Archive for Market Briefs

Market Brief – December 2018

Posted by Koenig Investment on
 December 21, 2018
  · No Comments

As we head into the end of year holidays most friends and clients are focused on spending time with their families and friends.  The recent volatility in the stock market can be a worrisome distraction from this focus on community.  We wanted to take a moment to share some of what we are seeing, and hopefully eliminate some of this distraction for you.

The stock market is reacting negatively to this week’s Fed decision.  Just a few months ago the majority of analysts expected the Federal Reserve to raise interest rates by ¼% in December, and then to follow-up with three or four more ¼% rate increases in 2019.  This week’s announcement both implemented the expected ¼% increase for December and reduced the planned 2019 increases to two (from three to four).  The Fed is very careful in how they phrase all statements released after their meetings. Investors and analysts were hoping this release would mention future rate hikes would be “dependent on data” or “if conditions warrant.”  No such verbiage was a part of the statement.  This lack of flexibility has caused worry over the Fed continuing to raise rates even if we do begin to see an economic slowdown.  That worry has negatively affected the stock market.  Fed moves during expanding market cycles that result in stock market declines have happened in the past.  This is normal activity.

As we have stated many times in the past, corporate earnings are the biggest drivers of stock market activity.  Most corporate earnings releases are due to be released in early January.  A few companies have released in December.  Walgreen’s noted year over year earnings growth of 14% and an annual revenue increase of 10%.1  Federal Express said they are still expecting high single digit growth in 2019 earnings compared to 2018.2  Both companies noted positive figures for domestic growth, but slowing conditions outside of the United States.  Nike soundly beat expectations and expects their “momentum” to continue into next year.  January releases are expected to show domestic corporate profits are growing, with some indications for further growth in 2019.  Uncertainty regarding events like Brexit, in conjunction with political instability in some regions, will likely continue to place downward pressure on foreign markets until these issues are resolved. 

The broad market is very nervous at the moment.  Many investors recall past downturns and worry we may be entering another.  The U.S. financial system is in much better shape than it was in 2008.  In mid-2017, 30-year mortgages were about 3½ % while today they are around 5%. Unemployment at 3.7% is the lowest since the late 1960’s, but has likely achieved a low point.  Inflation around 2% is actually a bit lower than where we would be in a more mature expansion.  Valuations on U.S. stocks are around 14 ½ to 15 times earnings compared to 28 times earnings in early 2000.  We do expect to see lower growth figures released in January 2019 compared to January 2018 as the effects of the tax cut fade.  Profit growth in 2019 will be lower than in 2018, but it will still be growth.  There is no expectation that profits will contract, merely that they have come off of their 2018 highs.  International markets are expected to see further weakness.

We hope this information helps you better understand where the markets are now, as well as what further market related news you may encounter over the holidays.  We wish you the happiest of holidays!

October 2016 – U.S. Employment

Posted by Koenig Investment on
 October 7, 2016
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The employment situation in the United States has slowly, but steadily, been improving since the 2008 recession.  The below graph shows initial jobless claims numbers from 1967 through October 2016.  As you can see, current initial jobless claims are at the lowest level seen since 1973.United States Initial Jobless ClaimsThe U.S. economy added 156,000 new jobs in September.2  Larger employers (those employing 500+ workers) recently outpaced smaller firms in job creation.  Individual sectors do differ in their employment outlook.  For example, energy has seen a contraction in employment over the past year while trucking companies note difficulty filling positions even while offering signing bonuses of $5,000 or more.  The overall unemployment rate did rise slightly to 5%.  However, that rise has largely been attributed to previously discouraged workers reentering the labor market and is not an indicator of a softening job market.

Some workers are still struggling despite current job growth rates.  Figures noting people who gave up looking for work or who can only find part-time jobs remain flat at 9.7%.3  Much of this can be attributed to the “skills gap”, meaning workers without advanced skills do still have difficulty finding full employment.  This figure is not expected to change meaningfully as employers having difficulties filling job vacancies have noted the need for skilled workers within their industries.

A tighter labor market for skilled workers is driving wage inflation.  Hourly wages have grown by 2.6% over the past year to $25.79/hour, just below the post-recession high.3  The numbers of hours worked per person has also increased.  An improvement in both average hourly wages and hours worked is encouraging.  Several economists think we may begin to see worker shortages by next spring.  Pay increases are expected to continue as companies seek to either fill vacancies or retain skilled workers.  This trend is being watched carefully as it may spur an increase in overall inflation, leading to interest rate increases by the Federal Reserve.  A ¼ point rate hike is likely in December given these employment trends.  The employment trends noted above have been gradual, meaning the upward inflationary pressure and need for the Fed to respond have also been slowly growing.  A continuance of current labor market trends is likely to make the Fed more comfortable with future rate increases.  However, while these are positive trends with steady momentum, they are still slow moving.  While this does make future rate hikes more likely, it is not overwhelming pressure on the Fed to raise rates.  While we do expect to see interest rates rise in 2017, we do not expect to see large increases.

