Stepping into Line

On December 18th, 2014, posted in: Economic News, Newsletter by

What’s with the Economy?

What we are seeing here is called “regression to the mean.” The S&P has underperformed its historic average over the last 15 years by nearly 50%. Eventually, we would expect it to come back into alignment. Couple that with a major downturn in the economic activity in Europe, China and Japan, and we have a global slowdown which is reflected in the stock market prices in general.

Despite the fact recent economic data has been positive, the stock market seems to either have already discounted the news, or is looking longer term with pessimism.

The November jobs report was very strong, which is evidence the U. S. economy is gaining momentum. Christmas is always a time that can give jitters or twitters depending on the mood of consumers. But retail sales jumped in November – increasing +0.7% from October. This was way above expectations.  Auto sales jumped as well, although falling gasoline prices is a mixed bag for the economy. Great for consumers, but the oil industry needs higher prices to pay for increased production. By the way, car sales are usually a good indicator of consumer optimism.

We saw business inventories grow, but about the same as October. Inventories were up about 5% from a year ago. This probably indicates retailers are optimistic about the Christmas shopping season and into the New Year.

The economy saw producer prices (PPI) fall in November. This marks the third decline since July. Gasoline has certainly contributed to the drop. The PPI is up +1.4% compared to the Fed estimate of 2.0%.

The US House and Senate avoided a government shut down and passed a pork filled $1.1 trillion spending bill. Conservatives are disappointed that this was a one year agreement, hoping they could leverage then post-election Congress to defund Obamacare and immigration. The good thing is they avoided a government shutdown which would have been a political problem for the GOP in all probability.

Despite the positive economic news in the US, the rest of the world is teetering on the edge of recession. This always sounds horrible, but it means they failed to grow one quarter over another, and the decline in growth meets the definition of a recession. China’s growth has slowed and Japan is still having problems with their currency. The U. S. has been described as the economic engine that pulls the world economy.  It is a steep hill. The more energy independence the US can maintain, the harder it will be for world dysfunction to affect us.

What’s with the Market?

 

Past performance is no guarantee of future results. Indices are not available for direct investment.

The markets dropped sharply in early December, despite the steady stream of positive news. The earnings reports were very positive as were the indicators and general economic news. Yet, stock prices dropped sharply the first week of December.

What were some of the factors that spooked the market? There is always Year-end selling. The S&P has held steady (reflecting the rush to large cap we have seen all year.)

Falling oil prices – the West Texas Crude (WTI) was down almost 40% compared to Jan 2014. It closed Dec 12th at $59.95 per barrel compared with $98.42 per barrel. As a result, gasoline prices are down nearly 20%.  Is it a good thing, or not?  Opinions vary.  Those who view the cost of gasoline as a “tax” on consumers are whooping it up – hoping for even stronger retail sales through year-end.  Worriers are concerned about the impact on the oil industry, from the big multinationals to small-time “frackers.”

Donde va El Fed?  Where is the Fed going?  The Fed met mid month and decided to hold fast on rates, but expressed optimism about all of the positive economic news. They also stated there are no strong signs of inflation that will accelerate their move toward higher short-term rates.

The sharp price drop in the market may signal a flight to safety. U. S. Treasury securities have been the classic “safe harbor” for many during stormy times. The 30-year and 10-year bond yields were considerably lower, but the Treasury auctions were oversubscribed.

Here is a Financial Fact for You

Money Magazine said the average 401(k) balance is now $91,000. This means participants are starting to be concerned about their retirement savings. Even so, this only produces $5000 a year of income at age 70. They need a lot more.

 

 

 

 

This information is compiled by Guy Baker from an assortment of news feeds including First Trust, Yahoo Finance, Bloomburg and others. This information is intended to be informational only. This newsletter contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. All investing involves risk, including the potential for loss of principal. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.
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