Will 2016 Stock Gains Continue in 2017?

2016 is in the record books and given the dreadful start of the year for US stock markets (in February, all major indexes corrected, falling more than 10 percent from the end of 2015,) the closing numbers were impressive. Total return results for 2016, which includes price appreciation and dividends showed the Dow up 16.5 percent and the S&P 500 ahead by 12 percent. The 2016 action occurred in three distinct phases:

1. January to middle of February: Fear of recession (S&P 500 -10% from Dec 2015 highs)
2. Mid February to Election Day: Recovery and slow growth (thru 11/4, S&P 500 +2%)
3. November 9^th – December 31: Post election rally (S&P 500 +9.5%)

The end of year rally was fueled by President-elect Trump’s pledges to reinvigorate the economy with a mix of fiscal policy changes, which include: A public-private infrastructure spending plan; corporate and personal tax reform; and the loosening of regulations across a number of sectors, including banking and energy.

The combination of these three potential initiatives could boost growth, as the economy enters the eighth year of the expansion. (In the first seven years, annual growth ranged from 1.6 to 2.6 percent.) Presuming that some form of each idea comes to fruition, most economists have penciled in growth of 2.5 to 3 percent for 2017, with two asterisks.

The first is that the plans could spark inflation, which could prompt the Fed to raise interest rates faster than anticipated and could snuff out some of the growth. The second asterisk is more dangerous—if Trump’s trade rhetoric were to escalate into a full-blown trade war, the economy would suffer dramatic negative effects, potentially leading to a toxic combination of a recession and inflation.

What lies ahead for the economy and markets in 2017 will be directly linked to the details of the broad themes that President-elect Trump and the Republican Congress are able to enact.

MARKETS: While stocks grabbed headlines, bond investors endured a wild ride in 2016. After starting the year at 2.273 percent, yields of the benchmark 10-year Treasury tumbled to 1.366% in early July-the lowest yield on record. Then in Q4, prices fell and yields increased by the largest amount in more than a decade. The total return from the so-called safe haven was DOWN 0.2 percent on the year.

• DJIA: 19,762, up 13.4% (The blue chip index topped 19,000 on Nov 22^nd and made a run late-year run at 20,000, but came up 13 points shy of the next round number milestone.)
• S&P 500: 2238, up 9.5% YTD
• NASDAQ: 5383, up 7.5% YTD
• Russell 2000: 1357, up 19.5% YTD
• 10-Year Treasury yield: 2.446%, down 0.2% (including interest payments)
• February Crude: $53.72, up 45% on year, the best annual gains since 2009. Early year recession worries caused crude oil to bottom out at $26.21 a barrel, the lowest level since 2003. December 31, increasing demand and an agreement by OPEC to curtail production, propelled the commodity higher.
• February Gold: $1,151.70, up 8.5% on year (snapped a 3-year losing streak)
• AAA Nat'l avg. for gallon of reg. gas: $2.33 (from $2.00 a year ago)

THE WEEK AHEAD: The last employment report of the year is due this week. It is expected that the economy added 175,000 jobs in December and the unemployment rate will edge up to 4.7 percent from 4.6 percent. For 2016, job growth will likely be about 2.2 million, down from 2.7 million in 2015 and just over 3 million in 2014, the peak year for this cycle.

Mon 1/2: Markets Closed

Tues 1/3:

9:45 PMI Manufacturing Index

10:00 ISM Manufacturing

10:00 Construction Spending

Weds 1/4:

Light vehicle sales for December

8:15 ADP Private Sector Employment

2:00 FOMC Minutes

Thurs 1/5:

10:00 ISM non-Manufacturing Index

Friday 1/6:

8:30 Employment Report

8:30 International Trade

10:00 Factory Orders

Will the Post-Election Stock Rally Last?

Stock indexes staged a broad, post-election rally, as investors pushed aside their concerns about a potential global trade war and a clampdown on immigration, and instead bet that President-elect Trump’s promise of infrastructure spending would propel profits at large industrial companies and his tax cuts would boost the economy. (Irony alert #1: Congressional Republicans have argued that the financial crisis stimulus (the $787B American Recovery and Reinvestment Act) did not work and fought against subsequent infrastructure spending plans as a way to boost economic growth.) While most believe that infrastructure spending would help the economy, the total impact would be largely determined by its size. At one point during the campaign, candidate Trump promised to spend about $550 billion over five years. If there is general agreement on the positive aspects of infrastructure spending, there is little consensus on Trump’s potential tax plan, which in its current form would disproportionately favor wealthier Americans.