In summary, the U.S. job market has basically recovered to pre-recession levels.  Workers can expect raises as their skills are more in demand and valued greater.  The economy is likely to see some upward inflationary pressure due to the tightening job market.  We can expect the Fed to respond with measured interest rate increases.  Unskilled workers still face employment challenges and are likely to continue to do so.

1)  http://www.tradingeconomics.com/united-states/jobless-claims

2)  http://www.ftportfolios.com/retail/blogs/economics/index.aspx

3)  http://www.morningstar.com/news/market-watch/TDJNMW_20161007241/update-us-adds-156000-new-jobs-in-september.html

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

Market Brief – July 2016

Posted by Koenig Investment on
 July 28, 2016
  · No Comments

We’re in the midst of 2016 second quarter earnings releases and I wanted to share with you the picture of the U.S. economy that is becoming clearer as companies release data.  Overall earnings figures are a bit better than expected.  In general, companies made more money last quarter than most analysts expected.  The consensus amongst most analysts is for a better than expected second half of 2016 than originally noted in January.  Both plow horse and tortoise metaphors are common in reports as they sum up thoughts on the current state of the economy.  While this often makes for bland reading and tame headlines, it is good news that should be welcomed as slow growth means less volatility in how companies operate.  Companies that are growing slowly and adding jobs at low, steady rates are less likely to overproduce and need to cut those jobs in a hurry when facing some contraction.  This lower volatility within operations helps keep the company, and the economy as a whole, chugging along a slow growth path.

There are several data points analysts are pointing to as they upwardly revise their expectations for the rest of 2016.  Unemployment is decreasing, year over year retail sales are up, housing starts continue to increase, and average worker pay – a previously worrisome weak spot in the recovery – is increasing.1  In fact, the current economy is basically meeting the definition of full employment.2  The one figure that has been noted again and again in these analyses is the ISM Manufacturing Index.  This index is a survey of purchasing managers around the country and tends to quickly reflect any changes in employment, production, inventories and new orders.  This index rose from 51.3 in May to 53.2 in June.3  Historically, such rises indicate a period of economic growth.  Lastly, investors are largely bearish at the moment.  The contrarian view is often correct as we do typically see a rising market when investors are pessimistic and expect a pullback.  The combination of all this data points to an economy continuing on a path of slow, steady growth.  While there is nothing especially exciting to report, this should nonetheless be welcome news embraced by the average investor seeking portfolio growth and lower volatility.

 

 

  1. http://www1.realclearmarkets.com/2016/07/27/fed_policy_not_in_tune_with_data_181382.html
  2. http://money.cnn.com/2016/05/23/news/economy/us-full-employment-williams/
  3. https://www.instituteforsupplymanagement.org/ISMReport/content.cfm?ItemNumber=30524

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

Market Brief – Brexit June 2016

Posted by Koenig Investment on
 July 28, 2016
  · No Comments

I wanted to take a moment to comment on the Brexit leave vote and its effect upon world markets today.  Part of the movement we’ve seen in the markets is due to the surprise nature of the vote.  Polls had predicted British voters would opt to remain a part of the EU.  That drove gains in the stock market yesterday that are largely being reversed today.  The rest of the drop we’ve seen today can generally be linked to the uncertainty regarding how British decoupling from the EU will effect various corporations, as well as entire economic sectors.  There are questions regarding how difficult the EU will make the exit in order to deter other countries from making the same move.  UK companies will continue to trade with mainland counterparts as they have been doing since ancient times.  There will need to be adjustments in how economic activity is conducted though.  Times of change are always unsettling and markets generally do not respond well to change.  We expect to see the broad market regain ground as a path forward for affected companies is determined.

While volatility in the markets is often unsettling to watch, it does provide opportunities for account growth.  For example, we expect managed futures and fixed income positions to gain ground in the next few days, oil and gas sector assets to remain largely unaffected, and stock based assets to decline less than the broad market.  Please do expect some short-term volatility within your accounts.  We will be making adjustments to accounts if appropriate in order to capture price change opportunities if they fit with your overall financial profile and risk tolerance.

While the broad market has ended the day well in the red, that is not an indicator of long-term problems within the U.S. markets or economy.  The current unemployment rate is 4.7%.1  This figure needs to be put into the context of the people it does and does not capture as the official definition of “unemployed” does not necessarily match the common definition.  However, the current figure is seen to more accurately portray the current employment situation than it did during the recession and immediate aftermath.  I would note that the average unemployment figure since 1950 is a much higher 6%.2  The bottom line is that volatility creates opportunities and we do not see today’s drop materially affecting what you can expect from your accounts over the long-term.

