Movement Forward, Can It Last?

The week ended with new highs on the S&P 500 and Dow 30 indices, 2032 and 17574, respectively. Oil ended the week at $78.62 and the ten year T at 2.314%. http://www.marketwatch.com/

The Republicans emerged from the elections controlling both the House and the Senate. The number of Republican governors increased by 3. http://graphics.wsj.com/midterm-election-results-2014/ Regarding "pro business" and "smaller government", these shifts bode well.

Fed Chair Yellen indicated that shifts in the Fed's stance on interest rates (i.e., increasing the Fed Funds rate in 2015) could potentially cause volatility in the global markets. She indicated they are working hard to communicate effectively. http://www.cnbc.com/id/102132230#. With that noted, EACH word that is spoken by Chair Yellen likely has meaning, and here is one quote from this week: "As employment, economic activity and inflation rates return to normal, monetary policy will eventually need to normalize too, although the speed and timing of this normalization will likely differ across countries based on differences in the pace of recovery in domestic conditions," Yellen said.

Looking at the three drivers identified by Yellen as it relates to the US:

Employment - As shown in the chart below, for October, the Employment Cost Index rose +0.7% in Q3 vs. (E) +0.5%, and is up +2.2% year-over-year. Thus, it is running only slightly ahead of inflation for the year. Employee compensation will not drive improved quality of life at this rate of increase.

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Also, the US created 214k new jobs in October, below expectations and below the 256k created in September. But "headline" unemployment rate dropped to 5.8%, the lowest since July 2008. The labor force participation rate, the percentage of Americans employed, increased to 59.2% in October, up from 59% on September, though still close to the lowest levels in many years. http://www.foxbusiness.com/economy-policy/2014/11/07/us-economy-adds-214k-jobs-unemployment-rate-falls/

Average hourly earnings of workers increased by only 0.1% in October over September and was up 2.0% year over year. http://www.bls.gov/news.release/empsit.nr0.htm (As shown in the chart above.)

There are those who consider that the recent decline in the "short term unemployed rate", which indicates how quickly newly unemployed are getting back to work and is now 100 bps below its long term average, may indicate that hourly earnings may begin to increase at rates greater than current inflation. (The long-term unemployed, those out of work for 27 weeks+, is 2x its historical average, still.) http://blogs.wsj.com/economics/2014/11/05/could-falling-short-term-unemployment-finally-spark-wage-growth/

Here is an interesting look at 5 other relevant employment statistics: http://www.npr.org/2014/11/07/362351935/forget-the-unemployment-rate-look-at-these-5-economic-indicators Clearly, nothing is clear cut.

Economic Activity - The national report from the Institute for Supply Management, the publisher of the ISM indices, reported for the non-manufacturing sectors that overall growth continued in October, but at generally slower rates/levels than in September. http://www.ism.ws/ismreport/nonmfgrob.cfm

For the manufacturing sectors, the ISM showed the 17th consecutive month of expansion. The indices quoted in the report all showed increasing rates of growth. http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942 Reuters has reported that US factory activity is equivalent to its 3+ year high. http://www.reuters.com/article/2014/11/03/us-usa-economy-markit-manufacturing-idUSKBN0IN18E20141103

Inflation - Current quoted inflation rate is 1.7%, which is below the Fed's targeted 2% rate. http://www.usinflationcalculator.com/inflation-news/ Remembering, of course, that price is where supply and demand meet, we can see that there appears to currently be a reasonable overall match up. The questions are (1) how much longer can this continue? (2) What is the likelihood of deflation, as this is a major risk when it does occur? (3) Are these numbers accurate? (I will only comment that "Statistics are statistics.") See http://www.shadowstats.com/alternate_data/inflation-charts and http://www.clevelandfed.org/research/data/us-inflation/cpi.cfm and http://www.clevelandfed.org/Research/data/US-Inflation/chartsdata/index.cfm?DCS.nav=Local

Other relevant news bites:

3rd Quarter Earnings for most S&P 500 companies have been reported. 81% of those reporting beat expectations, the highest rate in 4 years. http://www.msn.com/en-us/money/topstocks/sandp-500-earnings-beating-estimates-at-fastest-pace-in-four-years/ar-BBd3b1y

Both revenues and earnings on average were higher than expected. Earnings on average increased by 6.7% and revenues increased by 4.0%. http://www.zacks.com/commentary/35230/q3-earnings-season-winding-down

There are members of the Fed who continue to voice concern over risks of raising rates in 2015. http://blogs.wsj.com/economics/2014/11/05/feds-kocherlakota-raising-rates-in-2015-would-be-a-mistake/

Internationally: This week both Japan and the ECB continued to demonstrate their drive to increase economic stimulus. http://www.bloomberg.com/news/2014-11-06/draghi-reinforces-ecb-stimulus-momentum-to-assuage-investors.html

So where does that leave us?

With the improving economic environment and the stimulus in Europe and Asia, we believe the impact of the end of QE3 and the fear of managed rate hikes in mid to late 2015 will be limited. As we saw at the end of the mid-month pullback, the Fed members stepped in to remind the markets that they were watching and willing to support the economy's continued growth.

There are numerous debates running re the impact of lower oil and gas prices on consumers, manufacturers, E&P companies, refiners and transport. As always, vast generalizations can be made, but specific and detail evaluations need to be done at company level. Between hedging contracts, take or pay arrangements, various contractual commitments and negotiations, generalization made by the market can provide opportunities.

We have also seen volatility over the last 4 weeks as companies may have marginally met or missed expected revenues,earnings, margins, etc. Stocks sometimes increase on expectations and decline on news. We are working are to ferret out opportunities created, as well as identifying and monitoring risk.

Please note and remember that Tuesday is Veteran’s Day. The perfect day to say thank you to our Vets! Also, note that the stock markets will be open, CapitalRock will be hard at work, but the bond markets will be closed and many banks may be closed.

Please call or email with any questions or for more information. As we head into Naples' "Season" with neighbors returning to town and friends from the North coming to visit, it would be our privilege and pleasure to meet with family members, friends and neighbors to share second opinions, thoughts and ideas to help their financial success and their mental and financial comfort.

Have a great weekend and week!

#qe3 #economy #rates #employment