Perspectives from Above the Noise – Week of September 22, 2014

Investor attention was sharply focused on last Wednesday’s policy statement from the U.S. Federal
Reserve and Friday’s debut of a Chinese Internet giant on the NYSE, which was the largest U.S. IPO in history. The data reported during the week continued to paint a muddled picture of the domestic economy, with weekly initial jobless claims hitting an impressive 14-year low, the Philly Fed survey coming in slightly below expectations and housing starts plunging 14.4% in August to badly undershoot expectations. Globally, a referendum that would have resulted in Scotland’s independence from the U.K. was resoundingly defeated, leading to a generally upbeat end to the week for global markets.

A recent trend of very noteworthy moves in currency markets continued unabated during the week. The U.S. dollar’s impressive strength gathered more steam following Wednesday’s Fed announcement, driven by rising expectations for rate hikes in 2015. The yen touched a six-year low against the dollar on Friday after the Bank of Japan pledged to maintain its aggressive stimulus. The euro, meanwhile, saw a continuation of the weakness that has prevailed since the European Central Bank announced a rate cut and targeted-loan program, falling to a 14-month low vs. the dollar.

For the week, the S&P 500 gained +1.25%, the Dow Jones Industrial Average added +1.72%, and the MSCI EAFE (developed international) rose +0.04%.

Here are the 3 stories this week that rose above the noise:

Study: Recovery Eludes Long-term Unemployed

The headline employment statistics have been a bright spot for the economy in 2014. The U.S. economy has added an average of 215,000 jobs per month this year and the unemployment rate has dropped from 6.6% in January to 6.1% in August.

However, the statistics remain discouraging for the long-term unemployed. One out of every five individuals laid off in the past five years remains unemployed. The long-term unemployed are finding it difficult to re-enter the workforce, largely because of diminished skills and structural changes in the labor market. Moreover, many individuals that returned to the labor force after being unemployed for an extended period of time receive lower wages than their previous job and work in roles that are either temporary or part-time.

Behind the Fed’s Dovish Turn on Rates

A recent article from economist Alan Blinder sheds some light on the often shadowy communications of the US Federal Reserve. While markets remain concerned about the timing and pace of eventual interest rate hikes coming from the Fed (currently expected around the middle of next year), the author believes last week’s meeting went for the inflation and interest rate “doves”. He points out that voting rights on the Federal Reserve rotate among its reserve bank presidents and this year’s voters include only two real hawks, leaving them outnumbered.

Among other observations supporting a dovish view of last week’s meeting, Blinder points out that the Fed kept the phrase that declares interest rates would remain at their current low levels “for a considerable time” after its quantitative easing, or asset purchases, end next month.

Global Economy—Eurozone Growth Slows as Chinese Factories Trundle On

Recent data out of China has raised fears that the world’s second-largest economy has slipped back into a period of slowing growth. These fears were somewhat eased by The HSBC/Market Flash China PMI released yesterday that indicated factory growth improved in September and remains in expansion mode.

However, a measure of employment in the report dropped to its lowest level since 2009, a concerning development that may prompt further government stimulus efforts. Separately, the article also summarizes that latest data from Europe, which provides further evidence that growth is troublingly weak in the region. In aggregate, the latest indicators of global growth are sending a message of sluggish growth and fading economic momentum that may prompt additional stimulus measures from monetary authorities in the coming months.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.

Perspectives from Above the Noise – Week of September 15, 2014

A significant positive catalyst for consumer spending in the U.S. heading into the fourth quarter continues to come from falling energy prices. In addition to a surge in domestic production and a strong U.S. dollar, oil prices are coming under pressure from weak global demand. The International Energy Agency (IEA) again downgraded its demand projections for the rest of 2014, noting that the recent slowdown in demand growth was “remarkable” and the pace of recovery more subdued than expected. Several factors are contributing to the weak demand outlook for oil, including the recent stalling of the economic recovery in Europe, weaker-than-expected demand from China, and a 7.1% annualized plunge in Japan’s second-quarter GDP following a sales tax increase. As a result, U.S. gasoline prices are at their lowest level for this time of year since 2010 and appear likely to decline further in the coming weeks.

Speculation over potential changes in the language of the Fed’s policy statement is making next week’s Fed meeting perhaps the most anticipated of the year. There is growing speculation that the Fed will drop the “considerable time” language from its statement describing how long it will maintain its 0% interest-rate policy.

For the week, the S&P 500 fell -1.10%, the Dow Jones Industrial Average lost -0.87%, and the MSCI EAFE (developed international) dropped -1.27%.

