Archive for economy

April 2022 Newsletter

Posted by Koenig Investment on
 April 13, 2022
  · No Comments

The year has started off with a relatively volatile market, with the S&P 500 (a widely used gauge of broad stock market activity) down almost 10% by the end of January.  We saw additional up and down price swings throughout the quarter, with the S&P 500 ending down 4.6% as of March 31st.  There are several reasons for this activity.  As we have noted before, markets do not like uncertainty.  This quarter has seen uncertainty over lingering effects of COVID on the supply chain, the effects of the war in Ukraine on oil and commodity prices, continued concerns over inflation, and interest rate hikes.  Value and dividend paying stocks have performed better during this cycle as investors seek stability and certainty in uncertain times.

Inflation and interest rates

Inflation remains high at 7.9% as of the February Consumer Price Index.  Analysts do expect this to drop closer to 3% by the end of the year, in part due to the expected effects of interest rate increases.  The Federal Reserve has already begun to raise rates and has outlined a plan to continue to do so throughout the year.  The average 30-year fixed mortgage rate has increased from 2.84% in August 20211 to 4.86% as of April 20222, with expectations this will continue to rise as the Fed continues to raise rates.  This limits the amount many home buyers can borrow, resulting in cooling pressures on the housing market. 

We are seeing some initial signs of inflationary pressure easing.  Home prices are cooling in some markets.  Purchases of new appliances, home furnishings, and renovations should slow alongside housing.  Used car prices, while still high, have now fallen for the last two months.3  Supply chain pressures have eased for some industries as well.  While we are still early in this process, we are seeing signs of a return to pre-pandemic spending patterns that will ease some inflation concerns. 

Energy prices remain an area of uncertainty.  Russia is a large producer of natural gas and oil.  The sanctions levied against their producers as a result of their recent invasion of Ukraine has already caused energy prices to increase.  Additional sanctions are possible.  The impact of oil and gas prices on inflation is difficult to predict as this is tied to war, global demands, and alternate energy infrastructure builds that take time to implement.  Increased supply from OPEC is always a possibility, but this coalition has noted a preference for maintaining higher prices and an unwillingness to increase output to offset market losses from Russia.

Secure 2.0 Act

The Secure 2.0 Act is likely to pass near its current form.  This will delay the age at which retirement account owners are required to take mandated distributions, allow workers very near retirement to contribute more to their retirement accounts, and allow employers to help employees with student loans save for retirement, amongst other provisions.  We are monitoring these changes and will let you know if any affect you personally once the law has been finalized and passed.

Online security

We continue to see spoofing, phishing, and other scams proliferate online.  Here are some general rules of thumb to keep in mind for your safety:

  • Do not click on links from unknown sources. Links in e-mail and text messages can be used to install spyware and other malware onto your device.  The same applies to links in poorly maintained websites.  Know what you are clicking on before you click.
  • Scammers lie. They will pretend to be from a company or person you trust in order to abuse that trust.  If you are unsure of an e-mail link, do not use it.  Go directly to the company website instead.  Do not assume someone calling you is from the company they say they are.  Take down the information they give you and call the company back using the phone number listed on their website.  Independently verify who you are interacting with via some other channel than how they have contacted you.
  • Do not rush. We all make more mistakes when we are in a hurry.  Scammers use this to their advantage.  They make up false consequences to prod you to make quick decisions.  Take your time instead.
  • Neither e-mail nor text messaging are secure methods of communication. Do not send account numbers, credit card information, social security numbers, etc. via e-mail or text.  Use secure portals, encrypted communications, or tell the provider the information on the phone instead.

Summary

The outlook for 2022 is difficult to predict.  There are a variety of economic influences both domestically and abroad that will impact market returns.  While analysts and news outlets speak of likely outcomes, all are speaking with varying degrees of uncertainty.  For now, corporate earnings and job demand remain strong as our economy enters a period of monetary tightening.  Our office continues to focus on our client needs, planning for the unexpected, and maintaining diversified portfolios to help achieve account objectives and long-term financial goals.

