October 12, 2016

October 12th, 2016

U.S. Households & Economy – Post Financial Crisis

  • Households have significantly reduced debt servicing costs (e.g. monthly mortgage and loan payments), taking advantage of the low interest rates on mortgages and loans.
  • Household spending, however, has also decreased reducing the demand for many of the goods and services that the economy produces.
  • Although unemployment rates have declined there is still sufficient slack in the labor force (i.e. the supply of workers is still greater than the available number of jobs) which has put downward pressure on wage increases.
  • Reduced consumer demand and coupled will minimal wage growth has helped to reduce inflation.

Net Result: The US economy as measured by Real GDP growth has been in a slow growth mode since the financial crisis, is currently advancing at a snail’s pace but still positive.

Period 2009 2010 2011 2012 2013 2014 2015 1H 2016
Annual Real Growth Rate -0.24% 2.73% 1.68% 1.28% 2.66% 2.49% 1.88% 1.20%

The Markets Last Week

Stocks slipped last week as investors fretted over the possibility that interest rates around the world will rise more quickly than the market has anticipated.

The Dow Jones Industrial Average fell 68 points, or 0.4%, to 18,240.49, while the Standard & Poor’s 500 index dropped 15 points to 2153.74. The Nasdaq Composite also slipped 0.4%, to 5292.40.

The headline economic news was generally strong. The economy added 156,000 jobs in September, modestly below estimates, as the workforce expanded and wages rose; both manufacturing and nonmanufacturing production grew in the U.S. But the positive data did little to boost markets.

European Central Bank officials denied a report they were considering ways to wind down their bond purchases, but the prospect clearly worried investors. British Prime Minister Theresa May said in a speech that low-rate policies had hurt savers and “change has got to come,” a possible nudge to the Bank of England.

“You’re seeing clear evidence that central banks are running out of steam,” says Peter Boockvar, chief market analyst at the Lindsey Group. Without continued stimulus from central banks, investors will have little patience for companies that can’t increase their earnings consistently. “Look what happened” to Honeywell International (ticker: HON), Boockvar says. The industrial conglomerate surprised investors when it cut its earnings and sales estimates because of weakness in multiple units. Shares fell 7.5% on Friday.

With operating earnings for the S&P 500 set to fall for the sixth straight quarter, investors will continue to punish companies that can’t hit their targets, Boockvar predicts. “Without the help from central banks, there will be much less tolerance for earnings misses, earnings declines,” he says.

Rate anxiety was evident in the kinds of stocks that fell during the week. High-yielding companies such as telecom firms, utilities, and real estate investment trusts led the market lower, notes Jason Pride, director of investment strategy at Glenmede. “It’s all tied to this rate chatter,” he said. “It’s like a whisper in the background.”

Nonetheless, Pride says economic growth should continue to buoy markets in the longer run. “All this chatter in the background will move the markets daily or weekly,” he says. “But at the end of the day we’re in an economic expansion, and it doesn’t look like it’s stopping. It’s slow, but it’s still going. That should carry risk assets, that should carry equities.” (Source: Barron’s Online)

The Numbers

Returns through 10-7-2016 1-week Y-T-D 1-Year 3-Years 5-Years 10-Years
Bonds- BarCap  Aggregate Index      -.5   5.3    4.4     3.8     3.1     4.8
US Stocks-Standard & Poor’s 500      -.6   7.2 10.3   11.1   15.7     7.1
Foreign Stocks- MS EAFE Developed Countries     -.8    .9      .5       .5     6.8     1.7
             

Source: Morningstar Workstation. Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  Three, five and ten year returns are annualized excluding dividends.

Motivational Quote of the Week

“Doubt kills more dreams than failure ever will” Karim Seodike


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