Good Reports = Good Markets
This past Thursday, the S&P 500 broke 1,700 for the first time ever. While the number itself has no particular significance, it does represent another easily noted positive mark for the market. On Friday, the index closed at 1,706.87 – a new all-time high. (1) That same day, the Dow closed at a new all-time high as well and the NASDAQ ended at its highest point since 2000. (2)
This past week, we had a number of significant monthly economic reports released, along with the minutes from the most recent Fed Open Market Committee. (It’s my firm belief that to focus on any one single report or data point as a reason to – or not to – invest has no basis in logic.) Traders do respond to those, so it’s pretty telling that not much happened in the market until Wednesday when both the Fed and GDP comments came out. Things really picked up once that happened.
The Fed
Federal Reserve officials said they had kept the central bank’s $85 billion-per-month bond-buying program in place. In other comments, they pointed to modest economic growth, higher mortgage rates and low inflation as factors it’s watching closely. They also said the Fed intends to maintain the near zero interest rate levels for a “considerable time” after the end of the quantitative easing. (3) Notably absent from the statement was any change to the unemployment thresholds they track. The market seemed to like the idea of ongoing low rates having no relation to the tapering plan.
Here’s some thoughts you might want to consider as to how these Fed comments may influence investments over the foreseeable future. For instance, it seems that their focus on low inflation can indicate that there’s no real need to overweight in asset classes that protect against inflation.
The Fed’s forecast of even “modest” economic growth suggests that you don’t want to put yourself in a position where you could possibly miss out on a rise in asset values. And, since there’s no clear end-date to the Fed’s asset purchasing program, this uncertainty could cause more future volatility in bond market. Finally, over the longer term, interest rates will likely rise, so you may want to review your bond holdings to ensure you try to minimize your risk of potential principal loss.
The economy
The first report of the second quarter real gross domestic product (GDP) showed growth at a rate of 1.7% which was much better than expected. (4) This stronger than predicted growth has, I believe, laid a good foundation for the rest of the year. This marks the 16th consecutive positive GDP quarter. I guess all that seemingly never-ending double-dip talk must have been about ice cream, after all…
We also had the ISM’s monthly report on the US manufacturing sector beating economists’ estimates. (5) The pace of growth accelerated in July to the highest level in two years as new orders surged higher. More good foundation material.
Additionally, record-low interest rates and pent-up demand kept US car sales for July on track for its best year since 16.1 million vehicles were sold in 2007. (6) Finally, in the ever-growing housing sector, the S&P/Case-Shiller index of national property values rose in May by the most in more than seven years – gaining 12.2 percent from May, 2012. (7)
About the jobs
We had a number of very good reports throughout the week in this sector. It started on Wednesday when the ADP employment index said private payrolls increased 200,000 in July. (8) Then, on Friday, we had a positive report double-header.
Applications for unemployment insurance payments declined in the week ended 27 July, to the fewest since January, 2008. (9) Following that news, we learned that US payrolls grew more than expected last month and that the unemployment rate fell two-tenths of a percentage point to 7.4%, its lowest level since December, 2008.(10) All this leads to a stronger labor market than anybody thought we’d be seeing this time of year. And yes, more good foundation stuff.
Summary
While perhaps not all directly related to the markets, in my view, this combination of reports underscores the current – and improving –strength of our national economy. These data confirm a new consistent level of job creation…and that’s what matters to both real people (who care about jobs – not the GDP) and the Fed, which is focused on strong job creation.
It also adds to overall confidence and that’s ultimately reflected in improving asset values as people feel more comfortable that our economy is finally starting to run on its own…
Cheers!
Mike
509-747-3323
1. CNBC, 2 August 2013
2. Ibid.
3. FOMC meeting notes, 31 July 2013
4. Bureau of Economic Analysis, 31 July 2013
5. Institute of Supply Management, 1 August 2013
6. Wall Street Journal, 1 August 2013
7. S&P/Case-Schiller, 31 July 201
8. ADP Research Institute, 31 July 2013
9. US Department of Labor, 2 August 2013
10. Ibid.
Securities and investment advisory services offered through KMS Financial Services, Inc.
To get an overview of economic conditions, use this link. It’s updated monthly.
http://www.russell.com/Helping-Advisors/Markets/EconomicIndicatorsDashboard.aspx
Past performance is not indicative of future returns. Investing in securities of any type involves certain risks, including potential loss of principal. Investment return and principal value in a bond and/or securities portfolio will fluctuate so that investments, when sold or redeemed, may be worth more, or less, than the original investment.
Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.
Michael J. Maehl, CWM®
Senior Vice President
Opus 111 Group LLC
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