Often, it looks like the skies are about to fall
when, in reality, some things are improving. About three weeks ago I looked at
a newspaper showing headlines that the Justice Department had fined a very
large US bank $19 billion for helping out the country in 2008 (remember that?)
by ponying up to buy a defunct mortgage lender considered too big to fail.
Another headline explained our jets were in Iraq shooting at US manufactured Humvees
and tanks that were left there, apparently now mistakenly. They were being
fired at with US-made missiles. I saw headlines on people in Ferguson, Missouri
looting and burning down their own town. The Federal Reserve now thinks that
low interest rates will stay around a really long time, another headline read. Is
there a lot going haywire, or am I imagining this? It makes me wish for kinder,
more predictable economic times.
It’s
no secret that our markets are being propped up by the Fed’s low interest rate
policy. But, they are learning as they go, too. Early last
year they were set to raise rates late last year. Middle last year they were
ready to raise rates early this year. Early this year they were ready to raise
rates middle of this year. The spring of this year they were ready to raise
rates at the end of this year. Now they are essentially just saying “We’ll let
you know”. Go figure.
Now
for some good news: The Day of the Speculator May be Waning
The 2013 rise in the market was amidst obviously
questionable statistics not only based on their lackluster values (otherwise
the Fed would have lowered interest rates already) but often on their dubious calculations
(e.g. unemployment rate). Speculators went all in and did very well even amidst
a market where about 70% of all trades are done in milliseconds by computers
making buy/sale decisions based on microsecond inputs. Speculators got lucky. Now
serious investors (not speculators) need to rethink their stock market
positions.
The LPL Financial Current Conditions Index (CCI) as of late September indicates
some pretty encouraging news. A quote from their September 24, 2014 report says
“The CCI remains in the range of post-recession highs established after a
recent spring bounce, signaling the US economy may be emerging from the modest,
but steady, economic growth of recent years.” This well-thought-out index shows the good and bad,
as does information from the Bureau of Economic Analysis (BEA):
The
Good
· (CCI)
stronger retail sales
· (CCI)
Decreasing stock market volatility (as measured by the VIX)
· (BEA)
GDP rose 4.6% in the second quarter
· (BEA)
New home sales recently rose 18.9%.
· (BEA)
Corporate profits increased 8.4% in the second quarter
The
Bad
· (CCI)
Shipping traffic and commodity prices have recently decreased
· (BEA)
Existing home sales fell 1.8% in August
· (BEA)
Durable goods orders fell about 18% in August
· (BEA)
Initial jobless claims were up in September
General
Observations
Last week U.S. Treasury bills and similar German
bills, both of which are bonds, went negative on their yields. Investors were
willing to invest a dollar and receive less back as their bond matured. This
typically indicates a flight to quality from fear of a deeper loss.
The dollar has been very strong. This is somewhat of
a double-edged sword. On one hand a strong dollar means that prices of goods
and services that we sell overseas become more expensive. On the other hand,
investment gains made in dollars help increase foreign investor returns in the
US. Right now, the US dollar appears to be a relatively safer place to stash
investment money than most other currencies on the planet. This can work
dramatically to our advantage.
It is likely that equity assets are reasonably
valued given future expectations. This, along with Fed policy goals, continues
supporting our equity market. The Fed will remain on pins and needles looking
for signs of inflation. Remember, the Fed’s mandates are full employment and
price stability. It affects how fast they allow interest rates to return to a
more normal level. To be clear, they have caused a distortion in asset pricing.
The distortion needs to be corrected. Future earnings need to be there to
support the high prices partially resulting from low interest rates. This
appears to be happening, albeit in fits and starts. We also must allow for their
actions having created an environment of higher risk taking.
These numbers change weekly and merit watching. They
are not necessarily predictors; they simply indicate where we are.
With all of us in mind, it is imperative that
investors, especially retirement investors, do not get caught up in the stock
market hoopla. Well-thought-out decisions may not result in the highest
returns, but they also may not result in highest losses.
I am optimistic for the equity market going
forward. With serious money, be careful;
be smart.
Chris
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future.
This research material has been prepared by LPL Financial.
The economic forecasts set forth may not develop as predicted.
