August, 14 2017
North Korea may be a little country, but it can churn up big trouble.
The possibility that verbal hostilities between the United States and North Korea could trigger geopolitical conflict had investors on the run last week. In the United States, the Standard & Poor’s 500 Index fell by 1.4 percent, the Dow Jones Industrial Average lost 1.1 percent, and the NASDAQ Composite finished 1.5 percent lower.
Financial Times explained:
“The sell-off came as U.S. President Donald Trump escalated the war of words against the North Korean regime’s accelerated [program] of nuclear testing. Mr. Trump tweeted on Friday, “military solutions are now fully in place, locked and loaded, should North Korea act unwisely.”
July 31, 2017
There was some good news and some bad news last week.
First, the good news: Thanks to consumer spending and an upturn in federal government spending, the U.S. economy grew faster from April through June this year. Gross domestic product (GDP) grew by 2.6 percent during the period, according to the advance estimate for economic growth. This was an improvement over growth from January through March, when GDP increased by 1.2 percent.
Now, the bad news: Personal income did not grow as fast from April through June as it did from January through March. Wages and salaries grew at a slower pace, as did government social benefits and other sources of income. The New York Times wrote:
July 24, 2017
Do we have central banks to thank?
Low interest rates, accommodative monetary policy, and improving economic growth have helped stock markets around the world reach record highs, reports Barron’s:
“…a look around the globe shows the surge of the U.S. market to new peaks to be anything but unique. Major [markets] in Europe and Asia also have been setting records. Even in South Korea, the Kospi closed at a new peak and is up 25 percent from its 52-week low last year, as the global technology rally has proved to be more powerful than the threat of a nuclear-missile launch from North Korea. Last week also saw a record close in the S&P BSE Sensex in India. Japan’s Nikkei is up 25 percent from last August and near a 52-week high (albeit still down 48 percent from its 1989 bubble peak). The Shanghai Composite is a relative laggard, with a 9.6 percent gain from its August lows, bolstered by a 3.7 percent jump over the past five weeks.”
July 17, 2017
It was a good week for a lot of stocks but not bank stocks.
The Standard & Poor’s 500 (S&P 500) Index and the Dow Jones Industrial Average (DJIA) both finished at record highs last week. Barron’s indicated investors owe Federal Reserve Chair Janet Yellen a debt of gratitude:
“The main force behind the rally was the dovish performance by Federal Reserve Chair Janet Yellen in Congress on Wednesday and Thursday when she reiterated that rate hikes would most likely be gradual. On balance, her remarks were interpreted as evidence of continued accommodative monetary policy and, from there, stocks were off to the races. The ignition of the rally can almost be time-stamped to her appearance. Before her speech, the market was down for the week.”
July 10, 2017
Things you may want to know…
Last Friday, Financial Times (FT) published, ‘Five markets charts that matter for investors.’ Among the issues addressed in the charts were:
- The bond market bear watch. The yield on 10-year German Bunds (Germany’s government bonds) reached an 18-month high of 0.58 percent recently. Yields rose after the European Central Bank’s Mario Draghi indicated its stimulus efforts would end at some point.
When bond yields rise, bond values fall, and that makes rising interest rates quite a significant event for anyone who holds lower yielding bonds. In the United States, 10-year U.S. Treasuries moved to a seven-week high last week and then dipped lower following the release of the Federal Open Market Committee meeting minutes, reported CNBC.com.
July 3, 2017
This is the way the quarter ends – with a central bank scare.
Central bankers are stodgy. They speak carefully. For many, reading the words ‘Federal Reserve’ is enough to cause boredom to set in and web surfing to ensue.
Last week, though, the European Central Bank and Bank of England cracked the ‘open secret’ (i.e., central banks will provide less stimulus and increase rates at some point), and investors did not like what they heard.
Central bankers were quick to say they didn’t necessarily mean what people had heard, but the rumor of less accommodative monetary policy was already moving markets. Barron’s wrote:
“But make no mistake: Last week was a game changer. Federal Reserve Chair Janet Yellen fretted about the high level of asset prices, the Bank of England’s Mark Carney hinted at a rate hike, and Mario Draghi suggested the European Central Bank could be nearing the end of its bond buying…The market didn’t take it sitting down. Long-term Treasury yields surged, resulting in a wider spread off of short-term bond yields.”
June 26, 2017
It has been a very good year, so far.
Through the end of last week, the Standard & Poor’s 500 Index posted 24 record highs and delivered returns in the high single digits. The MSCI World ex USA Index was up more than 11 percent, and the MSCI Emerging Markets Index gained more than 17 percent.
After reading those numbers, many people would assume bond markets are down for the year. After all, stock and bond markets tend to move in different directions. Zacks explained,
“Stock and bond prices usually move in opposite directions. When the stock market is not doing well and becomes risky for investors, investors withdraw their money and put it into bonds, which they consider safer. This increased demand raises bond prices. When stocks rally and the risk seems justified, investors may move out of bonds and into stocks, driving stock prices up further.”
June 19, 2017
All eyes on inflation!
Inflation is the way economists measure changes in the prices of goods and services. The United States has enjoyed relatively low inflation for a significant period of time. Last week, the consumer price index indicated inflation had moved lower in May.
Inflation is our focus because it is at the core of two very different opinions that currently are influencing markets and investors. A commentary on the Kitco Blog explained:
“One of the most important economic debates today is whether the economy will experience reflation or deflation (or low inflation) in the upcoming months. Has the recent reflation been only a temporary jump? Or has it marked the beginning of a new trend? Is the global economy accelerating or are we heading into the next recession?”
Another key factor is employment. Traditional economic theory holds when unemployment falls (i.e., when more people are employed) inflation will rise because demand for workers will push wages higher. That hasn’t happened yet in the United States even though unemployment has fallen significantly.
June 12, 2017
Stock market historians may dub 2017 the Xanax year. Traditional historians will probably choose a different moniker.
Stock markets in many advanced economies have been unusually calm during 2017, reported Schwab’s Jeffrey Kleintop in a May 15, 2017 commentary. The CBOE Volatility Index, a.k.a. the Fear Gauge, which measures how volatile investors believe the S&P 500 Index will be over the next few months, has fallen below 10 on just 15 days since the index was introduced in 1990. Six of the 15 occurred during 2017. The average daily closing value for the VIX was 19.7 from 1990 through 2016. For 2017, the average has been 11.8.
Investors’ calm is remarkable because 2017 has not been a particularly calm year. We’ve experienced significant geopolitical events. For example, the U.S. launched a military strike on Syria, and dropped its biggest non-nuclear bomb on Afghanistan. There have been terrorist attacks in Europe, along with discord in the Middle East. The European Union has been unraveling. The U.S. government has shown unusual levels of disarray, and the U.S. President’s passion for Tweets has stirred the pot.
June 5, 2017
The bull market in U.S. stocks is getting really old!
In fact, this bull has been charging, standing, or sitting for more than eight years. In April, it became the second longest bull market in American history, according to CNN Money.
There are some good reasons the stock market in the United States has continued to trend higher. For one, companies have become more profitable. During the first quarter of 2017, companies in the Standard & Poor’s 500 Index reported earnings increased by 14 percent, year-over-year. That was the highest earnings growth rate since 2011, according to FactSet.
In addition, the economy in the United States has been chugging along at a steady pace. CIO Charles Lieberman wrote in Bloomberg View: