In this month’s recap: the Federal Reserve sees no rate hikes in 2019, investors watch Treasury yields with interest, hiring suddenly weakens, home sales pick up, and the price of oil tops $60.
THE MONTH IN BRIEF
The Federal Reserve altered its outlook on interest rates in March, and the stock and bond markets certainly took notice. Both the Fed and the European Central Bank communicated that they saw economic growth moderating. Even so, the S&P 500 managed to advance 1.79% for the month. Trade talks continued between the U.S. and China, but without much in the way of real developments. New reports revealed a sudden slowdown in hiring and only mild inflation. Existing home sales accelerated, crude oil gained value, and the Brexit saga took yet another turn.1
DOMESTIC ECONOMIC HEALTH
Without a doubt, the major story of the month was the Federal Reserve’s newly dovish stance on monetary policy. The central bank had forecast two quarter-point rate hikes for 2019 in late 2018. On March 20, it held rates steady while projecting only one quarter-point hike through 2021. In announcing this dramatic pivot, the Fed also lowered its estimate of 2019 U.S. economic expansion to 2.1% from the prior 2.3%. Talking to the media after the release of the March 20 policy statement, Fed Chairman Jerome Powell remarked that the “growth of economic activity has slowed,” adding that Fed policymakers saw “some weakening” in the economy, but no signs of a recession.2
More than a few investors interpreted the Fed’s revised outlook as a commentary on the near future. Demand for longer-term Treasury bonds increased, sending their prices higher and their yields lower (bond yields fall when bond prices rise and vice versa). On March 22, the yield on the 2-year Treasury exceeded the yield on the 10-year Treasury. Analysts call this an “inverted yield curve,” and when it happens, the financial media is quick to point out that it could signal a weaker economy ahead. This is open to debate, but rising demand for longer-term Treasuries does imply less appetite for risk in the financial markets.3
By March 26, the CMEGroup’s FedWatch Tool – a gauge of market expectations about interest rate changes – gave the Fed a 71.7% chance of making an interest rate cut by the end of the year, with a 57.7% chance of a cut by September.4
The latest employment report from the Department of Labor showed payrolls expanding by just 20,000 net new hires in February. Even so, the main jobless rate fell 0.2% to 3.8%; the U-6 rate, including the underemployed, dropped 0.8% to 7.3%. (Both reductions could reflect furloughed federal workers returning to their jobs.) Also worth noting: hourly wages were up a nice 3.4% year-over-year.5
Inflation remained muted. The latest Consumer Price Index (February) showed just a 1.5% annualized gain, hardly the kind of pressure that begs action from policymakers.5
On Main Street, there was a slip in consumer confidence. The Conference Board’s monthly index came in at 124.1 for March – a good reading, but well below the 131.4 mark of a month earlier. The latest available data on consumer spending showed a mere 0.1% gain in January.6
A much-watched index tracking the U.S. manufacturing sector showed solid growth, but a slightly slower pace of business activity. The Institute for Supply Management’s purchasing manager index for the factory sector fell from 56.6 in January to 54.2 in February.5
Last month, the federal government downgraded its estimate of fourth-quarter gross domestic product. The final estimate was 2.2%, revised from 2.6%.6
GLOBAL ECONOMIC HEALTH
As March ended, a positive note was sounded in the trade negotiations between the U.S. and China. Secretary of the Treasury Steven Mnuchin tweeted that “constructive” discussions were taking place, to be continued in April in Washington, D.C.7
The Brexit did not occur on March 29. Instead, the United Kingdom’s Parliament rejected Prime Minister Theresa May’s (revised) Brexit plan on that day, for a third time. The European Union had earlier granted the United Kingdom a short-term extension of the Brexit deadline; the revised deadline, April 12, now looms large. If Parliament cannot agree on a Brexit deal at the start of this month, May will be left two choices. She can try to carry out a “hard” Brexit by April 12, a move that has little apparent support in Parliament. Alternately, she can ask the E.U. to extend the Brexit deadline again, which is hardly a given.8
On the continent, the European Central Bank decided to bring back some of the stimulus measures it had announced an end to in 2018. In its latest policy announcement, the ECB said that it would hold off on raising interest rates until at least 2020. (It last raised interest rates at the start of this decade.) Elsewhere, the Organization for Economic Cooperation and Development (OECD) forecast 2019 growth of less than 1% for the economies of Germany, Japan, and the United Kingdom, and growth of only 1% for the 19-country Eurozone.9
WORLD MARKETS
Last month, some of the best-performing foreign indices were in the emerging markets. China’s Shanghai Composite advanced 5.09% in March, and India’s twin benchmarks outgained it: the Nifty 50 soared 7.70%; the Sensex, 7.82%. Interestingly, the United Kingdom’s FTSE 100 rose 2.89%; France’s CAC 40 added 2.10%. Taiwan’s TWSE 50 improved 2.19%. Two other indices were basically flat for the month: the German DAX eked out a 0.09% advance; the Australian All Ordinaries, a 0.14% gain. MSCI’s Emerging Markets and World indexes respectively improved 0.68% and 1.05%. Three indices took notable losses: South Korea’s Kospi lost 2.49%, Malaysia’s KLSE Composite fell 3.75%, and Argentina’s Merval retreated 4.62%.10,11
COMMODITIES MARKETS
Unleaded gasoline had another great month, rising 14.26%. That said, all eyes were on oil. WTI crude regained the $60 level, advancing another 5.12% in March and wrapping up the month at a price of $60.18 on the New York Mercantile Exchange. In contrast, natural gas lost 4.77% in March; heating oil, 2.91%.12
The U.S. Dollar Index improved 1.09% last month. All four major metals retreated: gold took a 1.65% loss, silver fell 2.89%, platinum retreated 2.77%, and copper ceded 0.56%. At the closing bell on March 29, an ounce of gold was worth $1,290.80 on the Commodity Exchange of the NYMEX. The March gains among major crops: cotton, 4.19%; cocoa, 2.14%; wheat, 1.44%. The March losses: coffee, 1.20%; corn, 1.31%; soybeans, 1.48%; sugar, 1.57%.12,13
REAL ESTATE
In a burst of good news for the housing market, existing home sales greatly increased. The National Association of Realtors announced a February gain of 11.8%. It was the best month for residential resales in more than three years. NAR chief economist Lawrence Yun credited a “powerful combination of lower mortgage rates, more inventory, rising income, and higher consumer confidence.” Even so, sales were still down 1.8% year-over-year, and the NAR pending home sales index was 1.0% lower in February. The median sale price of a single-family residence was $249,500 in the second month of 2019, up 3.6% from February 2018.6,14
New home sales also improved in February. They were up 4.9% month-over-month, albeit 0.6% year-over-year.7
As the NAR noted, mortgage rates have declined of late. Freddie Mac’s Primary Mortgage Market Survey showed the average interest rate for the 30-year, fixed-rate mortgage at 4.35% on February 28; in the same survey, the 15-year FRM had a mean interest rate of 3.77%. By March 28, the 30-year FRM bore an average interest rate of just 4.06%, while a 15-year FRM had an average interest rate of 3.57%.15
T I P O F T H E M O N T H In view of possible extended care needs, you may want to look at a hybrid life insurance policy that can potentially give you a pool of money to pay those costs. Unused benefits may be paid to the policy’s beneficiaries after your death.
LOOKING BACK, LOOKING FORWARD
All three big U.S. equity market benchmarks rose in March – to varying degrees, with the blue chips barely improving. The Nasdaq Composite settled at 7,729.32 on the last trading day of the month (March 29); the S&P 500, at 2,834.40; the Dow Jones Industrial Average, at 25,928.68. The Russell 2000 posted a one-month loss of 3.14%, declining to 1,539.78. The CBOE VIX, the index showing expectations of stock market volatility, ended March at 13.70, advancing 0.96%.1,16
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends.
10-year Treasury yield = projected return on investment, expressed as a percentage, on the U.S. government’s 10-year bond.
Currently, Wall Street’s collective eye is focused not only on the upcoming earnings season, but also on domestic and global growth. Dovish notes sounded by the Fed and the ECB and declining bond yields are signaling reduced expectations of economic vitality. Perceptions of the market and the economy may be shifting as a consequence and impacting bullish sentiment. All of this may pose a significant challenge for the stock market this month, and earnings results may or may not have the power to alter such perceptions. This is a good time to remember that markets go through cycles, and over the long term, you will experience many of them as an investor. There will always be ups and downs; your investment approach takes them into account, plus your time horizon. Whether April turns out to be spectacular, disappointing, or somewhere in between, your long-run objectives should remain your focus.
Q U O T E O F T H E M O N T H
“He who knows that enough is enough will always have enough.”
Laozi
UPCOMING RELEASES
April’s major scheduled economic news releases include: ADP’s March private payrolls report and the Institute for Supply Management’s March reading on business activity in the service sector (4/3), the latest jobs report from the Department of Labor (4/5), March consumer inflation (4/10), March wholesale inflation (4/11), the initial April consumer sentiment reading from the University of Michigan (4/12), March retail sales (4/16), March housing starts (4/17), the Conference Board’s latest leading indicator index (4/18), March existing home sales (4/22), March new home sales (4/23), the latest monthly snapshot of hard goods orders (4/25), the final April University of Michigan consumer sentiment index (4/26), March consumer spending (4/29), and a new Conference Board consumer confidence index and March pending home sales (4/30). The Federal Reserve makes its next announcement on interest rates on May 1.
T H E M O N T H L Y R I D D L E
It is filled with garb, and the price is free; you can take whatever you like and return what you don’t need. What is it?
LAST MONTH’S RIDDLE: What has four legs, bears weight without complaint, and never makes a peep when food is brought its way?
ANSWER: A table.
KeyStone Financial Team may be reached at 920-969-0717 or admin@kfgwi.com. www.kfgwi.com
Know someone who could use information like this? Please feel free to send us their contact information via phone or email. (Don’t worry – we’ll request their permission before adding them to our mailing list.)
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs, or expenses. Investors cannot invest directly in indices. All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor's 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world's largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The Nifty 50 (NTFE 50) is a well-diversified 50-stock index accounting for 13 sectors of the Indian economy. It is used for a variety of purposes such as benchmarking fund portfolios, index-based derivatives and index funds. The BSE SENSEX (Bombay Stock Exchange Sensitive Index), also-called the BSE 30 (BOMBAY STOCK EXCHANGE) or simply the SENSEX, is a free-float market capitalization-weighted stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE). The FTSE 100 Index is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The FTSE TWSE Taiwan 50 Index is a capitalization-weighted index of stocks comprises 50 companies listed on the Taiwan Stock Exchange developed by Taiwan Stock Exchange in collaboration with FTSE. The DAX 30 is a Blue-Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. Established in January 1980, the All Ordinaries is the oldest index of shares in Australia. It is made up of the share prices for 500 of the largest companies listed on the Australian Securities Exchange. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The MSCI World Index is a free-float weighted equity index that includes developed world markets and does not include emerging markets. The Korea Composite Stock Price Index or KOSPI is the major stock market index of South Korea, representing all common stocks traded on the Korea Exchange. The FTSE Bursa Malaysia KLCI Index comprises of the largest 30 companies by full market capitalization on Bursa Malaysia's Main Board. The MERVAL Index (MERcado de VALores, literally Stock Exchange) is the most important index of the Buenos Aires Stock Exchange. The U.S. Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.
CITATIONS:
1 - barchart.com/stocks/indices?viewName=performance [3/29/19]
2 - cbsnews.com/news/fed-rate-hikes-none-in-2019-federal-reserve-projects-no-rate-hikes-slower-growth-this-year/ [3/20/19]
3 - bloomberg.com/news/articles/2019-03-22/u-s-treasury-yield-curve-inverts-for-first-time-since-2007 [3/22/19]
4 - investors.com/market-trend/stock-market-today/dow-jones-futures-fed-rate-cut-odds-inverted-yield-curve/ [3/26/19]
5 - investing.com/economic-calendar/ [3/29/19]
6 - marketwatch.com/tools/calendars/economic [3/29/19]
7 - marketwatch.com/story/us-stock-futures-rise-as-wall-street-looks-to-wrap-up-week-month-and-quarter-with-gains-for-most-indexes-2019-03-29 [3/29/19]
8 - nytimes.com/2019/03/29/world/europe/brexit-britain-theresa-may.html [3/29/19]
9 - nytimes.com/2019/03/07/business/ecb-european-economy-stimulus.html [3/7/19]
10 - markets.on.nytimes.com/research/markets/worldmarkets/worldmarkets.asp [3/29/19]
11 - msci.com/end-of-day-data-search [3/29/19]
12 - money.cnn.com/data/commodities/ [3/29/19]
13 - marketwatch.com/investing/index/dxy/historical [3/29/19]
14 - nar.realtor/newsroom/existing-home-sales-surge-11-8-percent-in-february [3/22/19]
15 - freddiemac.com/pmms/archive.html [3/28/19]
16 - markets.wsj.com/us [3/29/19]
17 - markets.wsj.com/us [12/31/18]
18 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldAll [3/29/19]
In this month’s recap: domestic and foreign shares (and many commodities) advance, as two major investor anxieties ease for the moment.
THE MONTH IN BRIEF
You could say that Wall Street breathed a collective sigh of relief in February. Investors were encouraged by new developments in U.S.-China trade negotiations and by the minutes from the Federal Reserve’s most recent policy meeting. On Main Street, consumer confidence improved, while consumer spending kept pace. Home sales declined once more, but so did mortgage rates. Optimism about the potential of the markets seemed to outweigh pessimism about possible economic deceleration. The S&P 500 gained 2.97% for the month.1
DOMESTIC ECONOMIC HEALTH
All month, investors were focused on the possible impact that higher taxes on a wide range of Chinese imports might have on the economy. Those tariffs were scheduled to take effect at the start of March. Fortunately, hints emerged that the U.S. and China were making progress toward a deal to postpone their enforcement. As the month went on, discussions between trade negotiators picked up, and President Trump saw “substantial progress” being made. On February 24, he said that he would push back the March 1 deadline for the implementation of the new tariffs, without mentioning a new cutoff date. On February 28, U.S. trade officials announced that the deadline was suspended “until further notice.”2,3
The transcript from the January Federal Reserve policy meeting arrived at mid-month, with the hint that interest rate hikes might be paused. Fed policymakers felt that leaving the benchmark interest rate in its current range (2.25%-2.5%) “posed few risks at this point,” but left a door open to resuming the cycle of tightening if the economy gathered more steam. Additionally, “almost all” participants on the Federal Open Market Committee favored ending the central bank’s long-running reduction of its huge securities portfolio before 2020.4
A great jobs report arrived in February. During January, employers added 304,000 net new jobs. The unemployment rate did tick up to 4.0%; the U-6 jobless rate, which also counts the underemployed, interestingly rose 0.5% to 8.1%. Wages increased 3.2% during the 12 months ending in January.5
Both of the key U.S. consumer confidence indices rose during the month. The Conference Board’s gauge rebounded from a (revised) 121.7 January mark, all the way to 131.4, and the University of Michigan’s consumer sentiment index went from a 91.2 final January level to a 93.8 final February reading.5
Was the economy at risk of cooling off? Some of the most-watched economic indicators seemed to suggest as much. Consumer spending, as an example, had declined by 0.5% in December – not surprising given the 1.2% December fall for retail sales. Inflation was tepid, also: the Consumer Price Index advanced only 1.6% during the 12 months ending in January; though, the pace of core inflation (minus food and energy prices) reached 2.2%.5,6
As the month ended, the Bureau of Economic Analysis released its initial estimate of fourth-quarter growth: 2.6%, down from 3.4% in Q3. (The economy grew 2.9% across 2018.) Industrial output retreated 0.6% in January, and manufacturing output, 0.9%. On the bright side, the Institute for Supply Management’s Purchasing Manager Index, measuring the pace of the nation’s factory activity, improved 2.3 points in January to 56.6. (ISM’s service sector PMI went in the other direction, however, dipping 1.3 points to 56.7.)5,7
GLOBAL ECONOMIC HEALTH
The Brexit drama took yet another turn in late February. The March 29 deadline for the United Kingdom’s planned departure from the European Union remained, but a March 12 vote was scheduled in Parliament, giving lawmakers a choice to accept or reject a revised version of the Brexit deal that Prime Minister Theresa May presented to them in January. If May’s deal is spurned again, then Parliament will have the choice to vote for either a “limited” extension of the Brexit deadline (a postponement that the E.U. would have to approve), or a “hard” Brexit, with no deal in place (a move that many analysts fear would injure the U.K. economy for some time).8
Asian economies depend heavily on trade, and possible ripple effects of the U.S.-China trade disagreement were being felt last month. Chinese factory activity contracted for a third consecutive month in February. Hong Kong released data showing its GDP had shrunk 50% in the fourth quarter. South Korea, Japan, and Singapore all reported declines in exports in February. As to monetary policy, some dovish notes were being sounded. China’s central bank made noise about easing interest rates, and Japan was considering an economic stimulus.9,10
WORLD MARKETS
All in all, February was a very good month. One equity benchmark improved more than 10% (the Shanghai Composite, up 13.25%), and seven others posted monthly gains of at least 3% (France’s CAC 40, 7.20%; the pan-European FTSE Eurofirst 300, 5.28%; the United Kingdom’s FTSE 100, 4.86%; Australia’s All Ordinaries, 4.72%; Canada’s TSX Composite, 4.03%; Hong Kong’s Hang Seng, 3.83%; Taiwan’s TSE 50, 3.45%.) MSCI’s World index rose 2.83%. Mexico’s Bolsa lost 1.84% in February, and that was the only noteworthy retreat.11,12
COMMODITIES MARKETS
What commodity surged 28.93% last month? If you are like most people, you probably buy some of it each week. Unleaded gasoline was February’s peak performer. The other big February advances were made by heating oil (8.15%), platinum (6.41%), WTI crude oil (6.03%), and copper (5.68%). A barrel of WTI crude was worth $57.28 on the NYMEX at the February 28 close.13
The U.S. Dollar Index gained 0.55% for the month, improving to 96.11 by February 28. Both gold and silver went negative for the month: gold lost 0.39%; silver, 2.93%. Gold ended February at $1,314.70 on the COMEX; silver, $15.55. A few crops slumped badly in February: cotton fell 2.74%; corn, 3.86%; coffee, 9.99%; wheat, 12.34%.13,14
REAL ESTATE
The National Association of Realtors said that existing home sales had weakened for a third straight month in January, declining 1.2% to their slowest pace since November 2015. NAR chief economist Lawrence Yun commented that sales were “likely to have reached a cyclical low” in January, and one indicator pointed to possible improvement: NAR’s pending home sales index, which measures housing contract activity, rose 4.6% in the opening month of the year.14,15
While residential resales decreased, so too did mortgage rates. At the end of February, they were notably lower from where they began the year. Back on January 3, Freddie Mac’s Primary Mortgage Market Survey showed mean interest rates of 4.51% for a 30-year, fixed-rate loan, 3.99% for a 15-year, fixed-rate loan, and 3.98% for a 5/1-year, adjustable mortgage. On February 28, the average interest rate for the 30-year FRM was down at 4.35%. The 15-year FRM carried average interest of 3.77%; the 5/1-year ARM, average interest of 3.84%.16
T I P O F T H E M O N T H If you have a parent or relative who has given you legal power of attorney over their finances, betransparent about those finances with your siblings. This candor may prevent family squabbles.