As a reminder, the federal tax filing deadline is April 18th this year.  You can top off IRA or HSA contributions for 2021 at this time if you have yet to file.

 

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.

October 2021 Newsletter

Posted by Koenig Investment on
 October 20, 2021
  · No Comments

In what is typically known as the worst month of the year for stocks, September did not disappoint. Negative news coming out of China was the focus during the month.  Headlines noted fear over Evergrande–a Chinese real estate investment holding company–potentially defaulting. The news weighed heavily on Chinese stocks Spillover effects trickled through markets worldwide, including here at home. In addition, the talks of a government shutdown (again), infrastructure bill challenges, government spending/debt ceiling disagreements, and a more hawkish Fed all contributed to the tone last month.

Increased volatility was on display throughout September, and many market participants expect it to continue through October – the most volatile month of the year historically. Here’s how the major U.S. stock indices performed in September: the S&P 500 shed 4.76%, the Nasdaq 100 lost 5.73%, while the Dow Jones Industrial Average decreased by 4.29%. While many market participants expect continued volatility, remember that volatility can create potential opportunities for some investors. These are the times to remember why we are engaged in long-term investing and long-term strategy.

Fed Tapering

The Federal Reserve announced that tapering of their asset purchases is in the cards but did not signal precisely when it would begin. The tapering could begin as soon as November. This asset purchase tapering is a gradual process that will most likely last until mid-2022. Fed projections are for an increase to the benchmark overnight lending rate over the next several years. The consensus is for the Fed Funds rate to increase from current levels (0% – 0.25%) to 1.75% by 2024. Half of the Federal Reserve members now see the first interest rate hike in 2022–but we do not know exactly when the first increase will be as of yet.

Bond Yields Rise Slightly

The Fed kept the overnight lending rate unchanged at their September meeting–just as the market expected. However, the Ten-year note yield ($TNX) and 30-year bond yield ($TYX) increased during September. Mortgage demand fell as 30-year mortgage rates rose to near 3.00%. 

Inflation

The heavily watched Consumer Price Index (CPI) showed that prices increased 0.4% from August to September, primarily driven by higher energy and food prices.  Consumer prices are 5.4% higher versus a year ago, the highest since January 1991. The IMF’s recently released report on global economies expects to see U.S. inflation drop to a more typical 2% by the middle of 2022. 

Supply chain issues have persisted, and perhaps you have noticed this during your routine shopping. Analysts are predicting continued supply chain issues through the holiday shopping season.  This does not mean an expectation of completely bare shelves, but is a warning that specific or preferred items may not be in stock.  

Year-End 

It’s hard to believe we are already counting down the final months of 2021. This also means it’s not too early to start planning for year-end deadlines. Consider reviewing your IRA, Roth IRA, 401(k), and HSA contributions.  If you have an RMD and have not already taken it, our office will be reaching out to you soon to schedule yours.  

Whether you have a simple investment question or you need help reviewing your entire financial picture, we are here to help. Our office welcomes the opportunity to work directly with your tax preparer or legal professional to help assist in your planning needs. 

 

July 2021 Newsletter

Posted by Koenig Investment on
 July 12, 2021
  · No Comments

We wanted to reach out and provide you with some updates as we head into the second half of the year. We are back at work in our Medford office, continuing to schedule phone and Zoom meetings for clients who prefer to maintain social distancing. Please feel free to reach out to the office to schedule a review of your portfolio or financial situation at your convenience.

Continued Economic Recovery

Major market indices enjoyed a fruitful June, building on their year-to-date (YTD) figures. The S&P 500 is up 14.4% YTD as of June 30th. The bond market (Barclay’s Aggregate Bond) gained back ground from April lows to end the month with a -1.60% YTD figure. The bond market has gained ground as fears of rapid inflation have subsided. Rising rates do tend to cause short-term bond price declines. The expectation of eventual rising rates are likely to provide a headwind to broad market bond prices over the near future.

