Market Week

February 29th, 2016

The Markets

The major indexes listed here posted gains by the end of last week, marking the best overall week of performance in the new year. Both the Dow and the S&P 500 posted end-of-week gains of 2.62% and 2.84%, respectively. The Nasdaq and Russell 2000 recouped some of their early-year losses with gains close to 4.0%. Even the Global Dow gained 3.80% over the prior week’s close.

The price of crude oil (WTI) increased, closing the week at $29.83 a barrel, $0.81 ahead of the prior week’s closing price. The price of gold (COMEX), possibly feeling the effects of money moving back into equities, fell by last week’s end selling at $1,228 by late Friday afternoon, down from the prior week’s closing price of $1,238.20. The national average retail regular gasoline price decreased for the seventh week in a row to $1.724 per gallon on February 15, 2016, $0.035 below the prior week’s price and $0.550 under a year ago.

Market/Index

2015 Close

Prior Week

As of 2/19

Weekly Change

YTD Change

DJIA

17425.03

15973.84

16391.99

2.62%

-5.93%

Nasdaq

5007.41

4337.51

4504.43

3.85%

-10.04%

S&P 500

2043.94

1864.78

1917.78

2.84%

-6.17%

Russell 2000

1135.89

971.99

1010.01

3.91%

-11.08%

Global Dow

2336.45

2070.54

2149.19

3.80%

-8.01%

Fed. Funds rate target

0.25%-0.50%

0.25%-0.50%

0.25%-0.50%

0 bps

0 bps

10-year Treasuries

2.26%

1.74%

1.75%

1 bps

-51 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 minutes from January’s Federal Open Market Committee meeting highlight a mixed bag of economic indicators. While the Committee noted improving labor market conditions, increased household and business spending, and an improving housing sector, these positive trends were somewhat offset by slowing economic growth, inflation running below the Committee’s target rate of 2.0%, soft exports, and declining inventory investment. As to whether and when target rates will be increased, the Committee emphasized that it will continue to assess realized and expected economic conditions relative to the Committee’s objectives of maximum employment and 2% inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. At present, due to the apparent uncertainty of inflationary trends and economic growth, the Committee maintains its intent to gradually increase the federal funds rate, which will likely remain, for some time, below levels that are expected to prevail in the longer run.

· The Housing Market Index (HMI), based on a monthly survey of members of the National Association of Home Builders, is designed to reflect the pulse of the single-family housing market. According to the latest survey, builder confidence is dropping as evidenced by February’s HMI reading of 58, which is 3 points lower than January’s reading and the lowest reading since May 2015. Builders noted high land costs, the lack of available land, and the scarcity of labor as primary reasons for the slowdown in the single-family housing market. On the plus side, respondents did feel the prospective sales market would pick up over the next six months. Also, it’s important to note that these are preliminary readings that will likely be revised later.

· Housing starts and building permits for privately owned housing units were both down in January from the prior month. Applications for building permits for new home construction were at an annual rate of 1,202,000–0.2% below the revised December rate, but 13.5% above the January 2015 estimate. Privately owned housing starts for January were at an annual rate of 1,099,000, which is 3.8% below December’s rate, but 1.8% above the rate from a year earlier. On the other hand, completions were up in January, 2.0% ahead of December’s revised rate and 8.4% above the rate for January 2015. Nevertheless, the start of the new year finds the housing market slowing down, particularly considering that the number of building permits, indicative of future construction, has fallen the past two months.

· The prices producers receive for goods and services, as measured by the Producer Price Index (PPI), advanced 0.1% in January, following a 0.2% decrease in December. As reported by the Bureau of Labor Statistics, the increase in producer prices is attributable to a 0.5% advance in prices for services, which offset a 0.7% drop in the prices for goods. Looking at trends in this segment of the economy, producer prices are down 0.2% compared to January 2015, marking the 12th straight year-over-year decline. As an indicator of inflationary trends, downward movement in producer prices may lead the Federal Open Market Committee to hold off on further interest rate increases for the time being.