LOOKING BACK, LOOKING FORWARD
As you see directly below, all three major Wall Street indices recorded significant gains in February. For the record, the small-cap Russell 2000 climbed 5.08%. The February 28 settlements: Dow Industrials, 25,916.00; Nasdaq Composite, 7,532.53; S&P 500, 2,784.49; Russell 2000, 1,575.55. The oft-referenced barometer of stock market volatility, the CBOE VIX, lost 10.80% for the month, ending February at 14.78.1
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.
This first-quarter rally has pleasantly surprised investors after Wall Street’s gloomy end to 2018. Who knows how long this upturn may continue. Thankful investors are hoping that a conclusive resolution to the U.S.-China trade spat can provide stocks with further momentum. If the current business cycle did in fact peak in 2017, maybe the descent from the peak will be longer and more gradual than some analysts envisioned. As March arrives, the Street is cautiously optimistic that all this bullishness can continue a little longer. Whether it persists or falters, investors should not let the short-term climate of the markets and the economy distract them from an investment and saving approach intended to help them pursue their long-term goals.
Q U O T E O F T H E M O N T H
“Always listen to experts. They’ll tell you what can’t be done and why. Then do it.”
ROBERT HEINLEIN
UPCOMING RELEASES
Here are the economic news items with the potential to affect the markets this month (and some of this information is arriving late as a result of this winter’s partial federal government shutdown): February’s ADP payrolls report (3/6), January housing starts (3/8), January retail sales (3/11), the latest Consumer Price Index (3/12), a new Producer Price Index (3/13), January new home sales (3/14), the preliminary March consumer sentiment index from the University of Michigan (3/16), a Federal Reserve policy statement and subsequent press conference with Fed chair Jerome Powell (3/20), February existing home sales (3/22), March’s Conference Board consumer confidence index and February housing starts (3/26), February pending home sales and a new estimate of Q4 GDP (3/28), and the final March University of Michigan consumer sentiment number, February personal spending, and February new home sales (3/29).
T H E M O N T H L Y R I D D L E
What has four legs, bears weight without complaint, and never makes a peep when food is brought its way?
LAST MONTH’S RIDDLE: Many things can make one, it can be of any shape or size, it is created for various reasons, and it can shrink or grow with time. What is it?
ANSWER: A hole in the ground.
KeyStone Financial Group, Inc may be reached at 920-969-0717 or admin@kfgwi.com www.kfgwi.com
Know someone who could use information like this? Please feel free to send us their contact information via phone or email. (Don’t worry – we’ll request their permission before adding them to our mailing list.)
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs, or expenses. Investors cannot invest directly in indices. All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The FTSEurofirst 300 Index comprises the 300 largest companies ranked by market capitalisation in the FTSE Developed Europe Index. The FTSE 100 Index is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. Established in January 1980, the All Ordinaries is the oldest index of shares in Australia. It is made up of the share prices for 500 of the largest companies listed on the Australian Securities Exchange. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The FTSE TWSE Taiwan 50 Index is a capitalization-weighted index of stocks comprises 50 companies listed on the Taiwan Stock Exchange developed by Taiwan Stock Exchange in collaboration with FTSE. The MSCI World Index is a free-float weighted equity index that includes developed world markets and does not include emerging markets. The Mexican Stock Exchange, commonly known as Mexican Bolsa, Mexbol, or BMV, is the only stock exchange in Mexico. The U.S. Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.
In this month’s recap: equities rally here and around the world, economic fundamentals look solid, the pace of home sales slows, and oil surges.
THE MONTH IN BRIEF
During a month marked by political impasses in the United States and United Kingdom, equities performed well around most of the world. On Wall Street, the S&P 500 advanced 7.87% in January, with a new earnings season as well as trade and monetary policy developments providing tailwinds. Most of the economic data that rolled in was good; the partial federal government shutdown may have negatively impacted some of the numbers. Home sales fell off abruptly. Many commodities advanced. All in all, investors focused on the potential of the markets more than disputes.1
DOMESTIC ECONOMIC HEALTH
The Congressional Budget Office believes that the 35-day federal government shutdown cost the economy about $11 billion. The silver lining is that roughly $8 billion of that loss is potentially recoverable, presuming federal spending and consumer spending bounce back in the coming months.2
Due to the length and breadth of the shutdown, a few key economic reports did not appear last month. Nevertheless, there were plenty of attention-getting news items.
