This week’s Update looks at the amazing last 5 years in the markets—one of the best in our careers. It also examines the “usual suspects” that cause great runs like this one to end.
Who knows how long this historic run will last? Read on… it could yet be a bit longer.
Best always,
Lee and Jeremy
This Week’s Quote:
“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
― Sir John Templeton, legendary U.S. investor & businessman
JL Davis Thoughts This Week:
It’s hard to believe that the month of March marks the fifth anniversary of the most recent bull market in stocks that began back in 2009. Since then, the S&P 500 has had total returns of more than 200%. Amazing.
Perhaps like us at times, you might wonder how much more time this upward market move will continue. While we can’t know the future, we can know from history the type of events that tend to bring the bull markets to their natural end.
Economic recessions are one way, and we know from the past that recessions are inevitable. Without fail, every other economic expansion in history has come to an end and there’s little doubt that this one will as well. However, usually recessions require causation.
This week’s Federal Reserve meeting, the first one incoming chairperson Janet Yellen will chair, will focus as it always does on U.S. monetary policy. Today’s relatively “loose” monetary policy is the exact reverse of the “tight” monetary policies of the past that have caused recessions. It seems pretty unlikely from our point of view that any significant “tightening” will take place beyond what has already been announced, what with the Fed’s bond buying spree slowing down (“tapering”). It also seems unlikely that the Federal Reserve would act to raise interest rates quickly or high enough to became recessionary. Recent pronouncements indicate that the Fed will start to raise short-term interest rates some time in 2015, from their near zero present levels. Nothing scary there. It would seem that anything under a 3%-4% rate would do little to harm economic activity.
Large tax increases are at times a culprit in regard to recessions. The announcement a couple of weeks back that Congress is essentially tabling “tax reform” for the time being takes that challenge off the table for now, perhaps until after the 2016 elections.
Trade protectionism of the type that was enacted prior to the Great Depression of the 1930s could be a potential cause. In spite of continuing disagreements with China on various trade elements, there seems to be nothing looming there.
What about consumer debt? Interestingly, Americans have pared it back in recent years. Household financial obligations (the share of income needed to make monthly recurring payments on mortgages, leases, autos, student loans, credit cards and the like) is the smallest share of income since the early 1980s. And, the corporate debt-to-equity ratio remains low, with the amount of cash on corporate balance sheets at historic highs. Debt alone isn’t an issue right now.
Oil prices drove the 1970s era recessions. Today, U.S. energy production is way up and increasing. Petroleum imports are now only about twice exports, as opposed to ten times exports like in prior decades.
What about other causes? A financial panic could end the market run, but none seem likely. Government expansion as a percentage of GDP could be an issue, but that number is (some say surprisingly) actually going down at present. A “bubble” or overvaluation might be a cause, but present market levels don’t yet seem to be in bubble territory.
So, we’ll just keep watching our number one barometer, corporate earnings. Right now, they are still in fine territory. We’re heartened. So, while the five-year run-up in the markets is a comparatively long time, nothing currently on the horizon says it’s over. For now!**
Lee and Jeremy
Market Week: March 17, 2014
The Markets
Disappointing economic data across the board from China plus the escalating tug-of-war over Crimea helped send equities south last week. The S&P 500's decline put it back into negative territory for the year, while the instability in Ukraine sent investors scrambling for the relative security of U.S. Treasuries, sending the benchmark 10-year yield down as prices rose.
Last Week's Headlines
• Retail sales rose 0.3% in February, according to the Commerce Department, putting them 1.5% higher than in February 2013. The strongest gains were seen in sporting goods/hobby/music stores, which were up 2.5% for the month, nonstore retailers (up 1.2%), and health/personal care stores, also up 1.2%.
• Multiple signs that China's economic growth slowed in January and February raised concerns that demand for many emerging markets' exports could decline. Figures from the country's National Bureau of Statistics continued to show growth year-over-year; retail sales were up almost 12%, investments in fixed assets rose almost 18%, and industrial production was up 8.6%. However, all of those numbers were lower than in previous months, even after being adjusted for the impact of the Lunar New Year's vacation time. And sales of commercial buildings, which have helped fuel China's overheated economy in recent years, have fallen 3.7% since December.
• U.S. wholesale prices continued to give the Federal Reserve plenty of leeway to keep interest rates low. According to the Bureau of Labor Statistics, the wholesale inflation rate fell by 0.1% in February, its lowest level since last November. Most of the 0.3% decrease in prices for wholesale services was attributed to a 9.3% drop in margins for sales of clothing, footwear, and accessories. Demand for wholesale goods actually rose 0.4% during the month, led by a 0.9% increase in pharmaceutical prices.
• Shares of Fannie Mae and Freddie Mac plunged after bipartisan leaders of the Senate Banking Committee announced plans to phase out the mortgage giants, which have been operating under government conservatorship since the 2008 financial crisis. If adopted, the legislation would establish government-backed mortgage insurance administered by a new Federal Mortgage Insurance Corporation. Insurance payments would be triggered only after private lenders had suffered a loss of 10% or more on the loans involved. The measure also would require homeowners to put up at least a 5% down payment (3.5% for first-time buyers) to qualify for an FMIC loan, and would create a mechanism for standardizing mortgage-backed securities based on such loans.
Eye on the Week Ahead
Markets will assess Crimea's vote Sunday to secede from Ukraine, which could mean economic sanctions against Russia that could affect oil prices and threaten Europe's economic recovery. Wednesday's announcement by the Fed's monetary policy committee--its first guided by Janet Yellen--will be monitored for any shred of guidance on the timing of changes in the Fed's target interest rate.
Key Dates/Data Releases
3/17: Empire State manufacturing, international capital flows, industrial production
3/18: Consumer inflation, housing starts
3/19: Federal Open Market Committee announcement
3/20: Philadelphia Fed manufacturing, home resales
Data sources: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: U.S. Treasury (Treasury yields); WSJ Market Data Center (equities); Federal Reserve Board (Fed Funds target rate); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold, NY close); Oanda/FX Street (currency exchange rates). 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. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
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 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.
Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2014
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