The jobs data has been heavily in focus. Weekly reports have fluctuated between higher and lower figures as compared to expectations. Overall, hiring is up and workers are returning to the labor market. Not every industry is finding enough workers to fill as many positions offered as they would like, but this is to be expected from an economy that is restarting from pandemic shutdowns. Hiring is expected to increase as children return to school and parents can shift from childcare responsibilities to paid work. Changes to unemployment compensation and a lessened risk of virus exposure are additional major factors that will help push workers to return to the labor market. A number of workers are shifting between industries or employers, looking for higher wages or a better work conditions from employment. It will take some time for these shifts to slow and a more normal hiring pattern to resume.  Lastly, it remains to be seen how much of an effect virus induced early retirement will affect the labor market. The key component to all of these factors is time.

Inflation has obviously been a big topic in the news over the past few months. There is simply more money in the economy right now due to various stimulus efforts. These additional funds are chasing fewer goods as manufacturing comes back online and transportation of goods is restarted. We are also seeing shifts in buying patterns across larger than usual sections of the consumer market as people shift to post-pandemic life. These changes have combined to push up prices in some areas, but we are also seeing offsets in slowing sectors. For example, lumber made many headlines with spectacular price increases in 2020 and into early 2021. Those prices have now retreated significantly as stockpiling and home improvement activity has decreased. Not all sectors will see such dramatic swings, but we will continue to see shifts as spending habits change. The next CPI (Consumer Price Index) reading is on July 13th. We will continue to watch these readings for signs of inflation, be they transitory or more long lasting.

Interest Rate Hike Potential 

The markets were recently shaken by the potential rise in interest rates in early 2023. The announcement of higher interest rate guidance seemed to come as a surprise to many market participants. In a truly healthy economy, rates should not be this low. While the announcement may have been unwelcome news for some, we believe most market participants knew it was coming sooner or later. Whether we see measured increases begin in 2022 as some analysts have speculated, or further out into 2023, rate increases are to be expected when at historic lows. Measured increases will have effects on the market, but the effects are expected to be measured as well.

The Summer Stock Market

Historically, the market is a bit softer during the summer months, though there’s always the possibility that this year could be the exception. The market is looking for continued solid jobs data and some news on the inflation front. Restarting an economy does not happen in a day. Supply chain bottlenecks for some goods, uneven hiring, consumers and workers reevaluating priorities, and outbreaks of COVID in unvaccinated communities both here and abroad are all issues that should be expected to affect the path of economic recovery. 

Keeping tabs on the long-term is where success historically lies in the markets. Client portfolios remain positioned for the long-term. We will continue to evaluate recovery impacts on market sectors and how that affects portfolios. As always, please feel free to reach out with any questions you may have.

 

 

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

Newsletter – April 2018

Posted by Koenig Investment on
 April 30, 2018
  · No Comments

Pausing to Smell the Roses

Economic news often looks towards the future as investors try to predict both the best places to invest and avoid.  Today’s successes are often overlooked as investors look for clear indicators of trends and future activity.  Sometimes it is best to stop and look at the current environment, appreciate what is going well, and wait to judge the future.  The overall U.S. economy is doing quite well at the moment and there is no reason to expect this to change in the near future. 

Earnings, GDP, PE

We are now well into 2018 first quarter earnings release season. The picture being painted is one of solid growth and earnings.  The earnings growth rate has been much higher than anticipated, with the highest earnings growth reported since the third quarter of 2010.1  In fact, one research service we use predicted an earnings growth rate of 17.3% for the quarter as late as April 6th.  This has now been revised upwards to 23.2%.1 

As earnings rise they change the price-earnings (PE) ratio for companies.  This ratio explores how long it would take an investor to recoup their principal based on current company earnings.  Low PE ratios mean investors can expect principal recovery much quicker, high PE ratios mean investors are paying a premium for stocks and can be an indicator of a bubble.  As you can see from the below chart, current PE ratios are right in line with the recent historical average.