As expected, the Federal Reserve left interest rates alone in January. What really intrigued investors was the dovish tone of the Fed’s latest policy statement. It noted that the Federal Open Market Committee would be “patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate” for the economy. The central bank appeared newly cautious: language implying that rate hikes might be merited was now absent.3
In mid-January, China made a move in the U.S.-China trade dispute. It offered a plan to address the U.S. trade deficit, with an objective of cutting it to $0 by 2024. China would undertake a strategy to buy greater amounts of American goods: $45 billion more during 2019, and gradually, more in each of the following five years, with the multiyear increase reaching $1 trillion. Bloomberg News reported that U.S. negotiators wanted China to try and wipe out the trade imbalance within two years, not six. American demand for Chinese-made products is so strong, however, that making any real dent in the trade deficit might be a tall order, given current free market conditions.4
Main Street seemed a bit unsettled by the shutdown and recent stock market volatility. The most respected U.S. monthly consumer confidence gauge, maintained by the Conference Board, fell sharply in January to 120.2, a good reading that still represented its lowest level since July 2017. Its future expectations sub-index hit a 27-month low. At mid-month, the University of Michigan’s consumer sentiment index slipped from its final December mark of 98.3 to 90.7.5,6
The Institute for Supply Management’s twin purchasing manager indices also fell; those numbers exclusively concerned December. In the last month of 2018, ISM’s manufacturing sector index slipped 5.2 points to 54.1; its services sector PMI declined 3.1 points to 57.6. Both readings indicated solid sector expansion, just to a lesser degree than a month before.7
One word summed up the latest jobs report from the Department of Labor: fantastic. In December, employers added 312,000 net new workers to their payrolls. The main unemployment rate rose 0.2% to 3.9%, but that was an effect of more Americans looking for work. The U-6 rate, counting both the unemployed and underemployed, held at 7.6%. Wages were up 3.2% year-over-year, the best annual advance in a decade.8
The Consumer Price Index retreated 0.1% during December after a flat November; the core CPI rose 0.2% in the final month of 2018, replicating its November move. December also brought a slight slip for both the headline (0.2%) and core (0.1%) Producer Price Index.6
As January drew to a close, some significant data was still pending: the first estimate of Q4 GDP, plus the latest reports on personal spending as well as income and durable goods orders. This backlogged data could appear in the first half of this month.
GLOBAL ECONOMIC HEALTH
Would the Brexit be delayed? After the crushing 230-vote defeat of Prime Minister Theresa May’s withdrawal deal in Parliament, the United Kingdom faced six possible options: an extension of the March 29 Brexit deadline set by the European Union, a renegotiation of May’s withdrawal deal, a general election that could bring about a change in U.K. leadership, a “hard” Brexit with no trade agreements with the E.U., another national vote on the matter, or no Brexit at all with the U.K. staying in the E.U. As January ended, May faced a February 13 deadline to return to Parliament with either an altered deal or a statement of which other course of action she wanted the U.K. to pursue. While European Council President Donald Tusk tweeted that the Brexit agreement was “not open for renegotiation,” U.K. Foreign Secretary Jeremy Hunt said that a delayed Brexit could be in order. One key sticking point has been the flow of trade between Ireland and Northern Ireland, which could be disturbed if Northern Ireland leaves the E.U.9,10
China’s factory sector shrunk for a second straight month in January; the reading on the nation’s official manufacturing PMI improved 0.2 points to 49.5. The Chinese economy grew 6.6% in 2018 – a striking advance by global standards, but its smallest expansion since 1990. The effect of that slowdown was being felt in America (where major tech and heavy equipment firms reported declining sales in China) and in Japan, South Korea, and Australia, three of its other major trading partners. (Tariffs on a variety of Chinese imports to the U.S. are slated to rise from 10% to 25% before the end of the first quarter.)11,12
WORLD MARKETS
Investors felt bullish around the world last month, and the performance numbers of major equity benchmarks reflected their optimism. Europe saw broad gains: Russia’s MICEX improved 6.41% in January; Spain’s IBEX 35, 6.05%; the FTSE Eurofirst 300, 5.99%; Germany’s DAX, 5.82%; France’s CAC 40, 5.54%. Even in London, the FTSE 100 gained 3.58%.13
Indices in the Asia-Pacific region, Canada, and South America recorded even larger monthly jumps. Canada’s TSX Composite outperformed the Dow and S&P 500, surging 8.50%. The MSCI Emerging Markets index climbed 8.71% for the month, and MSCI’s World index added 7.68%. Look what two South American benchmarks did: Brazil’s Bovespa soared 11.14%, and Argentina’s Merval, 18.97%. Mexico’s Bolsa posted a monthly advance of 5.64%. Hong Kong’s Hang Seng and South Korea’s Kospi set the pace in the east, with respective gains of 8.11% and 8.03%. Australia’s All Ordinaries rose 3.99%; China’s Shanghai Composite, 3.96%; Japan’s Nikkei 225, 3.79%. The only notable retreats were minor: India’s Nifty 50 lost 0.29%; Malaysia’s KLSE Composite, 0.42%.13,14
COMMODITIES MARKETS
Oil got off to a great start for 2019. By the closing bell on January 31, a barrel of WTI crude was worth $54.04 on the NYMEX, after a 17.94% YTD gain. While natural gas futures lost 4.53% last month, unleaded gasoline improved 4.94%, and heating oil soared 11.71%.15
Among the softs, while cocoa took a 10.50% drop, other major crops rose. Sugar gained 4.16%; soybeans, 3.83%; cotton, 2.99%; wheat, 2.68%; corn, 0.47%; coffee, 0.34%. Copper led the key metals, rising 5.75%. Platinum advanced 4.35%, and silver and gold respectively added 4.05% and 3.03%. Gold ended the month at $1,319.50 on the COMEX; silver, at $16.06. The U.S. Dollar Index lost 0.80% in January.15,16
REAL ESTATE
First, the good news. January brought a significant dip in mortgage rates. In Freddie Mac’s last Primary Mortgage Market Survey of 2018 (December 27), a conventional home loan carried 4.55% interest on average. By January 31, that average interest rate had declined to 4.46%. The trend carried over to 15-year, fixed rate loans (4.01% to 3.89%) and 5/1-year, adjustable loans (4.00% to 3.96%).17,18
Additionally, delayed new home sales data from the Census Bureau showed a 17.0% jump in November to an 8-month high. (The Bureau’s report on January housing starts is still pending as a result of the shutdown.)19
Now, the bad news: existing home sales slowed. The National Association of Realtors announced that resales were down 6.4% month-over-month in December, after improving 2.1% in November. In 2018, existing home sales lagged 3.1% behind their 2017 pace; last year was the poorest year for home buying since 2015.6,20
In other real estate news, the 20-city composite S&P CoreLogic Case-Shiller home price index showed 4.7% annual appreciation in its latest edition (November), which was the slimmest gain in almost four years. The yearly advance had been 5.0% a month earlier. The NAR’s pending home sales index, which measures monthly housing contract activity, fell 2.2% to 99.0 in December; that was its worst reading since April 2014.5,20
T I P O F T H E M O N T H Recent college graduates are certainly challenged to save for the future, what with student loans, rent, and entry-level jobs. It can be tough to set anything aside. Still, saving and investing something is better than nothing, and the effort must be made. Given the power of compounding over time, starting early is smart.
