropriate professional.

Federal Reserve interest rate decision – now what?

On September 17, 2015 a much anticipated Federal Reserve meeting ended and the decision on interest rates has several implications for the financial markets.

Going into the meeting I anticipated 1 of 2 outcomes:

  1. The Fed would raise short-term interest rates for the 1sttime in over 7 years and their statement announcing the change would be “dovish” in nature.
  2. The Fed would not raise interest rates and their statement announcing why would be “hawkish” in nature.

What happened was a combination of the 2 – the Fed chose to not raise interest rates but their statement was “dovish” in nature.

(a “dovish” statement = lower interest rates for longer, while a “hawkish” statement would indicate higher interest rates sooner)

They gave 2 primary reasons why they did not increase rates – “In light of the heightened uncertainties abroad and the slightly softer expected path for inflation, the committee judged it appropriate to wait for more evidence, including some further improvement in the labor market, to bolster its confidence that inflation will rise to 2 percent in the medium term,” Chairwomen Yellen said. (CNBC)

While the Fed indicated that they could still raise interest rates later this year (they meet again in October and December), the odds have risen that they will not raise rates until 2016.

Financial markets deal with many factors – corporate earnings, economic outlook, interest rates, etc.. The thing the financial markets hate the most is uncertainty. Unfortunately, the Fed decision on interest rates and statement on their outlook only prolongs the uncertainty of when they will raise rates.

My expectation is that the equity markets will remain volatile, with a distinct possibility of retesting the lows hit back on August 24, 2015, at least until early October 2015.  That is when 3rd quarter 2015 corporate earnings season begins.  The bond market will benefit from this volatility as money flows out of equities and into the relative safety of fixed income investments.

Oh by the way, the U.S. fiscal year ends on 9/30/15 and as it stands now the federal government will shut down unless Congress approves funding for next year – stay tuned!

Although information herein has been obtained from sources deemed reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

 

Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful.  Past performance is no assurance of future results.

 

Please consider the charges, risks, expenses and investment objectives carefully before investing. Please see a prospectus containing this and other information. Read it carefully before you invest or send money.

 

Information provided should not be construed as legal or tax advice.  You should discuss any tax or legal matter with the appropriate professional.

 

September 2015 Monthly Outlook – Volatility vs. Loss

The volatile ride the financial markets gave us in August seems to be carrying over to September. As of 11:00am EST on 9/1/15 the equity markets were down roughly 2% across the board.

Before I address why I remain cautiously optimistic about the U.S. economy and financial market let’s take a moment to differentiate between volatility, declines in value, and actual losses.  Volatility is a fact of life with investments.  This leads to increase in decreases and increases in the value of investments.  Losses (or gains) only occur when you sell an investment.  The chart below highlights this quite well.  Just looking at the last 4 years, you will see that in 2011 the average decline in the S&P 500 during the year was -19%, yet the year ended flat (0% change).  In 2012 there was a -10% average decline during the year, yet the year gained 13%.  In 2013 the figures were – 6% decline during the year, but a 30% full year gain. In 2014 the figures were -7% decline during the year, but an 11% gain for the year.

Here’s another way to look at it.  The S&P500 hit a low of 666.79 on 3/6/2009 during the financial crisis. Since that time there have been 21 declines of 5% or greater. Of that 21, there have been 5 declines of 10% or more (including this recent decline), 2 declines of 15% or more, and 1 decline in excess of 20%.  Despite this volatility, the S&P 500 has risen 196% from 3/6/2009 through 8/31/2015. (Yahoo Finance)

Sept 2015 mthly outlook

I expect the volatility to continue.  I am looking for the equity market to establish a bottom, which is usually a function of price and time.  Ideally, I would like to see a retest of the lows from the last week of August that holds (~1,870 area on the S&P 500). I would then feel reasonably confident that the bottom was established.  If that level is violated then I will reconsider my outlook.

Enough about volatility.  Now, why I remain cautiously optimistic.

Economic activity in the U.S. continues to show, slow but steady improvement.  Last week, the Bureau of Economic Analysis  revised their estimate for 2nd quarter 2015 GDP (gross domestic product) up from 2.3%  to 3.7%.  Included in that report, inflation, as measured by the personal consumption expenditures (PCE), remained low at 1.2% year-over-year.  The Commerce Department also reported that consumer spending increased 0.3% in July and U.S. construction spending rose to the highest level in 7 years. On 9/1/15 Ford, GM and Chrysler all reported better than expected auto sales and the Institute for Supply Management reported “Economic activity in the manufacturing sector expanded in August for the 32nd consecutive month, and the overall economy grew for the 75th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.“

Yes there is some concern about global economic activity, primarily due to a slow down China’s economy.  This is worth monitoring closely.  However, the direct impact on our economy is not likely to be significant as 87% of our economy is domestically driven and we import 4 times more goods from China than we export to China (US Census Bureau).  The effects of a China slowdown will likely be felt indirectly via the impact on other countries, like Canada, that export natural resources to China.

I continue to keep a close eye of the economy and financial markets and will let you know when I feel action is required.  Please let me know if you have any questions or concerns.

September Calendar of Events   (comments and additions for future months are always welcome)

  • Summer is over and kids are going back to school  – please be careful on the roads.

Sep 7th              Labor Day

Sept 11th          Patriot Day- honoring those who lost their lives on 9/11/01

Sept 13th          Rosh Hashanah begins  – Happy New Year to all my Jewish friends

Sept 21st          International Day of Peace – consider lighting a candle for peace

Sept 23rd          Autumn begins

Sep 23rd           Yom Kippur  (The Day of Atonement)

Sep 26th           National Family Health & Fitness day – get out with your family to hike, bike or walk.

Sources: RiverFront Investment Group, Raymond James & Associates, Oppenheimer Funds, CNBC

Although information herein has been obtained from sources deemed reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

 

Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful.  Past performance is no assurance of future results.

 

Please consider the charges, risks, expenses and investment objectives carefully before investing. Please see a prospectus containing this and other information. Read it carefully before you invest or send money.

 Information provided should not be construed as legal or tax advice.  You should discuss any tax or legal matter with the appropriate professional.