SOURCE: Seeking Alpha3

Finally, GDP is a good indicator of the health of the economy as a whole.  2018 first quarter GDP stands at 2.3% versus 1.2% for the first quarter of 2017 and 0.6% for the first quarter of 2016.2  The first quarter tends to be the low figure for the year, so it can reasonably be expected that GDP will increase before the end of the year. 

The Rest of the Data

If the key metrics noted above are all positive, why the fear and worry in the news?  The first reason would be inevitability.  The stock market will eventually see a decline.  It goes through up and down cycles, meaning wait long enough and you will see prices fall.  One should pay attention to changes and not expect good times to last forever.  Let’s explore a few topics of worry in the news recently.  A good place to start is the slow ratcheting up of interest rates by the Fed. 

SOURCE:  MacroTrends4

The above graph is a chart of the 10-year Treasury rate over the past 50+ years (recessions noted in grey).  As you can see, we are currently in a period of historically low rates.  It’s also clear that we had higher rates in the 1990’s, a time of good performance by the stock market.  A rise in rates tends to slow housing sales and some business expansions as credit tightens.  However, these will be slow changes that are already widely expected and factoring into the decisions of families and companies.  Interest rate rises have been slow, and are expected to remain so.  Slow change allows for adjustment and is not the same as an unexpected market shock.  Interest rates are not expected to rise to a level that will prohibit borrowing, but rather to return to more historical norms.  This is good news for savers and an anticipated change for future borrowers.

Other articles point to a few large companies lowering guidance as a sign we’ve reached peak earnings.  It’s true that Caterpillar recently noted 2018 earnings may be their best and 2019 will likely be lower.  At the same time, Boeing both had good earnings and upwardly revised estimates through 2019.5  The fate of one company is not the fate of the economy as a whole.  Aggregate S&P 500 earnings estimates for 2019 have been revised upwards as companies release figures and give forward guidance.  That means companies generally do not see 2018 as a year of growth plateau, but rather as part of an upward trajectory that is expected to continue into 2019.

The last area of worry for some pundits is both wages and inflation.  We are seeing an uptick in both categories.  These are areas to watch for future developments that may provide drags on the economy.  We’re not there yet though.  Inflation remains at about 2.0%6 and wage growth is still at a lower rate than before the recession7.  Rising wage growth and inflation can be expected to limit the acceleration of economic growth, but are not expected to be a drag on the economy.

Summary

Some clients reading this may be wondering why their portfolios are not skyrocketing upwards given that the economy is doing well.  The stock market is considered a leading indicator and typically moves in advance of economic news.  The S&P 500 was up every month in 2017.  That is unusual.  Much of the good news noted above has already been priced into the market, allowing account values to increase in 2017.  The 2018 market is expected to increase more slowly, with more volatility than 2017.  Investors are looking to sell companies that have not benefited as much from economic growth, capture gains, and move on to other companies with rosier outlooks for the year.

The overall U.S. economy is doing quite well.  Persons looking for a job can probably find one with relative ease.  Borrowing costs remain historically low.  Companies are making money and looking to make more over the next year or so.  Of course, the market will eventually change and we will continue to watch for indicators of that change. 

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.

Newsletter – January 2018

Posted by Koenig Investment on
 February 27, 2018
  · No Comments

Year in Review

2017 has been a year of surprises.  An anticipated market pullback did not materialize this year.  Instead, we saw a year of above average growth in market price.  The S&P 500 (a widely followed basket of 500 U.S. company stocks) ended at 2673.61, a gain of 21.83% on the year.  A round-up of statistics shows GDP remained at a steady rate with the third quarter at 3.2%1.  Unemployment is at historically low rates, with December’s figure at 4.1% per the Bureau of Labor Statistics (BLS).  Lastly, foreign companies did well in 2017.  The International Monetary Fund (IMF) shows most mature economies with slow growth, while developing countries typically saw higher growth rates that bode well for their economies.2  2017 markets reflected this growth as the international sector posting its biggest gain since 2009. 

