Market volatility: Like most things in life, it’s all relative

November 25th, 2015

The stock market has certainly seen some increased volatility over the past year, with the past few months being an especially turbulent period. We believe, however, that the recent volatility spike feels more drastic than it really is, and this can be explained by the relative stability we’ve experienced over the past few years.

2015: Not as wild a ride as it seems

The illustration below compares the performance of the S&P 500 [the black bars] for each year going back to 1980, and below it the largest intra-year decline [the red dots][1] during that year.

The data above show that the average intra-year decline since 1980 has been -14.2%. So while 2015 may feel like an especially rough investing year, the -12% decline during the summer was actually smaller than the average annual decline. Also, it’s important to realize that there have been plenty of years when US stocks have yielded positive returns for investors, while experiencing more significant declines during the year than we have so far seen in 2015. In fact, the S&P 500 Index generated an average annual return of +8.5% from 1980 to 2014, with positive returns in 27 of those 35 years despite an average intra-year drop of -14.2%.

Putting it all into context

We’re not saying it’s irrational to be worried or uneasy when the market goes through a rapid correction. Even the most seasoned investors—ourselves included—can become uncomfortable during periods of volatility like the one we experienced in August and September. We believe, however, that media pundits and investors overreacted to the recent correction for a couple reasons.
First, human reactions are strongly influenced by context and recent events. The four years preceding the summer correction were unusually calm, with no intra-year declines exceeding 10%. So when this correction hit (suddenly, as most do), the contrast with the relatively placid market waters of recent years made it feel especially rough. Had a similar decline occurred in 2009, shortly after the extremely volatile years of the financial crisis, it would have felt like a gentle roll rather than a near capsize.
Also, it’s important to remember that print and television media operate in an increasingly competitive environment, where eyeballs drive ad sales and ad sales drive bottom lines. And for whatever reason, American eyeballs are more attracted to articles or television personalities that forecast either outstanding returns or drastic declines. It’s just not profitable to write an article with a title like “Market volatility: Like most things in life, it’s all relative.” This kind of headline won’t boost ratings or drive ad sales. So don’t let TV or media pundits’ predictions lead you astray with their profit-driven sensationalism.
It’s impossible to completely remove emotions from investing, but the ability to think and act rationally (especially in times of fear and uncertainty) is crucial to investment success.
Please let us know if you have questions about this article or anything else—we’re happy to help.
[1] The largest “intra-year decline” measures the largest top-to-bottom, or “peak-to-trough,” decline in percentage terms during that year.

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, CFA
Director of Investment Research, KCS Wealth Advisory

Market Week: November 25, 2015

November 25th, 2015

The Markets

Despite the terrorist attacks in Paris and Mali, stocks climbed higher by the close of last week. Investors may have been influenced by favorable earnings reports from some large companies and the feeling that the impending Fed interest rate hike may be a sign the government believes the economy is on a definite upswing. The S&P 500 and the Dow saw significant gains, rising 3.27% and 3.35%, respectively. Nasdaq continues to be a consistent performer, closing last week up almost 8% year-to-date.

The price of gold (COMEX) decreased, selling at $1,077.30 by late Friday afternoon compared to $1,083.20 a week earlier. Crude oil (WTI) prices gained, selling at $41.46 per barrel by week’s end. The national average retail regular gasoline price decreased to $2.178 per gallon on November 16, 2015, $0.057 below the previous week’s price of $2.235 per gallon, and $0.716 below a year ago.

Market/Index

2014 Close

Prior Week

As of 11/20

Weekly Change

YTD Change

DJIA

17823.07

17245.24

17823.81

3.35%

0.00%

Nasdaq

4736.05

4927.88

5104.92

3.59%

7.79%

S&P 500

2058.90

2023.04

2089.17

3.27%

1.47%

Russell 2000

1204.70

1146.55

1175.15

2.49%

-2.45%

Global Dow

2501.66

2358.29

2418.66

2.56%

-3.32%

Fed. Funds

0.25%

0.25%

0.25%

0%

0%

10-year Treasuries

2.17%

2.26%

2.26%

0 bps

9 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 Consumer Price Index (CPI) experienced a modest monthly gain in October, increasing 0.2%. This follows two consecutive months of decline. According to the Bureau of Labor Statistics report, the index has increased 0.2% over the last 12 months. The core CPI, less the volatile food and energy segment, sits at 1.9%–right at the Fed’s general 2% inflation target. Stronger inflationary trends could be a sign
of economic strength sufficient enough to absorb an interest rate hike.