 

 

  1.  http://www.bls.gov/news.release/empsit.nr0.htm
  2. http://www.tradingeconomics.com/united-states/unemployment-rate

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

Market Brief – August 2015

Posted by Koenig Investment on
 August 24, 2015
  · No Comments

Market Sell-off

Stock markets across the globe went into selling mode last week, with stocks in the U.S. declining more than 5%.1  European markets saw a slightly higher level of sales.  The Shanghai Composite, the major Chinese stock market, sold off more than 11% last week.1  This activity is continuing this morning as we write.  The Dow Jones Index opened down nearly 700 points this morning, but then saw several hundred points gained back.  It is currently trading down by a few hundred points, with this figure likely to have changed by the time you read this Market Brief.  The recent devaluation of Chinese currency and concerns regarding further devaluations are front and center in this sell-off.

However, there is little evidence that the U.S. economy is about to slow, necessitating a large market correction.  Additionally, manufacturing activity in Europe and Japan has actually accelerated somewhat in recent months.  The economies in the United States, Europe, and Japan will all benefit from lower energy prices.  Oil price decreases from $104/barrel in June 2014 to the around $40/barrel price we are seeing currently significantly cuts energy costs for many sectors.  Recent data on retail sales and housing have been positive.  The Wall Street Journal surveyed economists recently, with the general consensus being an expectation of an upward revision of U.S. 2nd quarter GDP to around 3.3%.2  The Fed had been expected to raise interest rates in September because the U.S. economy has been performing well enough for inflation to begin to be of concern.  While this may now be delayed, the general indicators that show a strengthened U.S. economy have not changed.

China

China accounts for about 15% of the world’s economic output, with an economy heavily based on export activity.  While a slowdown will be felt in China, it is unlikely to impact the United States.  Exports to China from the United States comprise less than 1% of U.S. GDP.2  Japanese exports to China are greater at 2.7% of their GDP.2  European countries such as Germany, France, Italy, and Spain all have Chinese export figures similar to either the U.S. or Japan.  The bottom line for all of these economies is that a contraction in the ability of the Chinese consumer to spend will have little to no effect on the export economy of each country.  Countries near China, such as Korea and Vietnam, will likely see more significant effects to their economies from a slowdown in China.

Summary

I would remind both retired and near retirement clients that stock market sell-offs do not directly impact the level of income earned from their accounts.  Company profits determine dividend levels and other distributions, not stock prices.  The Price Earnings (PE) ratio for the S&P 500 is currently about 16.5,3 compared to a 60 year average of around 17.  In comparison, the PE of the S&P 500 in early 2000 – just before the market drop – was around 34.

Heavy fixation on the short-term can make it harder to remain focused on longer-term goals.  Each time the market has seen significant drops, a client or two has asked me to sell-off significant portions of their portfolio.  The plan is always to wait out the drop.  Unfortunately, this strategy has never worked.  In each case, the client sold at or near a low and waiting to reenter the market at a higher price.  This type of selling is emotionally gratifying, but cause real long-term losses.  Prudent homeowners do not sell their homes when Zillow dips as they know the value in the property is in the long-term.  The prudent stock market investor should view their portfolio from a similar perspective.  A well-diversified portfolio and a little patience helps the experienced investor ride out market volatility.

1) Wall Street Journal (weekend), 8/22/2015-8/23/2015, What Investors Shouldn’t Do Now, Jason Zweig

2) Wall Street Journal (weekend), 8/22/2015-8/23/2015, Economic Risk Varies Around the Globe, Greg Ip

3)  SPY PE for 8/21/2015 as listed by State Street and WSJ Market Data Center for 8/21/2015

November 11, 2011

Posted by Koenig Investment on
 November 11, 2011
  · No Comments

The S&P is up for the week.  It has risen by 1.0% as of today since the October close.

The market has bounced around this week over concerns regarding Greece and Italy.  By the end of the week both countries had announced new political leadership, which the market does like so far.  There is a general perception that the new leadership is likely to deal with economic issues in a more realistic fashion when compared to the previous leadership, which was highly entrenched in both countries.

