Don't Fear The Fed
Current Market Analysis
Last Month's Results
Trends To Watch
What I'm Thinking
News and Notes
Current Market Analysis
As of the close of business Friday,
the Dow Jones Industrial Average stood at 17,245, which is essentially
the same as when I wrote to you last month. That belies the enormous moves,
up and down, that have happened in the interim. Indeed, the
#DJIA dropped by 665 points, or 3.7%, just last week thanks in part to
questions about upcoming Fed moves and plunging oil prices. I wrote
last month that I thought the Fed had made it pretty clear that it
would not adjust their short-term lending rates in 2015, which
would result in a year-end rally. Now, thanks to the better
than expected employment report (see below) there is a greater belief
that the Fed will indeed hike the lending rate in December, and that's
partly what tanked the market this week. So I'll say again what I've
said before: slightly higher rates are not a bad thing, and will not
negatively impact our economy so there's no reason for the sell
Looking at the
chart of the #DJIA
we see that the index staged a powerful rally in late October and early
November before rolling over and plunging last week. As a result, the
index is now testing support at around 17,100. If it holds, look for a
final year-end rally.
Index continues to show some signs of life as it struggles to move
above support above 8,050, a level around which the index has traded
for the past few months. Again, the question is whether or not that
support level will hold.
The Dow Jones
Average has been churning in a range between 610 and 530 for most of
this year as the utility sector continues to battle the specter of
looming interest rate increases, which are widely believed to hurt the
earnings of regulated utilities. I just think the whole debate is much
ado about nothing. A mild rate increase will do little to hurt this
sector, and large parts are unregulated and can therefore adjust their
prices to match any possible interest rate moves. The other factor is
that higher interest rates will make bonds more appealing relative to
utility stocks, but that argument too just doesn't hold water as bond
yields won't approach dividend yields for many years to come.
After dropping back to around 2.0%, the yield on
treasury bond has moved higher again thanks to the belief that
the Fed will raise rates at their December meeting. Still, the yield
remains between 2.0% and 2.5%, where it has stayed for most of the past
After three down months in the last four, October
exploded higher, bringing the year-to-date results into the black.
There were strong gains across the board in every sector except bonds.
Large-cap stocks did particularly well, led by the tech sector, which
surged almost 10%. Growth stocks also remain the best performing stocks
year-to-date. Value stocks, especially the small ones, are clearing
lagging behind. With six weeks left in the year, it's going to be close
as to whether the market ends the year in the black or the red.
Name of Index
Dow Jones Industrial Average
Large-cap tech stocks
Russell 1000 Growth
Large-cap growth stocks
Russell 1000 Value
Large-cap value stocks
Russell 2000 Growth
Small-cap growth stocks
Russell 2000 Value
Small-cap value stocks
Europe, Australia, Far East
US government bonds
Barclays High Yield
High-yield corporate bonds
* Return numbers
include the reinvestment of dividends
According to the Department of Labor, the
figure for seasonally-adjusted initial jobless claims for the week
ended November 7 was 276,000, unchanged from the prior
week, but about 21,000 higher than the prior month's figure.
four-week average of 267,750 was slightly higher
than the tally from a month ago. About 2.17 million
people continue to collect unemployment insurance, about 140,000 more
than last month.
a hugely disappointing result in September, the non-farm payroll
employment report in October was a massive surprise to the upside as
271,000 jobs were gained in the
month, while revisions added back 12,000 jobs to the August
and September totals. The household survey
reported that the unemployment rate fell to 5.0% while the
labor force participation rate remained at an historic low of 62.4.
Average hourly wages for blue collar workers moved to a new high of
the average work week inched up to 33.7 hours, which is still below the
high for the year set in January.
7.9 million workers were still being counted as
unemployed and 2.1 million people remained unemployed longer
than 27 weeks. The seasonally
adjusted number of people who could only find part-time work dropped to
5.8 million while the number of marginally attached workers remained at
1.9 million. The number of people holding multiple jobs
rose to a new annual high of 7.6 million. All of this helped the
"underemployment" rate fall to a very low 9.8%. This month was a big
reversal from the desultory report last month. And it may be just good
enough to give the Fed grounds to begin raising rates in December,
although I still think they'll wait until next year.