· The Federal Reserve puts out a monthly index of industrial production covering manufacturing, mining, and electric and gas utilities. The latest figures show that industrial production fell once again, declining 0.2% in October. Indexes for utilities (-2.5%) and mining (-1.5%) decreased, while the index for manufacturing actually moved up 0.4% for the month. Also on the plus side, at 107.2% of its 2012 average, total industrial production in October was 0.3% above its year-earlier level.

· The Housing Market Index, which is based on a survey of National Association of Home Builders members, seeks to rate the single-family housing market. The preliminary report for November shows the index dipped to 62 compared to October’s revised reading of 65. A reading over 50 denotes general builder confidence. While enthusiasm in the market for single-family home sales may have softened a bit, November’s preliminary reading reveals continuing optimism in the market.

· Housing starts–marked by the actual start of new residential construction–fell 11% in October compared to September’s revised figures. According to the latest Census Bureau report, there were about 1,060,000 housing starts in October–131,000 fewer than the prior month’s total. Builders cut back on construction of apartments and condominiums to the tune of 25.1%, while starts of single-family residences fell 2.4%. On the other hand, builders showed confidence in future residential sales, as applications for building permits rose 4.1%.

· In the week ended November 14, there were 271,000 initial claims for unemployment insurance, a decrease of 5,000 from the prior week. The advance seasonally adjusted insured unemployment rate was unchanged at 1.6% for the week ended November 7, while the advance number for continuing unemployment insurance claims was 2,175,000, a decrease of 2,000 from the previous week’s revised level.

Eye on the Week Ahead

Several important economic indicators are highlighted in reports during the week of November 23. Reports on existing home sales and new home sales may reveal the direction of the housing market heading to the end of the year. Imports and exports have generally been lagging for much of this year, and the latest figures are expected to reveal more of the same. The report on gross domestic product is the final take on overall economic activity available to the FOMC before its December meeting.

Data sources: 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: 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. 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.

Weelky Markets Update

November 11th, 2015

The Markets

Following a very favorable jobs report at the end of last week, the domestic indexes listed here posted overall gains as of last Friday’s close. The Russell 2000, which had been lagging a bit, saw the largest increase, gaining 3.26%, followed by the Nasdaq, which rose over 93 points. Only the Global Dow regressed by week’s end, but only by 0.11%. Also of note is the sharp increase in the 10-year Treasuries yield–up 18 basis points, as money moved out of bonds, possibly in anticipation of higher interest rates on the horizon.

The price of gold (COMEX) decreased, selling at $1,088.90 by late Friday afternoon compared to $1,141.70 a week earlier. Crude oil (WTI) prices fell, selling at $44.52 per barrel by week’s end. The national average retail regular gasoline price decreased to $2.224 per gallon on November 2, 2015, $0.004 under the previous week’s price of $2.228 per gallon, and $0.769 below a year ago.

Market/Index

2014 Close

Prior Week

As of 11/6

Weekly Change

YTD Change

DJIA

17823.07

17663.54

17910.33

1.40%

0.49%

Nasdaq

4736.05

5053.75

5147.12

1.85%

8.68%

S&P 500

2058.90

2079.36

2099.20

0.95%

1.96%

Russell 2000

1204.70

1161.86

1199.75

3.26%

-0.41%

Global Dow

2501.66

2436.23

2433.65

-0.11%

-2.72%

Fed. Funds

0.25%

0.25%

0.25%

0%

0%

10-year Treasuries

2.17%

2.14%

2.32%

18 bps

15 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

·                    For those at the Fed looking to raise interest rates in December, last week’s employment report will certainly support that move. The Bureau of Labor Statistics reported that nonfarm employment increased by 271,000 in October, while the unemployment rate (5.0%) and did the number of unemployed persons (7.9 million) remained steady. In October, average hourly earnings for all employees on private nonfarm payrolls rose by 9 cents to $25.20, following little change in September. Hourly earnings have risen by 2.5% over the year.

·                    The trade deficit for goods and services narrowed in September compared to August, according to the latest figures from the Bureau of Economic Analysis. The trade deficit was $40.8 billion in September, down $7.2 billion from $48.0 billion in August–the smallest deficit since February. September exports were $187.9 billion, $3.0 billion more than exports in August. September imports were $228.7 billion, $4.2 billion less than August imports. The September decrease in the goods and services deficit reflected a decrease in the goods deficit of $7.3 billion to $60.3 billion and a decrease in the services surplus of $0.1 billion to $19.5 billion.