According to the Tax Policy Center, by 2025, 51 percent of Trump’s tax reductions would go to the top one percent of earners (those earning more than about $700,000). Yes, the plan would raise the after tax income of middle class Americans by about 1.8 percent, but the top 0.1 percent would see a tax cut of more than 14 percent of after tax income. (Irony alert #2: The Trump tax plan would likely exacerbate income inequality that already exists and could be a surprise to those Trump voters who said that they felt left out of US economic progress.)

Economists caution that there are two other problems with the Trump tax plan: (1) rich people do not tend to spend their tax cuts; rather they redirect the savings into their investment accounts—that’s good for financial markets, but not so hot for the overall economy and (2) the tax cuts would cause a spike in federal debt levels – the plan would increase the federal debt by $5.3 trillion over ten years, according to the nonpartisan Committee for a Responsible Federal Budget. (Irony alert #3: Taken together, the spending and the tax cuts could balloon the national debt to more than 100 percent of GDP within a few years. How will fiscal conservatives make peace with that potential?)

Trump’s spending and tax cuts could help stimulate the economy in the short term, though the combination of those policies could also spur inflation and prompt the Federal Reserve to raise interest rates at a faster pace than currently expected. Under normal monetary policy, a faster rate hike cycle might snuff out a recovery. But some economists are more concerned that under President Trump, there would be a change in the composition of the Federal Reserve Board. (There will be a couple of vacancies next year and Fed Chair Janet Yellen’s term ends in February 2018.) A less disciplined Fed might accept more inflation, leading to higher long-term interest rates and a weak US dollar. A glimpse of how these policies could impact the bond was seen last week: more than $1 trillion was wiped off the value of bonds around the world.

Another area that could see big changes under President Trump is regulation. In addition to easing up on environmental rules, most expect to see a watering down of the Dodd Frank Wall Street reform, which had attempted to reign in the excesses, which contributed to the financial crisis. (Irony Alert #4: A populist President, put in office by an electorate that hates banks, would make life easier for the financial services industry. Financial sector stocks increased by 11 percent last week.)

Under Trump, the Consumer Financial Protection Bureau (CFPB), which was created out of the Dodd-Frank Act, will likely get diluted. In October, a federal appeals court ruled that the CFPB was “unconstitutionally structured” and as a result, the agency should be treated like others, where the president can supervise, direct and change the director at any time. Current CFPB chief Richard Cordray is unlikely to keep his job.

And finally, the big investment firms, which fought tooth and nail NOT to put clients’ interests first, are ready to resurrect their battle to water down the consumer-friendly Department of Labor Fiduciary Rule set to go into effect in April 2017.

MARKETS:

• DJIA: 18,847, up 5.4% on week, up 8.2% YTD (best week of 2016, biggest weekly gain since Dec 2011)
• S&P 500: 2164, up 3.8% on week, up 5.9% YTD
• NASDAQ: 5237, up 2.8% on week, up 4.6% YTD
• Russell 2000: 1282, up 10.2% on week, up 12.9% YTD
• 10-Year Treasury yield: 2.12% (from 1.77% week ago)
• British Pound/USD: 1.2593 (from 1.2518 week ago)
• December Crude: $43.41, down 1.5% on week, 3^rd consecutive weekly loss
• December Gold: $1,224.30, down 6.2% on week, lowest close since early June and worst weekly loss since June 2013
• AAA Nat'l avg. for gallon of reg. gas: $2.18 (from $2.22 wk ago, $2.20 a year ago)

THE WEEK AHEAD:

Mon 11/14:

Tues 11/15:

Home Depot

8:30 Retail Sales

8:30 Empire State Manufacturing

8:30 Import/Export Prices

Weds 11/16:

Cisco, Lowe’s, Target

8:30 PPI

9:15 Industrial Production

10:00 Housing Market Index

Thursday 11/17:

