Market Week: October 28, 2014

October 27th, 2014

The Markets

Relief at last: Investors finally regained some appetite for risk as equities got a break from the recent wave of selling. After four straight weeks of losses, the S&P 500 saw a strong bounce. However, the Nasdaq’s rebound was even bigger and the small caps of the Russell 2000 saw their second consecutive week of robust gains. Though the Dow industrials lagged the other three domestic indices, the rally brought the Dow back into positive territory for the year. The Global Dow also recovered from its slump, nearly managing to break even for the year.

The strong showing in equities helped send the benchmark 10-year Treasury yield up as prices fell. Meanwhile, the price of oil stabilized in the low $80s.

Market/Index

2013 Close

Prior Week

As of 10/24

Weekly Change

YTD Change

DJIA

16576.66

16380.41

16805.41

2.59%

1.38%

Nasdaq

4176.59

4258.44

4483.72

5.29%

7.35%

S&P 500

1848.36

1886.76

1964.58

4.12%

6.29%

Russell 2000

1163.64

1082.33

1118.82

3.37%

-3.85%

Global Dow

2484.10

2409.20

2470.50

2.54%

-.55%

Fed. Funds

.25%

.25%

.25%

0%

0%

10-year Treasuries

3.04%

2.22%

2.29%

7 bps

-75 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· Sales of existing homes jumped 2.4% during September, according to the National Association of Realtors®. That’s the highest pace of 2014, though the number of sales was 1.7% lower than in the previous September. The $209,700 median sale price was 5.6% higher than a year earlier.

· Meanwhile, new home sales were up 0.2% in September; the Commerce Department said that put them 17% higher than in September 2013.

· Consumer prices rose 0.1% in September. The Bureau of Labor Statistics said that left the Consumer Price Index up 1.7% for the last 12 months–a level that might give the Federal Reserve some leeway to keep interest rates low. Increases in food and housing outweighed a 0.7% drop in energy costs.

· China’s growth rate, while still robust compared to the rest of the world, slowed during the third quarter, according to the National Bureau of Statistics. The 7.3% increase in the country’s gross domestic product was slightly lower than Q2’s 7.5% and below the official target for annual growth (also 7.5%). Real estate prices and sales continued to be a soft spot in the Chinese economy.

· After subjecting 150 European banks to annual stress tests, the European Central Bank and the European Banking Authority said only 12 of them needed to raise additional capital as protection against a worst-case scenario. Italy had the most problem banks, with Greece and Cyprus tied for second.

· Similar stress tests for U.S. banks to be conducted by the Federal Reserve next year will measure how well they would withstand a sharp deterioration in the corporate bond market, especially high-yield bonds issued by highly indebted companies. As in previous years, the tests also will gauge exposure to threats from a variety of factors that include sharp declines in the job market and economic growth, a jump in oil prices to $110 a barrel, and a 60% drop in the stock market. Banks that fail the test could be restricted in their ability to pay dividends or buy back stocks until they address the deficiencies.

Eye on the Week Ahead

Once again, all eyes will be on the Fed as quantitative easing is expected to come to an end. And with recent volatility in the equities markets suggesting investor uncertainty, the first estimate of Q3 gross domestic product is likely to be significant. Also, the release of stress tests conducted on European banks could affect investor perception of the financial system there.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). 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 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.

Market Week: October 22, 2014

October 21st, 2014

The Markets

The hits just kept on coming: Ongoing weak economic data abroad, disappointing domestic retail and wholesale inflation numbers, and fears about the global impact of the Ebola virus continued to take a toll. At one point on Wednesday, the Dow had shed 458 points, though it saw a partial recovery later in the day. And despite a rally on Friday, the S&P 500 inched closer to correction territory; its 1% loss for the week left it down 6.2% from its September 18 record high. However, there also was some good news; the small caps of the Russell 2000, which have been beaten down for much of the year, had strong gains.

The benchmark 10-year Treasury yield continued to drop; as demand drove prices higher, the yield briefly fell below 2% on Wednesday. In Europe, the opposite was true; yields on 10-year Greek sovereign bonds rose to 9% as investors worried about whether the stagnant European economy might affect weaker countries’ ability to repay or refinance existing debt. The price of oil, which has been declining recently because of falling global demand, plummeted to the low $80s–its lowest level in more than two years.

Market/Index

2013 Close

Prior Week

As of 10/17

Weekly Change

YTD Change

DJIA

16576.66

16544.10

16380.41

-.99%

-1.18%

Nasdaq

4176.59

4276.24

4258.44

-.42%

1.96%

S&P 500

1848.36

1906.13

1886.76

-1.02%

2.08%

Russell 2000

1163.64

1053.32

1082.33

2.75%

-6.99%

Global Dow

2484.10

2430.85

2409.20

-.89%

-3.02%

Fed. Funds

.25%

.25%

.25%

0%

0%

10-year Treasuries

3.04%

2.31%

2.22%

-9 bps

-82 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· U.S. manufacturing data was mixed. According to the Federal Reserve Board, industrial production increased 1% in September and rose at an annual rate of 3.2% during the third quarter. However, growth measured by the Fed’s October Empire State manufacturing survey fell sharply from the five-year high recorded the previous month, and the Philly Fed index showed growth slowing slightly.