LOOKING BACK, LOOKING FORWARD
Equities got off to a flying start this year. While the big three all gained 7% or better last month, the small caps outran those bullish starts: the Russell 2000 soared 11.19% in January. At the closing bell on January 31, their settlements were: Dow Industrials, 24,999.67; Nasdaq Composite, 7,281.74; S&P 500, 2,704.10; Russell 2000, 1,499.42. Leading the pack among U.S. benchmarks in terms of monthly performance, the PHLX Oil Service Sector index climbed 19.28%. The CBOE VIX declined 34.82% in January, down to 16.57 at the end of the month.1
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.
Patient investors sighed with relief at January’s major Wall Street advance. The S&P 500 had not rallied so strongly in January since 1987. It just goes to show that when the bears come out, the bulls are quite capable of coming right back. Going into February, investors have three preoccupations: earnings, the rate of progress in the trade negotiations between the U.S. and China, and the lingering risk of a shutdown in Washington. In the best-case scenario, this month would see a return to business as usual on Wall Street: a leveling out of extreme volatility, a fading memory of December and its anxieties. With luck, maybe we will see that this month instead of a retreat inspired by poor quarterly results or sudden headlines.23
Q U O T E O F T H E M O N T H
“Cherish all your happy moments: they make a fine cushion for old age.”
Christopher morley
UPCOMING RELEASES
What will investors interpret during the rest of 2019’s shortest month? Besides earnings, they will look at the January Consumer Price Index (2/13), the January Producer Price Index (2/14), the preliminary February University of Michigan consumer sentiment index, recent retail sales data, and January industrial output (2/15), minutes from the January Federal Reserve policy meeting as well as new and delayed reports on homebuilding activity (2/20), January existing home sales and leading indicators (2/21), a new Conference Board consumer confidence index, January new home sales, and the December S&P CoreLogic Case-Shiller home price index (2/26), January pending home sales and hard goods orders (2/27), and then, an estimate of Q4 growth (2/28). January personal spending data, the January PCE price index, and the final February University of Michigan consumer sentiment index are slated to appear on March 1.
T H E M O N T H L Y R I D D L E
Many things can make one, it can be of any shape or size, it is created for various reasons, and it can shrink or grow with time. What is it?
LAST MONTH’S RIDDLE: You can see right through me. Different lights make me strange, and for each one, my size may change. What am I?
ANSWER: A pupil.
Your Keystone Team may be reached at 920-969-0717 or admin@kfgwi.com www.kfgwi.com
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This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs, or expenses. Investors cannot invest directly in indices. All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The MICEX 10 Index is an unweighted price index that tracks the ten most liquid Russian stocks listed on MICEX-RTS in Moscow. The IBEX 35 is the benchmark stock market index of the Bolsa de Madrid, Spain’s principal stock exchange. The FTSEurofirst 300 Index comprises the 300 largest companies ranked by market capitalisation in the FTSE Developed Europe Index. The DAX 30 is a Blue-Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The FTSE 100 Index is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The MSCI World Index is a free-float weighted equity index that includes developed world markets and does not include emerging markets. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The Bovespa Index is a gross total return index weighted by traded volume & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The MERVAL Index (MERcado de VALores, literally Stock Exchange) is the most important index of the Buenos Aires Stock Exchange. The Mexican Stock Exchange, commonly known as Mexican Bolsa, Mexbol, or BMV, is the only stock exchange in Mexico. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The Korea Composite Stock Price Index or KOSPI is the major stock market index of South Korea, representing all common stocks traded on the Korea Exchange. The All Ordinaries (XAO) is considered a total market barometer for the Australian stock market and contains the 500 largest ASX-listed companies by way of market capitalization. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The Nifty 50 (NTFE 50) is a well-diversified 50-stock index accounting for 13 sectors of the Indian economy. It is used for a variety of purposes such as benchmarking fund portfolios, index-based derivatives and index funds. The FTSE Bursa Malaysia KLCI Index comprises of the largest 30 companies by full market capitalization on Bursa Malaysia’s Main Board. The US Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.
In this month’s recap: equity and commodity markets experience major losses, the Fed sends a hawkish message, home sales improve, and the economy maintains its momentum.