Wal-Mart, Staples

8:30 CPI

8:30 Housing Starts

8:30 Philly Fed Business Outlook

10:00 E-Commerce Retail Sales

Friday 11/18

10:00 Leading Indicators

Tired Stock Markets and Fed Fatigue

I'm tiredTired of playing the game Ain’t it a crying shame

-Lili Von Shtupp (Madeline Kahn) in “Blazing Saddles

One thing we can all agree on this political season is that everyone seems tired -- tired of the shouting, the rhetoric and the divisiveness. In some ways, the stock market also feels a bit tired right now, as investors continue to suffer from Fed fatigue. After enduring a correction early in the year, then charging to all-time highs over the summer, the rally seems to have lost some steam lately. Perhaps the slowdown is for good reason, at least from the consumer’s point of view: with the labor market tightening, US companies are paying higher wages, which eats into their profit margins and hurts stock performance. Most Americans would likely happily endure so-so mid-single digit returns from stocks in their retirement plans, in exchange for fatter paychecks.

Conversations about the Federal Reserve also seem a little wearing these days. The Fed’s impact on risk assets, like stocks, seems to wax and wane from week to week, with most now believing that the central bank will raise rates by a quarter of a percent at the mid-December meeting. By that time, investors will know the outcome of the election and will also have a bit more data to confirm that economic growth can withstand a Fed move. This week, the government will release one of the last few important reports before that meeting: third quarter Gross Domestic Product (GDP).

After a dreadful first half of the year, when the economy expanded by just about one percent, growth has accelerated in the second half of this year, as the effects of a stronger dollar and lower oil prices have started to fade. Economists expect that the first estimate of third quarter growth will rebound to an annualized rate of 2.5 percent, due in large part to a surge in exports and specifically soybean exports. Depending on how the Bureau of Economic Analysis handles the spike and then likely reversal in the subsequent quarter could impact the headline. When it’s all smoothed out, we should expect that growth for all of 2016 will be the same, tired 2 percent or so that we have seen over the past few years.

In addition to GDP, which will be revised in a month, the Fed will also chew on the following before the December FOMC: two employment reports (11/6 and 12/4), two Personal Income and Spending reports, which contain the Fed’s favorite measure of inflation, PCE Index (10/31 and 11/30) and one more Consumer Price Index report (11/17). Presuming that these reports are mostly in line with trends, the Fed should hike in December. After that, I'm afraid to tell you that we're likely to endure another round of exhaustive speculation about the pace of rate hikes…in other words, be prepared for the 2017 version of Fed fatigue.

• DJIA: 18,145, up 0.04% on week, up 4.1% YTD
• S&P 500: 2141, up 0.4% on week, up 4.8% YTD
• NASDAQ: 5257, up 0.8% on week, up 5% YTD
• Russell 2000: 1218, up 0.5% on week, up 7.2% YTD
• 10-Year Treasury yield: 1.74% (from 1.80% week ago)
• British Pound/USD: 1.2227 (from 1.2188 week ago)
• November Crude: $50.85, up 1% on week
• December Gold: $1,267.70, up 1% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.23 (from $2.25 wk ago, $2.22 a year ago) Prices have climbed above their year-ago levels for the first time in over two years (7/13/14)

THE WEEK AHEAD:

Mon 10/24:

Visa

8:30 Chicago Fed National Activity Index

Tues 10/25:

Apple, AT&T, General Motors, Pandora

9:00 FHFA House Price Index

9:00 S&P Case-Shiller HPI

10:00 Consumer Confidence

Weds 10/26:

Coca-Cola, Groupon, Texas Instruments

10:00 New Home Housing Sales

Thursday 10/27:

Amgen, Deutsche Bank, Ford, Sirius XM

8:30 Durable Goods

10:00 Pending Home Sales

Friday 10/28:

Exxon Mobil, Hershey, MasterCard

8:30 Q3 GDP – 1^st Estimate

8:30 Employment Cost Index

10:00 Consumer Sentiment

September Stock Selloff?