2018

What can we expect of the new year?  A recent issue of a research service we subscribe to summed up bull vs. bear market conditions in a helpful manner.  The market tends to contract when we see a combination of tight money, rising rates, high inflation, and rapid growth.  We do not currently meet these criteria.  The Fed is slowly scaling back measures taken during the recession at a measured pace.  Money supply is slowly tightening as the Fed increases interest rates.  Rates are inching up and do not have us in an era of either tight money or truly rising rates.  Inflation remains low, with the personal consumption expenditure (PCE) price index at 1.5%3.  GDP continues at measured rates in the 2-3% range each quarter.  The outlook for 2018 real gross domestic product (GDP) is in the 2-3% range as well.  All of this together shows a picture of slow, steady grow rather than the beginnings of a pullback.  There remains the possibility of a correction in the market, with analysts looking towards a temporary event like we saw in early 2016 rather than a sustained bear market.

There is an expectation of greater earnings due to the recent corporate tax cut, although much of this is seen as already priced into the market.  Increased earnings will largely result from balance sheet reshuffling in the form of debt reductions, stock buybacks, and mergers or acquisitions4.  These will be one-time events that will solely enhance 2018 earnings.  Analysts expect the resulting gains to be temporary, lasting perhaps 12-18 months.  This, in conjunction with historically high consumer sentiment, bodes well for the 2018 market. 

It is helpful to pick a company benefiting from the tax changes in order to see the details.  Bank of America has been in the news recently as they announced an additional employee bonus of $1,000 for about 145,000 employees5, a total cost of $145 million.  Goldman Sachs estimates that Bank of America will see earnings grow by 14% due to the cut.  That would translate into earnings increases of about $2.5 billion.  Roughly 6% of the $2.5 billion received by the corporate tax cut will go towards employee wages.

Bank of America also noted a $5 billion increase in stock buybacks, above the $12 billion repurchase amount announced earlier in the year.6  Stock buybacks are used to increase earnings per share, which results in higher stock prices.  In summary, Bank of America will spend an extra $145 million on employee wages and spend $17 billion on stock buybacks in 2018.

The real world results from the tax cut will become clearer in 2018 as accountants have more time to delve into the provisions.  As with any change, there will be winners and losers due to the changes. The overall effect does appear to be a boost for a number of companies that will increase near-term earnings.

Summary

Foreign markets saw meaningful progress in 2017 from both consumer spending and corporate profits.  We believe many international markets are 3 or more years behind the U.S. in their economic activity.  We expect to maintain a fair degree of international exposure in client accounts in order to capture this growth.

There are a number of fiscal unknowns due to the changing of the U.S. tax code.  Accountants all over the country are working hard to analyze the impacts.  However, the bottom line for stock market growth is always corporate earnings.  Earnings have been rising and are expected to continue to do so.  There will likely be a modest boost to corporate earnings and overall economic activity this year due to the cuts.  The full impact of these changes will become clearer as we move through the year. 

We agree with analyst expectations of low level growth within the domestic market next year.  We will continue to posture client accounts to capture some of this growth, while protecting against downside events.  It is important to maintain downside protection in portfolios given that growth is expected to be limited.  We may see a pullback in the markets in 2018 or an unplanned outside event that causes disruptions.  We would view these events as acquisition opportunities.  Overall, we expect 2018 to be another year in the plowshare economy.

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

December 2016

Posted by Koenig Investment on
 December 13, 2016
  · No Comments

The U.S. economy should finish 2016 with final GDP growth figures of 1.6-1.7%.1  This is hardly a barn burner, but has been a continuation of the slow, steady growth seen for several years.  Current 2017 forecasts estimate GDP in the 1.8-2.2% range.2  However, it would be wise to note that projections for future years have been somewhat optimistic since the recovery.  For example, The Wall Street Journal Economics Survey of December 2015 predicted 2.6% GDP growth for 2016.  We will have to wait and see how 2017 compares to the expectations.