THE MONTH IN BRIEF
December 2018 will be remembered for its volatility and its challenges. The S&P 500 flirted with bear market territory, dropping 10.16% for the month. Appetite for risk declined here and abroad in the face of tariffs, concerns about the Federal Reserve raising interest rates too quickly, a federal government shutdown, and questions about the Brexit. It was also a difficult month for commodities. In contrast, Main Street seemed in good shape: low unemployment, high consumer confidence, and strong consumer spending were all evident.1
DOMESTIC ECONOMIC HEALTH
While the Federal Reserve certainly pays attention to Wall Street’s mood, it adjusts its monetary policy in respect to the economy, not the preferences of market participants. In December, the central bank did not exactly tell investors what they wanted to hear. Following the announcement of another quarter-point rate hike (the target range is now 2.25-2.5%), Fed chair Jerome Powell stated that monetary policy “does not need to be accommodative,” and affirmed that the Fed would continue to remove up to $50 billion per month of Treasury and mortgage-backed securities from its balance sheet. According to the latest Fed dot-plot, there would be no pause in tightening: two rate hikes were still envisioned for 2019. Major indices fell sharply after Powell’s remarks.2
To justify its stance, the Fed could point to a number of economic indicators. The manufacturing and service sectors were seeing considerable expansion, by the look of the Institute for Supply Management’s November purchasing manager indices. ISM’s non-manufacturing PMI rose 0.4 points to 60.7, and its factory PMI climbed 1.6 points to 59.3; these were great readings. (Additionally, the Federal Reserve said that industrial production rose 0.6% in November.) Department of Commerce data showed personal spending up 0.4% in October and retail sales advancing a decent 0.2%. Consumer confidence remained high. The University of Michigan’s index finished December at 98.3, higher than its final November mark of 97.5. The Conference Board’s monthly gauge came in at 128.1 – notably below its (revised) November reading of 136.4, but still at an impressive level.3,4
The Consumer Price Index was flat in November. The main reason? Cheaper fuel. Gasoline prices dropped 4.2%. Annualized inflation weakened to 2.2%, the smallest advance seen since February. Wholesale inflation, as measured by the Producer Price Index, ticked north 0.1%; in October, the gain was 0.6%. 4,5
Job creation did fall short of expectations in the eleventh month of the year. Employers added 155,000 net new workers to their payrolls in November, the Department of Labor stated, and the October increase was revised down to 237,000. A Bloomberg survey of analysts projected a November jobs gain of 198,000. Headline unemployment stayed remarkably low, just 3.7%; the U-6 rate, which also counts the underemployed, rose 0.2% to 7.6%. Annualized wage growth remained at 3.1%. Average net monthly payroll growth for the September-November period was 170,000.4,6
By December, the ongoing U.S.-China trade dispute had cooled a bit, with negotiations continuing. December 1 marked the start of a 90-day “ceasefire,” with both nations agreeing not to impose additional import taxes until late in the first quarter of 2019. China actually scaled back some tariffs as the year ended; the U.S. was set to boost tariffs on as much as $200 billion of Chinese goods effective this month.7
Lastly, the end of 2018 was very good for retailers. Mastercard Pulse measured a 5.1% year-over-year increase in retail purchases between November 1 and December 24, resulting more than $850 billion in purchases – the best holiday retail sales season in six years.8
GLOBAL ECONOMIC HEALTH
In December, the United Kingdom witnessed a parliamentary deadlock over the Brexit, with Prime Minister Theresa May withdrawing a scheduled vote over her deal with the European Union in the face of probable legislative defeat. In fact, as Christmas approached, there was no clear majority in Parliament favoring any of the Brexit options: May’s deal, the no-deal Brexit (an outcome that would dismay corporations), a “managed” no-deal, or another national vote on the matter. The U.K.’s March 29 deadline to leave the E.U. remains. In other euro area news, yearly inflation fell sharply in the region to 1.9% in November, descending from 2.2% in October.9,10
While China’s statistics bureau said recently that the country was on track to reach its 6.5% economic growth target for 2018, signs of a slowdown emerged. In December, the country’s factory output contracted for the first time in nearly three years, with its official manufacturing PMI falling to 49.4. The November Markit manufacturing PMIs for other key Asian economies indicated either minor month-over-month factory sector expansion (slightly above 50) or contraction (below 50). Japan’s Markit PMI came in at 51.8 (though it recovered to 52.4 in December); Taiwan’s, at 48.4; South Korea’s, at 48.6.11,12
WORLD MARKETS
Yes, December brought substantial losses for other major equity benchmarks – though generally speaking, the losses were smaller than the ones seen in the U.S. While the Nikkei 225 slid 10.10% last month, the common December loss was single-digit: 5.76% for the TSX Composite, 1.53% for the Bovespa, only 0.22% for the Bolsa, 6.55% for the DAX, 5.46% for the CAC-40, 3.61% for the FTSE 100, 5.92% for the IBEX 35, 2.49% for the Hang Seng, 4.14% for the Shanghai Composite, and just a respective 0.35% and 0.13% for the Sensex and the Nifty 50.13
How about some of the regional and multinational indices? Well, the MSCI World slipped 7.71%, while the MSCI Emerging Markets declined 2.92%. The FTSE Eurofirst 300 took a 5.44% loss. On a positive note, two emerging market benchmarks saw double-digit gains in 2018: Russia’s Micex advanced 12.16%; Brazil’s Bovespa, 15.03%.13,14
COMMODITIES MARKETS
Dollar strength put pressure on this sector in 2018; the U.S. Dollar Index gained 4.64% for the year, a performance better than that of many commodities. Gold and silver moved up in December. The yellow metal gained 5.11% to reach $1,284.50 on the COMEX on New Year’s Eve. Silver rose 9.90% for the month to $15.54 on the COMEX. Across 2018, gold lost 2.42%; silver, 9.14%. Copper retreated 5.17% last month, and platinum settled 1.29% lower.15,16
Oil prices kept falling. In December, WTI crude declined 9.64% to finish out the year at $45.83 on the NYMEX. For all of 2018, crude retreated 24.05%. Unleaded gasoline suffered a 7.45% December setback. Heating oil fell 7.83%. All of that paled next to natural gas, which plunged 36.01%. Most key crops also went negative on the month: soybeans lost 1.26%; wheat, 2.42%; coffee, 2.88%; sugar, 3.50%; cotton, 8.52%. Cocoa and corn were notable exceptions, the former advancing 11.85%, and the latter, 2.46%.16
REAL ESTATE
More homes sold in November – more existing homes, that is. The National Association of Realtors said that resales improved 1.9% in the penultimate month of the year, and that followed the 1.4% gain seen in October. The trend might not continue, though, as NAR’s pending home sales index retreated 0.7% in November. (Due to the federal government shutdown, the Census Bureau’s November new home sales report was still pending at this writing.) Housing starts and building permits were both up for November: groundbreaking increased 3.2%, and the pace of permits issued improved 5.0%.4
Home loans grew cheaper in December. Back on November 29, Freddie Mac’s Primary Mortgage Market Survey listed the mean interest rates on the following loans: 30-year FRM, 4.81%; 15-year FRM, 4.25%; 5/1-year ARM, 4.12%. By the December 27 Freddie Mac survey, everything was cheaper: 30-year FRM, 4.55%; 15-year FRM, 4.01%; 5/1-year ARM, 4.00%.17
The NAR reported a median existing home sale price of $257,700 in November, up 4.2% from November 2017. Another key measure of annualized gains, the 20-city composite S&P CoreLogic Case-Shiller home price index, had risen 5.0% year-over-year through October.18,19
T I P O F T H E M O N T H If you have a high-interest credit card, you may want to search to see if you can refinance the balance to a lower-interest card. A lower-interest card means a greater percentage of your payments will be applied to principal rather than interest.