2016 started with a stock sell off and full-blown correction (down 10 percent from the recent peak), challenging investors to remain calm and stick to their game plans. Then Brexit came along and once again, rattled nerves. Today the Cassandra's are out again with an old worry: the Fed will kill the stock market rally. The reignited jitters have been attributed to a few central bank officials hinting that the improving economy may justify an interest rate increase as soon as next week’s Fed meeting. Previously, there seemed to be little doubt that the central bank would wait at least until the December meeting. While most believe that December is still more likely, the selling acknowledges that the most recent leg up in stock prices occurred NOT because the economy is humming and companies are making a lot of money; rather the buying has been a sign that big investors feel with interest rates so low, stocks are the only assets that can deliver any potential for gains. As Federal Reserve  Governor Daniel Tarullo recently acknowledged “There's no question...when rates are low for a long time that there are opportunities for frothiness and perhaps over-leverage in particular asset markets.” (Emphasis added!)

In other words, when rates stay so low for so long, investors look past fundamentals, drive prices higher and can become complacent. One sign of that complacency can be seen in the VIX index, which is a measure of the expected swings in the S&P 500 over the next thirty days. Recently, the 30 day annualized volatility (of daily changes) in the S&P 500 fell to its lowest level since 1994. Friday’s selling may simply be proof that people periodically remember that the risks they previously accepted, may no longer feel so great, especially considering the age of the bull market. But as the analysts at Capital Economics note, “The fact that volatility was low in the mid-1990s did not preclude equity prices from rising for several years as a bubble inflated.”

Still, when you hear dire predictions, it’s hard not to feel butterflies. Although some investors may be tempted to sell, they do so at their own peril. Market timing requires you to make two precise decisions: when to sell and then when to buy back in, something that is nearly impossible. After all, even if you sell and manage to steer clear of the bear by staying in cash, you will not be able to reinvest dividends and fixed-income payments at the bottom and you are likely to miss the eventual market recovery. The best way to avoid falling into the trap of letting your emotions dictate your investment decisions is to remember that you are a long-term investor and you do not have all of your eggs in one basket. Try to adhere to a diversified portfolio strategy, based on your goals, risk tolerance and time horizon and do not be reactive to short-term market conditions, because over the long term, this strategy works. It’s not easy to do, but sometimes the best action is NO ACTION.

If you are really freaked out about the movement in your portfolio, perhaps you came into this period with too much risk. If that’s the case, you may need to trim readjust your allocation. If you do make changes, be careful NOT to jump back into those riskier holdings after markets stabilize.

June Jobs Take Off: Stocks Surge

The better than expected June jobs report was a much-needed shot in the arm for the recently sagging labor market. The economy added 287,000 jobs, including the return of about 30,000 striking Verizon workers, and the unemployment rate rose to 4.9 percent, but did so for a good reason: more people entered the labor force in search of work. Along with a terrible May (revised down to just +11,000 jobs, the weakest month of hiring since the job recovery began in 2010) and a mediocre April (revised up to +144,000), June’s numbers brought second-quarter average monthly job creation to 147,000 – that’s down from 196,000 in the first quarter, 229,000 last year and 260,000 in 2014. The big question now: is the recent trend portending weakness in the economy or is it a natural slowdown, as we begin the eighth year of the recovery?

Other parts of the report complicate the answer. The broad measure of unemployment U-6), fell to 9.6 percent, down 0.9 percent from a year ago, but more than a percentage point above its pre-recession level. Meanwhile, hourly pay increased by 2.6 percent from a year ago, matching the highest level of the recovery.

My guess is that the labor market is tightening and that something weird occurred in May. That said, more data is necessary to determine the direction of the labor market, which also means that the Fed is unlikely to take any action at its policy meeting at the end of this month.

Next question: Would a strong summer hiring season encourage the Fed to consider an increase at the September meeting? Maybe, but European politics may again force a delay in the Fed’s rate hike cycle. If you liked “Brexit,” you’re going to love “Quitaly”. In October, Italians will head to the polls to vote on whether to oust the current prime minister, potentially leading to a general election in which the anti-European Five Star Movement could gain ground and advance their call for Italy to withdraw its membership of the euro, though the party supports EU membership. As the vote nears, Italy is once again confronting the possibility of bailing out the world’s largest bank, Monte dei Paschi, which continues to hold nearly $400 billion of non-performing loans on its books, by far the largest in the EU.

According to Capital Economics, a survey in May “showed that 58 percent of Italians wanted a referendum on their EU membership. Granted, only 48 percent said that they would vote to leave. But the final UK opinion poll last week also suggested that only 48 percent would vote to leave the EU.” In other words, add you should probably add “Quitaly” to your summer lexicon.

