Week Ahead: Back to Work for Wall Street

Wrapping up the year in one post is tough, but let’s give it a try. Although the financial industry likes to think that the center of the universe is located somewhere between lower Manhattan and the hedge fund enclave of Greenwich, CT, most of 2013 was dominated by events in Washington DC. Fiscal Cliff: The year started with a cliffhanger Congressional vote that occurred 90 minutes after the January 1 “fiscal cliff” deadline. The agreement raised roughly $600 billion in taxes over 10 years, by increasing contributions to Social Security  from 4.2 percent, back to 6.2 percent on earnings up to $113,700; and by increasing taxes for wealthy Americans.

Sequestration: The genesis of the automatic $1.2 trillion in spending cuts, known as “sequestration,” occurred in August 2011, when lawmakers were battling over raising the debt ceiling. When the  “supercommittee” failed to devise an alternative to avert across-the-board cuts to defense and non-defense programs, the government was forced cut $110 billion from its budget, starting on March 1^st.

Economists warned that the combination of tax increases and spending cuts would reduce growth, which is exactly what occurred. Q1 came in at a measly 1.1 percent annualized pace, but as the year advanced, things picked up. GDP advanced to 2.5 percent in Q2 and then to a sizzling 4.1 percent in the third. The economy likely expand by about 2.25 to 2.5 percent for the year, a bit ahead of the worrywart predictions, but still about one percent slower than the post-World War II average of 3.3 percent.

Bernanke’s Taper Talk: During Fed Chairman Ben Bernanke’s May 22^nd testimony on Capitol Hill, he said that the central bank could taper its $85 billion monthly bond-buying program, if the economy were to perk up. The stock and bond markets fell on the suggestion that the central bank would remove stimulus from the economy, though the stock market recovered and eventually moved higher. By the time the Fed finally announced the dreaded taper at its last policy meeting of the year, investors took the news in stride and bought stocks. However, the bond market suffered a lasting blow: the yield on the 10-year treasury soared from 1.62 percent in the beginning of May to a two-year high of 3 percent and pushed down the value of bonds.

Government shutdown/Debt Ceiling: Budget fights are like clockwork, but 2013’s drama led to a partial government shutdown from Oct 1 - 16. Lawmakers finally agreed on a deal to reopen for business and to raise the debt ceiling, averting what the Treasury Department said would be an unprecedented and potentially catastrophic default.

Housing Recovery: 2013 was a big turning point for the US real estate market. The combination of low interests rates and bargain-basement prices brought big investors into the fray. The result was a 13 percent increase in home prices this year and a big uptick in activity. The pace of price gains will likely slow in 2014, due to higher mortgage rates and an increase in inventory, but single-digit increases would be increases nonetheless.

Stocks Soar: The Federal Reserve’s low interest rate policy and bond buying program made stocks the go-to asset class for investors. (See below for 2013 totals.)

First FULL WEEK of 2014: It’s back to work for Wall Street, after two consecutive holiday-shortened weeks. No time to gloat over those big gains for stocks, because this week the focus will be on Friday’s December jobs report. Economists are hoping to build on the strength of the past few months, when monthly job creation averaged over 200,000.

The economy added nearly 2.1 million jobs through November and with December expected to show an increase of about 200,000, total monthly job creation for the year is expected to be 190-195,000, a slight improvement from the 183,000 in 2012. The unemployment rate should remain at a five-year low of 7 percent. As a reminder, unemployment  was at 5 percent in December 2007, the month that the Great Recession officially started. It doubled to 10 percent at the end of 2009, before starting to drop.

Investors will also eye the minutes from the Fed's December policy meeting, when the central bank announced a $10 billion reduction in monthly bond-buying. There will be interest in whether Fed officials discussed the pace of future reductions.

MARKETS 2013:

• DJIA: 16,576, up 26.5% on year (including dividends: 29.7%)
• S&P 500: 1848, up 29.6% on year (including dividends: 32.4%)
• NASDAQ: 4176, up 38.3% on year (including dividends: 40.1%)
• Nikkei 225: up 57% (remains 40% below all-time high in 1989)
• Venezuelan Stock market: up 480%, best performer worldwide
• China’s Shanghai Composite: down 6.7 percent
• Brazilian Bovespa: down 15 percent
• 10-Year Treasury yield: 3.03% (including interest: down 1.3%)
• Barclay’s US Aggregate Bond Index, down 2.02% (first decline since 1999)
• Feb Crude Oil: $98.42, up 9.3%
• Feb Gold: $1202.30, down 28.7% (first losing year in 13)
• AAA Nat'l average price for gallon of regular Gas: $3.32 (from $3.30 a year ago)

