Stock Market Analysis
Conclusions: It was a down week for the S&P 500 as it lost 1%. However the general market saw very little change. In fact on an unweighted basis (where stocks are not overweighted or penalized based upon their size) we find the stock market was unchanged for the week.
The investing environment is showing signs of improving. Trepidation over a possible government shutdown is raising fear levels to more opportune levels. For example, our James Relative Fear Index, which compares the VIX to the S&P 500’s trailing PE, has greatly improved over the last week.
Certainly the prospects of a shutdown have captured the attention of the financial news media and much confusion remains. While a shutdown can hurt many individuals unnecessarily it is not Armageddon. Social Security checks will continue to be sent, the mail will still be delivered, and our bonds and their interest payments will likely get paid. In fact during the last government shutdown in 1995 actually saw the stock market rise 5%. This coincides with our sequestration research which found lower government spending was typically a helpful thing for the economy and stocks.
Speaking of the economy there are encouraging signs. On a year-over-year basis we find growth in disposable income is at its best levels this year. Likewise our nation’s saving’s rate is improving as well.
The Four Horsemen of the Economic Apocalypse are also taking a breather. We have found the Federal Reserve reports from Chicago, New York, Philadelphia, and Virginia to offer keen insights into the economy. Presently none of these reports are offering negative signals; historically a very good sign.
Additionally, we find shipping prices are surging recently. The Baltic Dry Index, which measures shipping costs for dry bulk items, has surged over 35% in the last three months. Traditionally this has been associated with an improving economy and a healthy stock market.
Presently our leading indicators remain favorable. Although hiccups in the investing world will likely be the norm for the stock market in the coming years there are presently good opportunities. We would add equities to underinvested accounts.
David W. James, CFA
Bond Market Analysis
Conclusions: If last week was poor for stocks and commodities, it was far better for bond investors as rising prices with declining yields were seen in the 10 year Treasury bond, where yields fell 11 basis points and the 20 year bond, where yields fell 10 basis points. The benchmark 10 year bond closed at a yield near 2.64%. Short bonds were either flat or slightly higher in price.
The dollar, on a trade-weighted basis has risen over 2.5% this year. This does not help exports; however, it may support bond prices and traders. Currencies of Brazil, Mexico, and South Africa were notably weaker, losing 1 to 2 percent this week, as poor economic tidings in the U.S. make it appear more likely the FED’s money-printing (Quantitative Easing) operation will continue awhile longer. The inflation this can bring has been especially harmful to struggling emerging countries. Meanwhile the spread in yields between corporate bonds and 10 year treasuries continues to contract. In any event, friends living off the income suffer as interest income as a percent of personal income declined from 13% in 2007 to about 9% today.
Retail sales were lethargic as one might expect in an environment where fewer people are working and earning from 40 hour jobs. We do note some pickup in housing related areas, including furniture and lawn care items. The personal consumption price index for all items rose at an annualized rate of 1.16%, which is below the consumer price index annual increase of 1.5%. With the FED apparently endorsing debt and spending, deleveraging appears to be nearing an end as credit market debt rose again for consumers.
Our bond indicators continue to remain neutral but are beginning to fade under the promise of renewed FED easing. Recent data shows inflation is low which should be good for bond investors. We expect higher inflation but later, not now. Bonds have been volatile and a reduced portion in portfolios should aid in limiting volatility while preserving capital. We recommend moderate positions in high quality bonds as well as some cash.
F James, Ph.D.