MARKETS: Last week, the yield on the 10-year U.S. Treasury note touched a record low of 1.321 percent and the 30-year also checked in with its own record low of 2.098 percent. Yes, that means that if you lend the US government money for THIRTY years, you would receive a paltry 2.1 percent in interest. Meanwhile, stock indexes charged higher on the week, nearing all time highs reached in May 2015. As earnings season begins this week, investors will have to reconcile current prices with a likely fifth straight year-over-year quarterly profit decline.

• DJIA: 18,146, up 1.1% on week, up 4.1% YTD, now above pre-Brexit level (18,011)
• S&P 500: 2130, up 1.3% on week, up 4.2% YTD, 1 point below 05-15 record high
• NASDAQ: 4956, up 2% on week, down 1% YTD
• Russell 2000: 1177, up 2.2% on week, up 3.6% YTD
• 10-Year Treasury yield: 1.366%, a record low close (from 1.45% a week ago)
• British Pound/USD: $1.295, a 31-year low
• August Crude: $45.41, down 7.3% on week, largest percentage loss since Feb
• August Gold:  at $1,358.40, up 1.5% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.25 (from $2.28 wk ago, $2.76 a year ago)

THE WEEK AHEAD:

Mon 7/11:

Alcoa

10:00 Labor Market Conditions

Tues 7/12:

6:00 NFIB Small Biz Optimism Index

10:00 Job Openings and Labor Market Turnover

Weds 7/13:

8:30 Import/Export Prices

2:00 Fed Beige Book

2:00 Treasury Budget

Thursday 7/14:

BlackRock, JPMorgan Chase, Yum! Brands

The Bank of England interest rate decision (the first post-Brexit announcement)

8:30 PPI-FD

Friday 7/15:

Citigroup, U.S. Bancorp, Wells Fargo

8:30 CPI

8:30 Retail Sales

9:15 Industrial Production

10:00 Business Inventories

10:00 Consumer Sentiment

What Does Brexit Mean for MY Money?

Since voters in the United Kingdom decided to leave the European Union last week, US consumers, investors and even travelers are trying to understand the impact of the historic Brexit vote. The question I continue to field is" “What does Brexit mean for MY money?”  Unlike the run of the mill correction that we saw earlier this year, the UK’s exit from the 28-member union is an “exogenous event.” That means that it has come from outside the predicted modeling system that most economists utilize and as a result, can have significant, negative effects on prices. For example, the British pound sterling tumbled to its lowest level against the US dollar in thirty years and global stocks have fallen sharply. Meanwhile, bastions of safety like US treasuries, German bunds and gold are rising. Still, large financial firms are saying that so far, there is no liquidity crisis and markets are functioning well.

While that is indeed good news, let’s not repeat old mistakes. Consider this: nine years ago this month, June, 2007, an unexpected event occurred: investment banking firm Bear Sterns (BS) had to bail out two of its hedge funds that were collapsing because of bad bets on subprime mortgages. At the time, there was no mystery surrounding the risks that were emerging, though 15 months later, there were complaints that the financial media had failed to sound the warning alarms.

In fact, the New York Times said the crisis at BS stemmed “directly from the slumping housing market and the fallout from loose lending practices that showered money on people with weak, or subprime, credit, leaving many of them struggling to stay in their homes. Bear Sterns averted a meltdown this time, but if delinquencies and defaults on subprime loans surge, Wall Street firms, hedge funds and pension funds could be left holding billions of dollars in bonds and securities backed by loans that are quickly losing their value.”

Let’s put that seemingly small BS event from nine years ago into context:

• June 2007: BS Bails out funds
• October 2007: US stock indexes hit all-time highs
• March 2008: BS goes broke and is taken over by JP Morgan Chase
• September 2008: Lehman Brothers Holdings files for Chapter 11 bankruptcy protection; Bank of America purchases Merrill Lynch; the Federal Reserve Bank of New York is authorized to lend up to $85 billion to AIG; the Reserve Primary Money Fund falls below $1 per share; Goldman Sachs and Morgan Stanley become bank holding companies

I am not suggesting that Brexit will cause a financial crisis, but we should carefully consider what dangerous spillover effects could occur. While US banks are better capitalized than they were leading up to the fall of 2008, the UK and European banks do not look nearly as healthy. In the two trading sessions after Brexit, the European Bank index lost about a quarter of its value and UK based banks did even worse.