THE WEEK AHEAD:

Mon 1/6:

10:00 Factory Orders

10:00 ISM Non-Mfg Index

Tues 1/7:

8:30 International Trade

Weds 1/8:

8:15 ADP Private Sector Jobs

2:00 FOMC Minutes

3:00 Consumer Credit

Thurs 1/9:

8:30 Weekly Jobless Claims

Fri 1/10:

8:30 December Jobs Report

Week Ahead: Asset Class Envy

With all of the celebrations over stock market records these days, you might think that investors are once again partying like it’s the nineties. But most investors learned hard lessons in the near two decades since those halcyon days. The 1990’s-2000 Internet boom and bust, followed by the 2000’s housing boom and bust, along with a once-in-a-generation financial crisis and two associated stock market crashes, cured most investors of their stock-only portfolios. They soon learned the beauty of a diversified portfolio, which can provide comfort during stormy periods of time. But those diversified portfolios are not nearly as comforting when stocks are soaring and bond and commodity markets are falling. That’s why when many investors review their year-end statements, their total gains are likely to be much less than the 30 percent returns of the S&P 500. The main culprit is the bond market, which has taken it on the chin in 2013. The price of the 10-year Treasury has dropped precipitously this year, as yields have soared from a springtime low of 1.62 percent to 3 percent on Friday. The result is a total loss in return of about 2.7 percent for an asset class known as a "safe haven"!

Analysts note that the rise in rates is occurring for a good reason: the economy is strengthening and as a result, the Federal Reserve can slowly get out of the stimulus business. That may be cold comfort for diversified investors, who no doubt are feeling a bit of asset class envy right about now. Let’s just hope that they do not bail out of bonds and jump into stocks at the wrong time, which in hindsight can seem like premature reallocation.

Worrying about losses in bond positions probably seems like a pretty good problem to have, if you are one of the 1.3 million Americans who have just seen long-term unemployment benefits expire. The benefit has paid an average of $300 per week for up to an additional 47 weeks for those who have exhausted the roughly 26 weeks of unemployment benefits that most states provide.

Late last week, Sen. Jack Reed (D-RI) announced plans to introduce a three-month extension of  long-term unemployment benefits, and is aiming for a procedural vote as soon as January 6. The $6.5 billion proposal would maintain aid for recipients, who would have their benefits restored retroactively, while buying legislators more time to work out a longer extension. Costs for a full year of extending the benefits are estimated at $25 billion, according to CBO.

Reed has his work cut out for him: Many lawmakers are reluctant to extend benefits unless other cuts are proposed to offset them. Economists caution that cutting long-term unemployment benefits could reduce first quarter GDP by 0.2-0.4 percent.

MARKETS:

• DJIA: 16,478 up 1.6% on week, up 25.7% on year
• S&P 500: 1841, up 1.3% on week, up 29% on year
• NASDAQ: 4156, up 1.3% on week, up 37.7% on year
• 10-Year Treasury yield: 3% (from 2.89% a week ago)
• Jan Crude Oil: $100.32, up 1% on week
• Feb Gold: $1214, up 0.9% on week
• AAA Nat'l average price for gallon of regular Gas: $3.30

THE WEEK AHEAD: The trading week between Christmas and New Year’s is often the lowest volume week of the year. With New Year’s Day falling mid-week, expect the first two trading sessions of 2014 to be equally quiet. Reports from the nation’s housing market, are expected to confirm that the sector is closing out a strong year. The Conference Board’s confidence index is expected to recover from October’s steep drop and November’s slide, both of which were probably due to the government shutdown and debt ceiling drama.

Mon 12/30:

10:00 Pending Home Sales

Tues 12/31:

9:00 Case-Schiller Home Price Index

9:45 Chicago PMI

10:00 Consumer Confidence

Bond markets close early, while stock markets have regular hours

Weds 1/1: GLOBAL MARKETS CLOSED FOR NEW YEAR’S DAY

Hold the sarcasm: Greece assumes the EU presidency from Lithuania

Thurs 1/2:

8:30 Weekly Jobless Claims

10:00 ISM Manufacturing

10:00 Construction Spending

Fri 1/3:

Motor Vehicle Sales