Tuesday, May 14, 2013

Is it only Federal Reserve policy moving the market? Your Weekly Update

Our friends at the Federal Reserve are still working overtime, buying bonds at a record rate. But does that move the market?

This week’s Update gives you our view on the matter and while we do think the U.S. is entering a “euphoric” phase in terms of market expectations (which could be a warning signal), we continue to see many other very positive signs overall.

You might enjoy passing this along to any or your friends or acquaintances who find themselves in the Chicken Little or World is Coming to an End Club(s)… we need to help them smell the flowers. It’s Spring, after all!

All the best,
Lee and Jeremy


This Week’s Quote:

“I don't believe in pessimism. If something doesn't come up the way you want, forge ahead.”
~Clint Eastwood


JL Davis Thoughts This Week:

“I hear the market is only up because the Fed’s printing money, right?” Jeremy and I are hearing this sentiment in our client meetings and in the public media often lately. It’s a fair question. However, we think there’s more to the story than Federal Reserve policy.

Fundamentally, we think markets always follow earnings, which is why they’re up. According to The Wall Street Journal, the percentage of the S&P 500 reporting earnings at or above expectations in the last period was 69%*. Outsized corporate earnings have been a theme of the market run since March of 2009. Since then, the Dow and S&P 500 have returned 161% and 156% respectively as of last Friday, according to Brian Westbury, chief economist at First Trust. Strong corporate earnings have created an amazing move…and continue to do so.

The last time JL Davis saw these kinds of powerful corporate profits was the late 90’s. Then, a monkey could virtually throw a dart at the stock page and pick a winner (don’t laugh, the “Monkey Test” is real**). In 1999, U.S. corporate profits totaled about $600 Billion (with a “B”). In contrast, 2012’s profits were $1 ½ Trillion (with a “T”), over two and a half times more. Yet, in a recent interview with CNBC, Warren Buffett said, “Stocks are reasonably priced now.” Interesting.

Add in the element of government spending, which peaked the last few years at a historically high rate, about 25% of gross domestic product (GDP). This year, in spite of all the partisan wrangling we hear, it should be down to about 22% of GDP—a nice trend. Markets may be heartened at this news.

So what about the Fed printing money? Since 2000, the Fed has indeed overseen an increase in the monetary base (the money supply in the U.S., or “M1”) of about 25% per year—a big number. But the money that is actually flowing through the economy is up at only a 6% annualized rate over the same period. The difference, fundamentally, is still living on the balance sheets of the banks, yielding record profits in many cases but not circulating into stocks somehow.

So there appears to be much more driving the markets than just our friends in the Fed at the moment and that continues to be good news for the long term investor.****

*http://blogs.wsj.com/moneybeat/2013/05/07/first-quarter-earnings-in-three-words/
**http://www.forbes.com/sites/rickferri/2012/12/20/any-monkey-can-beat-the-market/
***http://www.huffingtonpost.com/2013/05/06/federal-reserve-warren-buffett_n_3221964.html


Market Week: May 13, 2013

The Markets

And the beat goes on: Amid a week that was relatively light on economic influence, equity markets continued to set new records (except the Nasdaq, which still has a long way to go). The Dow, S&P 500, Nasdaq, and Russell 2000 all appear poised to reach the midyear point nearing or above a 15% gain, while the Global Dow is not far behind. Will the breakneck pace continue? While no one can say for sure, there is certainly no dearth of opinion on the matter. Stay tuned.

Last Week's Headlines

•The U.S. monthly budget surplus reached a level not seen in five years in April, the Treasury Department said on Friday. The higher-than-anticipated $113 billion surplus is due largely to record high tax receipts. Although April surpluses are not unusual due to the month's income-tax-filing deadline, this year's figure was almost double the surplus recorded in April 2012.

•The number of Americans filing new claims for unemployment insurance fell to its lowest weekly level in more than five years to 323,000, said the U.S. Labor Department. The four-week moving average was 336,750. Both figures were below the 350,000 benchmark that economists consider indicative of an improving job market.

•The nearly $8 billion in new debt that American consumers incurred in March was almost half the previous month's $18.6 billion increase, according to the Federal Reserve. Most of the borrowing increase was for major purchases such as cars or education, while revolving credit such as credit card debt fell at an annual rate of 2.4%.

•The dollar surpassed the noteworthy benchmark of ¥100 for the first time in more than four years on Thursday, fueling a Friday rally in the Japanese stock market and gains in the dollar versus other currencies. The surge was likely due to positive U.S. economic data combined with last month's moves by Japan's central bank to stimulate growth in that country.

•During a speech at a Fed conference in Chicago, Fed Chairman Ben Bernanke said that U.S. banks could face even more stringent regulation in the future. Indicating that there is still some concern about large, interconnected financial institutions being "too big to fail," Bernanke said that banks may face higher capital requirements intended to encourage them to reduce their complexity.

•For the first time, the Securities and Exchange Commission charged a local municipality of allegedly misleading investors in its municipal bonds. Harrisburg, PA settled the suit, and no criminal charges were filed against any individuals. The suit charged that city officials failed to fully disclose problems with its finances from 2009 to 2011--for example, a downgrade of the city's credit rating--after bonds were issued.


Eye on the Week Ahead

With earnings season coming to a close, investors may turn their attention to the flood of manufacturing-related data this week. And given the recent records in equities prices, options expiration at week's end could be accompanied by some volatility.

Key dates and data releases: retail sales, business inventories (5/13); import/export prices (5/14); wholesale prices, industrial production, Empire State manufacturing survey, international capital flows (5/15); consumer prices, housing starts, Philly Fed manufacturing survey (5/16); leading economic indicators, options expiration (5/17).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Prepared by Lee Davis**** and Broadridge Investor Communication Solutions, Inc. Copyright 2013

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