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ISM Indicates Fairly Robust Economic Activity

The Institute for Supply Management (ISM) released its Non-Manufacturing Report on Business for September 2015 on Monday, October 5, 2015, as this Weekly Economic Commentary was prepared for publication. It showed that the service sector remains robust, with the non-manufacturing ISM hitting 56.9, which over time, is consistent with real gross domestic product (GDP) of 3.5%. However, the report, as usual, was largely ignored by market participants, even though non-manufacturing activity (mainly the service sector) represents 70% of the U.S. economy. Financial markets, however, correctly focus more closely on ISM’s Manufacturing Report on Business, as S&P earnings — which over time, drive stock prices — are much more closely correlated to the manufacturing portion of the economy than to the service side. But for those concerned about a U.S. recession, the recent data on both the non-manufacturing and manufacturing ISMs are comforting. As noted above, the non-manufacturing ISM readings of 56.7 in September and 57.3 so far in 2015 indicate fairly robust economic activity continues in 70% of the U.S. economy. The manufacturing ISM data, however, are more concerning. Released last week, the manufacturing ISM for September 2015 came in at 50.2, below the consensus of economists as polled by Bloomberg News (50.6) and the August 2015 readingof 51.1. In fact, the September 2015 reading on the ISM was the lowest since May 2013, and indicates that the manufacturing economy, which accounts for just 30% of the U.S. economy.

ISM Non-Manufacturing Report


Fed Implications

The Federal Reserve’s (Fed) decision not to raise interest rates at its September 17 policy meeting was undoubtedly the biggest event of last week. Although not a big surprise, besides Donald Trump (and perhaps China), the Fed is all that anyone is talking about these days. This week we share some of our perspective on what the Fed’s decision may mean for the stock market and offer some investment ideas.

All else equal, whether the Fed hikes rates now or three months from now should not matter too much for global financial markets. The move — when it comes — will likely be just 25 basis points (0.25%) based on recent communication from the Fed. In Fed Chair Yellen’s September 17, 2015, press conference, she indicated, “And once we begin to remove policy accommodation, we continue to expect that economic conditions will evolve in a manner that will warrant only gradual increases in the target federal funds rate.” Historically, gradual increases have been 25 basis points. We do not anticipate big moves in the interest rates that impact consumer and business borrowing costs, whether the Fed had hiked in September 2015 or waits until October 2015, December 2015, January 2016, or even March 2016. And while we acknowledge that Fed stimulus and low interest rates have played a role in fueling the now six-and-a-half-year-old bull market, we argue that earnings growth has been a far bigger factor…. To continue reading please click the link below.

Fed Implications

How Much, How Far, How Fast, Not When

The policymaking arm of the Federal Reserve (Fed), the Federal Open Market Committee (FOMC), will hold its sixth of eight meetings of the year this week. On Thursday, September 17, 2015, at the conclusion of the two-day meeting, the FOMC will release a statement and a new economic and interest rate forecast. In addition, Fed Chair Janet Yellen will conduct her third post-FOMC meeting press conference of the year. The FOMC will also provide markets with a new set of targets at this meeting, as it does four times a year. The FOMC will release its new forecast for gross domestic product (GDP), the unemployment rate, inflation, the appropriate timing of the first rate hike, and the so-called “dot plot,” where each member identifies the appropriate level for the fed funds rate at year-end in 2015, 2016, 2017, and in the “longer run.” These data points will be scoured by market participants looking for clues regarding how the FOMC’s internal economic forecast has evolved since the last release in June 2015, for clues to future policy, regardless of any decision made this week. The dot plot, in particular the level of the fed funds rate the FOMC sees in the “longer run,” may play an important role in this week’s meeting if the committee does not raise rates.

How Much, How Far, How Fast, Not When


Guaranteed Education Tuition (GET) Update September 2, 2015

The GET Committee met for the third time since the Legislature enacted the College Affordability Act, which lowers the cost of tuition at Washington’s public colleges and universities. These new tuition provisions affect some of the assumptions that the GET pricing and payout models have historically been based upon. The GET Committee continued reviewing the legislation and developing a plan for responding to all of the components of the Act. At the meeting, Committee members heard from the State Actuary, received reports from staff and comments from customers, and considered options for the GET Program moving forward.
The GET Committee is confident the program will continue to be a great college savings resource for years to come, they understand that some customers may wish to seek other options. Accordingly, after a period of discussion, yesterday the GET Committee voted on three policy changes they believe will protect GET customers and provide them with increased account flexibility The motions, which passed unanimously, are:
1.) Based on the recent passage of the College Affordability Act, effective September 2, 2015 the payout value for the GET program will remain $117.82 per unit until the time when one-year of resident undergraduate tuition and state mandated fees at Washington State’s highest priced public university surpasses $11,782.
2.) Based on the recent passage of the College Affordability Act, effective September 2, 2015 and through December 15, 2016, the GET program will waive all state program refund fees and the two-year hold requirement for all account owners.
3.) Based on the recent passage of the College Affordability Act, effective September 2, 2015 and through December 15, 2016, the GET program permit account owners to receive a refund of their contributions or the payout value, whichever is greater.

