Perspectives from Above the Noise – Week of November 24, 2014

The market’s virtually uninterrupted rise since mid-October continued in the past week, with the S&P 500 rising four out of five days to close at another all-time high. Global monetary policy provided a strong catalyst for higher asset prices during the week, starting with Wednesday’s release of the Fed’s October meeting minutes revealing concern over a possible downward shift in longer-term inflation expectations. Some of the participants also noted that any downturn in inflation expectations “would be even more worrisome if growth faltered.”

So, how is the growth outlook shaping up? Well, for most of the world, growth is decelerating. The latest evidence was the purchasing managers’ index for the Eurozone, which unexpectedly dropped to a 16-month low in November, suggesting that GDP for the region is barely growing, and a drop in the new-orders component indicates that Europe’s growth may slow even further by the end of the year. Here in the U.S., though, the data has thus far been able to generally buck the global trend.

For the week, the S&P 500 rose +1.16%, the Dow Jones Industrial Average added +0.99%, and the MSCI EAFE (developed international) increased +1.03%.

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

Home Prices in 20 U.S. Cities Increase at a Slower Pace

The growth in U.S. home prices continues to decelerate as the S&P/Case-Shiller index of property values increased 4.9 percent from September 2013, down from last month’s 5.6 percent reading. The current growth represents the smallest gain since October 2012.

On a month-over-month basis, seasonally adjusted prices increased 0.3 percent in September. Most analysts believe the year-over-year gauge is a better indicator of trends in prices than the month-to-month data. Despite the recent decline, David Blitzer, chairman of the S&P index committee, stated, “with the economy looking better than a year ago, the housing outlook for 2015 is stable to slightly better.”

Why the Saudis Actually Like it When the Price of Oil Plummets

The price of crude oil has plummeted by 35 percent over the past year, easing energy costs to global consumers. This Thursday, the Organization of the Petroleum Exporting Countries (OPEC) meets to discuss possible output cuts to shore up the price of crude oil. However, analysts say the cartel’s largest producer, Saudi Arabia, is content to see U.S. shale oil producers suffer from low oil prices and will resist pressure to reduce output.

Low prices could potentially make U.S. shale oil production unsustainable and force U.S. producers out of business. With some analysts predicting first-half 2015 demand for OPEC crude oil at only 28-29 million barrels per day vs. the 30.9 million barrels a day the cartel produced last month, they say OPEC needs to cut 2 million barrels a day to balance the market. Absent a cut of this magnitude (which seems unlikely this week), oil prices may well be headed lower.

In Change of Strategy, China Cuts Interest Rate

The People’s Bank of China (PBOC) cut interest rates for the first time in over two years in an attempt to stabilize China’s slowing growth, ward off deflation, and assist local state-owned companies that are having trouble managing high debt burdens. China’s leadership was previously resistant to a rate cut based on fears that lower interest rates could potentially create a debt and property bubble.

In recent months, growth began to weaken and the property market has cooled. GDP growth slowed to 7.3 percent last quarter (below China’s target of 7.5 percent) and home prices declined in October year-over-year in 67 of the 70 largest cities in China.

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 November 17, 2014

Markets were little changed in the past week with stocks pausing from the furious rally that began in mid-October. For some perspective on how relentless the recent rally in equities has been, consider that the S&P 500 has closed above its five-day moving average for 21 consecutive days, the fourth-longest streak in the past 20 years. A number of other indicators also suggest the market is overbought and some further consolidation is likely in the short-term.
A relatively strong earnings season will enter the homestretch this week. With more than 90% of companies in the S&P 500 having reported third-quarter results, a very solid 74% have beaten earnings expectations according to data compiled by S&P Capital IQ. The encouraging earnings results reported by a range of companies have played a major role in boosting investor sentiment in recent weeks and it appears unlikely that there is any broad risk remaining from third-quarter earnings season.
For the week, the S&P 500 rose +0.39%, the Dow Jones Industrial Average added +0.35%, and the MSCI EAFE (developed international) gained +0.88%.
Here are the 3 stories this week that rose above the noise:
Consumer Sentiment in U.S. Increases More Than Forecast
Consumer confidence increased ahead of expectations this month and reached a seven-year high, which bodes well for retailers with the holiday shopping season only a few weeks away. Retailers have already seen a boost from rising consumer sentiment, as retail sales rebounded in October and increased by 0.3 percent compared to September.
Consumer sentiment has been boosted by the strengthening labor market, falling gasoline prices and record high stock prices. Despite stronger economic growth and falling unemployment, consumers appear pessimistic about the outlook for wage growth and inflation.
Mega-Mergers Popular Again on Wall Street
One potential sign of excessive risk taking that warrants close scrutiny is an ongoing surge in mergers and acquisitions. An article from The New York Times DealBook blog details the recent megadeals that have pushed the value of announced transactions in 2014 to the highest level since the dot-com boom. Given the recent history of merger booms preceding economic downturns many analysts are worried about the implications of this year’s surge in deal activity. 

The article provides a balanced view of the sustainability and risks associated with current wave of mergers and acquisitions and some reasons for optimism that the current boom will prove more sustainable than the past two cycles.
Abe Calls Early Election, Delays Sales Tax Increase
Japanese Prime Minister Shinzo Abe called an early election in a bid to extend his term and salvage his Abenomics policies after the country fell into recession. Abe also delayed for 18 months a second planned sales-tax increase after the first installment in April led consumer spending to stagnate and the economy to contract for two straight quarters.
Although he didn’t give an election date, observers believe he will probably pick December 14 for the election. For U.S. investors, the renewed weakness in Japan and Europe is being watched closely by the U.S. Federal Reserve and may delay its decision to raise interest rates toward the middle of next year.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment
management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.
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 November 10, 2014

U.S. markets continued their recent surge in the past week, with the S&P 500 closing at a series of all-time highs. Tuesday’s mid-term elections turned out to be a big night for the Republicans, with the GOP taking control of the Senate and adding to its majority in the House. Despite the strong gains the GOP registered, it remains far from the two-thirds majority necessary to override a presidential veto, making continued gridlock on many issues a pretty likely scenario.