2017 Expectations

The market will continue to focus on earnings, interest rates, inflation, and taxes as we move into 2017.  The year should keep analysts busy given the talk of significant changes to the tax structure.  President Elect Trump is proposing the lowering of personal and corporate taxes for most people and companies.  In addition, a proposal to allow U.S. companies to move foreign earnings held abroad back to the United States as a special, lower tax rate will be worth watching.  This proposal could bring back hundreds of billions of dollars to the United States.

Governmental spending at the state and local levels has been constrained by increased pension and healthcare costs for many areas of the country.  This has limited the spending of these local entities for other programs.  It is hoped that Trump stimulus programs could be a positive for state and local governments.  It is likely that such stimulus programs will contribute to the national debt.  Specific policy proposals will allow analysts to determine the probable effects of both spending and debt increases at that time.

Inflation and rising interest rates are areas to watch for as a drag on 2017 GDP.  A ¼ point rate increase (0.25%) by the Federal Reserve in December is widely anticipated.  Two further ¼ point increases in 2017 (as is anticipated) would bring the federal funds rate to 1.0% by year end.  Housing markets are expected to see less appreciation as a result.  Moving the national average for mortgage interest rates from 4% to 5% still leaves this rate historically low.  However, it is also a 25% increase in borrowing costs.  For example, a mortgage of $300,000 costs the borrower $12,000 annually at 4%.  It jumps to $15,000 annually at 5%.  This is enough of a change to price some buyers out of their local markets. The national real estate average shows price growth of about 6% last year.  Markets like Portland, Seattle, and Denver have seen much greater price rises.  Expectations are for these markets to slow their growth as buyers reassess what they can afford.

At the same time, the combination of full employment and likely increasing energy prices is expected to increase inflation in 2017.  Businesses are expected to raise wages, and prices, as they compete for skilled workers.  OPEC agreements to limit pumping are expected to hold and help drive up oil prices somewhat.  It is hard to gauge exactly how much impact any of these factors will have on next year’s economy, but all are expected to play a part.

The financial markets seem to be very confident that better economic news is just around the corner.  They seem sure that tax cuts and increased infrastructure spending is a done deal, despite any definitive proposals.  Some businesses are anticipating a reduction in regulations they have previously complained of.  The new optimism seems to be based on recent proposed appointments of anti-regulation proponents and the creation of the most conservative cabinet in decades.  The markets appear to be anticipating profits to be made from the changes these individuals – as well as other likely cabinet picks – would like to make to sectors of our economy.  New government policies, even with one party firmly in control, take longer to implement than most people expect.  Ideas get watered down and projects can take years to become shovel ready. 

Summary

The United States has been governed by a Republican Congress and President 22.5% of the time since the early 1900’s.  The Dow Jones Industrial Average has returned approximately 7% annually during those time frames.2  Markets don’t like uncertainty.  They began to move after the election results became clear and investors could trade based on likely governmental policy changes.  A number of analysts feel 2016 is finishing with some of next year’s expected gains already priced into the system.  We will have to wait and see which of these expectations become reality, and which have been unrealistic hopes.  It is certain that 2017 will be a year with some interesting changes to adapt to, and, hopefully, profit from.

We wish everyone a happy, enjoyable holiday season as we all reflect on 2016 and mull over the possibilities of 2017. 

  1.  http://news.morningstar.com/articlenet/article.aspx?id=784381; Economy Not as Strong as Consensus Believes, Robert Johnson 12/10/2016
  2. Bob Brinker’s Marketimer, 12/5/2016, Vol 31, No. 12
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.

March 2016

Posted by Koenig Investment on
 March 7, 2016
  · No Comments

Volatile Markets

This year has begun with market activity that has left many investors nervous.  Although economists noted the overall U.S. economy was performing at a decent level throughout January and February, the markets reacted sharply to fears over China and lower oil prices.  The S&P 500 declined by a little more than 10% as of mid-February, leading to talk of recession in some media outlets.  Economists as a whole did not endorse this speculation, but could not definitively say if or when the market would recover.