Congressional Budget Office (CBO) estimated that on a net present value
basis, the Treasury reported a budget deficit of $137
billion in October, about $16 billion more than the shortfall recorded
in the same period
The National Association of Homebuilders/Wells Fargo Confidence
Index rose three points to 64 in October, a level last achieved in late
October's three-point up tick, builder confidence has been holding
steady or increasing for five straight months. This upward momentum
shows that our industry is strengthening at a gradual but consistent
pace," said NAHB Chief Economist David Crowe. "With firm job creation,
economic growth and the release of pent-up demand, we expect housing to
keep moving forward as we start to close out 2015."
The Census Bureau reported that privately owned housing starts
were 6.5% higher in September, after falling the prior two
months, rising to
an adjusted annual rate of 1,206,000 units, which was 17.5%
than a year ago. New building permits
from the prior month but remained 4.7% higher than the
year before. This is a mixed message, but still relatively positive.
The Census Bureau reported that on a seasonally
adjusted annualized basis 468,000 new homes
were sold in September, down a whopping 11.5% from August
but up a slim 2.0% from a year ago. This is the lowest number of new
homes sold this year. The estimate of the number of homes for sale
was 215,000, representing a widened 5.8 months of inventory at the
current rate of sales. The median sales price was $296,900, leaving it
just above the 12-month moving average price of $294,592.
The National Association of Realtors reported that on a seasonally
adjusted annualized basis, 5.55 million existing homes
were sold in September, an increase of 250,000, or 4.7%, from August,
and was 8.8% higher than a year ago. The estimate of homes for
sale is 2.21 million, which represents 4.8 months of inventory
at the current rate of sales. The average selling price
was $221,900, off the high levels recorded in June and
above the rising 12-month average of $216,600. Overall, the housing
market appears to be fairly robust.
According to the Institute for Supply Management (ISM), economic
activity in the manufacturing sector dipped (for the fourth straight
month) to 50.1 in September, barely registering growth for the
27th straight month. The ISM index of non-manufacturing activity rose
to 59.1, which signaled
growth in the service sector for 69 consecutive months. It's clear the
reason wages aren't moving is all of the job gains are in the
lower-paying service side of the economy. As I've asked
before, does this portend "the end
of jobs" in America, as higher wage jobs are outsourced to either
robots or cheaper countries?
Conference Board reported that its index of Leading Economic
Indicators (LEI) declined 0.2% in
September, the first drop of the year. "Despite
September's decline, the U.S. LEI still suggests economic expansion
will continue, although at a moderate pace," said Ataman Ozyildirim,
Director of Business Cycles and Growth Research at The Conference
Board. "The recent weakness in stock markets, the manufacturing sector
and housing permits was offset by gains in financial indicators, and to
a lesser extent improvements in consumer expectations and initial
claims for unemployment insurance. The U.S. economy is on track for
moderate growth of about 2.5 percent in the coming quarters, despite
the mixed global economic landscape."
According to the "advance" estimate by the Bureau of Economic Analysis,
GDP increased at an annual rate of only 1.5% in Q3 2015, down sharply
from the 3.9% rate reported in Q2. This was still better than the
decrease of 0.2% in Q1, but below the 2.2% increase in Q4 2014.
And it remains well below the 5.0% and 4.6% growth rates in Q3 and
Q2 2014, respectively. Clearly this is not the strong growth
that anyone is hoping for, and it may mean the Fed will hold
rates at zero until next year.
According to the BLS, the seasonally adjusted Consumer Price Index
for all Urban Consumers (CPI-U) decreased 0.2% in September,
and was essentially unchanged over the past 12 months. If you
strip out food and energy, CPI rose 0.2% as energy prices fell in
food gained sharply. It is clear to me, and it would seem to the Fed as
well, that economic growth is stagnant right now.
The Conference Board's Consumer Confidence Index
dropped in October to 97.6. "Consumer
confidence declined in October, following September's modest gain,"
said Lynn Franco, Director of Economic Indicators at The Conference
Board. "Consumers were less positive in their assessment of present-day
conditions, in particular the job market, and were moderately less
optimistic about the short-term outlook. Despite the decline, consumers
still rate current conditions favorably, but they do not anticipate the
economy strengthening much in the near-term."
bouncing off support in mid-October, the price of the dollar
index has zoomed higher, attempting to pierce resistance at 100. This
has had a very negative impact on commodity prices, like oil (see
below). Clearly the dollar
has strengthened as sentiment supporting a Fed rate hike grew.