· Impacted by falling energy prices, consumer prices for goods and services remained relatively flat in January, according to the latest Consumer Price Index. On a more positive note, the CPI increased 1.4% over the last 12 months, and the index, less food and energy, is up 0.3% for the month. The increase (less food and energy) was broad-based, with most of the major components rising, but increases in the indexes for shelter and medical care were the largest contributors. This report may imply that inflation is trending upward, but the strong dollar and declining energy prices have kept inflation in check. The CPI, coupled with the PPI, is keeping inflation below the Fed’s target rate of 2.0%, lending credence to the view that interest rates will remain the same for the near term.

· The Federal Reserve puts out a monthly index of industrial production, which attempts to demonstrate the overall production of factories, mines, and utilities. For January, industrial production increased 0.9%, following a 0.7% drop in December. The index for utilities jumped 5.4%, while demand for heating moved up markedly after having been suppressed by unseasonably warm weather in December. Manufacturing output increased 0.5% in January and was 1.2% above its year-earlier level. Mining production was unchanged following four months of declines that averaged about 1.5% per month. In addition, capacity utilization for the industrial sector increased 0.7 percentage points in January to 77.1%, a rate that, while improving, is still 2.9 percentage points below its long-run (1972 to 2015) average.

· The Conference Board Leading Economic Index® for the U.S. declined 0.2% in January following a 0.3% decrease in December. According to the report, January’s decline was driven primarily by large declines in stock prices and further weakness in initial claims for unemployment insurance. However, the report further states that despite back-to-back monthly declines, the index doesn’t signal a significant increase in the riskof recession,  and its six-month growth rate remains consistent with a modest economic expansion through early 2016.

· For the week ended February 13, there were 262,000 initial claims for unemployment insurance, a decrease of 7,000 from the prior week’s unrevised level of 269,000. For the week ended February 6, the advance number for continuing unemployment insurance claims was 2,273,000, an increase of 30,000 from the previous week’s revised level. The advance seasonally adjusted insured unemployment rate was 1.7% for the week ended February
6, an increase of 0.1 percentage point from the previous week’s unrevised rate.

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 News

February 20th, 2016

The Markets

Spurred by a bounce in crude oil prices and banking shares, the stock market rallied last Friday, but not enough to overcome five consecutive trading-day losses. Money continued to move from equities to the safety of bonds and gold, driving the yield on 10-year Treasuries down to 1.74% while driving up the price of gold. Despite Friday’s rally, the Dow lost over 230 points over the prior week, while the S&P 500 and Nasdaq came close to recouping early-week
losses, each falling less than 1% compared to their respective prior week’s closing values.

The price of crude oil (WTI) rallied from a low price of $26.05 on February 11, closing the week at $29.02 a barrel, still down $1.98 from the prior week’s closing price. The price of gold (COMEX) increased again, selling at $1,238.20 by late Friday afternoon, up from the prior week’s closing price of $1,174.10. The national average retail regular gasoline price decreased for the sixth week in a row to $1.759 per gallon on February 8, 2016, $0.063 below the prior week’s price and $0.432 under a year ago.

Market/Index

2015 Close

Prior Week

As of 2/12

Weekly Change

YTD Change

DJIA

17425.03

16204.97

15973.84

-1.43%

-8.33%

Nasdaq

5007.41

4363.14

4337.51

-0.59%

-13.38%

S&P 500

2043.94

1880.05

1864.78

-0.81%

-8.77%

Russell 2000

1135.89

985.62

971.99

-1.38%

-14.43%

Global Dow

2336.45

2138.80

2070.54

-3.19%

-11.38%

Fed. Funds

0.50%

0.50%

0.50%

0 bps

0 bps

10-year Treasuries

2.26%

1.83%

1.74%

-9 bps

-52 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

· In testimony before both the House Committee on Financial Services and the Senate Committee on Banking, Housing and Urban Affairs, Federal Reserve Chair Janet Yellen stated that overall economic conditions may not be sufficiently improved to justify a further interest rate hike in March, when the Federal Open Market Committee (FOMC) next convenes. Addressing the FOMC’s objectives of maximum employment and 2.0% inflation, Yellen
noted that while there has been progress in the labor market, “there is still room for further sustainable improvement.” Yellen said the committee expects inflation to continue at its slow pace in the near term primarily due to declines in oil prices and weak exports. However, she said inflation is expected to rise to its 2.0% objective over the medium term. The text of the prepared testimony may be found here.