If you are traveling to the UK or Europe or you enjoy imported cheese and wine, you might be delighted to see the US dollar strengthen. But as the dollar rises, emerging markets like China could come under pressure, echoing what happened in the first six weeks of the year, when global stocks tumbled and US stock corrected. And if European growth slows, its weaker economies (Portugal, Italy, Greece, Spain) will once again be at the heart of sovereign debt questions.

In terms of the US, analysts at Capital Economics say the UK and the EU account for 4 and 15 percent of US exports, respectively. If both regions go into a recession, Brexit could shave 0.2-0.3 percent from the current US growth rate of 2 percent. But estimates can be rocked by emotions. A US-based multinational may hold back on hiring everywhere to see how things shake out post-Brexit. For US exporters, the rising US dollar will create a drag on competitiveness in overseas markets and could potentially trigger lay offs at home. And if non-affected businesses and consumers start to feel unnerved, they too might pull in the reins, causing the US economy to slow down more than anticipated.

Amid all of this uncertainty, anxiety levels are rising, testing the third longest bull market in history. Some may feel butterflies and may even be tempted to sell. Remember that market timing rarely works because even if you sell and manage to steer clear of the bear by staying in cash, you will not be able to reinvest dividends and fixed-income payments at the bottom and you are likely to miss the eventual market recovery. There is clear evidence that when investors react either to the upside or downside, they generally make the wrong decision.

The best way to avoid falling into the trap of letting your emotions dictate your investment decisions is to remember that you are a long-term investor and do not have all of your eggs in one basket. Your diversified portfolio strategy, based on your goals, risk tolerance and time horizon should help you fight the urge to react to short-term market conditions. It’s not easy to do, but sometimes the best action is NO ACTION. And don’t forget that if you are still contributing to your retirement plan or funding your kid’s education fund, take comfort in knowing that you are buying shares at cheaper prices.

If you are really freaked out about the movement in your portfolio, perhaps you came into this period with too much risk. If that’s the case, you may need to trim readjust your allocation. If you do make changes, be careful NOT to jump back into those riskier holdings after markets stabilize. Finally, if you need access to your money in the short-term (within the next 6-12 months), be sure that it is not invested in an asset that can fluctuate.

Investing Amid Market Volatility

It has been a rough year for investors. U..S stock indexes have plunged into correction territory (down 10 percent from the recent peak) for the second time in six months and the big swings are testing every investor’s internal fortitude. The bad start to the year is causing a bit of déjà vu all over again, especially given the dire predictions of some economists and analysts. The current situation is not like 2008, primarily because there is no financial crisis brewing. In fact corporate balance sheets (outside of the energy sector), including those of financial services companies, are in decent shape. Additionally, despite slowdown fears, the U.S. economy, while not strong, is still growing by about 2 percent annually. That means in a year like 2015, you have soft quarters like Q1 and Q4 where there is barely any growth (+0.6 percent and estimated +1 percent) and the recession calls are abundant, and stronger ones like Q2 and Q3, where the economy seems fine (+3.9 percent and +2 percent).

Still, when people hear big banks, like RBS saying “The downside is crystallizing. Watch out. Sell (mostly) everything” it’s hard not to feel butterflies. Although some investors may be tempted to sell, they do so at their own peril. Market timing requires you to make two precise decisions: when to sell and then when to buy back in, something that is nearly impossible. After all, even if you sell and manage to steer clear of the bear by staying in cash, you will not be able to reinvest dividends and fixed-income payments at the bottom and you are likely to miss the eventual market recovery.

In fact, data from Dalbar confirm that when investors react, they generally make the wrong decision, which explains why the average investor has earned half of what they would have earned by buying and holding an S&P index fund. We’ll see if the folks at RBS can beat the odds.

The best way to avoid falling into the trap of letting your emotions dictate your investment decisions is to remember that you are a long-term investor and you do not have all of your eggs in one basket. Try to adhere to a diversified portfolio strategy, based on your goals, risk tolerance and time horizon and do not be reactive to short-term market conditions, because over the long term, this strategy works. It’s not easy to do, but sometimes the best action is NO ACTION.