With the economic calendar somewhat light and earnings season passing its peak, the coming week may present an opportunity for the market to take a breather after the wild ride of recent weeks.  Expectations for the Fed’s first rate hike have been pushed out to the second half of 2015 following the market volatility of October and the comments of these officials will be scrutinized for any indications of a possible shift in the Fed’s thinking.

For the week, the S&P 500 rose +0.69%, the Dow Jones Industrial Average added +1.05%, and the MSCI EAFE (developed international) dropped -1.01%.

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

Budget Blues Fade as U.S. Fiscal Drag Ends After Election

Last week’s election results – which saw Republicans gain control of the Senate – paradoxically also may lead to a little extra spending from Washington. While the party opposes much federal spending as wasteful, it’s been more open to expanding military support. Moreover, states and cities are taking advantage of low interest rates to borrow money for roads, bridges and other infrastructure projects. Last year’s budget restraint was the strongest since the recession ended in June 2009, as Congress eliminated a payroll tax cut, raised income taxes on the wealthy and reined in spending.

The upshot is that the combined budgets of cities, states and the federal government will add 0.4 percent to annual growth in the fourth quarter of this year, after reducing it by 0.9 percent in the year-ago period, according to St. Louis based Macroeconomic Advisers. Over the next two years, state and municipal governments are expected to add about 300,000 jobs to payrolls, more than offsetting a probable 50,000 cut in the federal workforce, primarily from attrition in jobs not filled.

The Rise of Invisible Unemployment

While headline employment data has been generally solid throughout 2014, one troubling weakness that continued to show up in last week’s nonfarm payrolls report has been anemic wage growth. This article from The Atlantic provides a good summary of possible explanations for the weakness in wages, with the relative lack of improvement in the number of individuals working part-time for economic reasons an important indicator to watch in 2015.

The lack of wage growth has been a key factor in preventing concerns about an aggressive Fed tightening cycle from impacting investor sentiment and this article provides some evidence that wage growth may remain soft for the foreseeable future.

Full Housing Recovery May Not Happen Until 2018

The housing recovery still has a long way to go according to the most recent Zillow survey of 100 real estate professionals and economists. The consensus view is that home values might not reach their prerecession peak until 2018. The panelists place most of the blame for the slower-than-expected recovery on changing demographics and cash-strapped potential first-time homebuyers.

High student loan debt, rising rents, and strict lending standards are all cited as reasons why the housing market remains challenging for potential first-time homebuyers. The panelists predict that home values will finish this year 4.8 percent above 2013 levels and gain an average of 3.7 percent annually between 2015 and 2019.

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 November 3, 2014

The remarkable market recovery that began on October 15 gained even more steam in the past week with catalysts provided by central bank policy and a better-than-expected print for third quarter U.S. GDP.

Expectations that the Federal Reserve would take a somewhat more dovish stance in its latest policy statement in response to recent weakness in Europe were largely dashed when the statement was released on Wednesday. With the statement the Fed officially ended its latest quantitative easing program that began in September 2012 and ultimately added more than $1.6 trillion to its balance sheet.  In addition to mid-term election results, the upcoming week will be headlined by the release of October’s major economic data

For the week, the S&P 500 rose +2.72%, the Dow Jones Industrial Average rocketed +3.48%, and the MSCI EAFE (developed international) gained +2.24%.

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

A Breakdown of How the Market Performs after Midterm Elections

Tuesday’s midterm elections will be closely monitored to see whether Republicans take control of the Senate from the Democrats, creating a unified Republican Congress. Historically, markets have performed well following midterm elections. Seasonality plays a part — since the end of World War II the November-April period has proven to be the strongest period for stocks, with an average 7.1 percent gain for the S&P 500.

However, Bank of Montreal notes that “midterm election years tend to see that performance get an extra boost, with stocks returning 16.3 percent over the same stretch.” Furthermore, S&P Capital IQ’s Sam Stovall points out that the combination of a Democratic president and a unified Republican Congress has been accompanied by the best average performance for the S&P 500 since 1945 and the second best since 1901.

Oil Hits Four-year Low Near $82 after Saudi Arabia Cuts U.S. Prices

Oil prices have been under steady pressure for several months and experienced another sharp drop this morning on news that Saudi Arabia is cutting its prices for the oil it sells to the United States. This Reuters article details the price reduction and provides some theories on potential ramifications of the move.

The price cut adds to evidence that OPEC will not curb output at its November 27 meeting despite falling prices and a very well-supplied market. This latest price drop has taken Brent crude to a four-year low, which should continue to pressure retail gasoline prices and provide a boost to consumer sentiment in the coming weeks.

Factories Spur U.S. Growth as World Markets Cool: Economy

U.S. manufacturing activity surged in October, as the Institute for Supply Management’s (ISM) factory index increased to 59 from 56.6 in September (above 50 signals expansion). Last month’s manufacturing activity matched its highest level since March 2011, indicating that the future looks bright for U.S. manufacturing despite slowing global growth.

The ISM New Orders index rose last month to its second-highest level since August 2009, providing added optimism that manufacturing will continue to be a strength for the U.S. economy in the coming months. Additionally, consumer demand will most likely get a boost from a strengthening job market and falling gasoline prices. The projected increase in consumer demand may provide a tailwind for U.S. manufacturing.

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.