· December saw the number of job openings (5.6 million), hires (5.4 million), and total separations (5.1 million) increase over November, according to the latest Job Openings and Labor Turnover Summary (JOLTS) from the Bureau of Labor Statistics. Over the 12 months ended in December 2015, hires totaled 61.4 million and separations totaled 58.8 million, yielding a net employment gain of 2.6 million. Another positive aspect of this report is the increase in the number of quits, which was 3.1 million in December, compared to 2.9 million in November. Generally, an increasing quits rate is indicative of workers moving up to better jobs. Also, layoffs and discharges fell from 1.69 million in November to 1.61 million in December.

· According to advance estimates, the Census Bureau reported that retail and food services sales for January were $449.9 billion, an increase of 0.2% over the prior month and 3.4% above January 2015. Total sales for the first quarter of fiscal 2016 are up 2.5% from the same period a year ago. Boosted by low gasoline prices and dwindling unemployment, consumers increased retail spending on most items, but particularly on motor vehicles, groceries, and building materials. In fact, excluding gasoline, retail sales in January were up 0.4% from December.

· The monthly budget statement from the Department of the Treasury revealed a budget surplus of $55 billion for January. Total receipts for the month were $314 billion–$181 billion of which came from individual income taxes. The government spent $258 billion in January, with defense, Social Security, and Medicare comprising about 53% of the total outlays. Four months into the government’s fiscal year, the total budget deficit is $160.4 billion, about 17% lower than the comparable period last year.

· Not unexpectedly, prices for U.S. imports decreased 1.1% in January for the second consecutive month, the U.S. Bureau of Labor Statistics reported last week. U.S. export prices also fell in January, decreasing 0.8%. The decline followed a 1.1% drop in December. Principally driven by low oil-based goods and a sinking global economy, import prices are down 6.2% year-on-year. Export prices are down 5.7% compared to a year earlier,
impacted by receding agricultural products, which are down 12.7% year-on-year.

· Trade sales and manufacturers’ shipments for December were down 0.6% from November and 2.7% from December 2014, while manufacturers’ inventories were up 0.1% and 1.7%, respectively, for the same periods. The total business inventories to sales ratio for December was 1.39, compared to 1.38 in November and 1.33 in December 2014. With slowing sales, businesses are trying to keep inventories down. Inventories that far exceed
sales could negatively impact employment.

· The University of Michigan’s Index of Consumer Sentiment for February came in at 90.7, down from 92.0 in January and significantly lower than the 95.4 index reading in February 2015. The latest information indicates consumer confidence continues to decline, due to a less favorable economic outlook for the year ahead.

· For the week ended February 6, there were 269,000 initial claims for unemployment insurance, a decrease of 16,000 from the prior week’s unrevised level of 285,000. For the week ended January 30, the advance number for continuing unemployment insurance claims was 2,239,000, a decrease of 21,000 from the previous week’s revised level. The advance seasonally adjusted insured unemployment rate was 1.6% for the week ended January
30, a decrease of 0.1 percentage point from the previous week’s unrevised rate.

Eye on the Week Ahead

This week’s focus is on inflationary trends with the latest reports on producer prices and the Consumer Price Index. The week also offers the latest information on housing starts, a closely monitored report on the housing sector in particular, and the economy in general. The minutes from the FOMC’s last meeting are released this week, which, when coupled with Chair Janet Yellen’s congressional testimony, could provide insight as to the inclination of the
committee relative to raising interest rates at its next meeting in March.

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.