· Eurozone manufacturing output fell sharply in August, according to the European Union’s statistical agency; the 1.8% drop was the largest monthly decline since late 2008. Production in the 28-member EU also fell 1.4%, and the 4.3% decline in German industrial production was especially unsettling.

· To help combat that weakness, the European Central Bank will start buying asset-backed securities and certain bank bonds shortly. And in China, the central bank there is reportedly ready to inject more than $30 billion into its banking system to try to jump-start lending.

· The International Energy Agency cut its forecast for global demand for oil for the rest of this year and 2015. Weak global demand, increased U.S. production, and a strong dollar have already cut the price of oil by more than 20% since June, and the IEA said prices could fall further if supply isn’t reduced. However, several key members of the Organization of the Petroleum Exporting Countries (OPEC) have indicated that at least for now, they prefer to try to retain market share rather than cut supplies to support prices.

· September’s 0.3% annual inflation rate in the eurozone–the lowest level in five years–raised concerns about the possibility of deflation, especially since consumer prices actually fell in several countries. However, prices in the EU as a whole were up 0.4% during the month.

· Wholesale prices fell in the United States; the Bureau of Labor Statistics said prices for finished products and services dropped 0.1% in September, though they are 1.6% higher than the previous September. The 0.7% monthly decline in both the volatile food and energy sectors was largely responsible; not including food and energy, prices were up 0.2%.

· Retail sales in the United States slipped 0.3% in September, though the Commerce Department said they were 4.3% ahead of a year earlier. The biggest declines were seen in building and garden supplies, clothing, and nonstore retailers, all of which were down more than 1% during the month.

· U.S. housing starts jumped 6.3% in September; according to the Commerce Department, that put them 17.8% ahead of the previous September. Also, building permits–an indicator of future activity–were up 1.5% in September and 2.5% from a year ago.

Eye on the Week Ahead

After four straight weeks of volatility, investors will likely keep their fingers crossed for a break in the action as third-quarter earnings reports continue to stream in. Chinese third-quarter economic data will be watched in light of global growth concerns. Falling energy costs could keep U.S. consumer inflation figures low.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). 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 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.

Say Hello to the Correction

October 19th, 2014
The correction that we opined might be on the way is now here. So now what?
First, say seated and buckle up. The ride may continue to be bumpy for a while, but it will eventually end. Exactly when and at what price levels we don’t know, but even very nasty corrections (which so far, this is not) last 8 to 10 weeks on average from peak to trough. This one, which we now know began on September 19, is already 6 weeks old, so we should be well past the midpoint.
Second, corrections are both healthy and normal. They typically occur every 12 to 18 months, but we haven’t had a selloff of more than 10% since 2011. So a rocky period in the markets is long overdue. The cause doesn’t much matter, as in retrospect the worries will seem overblown. It’s the result that counts: investors get scared and sell emotionally. Those who stay calm and stick it out are likely to be rewarded down the line.
As unpleasant as it may be—and trust us, we’re not having fun either—long-term investors should welcome the selloff. It means that markets are returning to normal after a long stretch of atypical calm. As we’ve said before, volatility is the price one must pay for the higher expected long-term returns afforded by equities versus bonds and cash. If we find a free lunch (an investment with high expected returns and low volatility) we’ll let you know—but don’t hold your breath.
Dr. Ken Waltzer, MD, MPH, AIF®, CFA, CFP®
Managing Director, KCS Wealth Advisory

​Laura Gilman, CFP®, PFP, MBA
Managing Director, KCS Wealth Advisory

Adam Bragman
Director of Investment Research, KCS Wealth Advisory

Market Week

October 18th, 2014

The Markets

Concerns about signs of weaker growth abroad seemed to outweigh domestic corporate earnings reports last week as volatility went extreme. The Dow industrials saw triple-digit swings four days in a row that wiped out all of the index’s year-to-date gains, and both the Dow and the S&P 500 had their worst weeks since May 2012. By the end of the week, the S&P was down 5% from its most recent high (a 10% drop is considered a correction). Meanwhile, the Russell 2000 fell solidly into correction territory, ending the week down almost 13% from its most recent high in March. The Global Dow also turned negative year-to-date.

The volatility sent investors once again seeking the relative security of U.S. Treasuries. As the price of the benchmark 10-year note has risen, the decline in its yield has accelerated in each of the last four weeks; the 10-year yield ended last week at its lowest level since June 2013.