Here are the 3 stories this week that rose above the noise:

Economists React: China August Industrial Growth Hits Six-Year Low

Emerging-market equities have outperformed their developed counterparts year-to-date. However, analysts are growing concerned about the persistence of this outperformance. And, recent economic data from China is starting to raise red flags. The country’s industrial output rose 6.9 percent in August from a year earlier, the slowest growth since the 2007-2009 recession.

Other indicators, including property, investment and retail, also point to an economy that looks much worse than some had expected. The question is how the government will respond to slower economic growth. Possible measures include interest-rate cuts, as well as structural and financial reforms.

Companies’ Stock Buybacks Help Buoy the Market

An article from The Wall Street Journal points out that companies are buying back their shares at the briskest pace since the last financial crisis, helping fuel the ongoing bull market and providing support during stock market downdrafts. According to Barclays, companies in the second quarter spent 31 percent of their cash flow on buybacks, the most since 2008 and up from 14 percent at the end of 2009.

Record earnings and high cash balances are driving the share buybacks. At the end of the second quarter, non-financial companies in the S&P 500 index held $1.35 billion of cash, down slightly from an all-time record of $1.41 billion at the end of last year, according to FactSet. Companies have become more strategic with the timing of the purchases, preferring to buy when share prices fall, and as a result, limiting share-price declines.

Big Issues a Strong Warning about Market Ebullience

Heading into tomorrow’s Fed policy statement speculation has been high that a change in the statement’s language will signal a more hawkish stance. Although some recent economic data has been surprisingly strong, some moderation in closely watched labor market and inflation data does not create a clear-cut case for a more hawkish Fed. If there is a change in Fed language, the motivation may be due to concerns over signs of excessive risk taking in financial markets.

A recent article from Institutional Investor summarizes a recent warning from the Bank of International Settlements, regarded by many as the central bank for central banks, that there are many signs of investors reaching for yield and becoming overly complacent about the path of future interest rates. If the Fed does shift to a somewhat more hawkish tone in the coming months, concerns such as those mentioned in the article are likely to be the motivation.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.

Perspectives from Above the Noise – Week of September 1, 2014

Despite volatility around geopolitical concerns and sluggish growth in Europe, U.S. stocks had another record week, as the S&P 500 set another new high. Meanwhile, the Ukrainian crisis hit a new level of tension as reports emerged that Russian forces have invaded eastern Ukraine and are engaging local forces. Time will tell how the Russian agenda will play out in Ukraine, but interruptions in gas supplies will not be good for Europe's economy.

Key manufacturing reports across the globe have influenced what we are reading this week, as the US pace is record-breaking, while Europe hits a snag.

For the week, the S&P 500 added +0.75%, the Dow Jones Industrial Average gained +0.57%, and the MSCI EAFE (developed international) increased +0.58%.

Here are the 3 stories this week that rose above the noise:

U.S. Manufacturing Grows at Fastest Pace in Three Years

The U.S. manufacturing sector continues to propel the economy, growing for the 15th consecutive month. The Institute for Supply Management’s (ISM) Manufacturing Index rose to 59, the highest reading since March 2011 (levels greater than 50 indicate growth).

Gains were broad-based -- the new orders index climbed to 66.7, the highest level since April 2004, the employment index grew for the 14th consecutive month, and the production gauge rose to the strongest since May 2010. The overall reading exceeded even the most optimistic forecast among the 78 economists surveyed in a Bloomberg survey.

Europe’s Manufacturing Malaise Was Not in Policymakers’ Playbook

A post from The Wall Street Journal Moneybeat blog summarizes the latest evidence of sharply weakening manufacturing activity in the Eurozone, with manufacturing purchasing managers’ indexes for August showing negative momentum throughout the region.

As pointed out in the article, one result of this disappointing data has been increasing expectations that the European Central Bank (ECB) will soon announce a large asset-purchase program, which helps explain why the yields on German and French bonds have recently plunged to all-time lows. As a result, markets are likely to be heavily influenced in the coming weeks by Eurozone data and the ECB’s policy response.

Here’s Why Morgan Stanley Says the S&P 500 May Near 3,000

The S&P 500’s rally isn’t over and the key equity index could jump 50 percent more by 2020 as the U.S. economy heads for a record winning streak, according to investment bank Morgan Stanley. A slower, though sustained, period of growth could help the equity benchmark peak near 3,000, according to a report issued by the investment bank. The U.S. economy, which began recovering in July 2009, may continue growing for five years or more, making the probability of a cycle peak low for some time.

Part of their outlook is due to expectations that central banks are likely to keep interest rates lower for longer as major economies around the world are at different states of growth. Amid lower levels of household debt and brighter confidence on the part of American consumers, the U.S. economy may be just halfway through a period of sustained growth with company profits following, Morgan Stanley said.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.

International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.