KCS Quarterly Market Review

February 11th, 2016
In this newsletter, we’ll be discussing:
·         What the markets did in 2015
·         How and why the price of oil has collapsed
·         Whether cheap oil is good or bad for the global economy
·         The relative strength of the US dollar, and its effect on US (and non-US) investors
·         Why international investing is still a must
Brief review of 2015
Last year was difficult for investors, especially active ones, and January of this year was no picnic, either. Here are performance figures for a few key asset classes:[1]
·         S&P 500: +1.2%
·         S&P 500 without FANG (Facebook, Amazon, Netflix & Google): -3.8%
·         Small Cap US Stocks (Russell 2000): -4.4%
·         Developed Foreign Stocks (EAFE): -0.8%
·         Emerging Market Stocks (MSCI EM): -14.9%
·         Investment Grade Bonds (Barclays Aggregate): +0.5%
·         High-Yield Bonds (BofA HY Master II): -4.6%
·         Commodities (Bloomberg Commodity): -24.7%
In short, not much on the plus side and a lot of negative numbers, some small and some not so small. As we’ve said before, we believe a cyclical bear market began when oil prices started their long fall in the summer of 2014 and is probably in its later stages now. Keep in mind that the sharpest price moves (both down and up) occur near the end of bear markets, so January’s volatility may continue until we finally turn the corner, hopefully in the early months of 2016.
2015: The year of (too much) oil
2015 was the year that oil went from cheap—having fallen from $105/barrel to under $55 in 2014—to really cheap, dropping to $37 (it’s now about $30). The graph below shows the WTI crude oil spot price ($/barrel) along with the performance of global energy stocks in the iShares S&P Global Energy ETF (IXC) during 2014 and 2015.
Of all the factors affecting oil prices—including weakening global demand, a stronger dollar, and increasing US output from fracking—one in particular sticks out: Saudi Arabia. By ramping up its oil output, the Saudis have created enough excess supply that the price of oil has collapsed over the past year and a half. With West Texas Intermediate (WTI) crude oil now around $30/barrel, many producers are finding it unprofitable to pump oil out of the ground, and have little incentive to develop new sources of supply.
Most bear markets are led down by one or two sectors. In 2000 it was tech; in 2008, financials. The current decline started in energy and materials stocks back in in the summer of 2014, and finally spread to the broader market in May of last year. Thus, the broad market has been weak for over 8 months already, while the sectors that triggered the decline started dropping 19 months ago. This suggests that we are likely closer to the end of the downturn than the beginning. At some point in 2016, we expect a clear turnaround in stocks and a resumption of the secular bull market that began almost 7 years ago.
Is $30/barrel oil bad for the global economy?
Cheap oil is great for energy users and bad for suppliers. Since there are far more of the former, low oil prices are generally good for the global economy, as less spent on gasoline and other petroleum products means more money is available to deploy elsewhere. And contrary to what you may have heard, cheap oil has never triggered a recession, but expensive oil (e.g., in 2007, 1982, 1973) often precedes recessions. Thus, the idea that the current low price of oil heralds a further slowdown in the global economy is not based on history.
However, when it comes to oil prices, there’s pleasantly low and then there’s uncomfortably low. We’re much closer to the latter now, where the pain among oil-producing companies and countries can offset the benefits low prices provide to oil consumers. Even Saudi Arabia recently hinted that it’s been surprised by the extent of the oil price drop. The result has been a marked decline in energy-related industrial activity both in the US and abroad. Recent mediocre reports manufacturing reports can be at least partly traced to this pullback in oil company activity.
The good news is that oil prices won’t stay this low forever. Even if Saudi Arabia, Russia, Iran and US frackers continue to pump all the oil they can, some of it at a loss, supply and demand will gradually come into balance. Though global economic growth has slackened of late, oil demand continues to climb, and low prices are slowing the transition to alternative fuels and discouraging conservation. At the same time, oil wells deplete over time and need to be replaced. But with oil companies making dramatic cuts in capital spending, depleting wells won’t be replaced quickly enough to maintain current production.[2]
In the US, oil production has been declining since March of last year[3], though not as fast as many would like. With prices even lower this year, it’s likely that production declines will accelerate. Perhaps as soon as 2017, we may be seeing $80 oil again.
China: The other elephant in the room
While Saudi Arabia wreaks havoc in the energy sector, weakening demand from China is causing pain in the global materials sector. Iron ore, copper and other commodity prices crashed throughout 2015, hurting commodity producing companies and countries that are net commodity exporters, such as Brazil and Australia.
While the Saudi’s intentions are clear, China’s economic status can be a bit fuzzy. Even though much of the data coming from China may be inaccurate, it seems clear that its growth rate has slowed considerably in the past year. At first, the damage was mostly confined to the Chinese stock exchanges and companies in the materials sector, but now the contagion has spread to the entire stock market. Even Apple stock has been hit by the “China flu.”
China is a net-exporter (it exports more than it imports) and its exporters benefit from a cheaper Yuan, as this makes their products cost less in the buyer’s currency. On the other hand, a net-import economy like the US prefers a stronger currency because we get more “bang for our buck” when we buy overseas.
For many years, China “pegged” its currency to the US dollar to maintain pricing of their goods in the US. But with the dollar having increased in value against most major currencies, linking the Yuan to the dollar made Chinese exports more expensive to countries paying in currencies other than the US dollar. This partly explains why China has recently decoupled the Yuan from the dollar—doing so makes their products more attractive to virtually everyone, not just US-based buyers.
How long the economic slowdown in China will last and whether it worsens are anyone’s guess. But we don’t expect problems in China to take down the global economy, any more than Japan’s
