Our Blog


Quality Independent, Unbiased, Financial Advice and Wealth Management

-Family Owned Since 1985

 
 
 
 

Japan Check-In: Will the Weak Q3 GDP

Japan reported a 1.6% annualized decline in real gross domestic product (GDP) in the third quarter of 2014 over the weekend of November 14 – 16,2014. Policymakers in Japanese Prime Minister Shinzo Abe’s government

and at the Bank of Japan (BOJ), as well as most market participants, expected a solid gain in GDP in Q3, not a decline. The consensus of economists polled by Bloomberg News was looking for a 2.2% gain in GDP

in Q3, after the Japanese economy contracted more than 7% in Q2 2014 in response to a big value-added tax (VAT) increase imposed in April 2014. (We’ll discuss the VAT in more detail below.) As a result of the unexpected

decline in GDP in Q3, Japan’s economy has met the unofficial definition of recession (i.e., two consecutive quarters of negative GDP) and has entered its fourth recession since 2007. How long Japan’s economy remains in recession — and more

importantly, the policy response to the latest recession — may help to determine the trajectory of global growth in 2015 and beyond….

Japan Check-In

Solid Earnings Season Spelled Out

The market’s focus was clearly on the midterm elections last week (November 3 – 7) with the Republicans taking control of the Senate — as expected — and adding to their majority in the House. While the certainty

provided by an election outcome has been positive for the stock market over time (as we wrote in our September 2, 2014, Weekly Market Commentary: Midterms May Mean More Gains for Stocks”), our still positive stock

market outlook is based much more on fundamentals. It does not get more fundamental than earnings, so this week we provide a wrap-up of third quarter earnings season….

Solid Earnings Season Spelled Out

 

S&P Is Not GDP

U.S. economic growth has been subpar — right around 2% — during much of the ongoing economic expansion. Yet, the S&P 500 has returned nearly 230% cumulatively since the bear market low on March 9, 2009. How didthat happen and is it justified? Before trying to answer to those questions, it is worth pointing out that this situation is not all that unusual. In fact, since 1950, the S&P 500 median return is 13% (average is 12%) when real gross domestic product (GDP) grows less than 3%, with the S&P generating a positive return 68% of the time. However, a good portion of those returns come during recessions — historically, the best time to buy stocks is at recession troughs. But even if we take those periods in and around recessions out of the equation and look at annual returns when GDP growth is between 1–3%, the median (and average) S&P 500 return is a respectable 7–8%. Stocks tend to like average (or slightly below average) growth, which is not strong enough to generate worrisome inflation. Now back to the question of what has driven this stock market to far outperform economic growth….

S&P Is Not GDP

Corporate Calm

The stock market’s recent gains have gone a long way toward restoring calm in the marketplace. The rebound — 5% off the S&P 500 low on October 15, 2014 — has been driven by a combination of factors, including some better economic data, prospects for more support from central banks, old fashioned bargain hunting, and perhaps most importantly, generally solid earnings results. The market’s concerns have not fully been alleviated, but progress has been made. We would argue that the market’s biggest concern right now is slower global growth, particularly in Europe where the Eurozone is potentially on the verge of another recession. Slowing growth in China also remains a concern, though less so…..

Corporate Calm

 

 

Oil Hits the Skids

The S&P 500 fell 1% last week (October 13 – 17, 2014) in volatile trading, leading market participants and media pundits to speculate on how far the stock market slide—now just over 6% from the September 18, 2014, closing high — might go. In last week’s Weekly Market Commentary, “Pullback Perspective,” we cited the economic backdrop, central bank support, and valuations as reasons the pullback was unlikely to turn into a bear market (a 20% decline). This week we turn to an area that has already entered bear market territory and discuss our outlook for oil and the energy sector.

Why Does Oil Matter?

Oil has a significant impact on several key sectors of the economy….

Oil Hits the Skids

 

Current Conditions Index October 15, 2014

Over the past week, the LPL Financial Current Conditions Index (CCI) fell 13 points to 249. While the CCI has shown some downward movement since its June 2014 multiyear high, it still sits at the peak levels established

between the Great Recession and the end of 2014’s unusually cold and snowy weather. It remains consistent with the U.S. economy emerging from the modest, but steady, economic growth of recent years…

Current Conditions Index

Pullback Perspective

This latest stock market pullback has provided an unwelcome reminder that stocks do not always go up in a straight line. Even within powerful bull markets such as this one, pullbacks of 5 – 10% have been quite common anddo not mean the bull market is nearing an end. In this week’s commentary, we attempt to put the pullback into perspective. We look beyond this latest bout of volatility and share our thoughts on the current bull market, compare it with prior bull markets at this stage, and discuss why we do not think it’s coming to an end….

Pullback Perspective

 

Blasé on the Budget

The U.S. Treasury will report the federal budget figures for fiscal year (FY) 2014, which ended on September 30, 2014, as soon as this week (October 6 – 10, 2014). According to a recent report by the nonpartisan Congressional

Budget Office (CBO), the United States will likely run a $506 billion deficit in FY 2014, a $170 billion improvement from the $676 billion deficit racked up in FY 2013. As a percent of nominal gross domestic product (GDP), the

deficit in FY 2014 is expected to be 2.9%, down from 4.1% in FY 2013, leaving the public debt-to-GDP ratio — a key metric for global financial markets to assess the creditworthiness of a country — at 74%…

Blasé on the Budget

 

Housing Hiatus?

The most recent figures on gross domestic product (GDP) — the broadest measure of economic activity — revealed that residential investment (a.k.a.housing) grew at an 8.8% annualized pace between the first and secondquarters of 2014. As a result, housing contributed 0.3 percentage points to the overall 4.6% gain in GDP in Q2. It was the first time since Q3 2013 that housing added to GDP growth; but it marked the 12th quarter of the last 15, dating back to late 2010, that housing has made a positive contribution to GDP. Prior to that, between late 2005 and late 2010, housing had been a drag on the overall economy in 17 of the 20 quarters (or five years), as the economy endured the housing-induced Great Recession and its aftermath…

Housing Hiatus?

 

Mind The Gap

On September 17, 2014, the Federal Reserve’s (Fed) policymaking arm, the Federal Open Market Committee (FOMC), met for the sixth time this year. On the one hand, the FOMC surprised markets by announcing “how” it

would exit from quantitative easing (QE) and reduce the size of its balance sheet in the coming years. On the other hand, the FOMC calmed markets by not making any substantive changes to its forward guidance to the public

and financial markets on when it would begin raising rates. The statement released after the meeting once again said that the FOMC would keep rates low for a “considerable time” after QE ends. However,the new set of economic

and rate forecasts by FOMC members indicated…

Mind The Gap