Market/Index

2013 Close

Prior Week

As of 10/10

Weekly Change

YTD Change

DJIA

16576.66

17009.69

16544.10

-2.74%

-.20%

Nasdaq

4176.59

4475.62

4276.24

-4.45%

2.39%

S&P 500

1848.36

1967.90

1906.13

-3.14%

3.13%

Russell 2000

1163.64

1104.74

1053.32

-4.65%

-9.48%

Global Dow

2484.10

2493.99

2430.85

-2.53%

-2.14%

Fed. Funds

.25%

.25%

.25%

0%

0%

10-year Treasuries

3.04%

2.45%

2.31%

-14 bps

-73 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· Minutes of the most recent meeting of the Federal Reserve’s monetary policy committee showed that members are worried about slowing global growth. The potential domestic impact of dollar strength, which could become more problematic when interest rates increase, also was a concern, as a stronger dollar could make U.S. exports more expensive and weigh on the domestic economy. Members also wrestled with how to communicate any shift in the committee’s expectations about when a rate increase might occur.

· European Central Bank President Mario Draghi said that the already sluggish European economy seems to be slowing further. Coupled with discouraging economic reports out of Germany–exports fell 5.8% in August, and manufacturing output and new orders also were down–Draghi’s statement raised concerns about the financial health of Europe as a whole. To add to the gloom, the International Monetary Fund also lowered its outlook for global growth next year, though its U.S. forecast was more optimistic.

Eye on the Week Ahead

The question of the week will be whether last week’s volatility exhausted negative sentiment or there’s more to come. If domestic Q3 earnings reports and corporate guidance are robust, they might help provide some counterbalance to global pessimism. However, many large U.S. corporations earn a large percentage of their profits overseas; if forward guidance tends to be negative, that could have the opposite effect. Options expiration at week’s end also could affect volatility.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). 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 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.

Market Week: October 6, 2014

October 6th, 2014

The Markets

For the second straight week, a Friday rally after encouraging employment numbers couldn’t outweigh equities’ losses earlier in the week. However, it did manage to rescue the Russell 2000 from a brief dip into correction territory (a correction is generally considered to be 10% down from the most recent high). Once again, the Dow industrials and the S&P 500 outpaced the small caps, while equities’ recent slump translated into gains for the price of the benchmark 20-year Treasury.

Market/Index

2013 Close

Prior Week

As of 10/3

Weekly Change

YTD Change

DJIA

16576.66

17113.15

17009.69

-.60%

2.61%

Nasdaq

4176.59

4512.19

4475.62

-.81%

7.16%

S&P 500

1848.36

1982.85

1967.90

-.75%

6.47%

Russell 2000

1163.64

1119.33

1104.74

-1.30%

-5.06%

Global Dow

2484.10

2551.32

2493.99

-2.25%

.40%

Fed. Funds

.25%

.25%

.25%

0%

0%

10-year Treasuries

3.04%

2.54%

2.45%

-9 bps

-59 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

· The 248,000 new jobs created in September helped cut the U.S. unemployment rate from 6.1% to 5.9%; it’s the first time since July 2008 that joblessness has been below 6%. Also, the Bureau of Labor Statistics said hiring during the prior two months was stronger than previously thought. However, at least some of the decline in the unemployment rate resulted from 97,000 people dropping out of the labor force (for example, retiring baby boomers). That brought the percentage of people in the workforce to 62.7%–the lowest participation rate since 1978.

· Though home prices measured by the S&P/Case-Shiller 20-City Composite Index continued to rise in July, the pace slowed significantly. Year-over-year gains were down in 19 of the 20 cities, and monthly increases were smaller in 17 cities. Nevertheless, the index was 6.7% ahead of a year earlier, and prices rose 0.6% during the month.

· The European Central Bank declined to make any further cuts to interest rates until it sees the impact of bond purchases scheduled to begin this month, including sovereign bonds from Greece and Cyprus. However, President Mario Draghi reiterated that the ECB stands ready to adopt further stimulus measures if necessary.

· Both personal income and consumption were up in August, according to the Bureau of Economic Analysis. The increase in private wages and salaries was almost double that of July, pushing personal income up 0.3%. Personal consumption–one of the Fed’s favorite measures of inflationary pressure–rose 0.5%. That increased consumption helped cut the savings rate from 5.6% to 5.4%.

· The failure of China’s manufacturing sector to rebound in September from the previous month’s low level fanned concerns about global growth. HSBC Corp.’s Purchasing Managers’ Index remained at 50.2–barely above the level that would represent contraction.

· The U.S. services sector continued to grow in September, but at a slightly slower pace. The Institute for Supply Management’s non-manufacturing purchasing managers’ index nudged downward one point from August’s record level to 58.6.

Eye on the Week Ahead

The Q3 earnings season will have its unofficial kickoff when Alcoa reports its results after Wednesday’s market close. Discussions of what should happen after the anticipated end of quantitative easing will be scrutinized when minutes of the most recent Federal Open Market Committee meeting are released on Wednesday.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). 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 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.