collapse did in the 1990s, when global growth outside the Land of the Rising Sun was quite robust. Nonetheless, we are keeping a close eye on China both for signs of a turnaround or deepening troubles.
While we wait for China to put its financial house in order, keep the following in mind: 1) If any government has the tools and influence to help their economy, China’s certainly does; and 2) stocks most affected by China already appear to be priced for a continued—or even deepening—China slowdown.
The US dollar has been strong lately
As you can see, the US dollar has appreciated considerably against the Euro, Canadian dollar and British pound over the past 13 months.
The dollar’s recent strength is primarily due to the relatively stronger US economy (compared with other countries) and the prospect that interest rates will rise here while staying stable or falling in most other countries. A “strong dollar,” contrary to what many believe, is neither a good nor a bad thing; it all depends on your point of view. For example, the following people and entities benefit from a stronger dollar:
(1)   Travelers – Those of you who have traveled overseas have probably noticed that your dollars are going further these days.
(2)   US companies that import more than they export – They make more overseas purchases (using a US dollar) than overseas sales (receiving a weaker currency), so this is a net positive for them.
(3)   Non-US companies that export more (to the US) than they import (from the US) – This is simply the opposite of scenario #2.
(4)   Non-US investors who held US equities in their portfolios during the US dollar’s appreciation. There is always “currency risk” in international equities; these investors happened to be on the right side of the trade.
But US investors have been hurt by the stronger dollar
There are two main ways that the stronger dollar has hurt US-based investors. First, US companies that sell overseas have seen their earnings crimped by the stronger dollar. This occurs both because their goods are now more expensive in non-US currencies, hurting sales, and because the conversion of foreign-currency earnings to US dollars is happening at a less favorable exchange rate. As approximately 1/3 of the S&P 500’s revenues come from overseas, this has been a significant drag on large US companies’ earnings and thus on their stock prices.
While US stocks have been weighed down by the stronger dollar, non-US stocks have been hit even harder. This is because they trade in the currency of their home country, but US investors buy non-US stocks with US dollars. If the home currency depreciates against the dollar, the US investor sees a decline of the value of his or her investment even if the price of the stock in the home currency stays the same.
For example, assume you purchased a German company’s stock last year, and during the time you owned it, the stock appreciated 10%. If at the same time, the dollar rose by 15% against the Euro, you would see a modest negative return of –5% (+10% minus 15%). Thus, while a German investor would have made 10% in the investment, you saw a 5% loss because you used US dollars to buy the stock.
So why invest in non-US stocks?
Given that with non-US stocks, you add the risk of currency fluctuations to those of the stock market, why would anyone want to invest overseas? There are several reasons:
1.      Diversification: Studies have shown that adding international stocks to a domestic portfolio reduces risk, even if it doesn’t add to return.[1] This is because US and foreign stocks aren’t completely correlated—sometimes one group zigs while the other zags, reducing the amount of price fluctuation in your portfolio. Also, by leaving out foreign securities, you’re ignoring half of the world’s stock market and almost 84% of its GDP (though many US companies do sell overseas as we stated above).
2.      Currency values can go up as well as down, and tend to be among the most “mean-reverting” of all financial assets. This means that the US dollar can’t continue to rise in value forever, and it’s highly likely the dollar will eventually weaken against foreign currencies. It may not be tomorrow or the next day, but once it does, the weakening dollar will provide a tailwind that adds to the performance of non-US stocks. (In the above example, if the dollar had fallen by 15% rather than rising, your total return on the German stock would have been about +25%.)
3.      The US market doesn’t always outperform the rest of the world. In fact, non-US stocks outperform about half the time, but you can’t predict which half. And when they do outperform, it can be by a lot. For example, during the 3-year period 2004 through 2006, the S&P 500 gained a hefty 34.4%. Pretty nice, right? But during that same period, non-US stocks rose 72.5% in dollar terms (and emerging markets surged 117%)! If you were investing only in the US, you would have given up quite a bit of return. Recently, the US market has done better than non-US markets, especially in US dollars, but foreign stocks will again have their day.
Conclusion
After a mild down year in 2015 and a rough January that saw lots of volatility and global stocks sinking another -5.3%, it’s easy to feel like you want to give up on “risky” assets, or at least trim them back. But your asset allocation decisions should have little to do with the market’s recent action and everything to do with your long-term goals. Abandoning your carefully constructed asset allocation whenever the market starts misbehaving is a good way to end up well short of your goals.
Remember, it’s just when nothing seems to be going right that turnarounds unexpectedly occur. No one can see the bottom of a bear market except in retrospect, and trying to do so is bound to fail. We don’t know exactly when investors’ mood will improve, but we know that it always does and there will be brighter days ahead for the markets.
[1] All data from www.finance.yahoo.com
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
KCS Wealth Advisory is a registered investment adviser. Our services include discretionary management of individual and institutional investment accounts, along with personalized financial, estate and tax planning services.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results. Investing involves risk, including loss of principal. Consult your financial professional before making any investment decision. Other methods may produce different results, and the results for different periods may vary depending upon market conditions and portfolio composition. This email does not represent an offer to buy or sell securities.
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Market Week: February 2, 2016