The decline in overall stock prices occurred in tandem with a falling of oil and other commodity prices.  Many parts of the world are expected to have slower economic activity in 2016, with China most notably experiencing slower economic growth.  Declines in commodity prices appeared to be a reaction to various projections of slowing overseas activity.  Data on the economy led to an uptick in commodity prices in late January and into early February.  The broad stock market followed suit and gained back some of the ground lost earlier in the year.  As of March 6th, the S&P 500 has regained most of its earlier declines, now posting a modest year-to-date decline of less than 2%.

It is difficult to call either a market high or low until well after the fact.  While few are willing to definitively state that the bottom has been reached and passed, a number of analysts are now stating we have likely passed the bottom.  There are a number of reasons for them to begin to make this call.  Both Canada and Australia have economies heavily reliant on commodities.  Canada has a large oil sector and mining is important to the Australian economy.  Both currencies took a hit starting in 2014 as we saw non-oil commodity prices begin a decline.

The graphs of both the Canadian and Australian stock markets mirror their currency graphs with declines from mid-2015 and then bouncing back in February.  Commodity based company stocks such as Freeport-McMoran (copper), Alcoa (aluminum), and indices like the Dow Jones U.S. Steel Index all show declines beginning in the summer or fall of 2015, with bottoms in late January.1 While it is too soon to definitively call a bottom to recent commodity and market activity, a number of signs are pointing towards this being the case.

United States Economy

Employment – The unemployment rate continued its slow decline to 4.9% in February.  This was accompanied by a small increase in the labor force participation rate, meaning that the decline in unemployment is a result of increased employment and not workers giving up on looking for jobs.2  In fact, the discouraged workers (defined as persons no longer looking for work as they believe they will not find any) figure is down 18% from the previous February.

An interesting development in the current labor market is wage growth.  The average wage in February 2016 is 2.2% higher than for February 2015.3  Costco is a notable example of this upward wage pressure, making national news with their increase of a minimum wage to $13/hr.  They are not the only company to note pressure to increase wages in order to stem employee turnover and attract desirable workers.

Corporate Earnings – Corporate profits remain steady overall.  We are seeing a smaller group of companies project earnings growth in 2016 compared to the number of companies projecting growth in 2012 and 2013.  This is a more mature market that is holding steady.  Dividend paying stocks remain attractive as investors seek alternatives to low interest rates paid by bonds.

Other sectors – Statistics for the overall U.S. economy continue to portray a boring, yet positive picture.  The economy is continuing its slow, steady growth with healthy levels of new-vehicle sales for February, greater than expected existing-home sales for January, and manufacturing and purchasing data in line with a GDP growing at about 2% annually.

Summary

2016 has gotten off to a volatile start, with markets regaining much of the ground lost in early 2016.  Commodities look to have been oversold in this period.  Recent price rebounds in commodity prices have been led by currency and stock market reversals in Canada and Australia, historically a signal of stabilizing or growing commodity prices.  The U.S. economy is in better shape, continuing its slow, steady growth.  We expect 2016 to continue to show steady U.S. growth and a recovery within a number of commodity sectors.

 

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.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.

January 2016

Posted by Koenig Investment on
 February 23, 2016
  · No Comments

China’s Economy

We ring in 2016 with a good dose of market volatility. The five year graph of the Shanghai Composite Index shows a bit of a decline in 2011, fairly flat in 2013 through mid-2014, and then a steep rise starting in mid-2014.  This rise coincided with the Chinese government encouraging citizens to buy stocks, even as monthly economic statistics were showing the economy was slowing and economic data was coming in below forecasts. Unlike the United States and Europe where pension funds, university endowments and mutual funds make up a large portion of stock ownership.  China is almost all affluent, individual investors.  Given this dynamic greater volatility is almost a given.