How much stronger can it get? Recent history would suggest the index
will dip again.
chart of the price of West Texas Crude is just ugly as the price has
fallen below interim support at $42.50 and looks to be headed toward
major support at $37.50. A price below $40 per barrel could be
devastating for the energy complex in this country, not to mention oil
producing countries around the world.. As I said last month, it will be
hard to make a bull case for a meaningful recovery in the price of oil
shows signs of sustained growth, and until either supply falls to meet
demand or demand rises to meet supply. So far now, I'm not making any
new investments in this sector.
isn't a pretty picture either, as the price of gold has collapsed in
the past month and is in danger of falling below major support just
above $1,075. Every time the price of gold has moved higher this year
the rally has been quickly snuffed, sending the price lower. Last
month, as the price was moving higher, I wrote that I couldn't make the
case for a lasting bull rally in the shiny
metal and that seems to be the case.
surging dollar, and a faltering global economy, has simply crushed
the price of copper, which has fallen to levels not seen since
the depths of the financial crisis. I wonder if the Fed is looking at
failing to break to a new record high earlier this month, the
price of the Nasdaq Composite is falling back towards support at 4,900.
This is simply part of a bigger market swoon. I expect a quick
financial sector is one of the few areas of the market to benefit from
the expectation of a Fed rate increase. Note how the XLF has jumped
about 10% in the past two months, right after I wrote that the sector
was a "buy". Let's see if the rally can move the index above resistance
for a brief surge in August, the price of the housing index
has remained in a fairly tight range (purple dotted lines) for most of
the year, making it hard to profit from investments in the sector. Note
a flat MACD and RSI, and moving averages that have converged perfectly.
There's no volatility here right now.
index for developed international markets has remained in the bottom
part of its trading range for the past four months. Given how little
global economic growth is in evidence right now, it's hard to make a
case that this index will move much higher any time soon.
the breakout in the Shanghai
Index real? Is this the beginning of a real rally, or simply another
sucker's bet? Personally, I think their market is a mess and should be
avoided, regardless of
whether or not the index rallies in the short term.
forming a double bottom from late August to early October, the
sentiment index surged higher over the past month. In my September
letter I wrote
that "I'm not sure when sentiment will turn, and clearly I've been
wrong with my recent "buy" signals, but things are setting up for a
major rally sometime soon. And when it happens, it should be
powerful." That was certainly the case. Now we'll have to wait and see
if the rally has legs.
price of the volatility index, the VIX, is moving higher right
now, heading up towards the higher end of the primary trading range. I
don't think there's anything to worry about right now, nor is it the
right time to start buying just yet.
What I'm Thinking and
my last two newsletters I suggested that the stage was set for the next
big rally, and that I expected further gains
in November and December, enabling the market to finish in the
black by year-end. I was feeling pretty good about that prediction
until last week, when the broad market headed lower. Still, I believe
we've got another rally coming up which will indeed allow the market to
finish the year higher than it started.
though I've predicted many times that the Fed won't raise rates until
next year, I kind of wish they'd do it already and get it over with.
Rates have been kept at an artificially low level for far too long,
punishing savers and people on fixed incomes. Enough is enough. The Fed
should bump their lending rate up by 25 basis points, ending all the
speculation. Then they should say that they expect to leave the rate
alone until there is clear evidence of economic growth. That certainty
would likely send the market higher and quiet all of the useless, and
almost daily, speculation of when will the rate increase finally
of the close of business on Friday, I've completed about 95% of all
anticipated trades for the year on behalf of my clients. Barring
anything unforeseen events happening in the market over the next six
weeks, I'll be pleased to begin 2016 with my portfolios as
they are currently constituted. I'm very comfortable with my current
holdings and I believe my clients are well positioned for whatever the
market will throw at us in 2016.
past weekend I was thrilled to celebrate one year of marriage to my
amazing wife Kathiryn. We shared a great meal, highlighted by a
spectacular bottle of wine. I'm so blessed to have met her four years
and four months ago and I'm looking forward to at least another 49 more
anniversary celebrations. I love you honey.
late October Kathiryn and I attended two great fundraising events in
support of the Food Bank for Westchester and Cluster, Inc. Both
charities support people in need in our local communities. I hope each
and every one of you find a way to give back, whether it be with your
money or your time. I believe that it's a moral imperative that those
who have the most find a way to help out those who have the greatest
as the days grow shorter and colder I'm ready to head to
warmer climes. It's time to sit in the sun, read some books
and begin to recharge my batteries. Bon voyage.
it for now. I look forward to writing to you
for the final time this year next month.
and Views", Copyright, Werlinich Asset Management, LLC and
www.waminvest.com. All Rights Reserved.