February 2nd, 2016

The Markets

Volatility continues to best describe the markets throughout the first month of 2016, as stocks continued to rebound after a very shaky start to the new year. Boosted by a jump in oil prices, favorable earnings reports, and an end-of-the-week move by the Japanese central bank to set negative interest rates, each of the indexes listed here posted gains for the week. The Global Dow increased just under 2.0%, while the Dow, likely influenced by favorable earnings reports, gained over 370 points to close up 2.32% for the week.

Despite a surplus, rumors of overseas production cuts pushed the price of crude oil (WTI) up, closing at $33.74 a barrel. The price of gold (COMEX) increased, selling at $1,118.39 by late Friday afternoon, up from the prior week’s closing price of $1,098.50. The national average retail regular gasoline price decreased for the fourth week in a row to $1.856 per gallon on January 25, 2016, $0.058 below the prior week’s price and $0.188 under a year ago.

Market/Index

2015 Close

Prior Week

As of 1/29

Weekly Change

YTD Change

DJIA

17425.03

16093.51

16466.30

2.32%

-5.50%

Nasdaq

5007.41

4591.18

4613.95

0.50%

-7.86%

S&P 500

2043.94

1906.90

1940.24

1.75%

-5.07%

Russell 2000

1135.89

1020.77

1035.38

1.43%

-8.85%

Global Dow

2336.45

2135.79

2177.64

1.96%

-6.80%

Fed. Funds

0.50%

0.50%

0.50%

0 bps

0 bps

10-year Treasuries

2.26%

2.03%

1.92%

-11 bps

-34 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 Reserve decided not to raise interest rates at its meeting last week. Even as economic growth slowed since its last meeting, the Federal Open Market Committee noted that labor market conditions improved and household spending and business fixed investment have been increasing at moderate rates, while housing has improved further. However, exports have been soft and inventory investment slowed. Inflation has continued to run below the committee’s 2% objective, partly reflecting declines in prices for energy and non-energy imports. Nevertheless, the committee expects economic activity will expand at a moderate pace and labor market indicators will continue to strengthen.