The other news of note this week was a decline in jobless claims for the week ending November 5th.  New claims are at their lowest level since early April.1

1)  http://www.nytimes.com/2011/11/11/business/economy/jobless-claims-fall-to-lowest-level-since-april.html

October 28, 2011

Posted by Koenig Investment on
 November 11, 2011
  · No Comments

As I had communicated in prior newsletters, the release of third quarter earnings figures has been largely positive news.  We have seen the market rise over the past few weeks in response.  As of this morning Bloomberg noted 323 of S&P 500 companies have released their quarterly earnings.  They summed up earnings figures with the following “Earnings Surprises” chart:

Q3/11

Positive Surprises:            227/323 =  70.3%

0% Surprises:                   32/323 =   9.9%

Negative Surprises:             64/323 =  19.8%

SOURCE:  Bloomberg

http://www.bloomberg.com/news/2011-10-28/third-quarter-of-11-s-p-500-earnings-snapshot-as-of-oct-28.html

Current market optimism is predicated not just on unexpectedly positive third quarter figures, but also on the expectation of future growth in earnings.  There are a number of areas of the economy one can look to when forecasting the future.  One key area is railroad freight volume.  Union Pacific, the largest railroad in the U.S., saw third quarter revenue rise by 16% over the previous year, with earnings rising by 19%.  Smaller national and regional railroads have also been in the news with increasing freight volume driving increasing earnings for the industry.  CSX, Rail America Inc, Norfolk Southern, Kansas City Southern, and CN Rail (Canada’s largest railroad) are just a few examples of railroads making recent news due to increased revenue and earnings.  Similar reports have been coming out of trucking companies, with Knight Transportation showing a year-over-year revenue increase of 18.7% for the third quarter.

A great deal of yesterday’s stock market move reflects optimism over the Euro debt plan that Germany has now agreed to.  European banks are the largest Greek bond holders and have been resistant to the idea of taking substantial losses on these holdings.  This has now changed.  Banks holding Greek debt have agreed to take significant write downs on their holdings – likely 50% – in exchange for European governments agreeing to back the banks in each of their countries.  The exact details are still being worked out, but the major points of the plan have been accepted by the key players involved.  While not a perfect solution, the market is judging this a workable plan that will allow Europeans to take the losses needed from Greek investment and move on.

October 14, 2011

Posted by Koenig Investment on
 November 11, 2011
  · No Comments

In my last commentary two weeks ago I noted the close of the S&P 500 at 1,131.  We saw the market close at 1,224 today.  This is above the 1,120-1,210 range we have seen since August.  Much of the reason for the recent uptick in the market is third quarter earnings.  The bulk of reports will be released in the second half of the month of October.  However, some companies are releasing third quarter earnings now.  The financial sector reports are coming in with lackluster figures, but this was widely expected.  Google made a splash in the business world today with the release of a 26% increase in earnings and 37% increase in revenue for the third quarter.  Apple posted record quarterly revenue.  Mattel came in better than expected with a 6.2% gain in earnings.  PepsiCo also released better than expected figures for the quarter.

These companies are just a few that have released third quarter figures, but show better than expected profits across a wide range of sectors.  As I have been mentioning for some time now, corporations are making money.  The volatility in the stock market we have seen this summer has been driven in part by emotional responses to European events that have little to do with the actual financial picture of most U.S. corporations.  The market drop we saw in the fall of 2008 took place in the context of lowered corporate earnings.  How significant of an earnings drop was to be seen was a large unknown at that time.  The current situation of rising corporate earnings clearly differs from the situation seen in 2008.  Most economists do not feel we are going to have a double dip in the U.S. economy and the upcoming earnings reports are likely to reinforce this view.  I would note that one of the more respected market technicians (a specialized market analyst) I subscribe to does think we have seen the lows of the current market.  I will give you additional information regarding further earnings releases as they come in over the next two weeks.

I would note that account values have fluctuated greatly from day-to-day during the past few weeks.  The monthly statement(s) you are receiving now were generated on September 30th and are dated.  Should these statements be generated today, you would likely see meaningfully higher account values given the market rise since the end of last month.

September 30, 2011

Posted by Koenig Investment on
 November 11, 2011
  · No Comments

The U.S. stock market ended another volatile week with the S&P 500 closing down at 1,131.  We saw the SP 500 rally significantly on Monday, and to a lesser degree on Tuesday.  This was followed by a large drop on Wednesday, a measured rise on Thursday, and another large drop today.  The week as a whole has now ended virtually where it began – 1,131 versus 1,136.  While we are often seeing large swings on a day-to-day basis, we still have not seen a breach of the early August low noted in my last e-mail update.  Third quarter earnings will start trickling out in the next 10 days, but the majority will be released in mid-October.  We will have to wait to see whether real earnings come in above or below expectation and how this news affects the markets.

The news out of Europe continues to wag the tail of the U.S. stock market.  Much of the focus is on Germany and how the German government will react to the sovereign debt developments of weaker European nations.  Germany’s export market was around 20% of GDP prior to EU integration.  It is now around 40%, with most of the growth coming from EU partner nations.  Germany has benefited greatly from the European common currency and Euro zone agreements.  If the Euro were to unravel then Germany would get hit harder than many other European nations.  The German government understands the ramifications of Euro dissolution and is working to prevent any unraveling of the current system.  While the average German taxpayer does not appear to have much interest in helping economically weaker countries in the Euro zone, the government and much of the business community are working towards preservation of the current system.

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