·                    According to the Institute for Supply Management Report on Business®, the October Purchasing Managers’ Index (PMI®) registered 50.1%, a decrease of 0.1% from the September reading of 50.2%. October’s reading marks the third consecutive month of decline in the manufacturing sector. A reading above 50% indicates that the manufacturing economy is generally expanding; below 50% indicates that it is generally contracting. The report also includes information on a number of sub-indexes, which provide some insight into manufacturing activity. For instance, the New Orders Index, the Production Index, and the Prices Index each increased in October compared to September. Yet, the Employment Index and the Imports Index both regressed. Survey respondents expressed concerns over the high price of the dollar and the continuing low price of oil.

·                    In contrast to the PMI®, the ISM Non-Manufacturing Index (NMI®) has been posting positive data indicating growth. October’s report maintained that trend as the NMI® came in at 59.1%–2.2% ahead of September’s reading. The reading for October represents growth in the non-manufacturing sector, but at a faster pace, since readings over 50% represent some growth. According to the report, the Non-Manufacturing Business Activity Index increased 2.8%; the New Orders Index gained 5.3%; the Employment Index rose 0.9%; and the Prices Index increased 0.7%–an indication that prices decreased in October.

·                    The U.S. Census Bureau of the Department of Commerce reported last week that construction spending during September 2015 was estimated at a seasonally adjusted annual rate of $1,094.2 billion, 0.6% above the revised August estimate of $1,087.5 billion. The September figure is 14.1% above the September 2014 estimate of $959.2 billion. Spending on private construction was at a seasonally adjusted annual rate of $794.2 billion, 0.6% above the revised August estimate of $789.7 billion. In September, the estimated seasonally adjusted annual rate of public construction spending was $300.0 billion, 0.7% above the revised August estimate of $297.8 billion.

·                    Nonfarm business sector labor productivity increased at a 1.6% annual rate during the third quarter of 2015, the U.S. Bureau of Labor Statistics reported last week, as output increased 1.2% and hours worked decreased 0.5%–the first decline in hours worked since 2009. From the third quarter of 2014 to the third quarter of 2015, productivity increased 0.4%, reflecting increases in output and hours worked of 2.3% and 1.9%, respectively.

·                    Continuing a somewhat disturbing trend, new orders for manufactured goods, down in July and August, decreased $4.7 billion, or 1.0%, to $466.3 billion in September, the U.S. Census Bureau reported last week. Shipments, unfilled orders, and inventories each decreased in September from August. The decline in factory orders can be traced, at least in part, to weakness in exports, low oil prices, and a soft energy sector.

·                    Initial claims for unemployment insurance increased by 16,000 for the week ended October 31, to close at 276,000, up from the previous week’s unrevised level of 260,000. The advance seasonally adjusted insured unemployment rate was unchanged at 1.6% for the week ended October 24, while the advance number for continuing unemployment insurance claims increased 17,000 to 2,163,000.

Data sources: 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: 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. 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.

Market Week: November 3, 2015

November 3rd, 2015

The Markets

News that the Fed would not be raising interest rates at least until December had little impact on the markets in general, as equities closed last week without much movement from the prior week. The Dow and S&P 500 finished last week up 0.1% and 0.2%, respectively. Of the indexes listed here, last week’s biggest gainer was the Nasdaq, up 0.44% to 5053.75, while the Russell 2000 and the Global Dow both finished the week losing value.

The price of gold (COMEX) decreased, selling at $1,141.70 by late Friday afternoon compared to $1,164.00 a week earlier. Crude oil (WTI) prices gained a bit, selling at $46.39 per barrel by week’s end. The national average retail regular gasoline price decreased to $2.228 per gallon on October 26, 2015, $0.049 under the previous week’s price of $2.277 per gallon, and $0.828 below a year ago.

Market/Index

2014 Close

Prior Week

As of 10/30

Weekly Change

YTD Change

DJIA

17823.07

17646.70

17663.54

0.10%

-0.90%

Nasdaq

4736.05

5031.86

5053.75

0.44%

6.71%

S&P 500

2058.90

2075.15

2079.36

0.20%

0.99%

Russell 2000

1204.70

1166.06

1161.86

-0.36%

-3.56%

Global Dow

2501.66

2458.13

2436.23

-0.89%

-2.62%

Fed. Funds

0.25%

0.25%

0.25%

0%

0%

10-year Treasuries

2.17%

2.04%

2.14%

10 bps

-3 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 Federal Open Market Committee (FOMC) again voted to maintain its current interest rate policy through November. While noting that economic activity has been expanding at a moderate pace, with household spending and business fixed investment increasing in recent months, the FOMC also noted that net exports are soft, the pace of job gains has slowed, and inflation continues to run below the FOMC’s target rate of 2.0%. The FOMC does not meet again until December, at which time it will assess progress towards its objectives of maximum employment and 2.0% inflation. While a rate increase is still in play for December, the FOMC cautioned that, “even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the [c]ommittee views as normal in the longer run.”