If you are really freaked out about the movement in your portfolio, perhaps you came into this period with too much risk. If that’s the case, you may need to trim readjust your allocation. If you do make changes, be careful NOT to jump back into those riskier holdings after markets stabilize.

If you have cash that is on the sidelines and are nervous putting it to work as a lump sum, you should take heart in research from Vanguard, which shows that two-thirds of the time, investing a windfall immediately yields better returns than putting smaller, fixed dollars to work at regular intervals.

But, if you are the kind of investor who is less concerned with the probability of earning and more worried about losing a big chunk of money immediately, you may want to stick to dollar cost averaging. Vanguard notes “risk-averse investors may be less concerned about averages than they are about worst-case scenarios, as well as the potential feelings of regret that would occur if a lump-sum investment were made immediately prior to a market decline.”

Stocks Weak, Job Market Strong

The first week of trading was the worst ever for the Dow (down 6.2 percent) and the S&P 500 (down 6 percent), but fear not: the U.S. economy is alive and well! Look no further than to the December jobs report, which came in stronger than expected. The economy added 292,000 jobs and the previous two months were revised higher, which made 2015 the second best year for job creation since the 1990’s. For all of the anxiety over markets and the global economy in 2015, there were 2.65 million jobs created, or a monthly average of 221,000, shy of the 2014 level of 260,000 per month, but solid nonetheless. The unemployment rate remained at 5 percent, the lowest level since the spring of 2008.

The top line results do not mean that all is perfect with the US employment landscape. Indeed, there are still stubborn problems that persist. For example, wages slid by a penny in December and it was only because December 2014 wages were so weak that the year over year increase came in at 2.5 percent. We’ll need to see 2016 data before understanding whether employers are paying more in compensation.

The number of long-term unemployed (those jobless for 27 weeks or more) was unchanged at a still-high 2.1 million in December and has shown little movement since June. Thankfully, there was improvement in the first half of the year, so the number of long term unemployed was down by 687,000 in 2015. It was a similar story for the 6 million part-time unemployed – there was little movement in December but over the year, their ranks shrank by 764,000.

The civilian labor force participation rate, which is the percentage of the working age population in the labor force, edged up in December to 62.6 percent, but too close to 40-year lows for anyone to feel good about it. While about half of the post-recession decline in the rate is due to demographics, the low level indicates that many Americans have left the labor force because they are frustrated.

What does this report tell us about the state of the US economy as we closed out 2015? Although growth is certainly not stellar—GDP likely advanced by 2.25 percent last year, matching the previous three years’ rate—it was strong enough to produce a slew of jobs in a variety of sectors. Annual gains were robust for in professional and business services (+605K), construction (+263K), health care (+480K), and food services and drinking places (+357K).

The weakest parts of the economy are those that are associated with energy and manufacturing. With crude oil down by over 30 percent in 2015, the mining industry lost 129,000 jobs during the year. And with the strength of the US dollar and weakness in Asian economies, manufacturing employment was little changed (+30,000), following strong growth in 2014 (+215,000).

A rotten first week for stocks notwithstanding, fears over the US economy falling over a cliff may be overblown. According to Capital Economics, while growth in the fourth quarter probably slowed to a pokey pace of 1 to 1.5 percent annualized, the stock market is a bit wobbly, the massive surge in employment in December illustrated that “there is no reason to believe that this is the start of a more serious downturn.”

MARKETS: Don’t look now, but the average stock in the S&P 500 is already in a bear market—down 22.6%, according to Bespoke Investment Group.

• DJIA: 16,346 down 6.2% on week, down 6.2% YTD (8/24/15 low: 15,370)
• S&P 500: 1,922 down 6% on week, down 6% YTD (8/24/15 low: 1867)
• NASDAQ: 4,643 down 7.3% on week, up 7.3% YTD (8/24/15 low: 4292)
• Russell 2000: 1121, down 7.9% on week, down 7.9% YTD, down 19.3 percent from June 2015 highs)
• 10-Year Treasury yield: 2.12% (from 2.27% a week ago)
• Feb Crude: $33.16, down 10.5% on week, lowest settle since Feb 2004
• Feb Gold: $1,097.90, up 3.6% on week
• AAA Nat'l avg. for gallon of reg. gas: $1.98 (from $2.00 wk ago, $2.17 a year ago)

THE WEEK AHEAD: No rest for the weary…after the bear took a bite out of investors last week, earnings season begins!