Inflation is expected to remain low in the near term, in part because of the further declines in energy prices, but to rise to 2% over the medium term. The committee will continue to assess realized and expected economic conditions, but expects the federal
funds rate to remain, for some time, below levels that are expected to prevail in the longer run.

· A key indicator of economic growth is the gross domestic product, which is the most comprehensive measure of productivity. The latest figures from the Bureau of Economic Analysis show the economy generally sputtered for the fourth quarter of 2015, expanding at a seasonally adjusted annualized rate of only 0.7%. Comparatively, the GDP had expanded 2.0% in the third quarter and 3.9% in the second quarter. While the housing and job markets have been steadily improving, falling oil prices and a strong dollar have impacted business production, sales, and consumer spending. For the year, the GDP expanded 2.4%, essentially the same as the prior year and in keeping with the 2.1% average annual growth rate since 2010.

· Further evidence that growth in the manufacturing sector is moving at a slow pace, orders for durable goods decreased for the fourth time in the last five months in December, according to the latest information from the Census Bureau. New orders for manufactured durable goods (expected to last at least three years) decreased $12.0 billion, or 5.1%, to $225.4 billion following a 0.5% November decrease. Excluding transportation, new orders decreased 1.2%. Excluding defense, new orders decreased 2.9%.

· The advance report on the U.S. international trade in goods and services from the Census Bureau reveals that the trade gap in December was $61.513 billion, compared to a revised $60.298 billion in November, reflecting further contraction in exports.

· There was some positive news for U.S. workers as wages and benefits grew 0.6% in the fourth quarter, according to the Bureau of Labor Statistics’ Employment Cost Index. Wages and salaries, which make up about 70% of the overall index, grew 0.6%, while benefits rose 0.7%. Overall, compensation costs for civilian workers increased 2.0% for the 12-month period ended in December 2015.

· Toward the end of 2015, home prices continued to rise across the United States according to the latest S&P Case-Shiller Home Price Index, which recorded a 5.3% annual increase in November versus a 5.1% increase in October. The 20-City Composite’s year-over-year gain was 5.8% versus 5.5% reported in October.

· Sales of new homes increased by 10.8% in December from the prior month, based on the latest information from the Census Bureau. The median sales price for new houses sold in December was $288,900, while the average sales price was $346,400–both figures representing a sharp decrease compared to November’s prices of $297,000 and $364,200, respectively. An estimated 501,000 new homes were sold in 2015. This is 14.5% above the
2014 figure of 437,000.

· The National Association of Realtors® indicated that pending home sales inched up in December. Bolstered by increased activity in the Northeast, the Pending Home Sales Index came in at 106.8, 0.1% ahead of November’s reading. Warm weather in the Northeast and favorable inventory conditions compared to the rest of the country fueled the Northeast’s increased contract signings for home purchases.

· The Conference Board Consumer Confidence Index®, which had increased in December, improved moderately in January. The index now stands at 98.1, up from 96.3 in December. ”Consumer confidence improved slightly in January, following an increase in December,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions held steady, while their expectations for the next
six months improved moderately.” On the other hand, the University of Michigan’s Index of Consumer Sentiment fell 0.6% in January, primarily based on stock market declines and somewhat weakened prospects for the national economy.

· For the week ended January 23, there were 278,000 initial claims for unemployment insurance, a decrease of 16,000 from the prior week’s revised total. For the week ended January 16, the advance number for continuing unemployment insurance claims was 2,268,000, an increase of 49,000 from the previous week’s revised level. The advance seasonally adjusted insured unemployment rate increased to 1.7% for the week ended January
16.

Eye on the Week Ahead

On tap for the week are the latest reports on consumer spending and manufacturing, as well as the all-important employment situation summary from the Bureau of Labor Statistics.

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.