To read the full letter please follow the link below:

GET Program Update Letter

*GUARANTEED EDUCATION TUITION is not registered broker/dealers and are not affiliated with LPL Financial.

Technical Playbook

When markets are tough, emotions can take over. The natural emotional response to sharp stock market declines is to sell. In periods like these, especially when the media sensationalize every gloomy angle as they tend to do, an objective look at the data can be reassuring and help us make better investment decisions. Like analyzing statistics to assess the outcome of a football game (this week does mark the beginning of the NFL season), the stock market gives us a lot of data over many decades to help us make good investment decisions when our initial emotional reaction might be to call a time-out and sell stocks. History gives us our playbook — so no matter what the environment (or who the opponent), we should have a good idea of how to respond and what play to call. We won’t always be right, but we can seek to stack the odds in our favor and increase our chances of gaining yards while limiting fumbles. This week we take a technical, data-driven approach to assess the likelihood that the current market decline (now about 10% from the May 21, 2015, S&P 500 peak) becomes something worse.

Consulting our Technical Playbook

China Challenge

Markets remain concerned that any damage done by the almost 40% drop in the Chinese equity markets since midyear will spill over into the Chinese economy, which, in turn, could slow global economic growth. During earnings season for the second quarter of 2015 , several large U.S. multinational companies sounded cautious on China’s economy in the near term, most notably firms selling into China’s real estate and construction businesses. On balance, while generally acknowledging that overall economic growth in China may have hit a speed bump
in the second quarter, many of these same firms continue to be upbeat on China in the medium and long term and continue to cite the rise of the Chinese middle class as a key driver of their sales in China in the coming years. The latest data suggest that S&P 500 companies derive less than 5% of sales directly from China….

China Challenge

Flat Start Does Not Mean Flat Finish

This year has brought a whole lotta flat. The S&P 500 dipped into negative territory for the year last week (on August 12) and is only up about 1% year to date. The bond market has been flat — the Barclays Aggregate Bond Index has returned just 0.51% so far in 2015. Even the U.S. economy was relatively flat during the first half of 2015, with just 1.5% growth in gross domestic product (GDP) on an annualized basis, well below potential. Flat, flat, and more flat. With the S&P 500 still fairly close to flat on the year (+1.6% on a price basis as of August 14), we look at how likely stocks are to produce a solid year of gains. A look back at history over recent decades is encouraging….

Flat Start Does Not Mean Flat Finish

Bond Market Perspectives: “Summer Growth Concerns”

The fixed income markets exhibited signs of a growth scare in July as inflation-adjusted, or real, yields fell over the month. The decline in real yields, along with lower inflation expectations and a flattening yield curve, all reflect the market’s downgraded assessment of future economic growth. Signs of growth picked up for the domestic economy over the second quarter of 2015 and, as a result, inflation expectations were on the rise throughout thequarter. Housing data were the standout, existing home sales in June moved to an annualized rate of 5.5 million, the highest since February 2007. Strongconsumer spending was another bright spot. Data released so far in the third quarter — such as a slowdown in retail sales figures and weak readings on wage growth — have been mixed and helped push inflation expectations down on the prospects of lower than anticipated growth…

Summer Growth Concerns


U.S. Dollar Still Stands Tall

The U.S. dollar remains strong, defying some skeptics. As has been the case since late 2008 when the Federal Reserve (Fed) began its quantitative easing (QE) program, there has been a great deal of concern recently among some market participants that the dollar is on the verge of a significant decline. Although the dollar may have lost some market share relative to other global currencies in recent decades, it remains the dominant global currency (often referred to as a reserve currency) and we expect it to remain so for the foreseeable future.

The U.S. dollar is getting a lot of attention these days for many reasons. The dollar’s strength this year (+7% year to date based on the DXY U.S. Dollar Index) has had a negative impact on earnings for U.S.-based multinationals and contributed to fears of an “earnings recession” (not our expectation). Commodities, which trade in dollars globally, have been under pressure from the dollar’s strength beyond the impact of fundamental factors such as the slowing Chinese economy and oil’s high-profile global supply glut. Finally, some are worried that the dollar may lose its place as the leading reserve currency, which we discuss below.

US Dollar Still Stands Tall


Markets at a Glance

Markets at a Glance shows annual and YTD performance for a broad array financial market asset classes.  As the overall market moves through different cycles and environments, individual asset class performancecan also fluctuate. This report is helpful in illustrating the extent to which asset class performance can vary and the importance a well-diversified portfolio can have in minimizing these variations.

Markets at a Glance