·
As predicted by the FOMC, last Thursday’s first report on the third-quarter GDP showed a slowdown in the economy’s growth. Real gross domestic product–the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production–increased at an annual rate of 1.5% in the third quarter of 2015, according to the “advance” estimate released by the Bureau of Economic Analysis.
In the second quarter, real GDP increased 3.9%. The deceleration in the growth of the GDP is attributable, in part, to a decrease in private inventory investment and in exports.

·
While consumers spent a little more in September, it wasn’t much of an increase, according to the latest figures on personal income and outlays from the Bureau of Economic Analysis. Personal spending by consumers for durable goods, nondurable goods, and services increased by a scant 0.1% in September compared to August. Personal pretax income also rose only 0.1% for the month–the smallest increase since this past March. Most
importantly from the perspective of the FOMC, inflation, as measured by the personal consumption expenditures index, increased only 1.3% (excluding food and energy) from last September–well below the FOMC’s target rate of 2.0%.

·
The housing market, which has been a consistently favorable performer this year, received a bit of a jolt with the latest U.S. Census Bureau report revealing that sales of new single-family houses in September were at a seasonally adjusted annual rate of 468,000–11.5% below the revised August rate of 529,000. The median sales price of new houses sold in September was $296,900, while the average sales price was $364,100. The seasonally adjusted estimate of new houses for sale at the end of September was 225,000. This represents a supply of 5.8 months at the current sales rate. Despite the drop in new home sales in September, sales of newly constructed homes is still 2% above the September 2014 estimate of 459,000. The slowdown in new home sales could be attributed to a rise in asking price, which, at $296,900, is 13.5% higher than a year ago.

·
The National Association of Realtors Pending Home Sales Index® declined 2.3% to 106.8 in September from August’s revised 109.3. This is the second-lowest level of the year (January was 103.7), and is likely due to the lack of available inventory, especially in the lower end of the market, coupled with a possible hesitancy from consumers who may fear a continued economic slowdown.

·
The S&P/Case-Shiller home price index showed a 4.7% annual increase in August 2015 versus a 4.6% increase in July 2015. “Home prices continue to climb at a 4% to 5% annual rate across the country,” according to David M. Blitzer, Managing Director and Chairman of the Index Committee.

·
The U.S. Census Bureau publishes an advance report on the trade gap in goods (not services) about a week before more detailed information is released by the U.S. Bureau of Economic Analysis. The advanced report revealed that the trade gap is expected to narrow–closing at $58.6 billion in September compared to $67.2 billion in August.

·
An early estimate of new orders for durable goods (manufactured items expected to last at least three years) placed with domestic manufacturers for immediate and future delivery predicts a decrease of $2.9 billion, or 1.2%, in September, according to the U.S. Census Bureau. This decrease, down two consecutive months, followed a 3% August decrease. Excluding transportation, new orders decreased 0.4%. Excluding defense, new orders decreased 2%. The dip in durable goods orders may be attributable to low oil prices and weak exports resulting from a strong U.S. dollar.

·
For the third quarter, compensation costs for civilian workers increased 0.6%, the U.S. Bureau of Labor Statistics reported last week. Wages and salaries (which make up about 70% of compensation costs) increased 0.6%, and benefits (which make up the remaining 30% of compensation) increased 0.5%. As the number of available jobs contracts, wages may be showing some upward movement based on these latest figures.

·
According to The Conference Board Consumer Confidence Index®, consumer confidence declined in October. The index dropped from 102.6 in September to 97.6 in October. Lynn Franco, Director of Economic Indicators at The Conference Board said, “Consumers were less positive in their assessment of present-day conditions, in particular the job market, and were moderately less optimistic about the short-term outlook.” Conversely,
the University of Michigan’s Index of Consumer Sentiment for October rose to 90.0 from 87.2 in September due to gains in confidence among lower income households. However, confidence among households with incomes in the top third retreated a bit.

·
Initial claims for unemployment insurance increased by 1,000 for the week ended October 24, to close at 260,000, up from the previous week’s unrevised level of 259,000. The advance seasonally adjusted insured unemployment rate was unchanged at 1.6% for the week ended October 17, while the advance number for continuing unemployment insurance claims decreased 37,000 to 2,144,000–the lowest level since November 4, 2000.

Eye on the Week Ahead

With news that the Fed will not be raising interest rates in the near term, focus for the coming week will center on manufacturing, the trade deficit, and the employment situation–areas of particular
interest to the FOMC.

Data sources: 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: 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. 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.