SOURCE: https://www.quandl.com/data/YAHOO/INDEX_SSEC-Shanghai-Composite-Index-China

In the latter part of the 1990s corporations were moving manufacturing to China from the United States and other countries to take advantage of lower labor costs.  This mass influx of manufacturing drove the Chinese economy for the last 15 years, resulting in annual GDP growth of 8-10%.  This is an almost unheard of figure, and one that eventually has to moderate.  Growth in the Chinese middle class has been fairly rapid and consumer spending will be a larger portion of their economy going forward.  The Chinese government is trying to transition from primarily a manufacturing and exporting economy to be more of a consumer based economy.

Currency – We continue to see China’s currency (Yuan) be devalued against the U.S. Dollar and Euro.  Although currency instability has rattled markets, it does have a positive impact on U.S. corporations purchasing Chinese products.  Walmart specifically should be a big beneficiary, as a weakening Yuan reduces the costs of Walmart’s extensive purchases from China.

Markets – The Chinese government has looked somewhat clumsy in their actions in dealing with a slowing economy and a stock market that had a huge one year run up from mid-2014 through mid-2015.  They imposed a circuit breaker to shut down the stock market if it dropped by 5%.  It took 29 minutes to reach that point during one day this week.  The government has now withdrawn that rule.  In addition, most of the individual investors within the Chinese market are also Chinese citizens.  Their market rules make entry of foreign money difficult to say the least.  This has created a situation in which large numbers of persons relatively new to stock market investing have driven up market prices to unsustainable levels.  We are seeing a drop in price as the President, Xi Jinping, has begun to change the government’s oversight of the markets.  These are long-term oriented reforms that are painful in the short-term, but should give better results than the patchwork stimulus implemented over the past summer.

While the volatility in the Chinese stock markets is attention grabbing, it likely would not impact the average investor elsewhere.  You may recall stories in the 1980’s about Japan’s rapidly growing economy.  Their economy was growing by leaps and bounds until 1989.  Their market peaked in that year and has never fully recovered.  Most U.S. companies and households did not notice this slowdown in the 1990’s even though Japan was a U.S. economic partner.  China is 0.7%1 of the U.S. export market.  A slowdown in the Chinese economy is likely not going to be felt in the broad U.S. economy.  It is simply not large enough to be felt.

United States Economy

Employment – December employment figures released today show a gain of 292,000 jobs. This beat a consensus estimate of 200,000 jobs.  The employment figures for October and November were both revised upward by 50,000.  Almost all sectors of the economy posted job growth except energy.  The unemployment rate remained steady at 5%.2

Corporate Earnings – Corporate profits are the life blood of stocks.  GDP projections are holding steady at low, but positive numbers. Some sectors are seeing typical cyclical contraction, but a company that made money in 2015 is likely to continue to make money in 2016. I would guess the year over year growth in 2016 will be a bit lower than recent years but still growing.

Starting the middle of January we will start to see the release of 4th quarter corporate earnings results.  These results should help support the markets.  In manufacturing employment gains in chemical and plastics are offsetting job losses in metals and energy. Retail sales show a migration of consumers to online firms over traditional brick and mortar retail.

Construction – Construction continues to hold up well in both commercial and residential.  New home starts for November rose 10.45% from October and 16.48% since one year ago.3  US existing home median sales prices are up 6.32% over the one year period.4  Housing is no longer a drag on the overall economy, but rather a healthy sector contributing to overall growth.

Summary

Bright spots in the market in 2015 were technology companies, including biotech.   Several companies have interesting new drugs, devices, or other technology based products that are likely to help company earnings.  REITs are another area to watch.  REITs tend to perform well in rising interest rate environments.  We’ve seen some healthcare REITs whose valuations have dropped far enough during the past year that early 2016 is an attractive entry point in these offerings.  Overall, the U.S. economy is in good shape.  The market activity in China is interesting to follow, but will not have a material impact on the economy here.

 

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.

 

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