Mon 1/11: Alcoa

Tues 1/12:

10:00 Job Openings and Labor Turnover Survey

Weds 1/13:

2:00 Fed Beige Book

Thursday 1/14:

JP Morgan Chase

8:30 Import/Export Prices

Friday 1/15:

Wells Fargo

8:30 PPI

8:30 Retail Sales

8:30 Empire State Manufacturing Index

9:15 Industrial Production

10:00 Consumer Sentiment

The Fed Fails to Soothe Investors

Citing the slowdown in China and other emerging markets; a strengthening US dollar; global market volatility; and persistently low inflation, the Federal Reserve kept short term interest rates at 0-0.25 percent, which is where they have been for nearly seven years. Although the central bankers believe that these issues are “transitory,” they decided to err on the side of caution and do nothing. If Fed officials meant to soothe investors, they failed, at least in the short term. In the category of unintended consequences, the Fed’s inaction, which was meant to assuage, may have had the opposite effect, by reinforcing investors’ worries about the global economy. Previous fears about China’s growth, which caused the summer stock market correction, went straight to the front burner, despite scant evidence that the global slowdown has hit US shores.

Stocks edged lower the afternoon of the decision and tumbled the following session. Although a rate increase may have done even more damage to stocks, the fact that the Fed did not follow through on a rate increase, after telegraphing it for months, has led some analysts to question they can trust what officials are communicating to the public. Paul Ashworth of Capital Economics wrote “A few months ago it was Greece, now it is China. According to the Fed’s accompanying statement ‘recent global economic and financial developments may restrain economic activity somewhat." [His emphasis] In another couple of months it could be the debt ceiling or who knows what else that is generating the uncertainty.”

While the status of the world’s economy may be uncertain now, one thing is clear: median household income in the US is stuck. With all eyes on the Fed, few paid attention to the mid-week release of a Census Bureau report, which showed that median household income was $53,657 in 2014, an $805 decrease from 2013. This is the third consecutive year that the annual change was not statistically significant, following two consecutive annual declines.

More sobering is that when adjusted for inflation, the median household is 6.5 percent lower than it was in 2007 ($57,357), on the eve of the recession and 7 percent lower than it was 15 years ago in 2000 ($57,724), prior to the previous recession. (Income data from Sentier Research are a bit better, but show a similar trend—the median household income in July was 2.6 percent lower than when the recession started and 3.8 percent below January 2000 levels.)

Median income peaked in the mid-1990’s and since then, has gone nowhere fast. Despite hopes for overall wage gains in the current recovery, most of the progress on incomes has been clustered around the top 5 percent of all earners. The gap between high earners and low earners has increased 5.9 percent from 1993, the earliest year available for comparable measures of income inequality.

I hate to end on such a sour note, so perhaps wages will soon start to show improvement across all income levels. Chairman Janet Yellen said that the pace of job gains has been “solid” and fed officials raised their growth forecasts for this year, so maybe, just maybe, the income numbers will start to pick up. Even if they don’t, a sunnier outlook in the fourth quarter is likely to prompt the Fed to raise rates by a quarter-point, either in October or December. 

MARKETS:

• DJIA: 16,384 down 0.3% on week, down 8% YTD
• S&P 500: 1,958 down 0.2% on week, down 4.9% YTD
• NASDAQ: 4,827 up 0.1% on week, up 2% YTD
• Russell 2000: 1163, up 0.5% on week, down 3.4% YTD
• 10-Year Treasury yield: 2.19% (from 2.19% a week ago)
• October Crude: $44.68, down 0.01% on week
• December Gold: $1,137.80, up 3.1% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.30 (from $2.35 wk ago, $3.36 a year ago)

THE WEEK AHEAD:

Mon 9/21:

8:30 Existing Home Sales

Tues 9/22:

Weds 9/23:

Thurs 9/24: 8:30 Durable Goods Orders

10:00 New Home Sales

5:00 Janet Yellen Speaks at UMass/Amherst

Fri 9/25:

8:30 Q2 GDP (final reading)

10:00 Consumer Sentiment