LOOKING BACK, LOOKING FORWARD
During one of the most volatile months in recent Wall Street history, the S&P 500 had nine intraday moves of at least 1% (as opposed to eight such instances during all of 2017), and the Dow Jones Industrial Average gained 1,000 points in a day for the first time. The ups and downs tested the patience of investors large and small. When the month ended, the most esteemed Wall Street indices were considerably lower. The S&P 500 ended the year at 2,506.85; the Dow, at 23,327.46; the Nasdaq Composite, at 6,635.28. The small-cap Russell 2000 wrapped up 2018 at 1,348.56, taking a 12.94% December fall and losing 12.18% for the year. The CBOE VIX soared 54.62% for the month and 130.25% for 2018, settling at 25.42 on December 31.1,20
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.
At this moment, investors old and young are looking at their portfolios and wondering what moves might be appropriate. How about no moves at all? At its core, a saving and investment strategy for a pre-retiree is developed based on risk tolerance, time horizon, and goals, and that big-picture approach takes episodes of market instability (and market downturns) into account. A deviation from that strategy may be ill-advised. If you are wondering about the outlook for Wall Street for 2019, many prognostications are bullish, some to remarkable degree. USA TODAY recently polled a range of Wall Street investment strategists, and they thought the S&P 500 would gain about 25% this year, on average. Is this just wishful thinking, drenched in blue sky? Anything is possible, but to encourage returns like that, it might help to have a pause in tightening by the Fed, an end to the trade war between China and the U.S., a comeback for oil, and earnings calls that contradict worries about corporations becoming slightly less profitable. January will likely see more of the volatility witnessed in December, hopefully less pronounced. This month and this year, investors will appreciate the core principle of diversification, for little is certain about the next few months on Wall Street.23
Q U O T E O F T H E M O N T H
“Make your life a mission – not an intermission.”
ARNOLD GLASOW
UPCOMING RELEASES
January’s roll call of major economic news items includes the December employment report from the Department of Labor (1/4), ISM’s December non-manufacturing PMI (1/7), a new Consumer Price Index (1/10), the latest Producer Price Index (1/15), December retail sales and a new Federal Reserve Beige Book (1/16), December housing starts and building permits (1/17), December industrial output and the preliminary January University of Michigan consumer sentiment index (1/18), the latest existing home sales report from the National Association of Realtors (1/22), a fresh Conference Board leading indicators index (1/24), December new home sales and durable goods orders (1/25), the latest Conference Board consumer confidence index and the November S&P CoreLogic Case-Shiller home price index (1/29), a Federal Reserve policy decision, ADP’s January payrolls data, and NAR’s index of housing contract activity for December (1/30), and finally, the December PCE price index and consumer spending report (1/31).
T H E M O N T H L Y R I D D L E
You can see right through me. Different lights make me strange, and for each one, my size may change. What am I?
LAST MONTH’S RIDDLE: It is often surrounded by water and at risk from waves, and it has a fin rather than a sail or motor, but without water and waves, there would be no real use for it. What is it?
ANSWER: A surfboard.
Remember, we are never too busy to be a resource or sounding board for the people you care about.
Just call and let us know how we can help out.
KeyStone Team may be reached at 920-969-0717 or admin@kfgwi.com www.kfgwi.com
Know someone who could use information like this? Please feel free to send us their contact information via phone or email. (Don’t worry – we’ll request their permission before adding them to our mailing list.)
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs, or expenses. Investors cannot invest directly in indices. All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The Bovespa Index is a gross total return index weighted by traded volume & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The Mexican Stock Exchange, commonly known as Mexican Bolsa, Mexbol, or BMV, is the only stock exchange in Mexico. The DAX 30 is a Blue-Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The FTSE 100 Index is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. The IBEX 35 is the benchmark stock market index of the Bolsa de Madrid, Spain’s principal stock exchange. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The BSE SENSEX (Bombay Stock Exchange Sensitive Index), also-called the BSE 30 (BOMBAY STOCK EXCHANGE) or simply the SENSEX, is a free-float market capitalization-weighted stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE). The Nifty 50 (NTFE 50) is a well-diversified 50-stock index accounting for 13 sectors of the Indian economy. It is used for a variety of purposes such as benchmarking fund portfolios, index-based derivatives and index funds. The MSCI World Index is a free-float weighted equity index that includes developed world markets and does not include emerging markets. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The FTSEurofirst 300 Index comprises the 300 largest companies ranked by market capitalisation in the FTSE Developed Europe Index. The MICEX 10 Index is an unweighted price index that tracks the ten most liquid Russian stocks listed on MICEX-RTS in Moscow. The US Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.
In this month’s recap: equities rise with a little help from the Fed, oil dives, and most key domestic indicators look quite strong.
THE MONTH IN BRIEF
Presented by KeyStone Team, December 2018
For most of November, the stock market was plagued by the same skepticism evident in October: the sense that corporate profits were declining and economic growth was slowing. Then Federal Reserve chairman Jerome Powell threw investors a line: he delivered a speech late in the month that soothed some of the considerable anxiety in the equity markets. Helped by Powell’s comments, the S&P 500 gained 1.79% on the month. While analysts sensed the bull market was in its late phase, consumers remained confident, enthusiastic participants in an apparently thriving economy. In a surprise, home sales picked up. Oil fell. The United Kingdom scheduled a critical parliamentary vote on the Brexit; China and the U.S. returned to the negotiating table regarding tariffs.1
DOMESTIC ECONOMIC HEALTH
Speaking to the Economic Club of New York on November 28, Federal Reserve chair Jerome Powell delivered a rather dovish message: if interest rates were not quite where they should be, given the robust economy, they were at least close. In his view, rates were “just below the broad range of estimates of the level that would be neutral for the economy – that is, neither speeding up nor slowing down growth.” This was what Wall Street wanted to hear. The Dow Industrials rocketed north 618 points on the day. Just a month earlier, Powell had sounded distinctly hawkish, commenting that rates were a “long way from neutral.”2,3
A trio of reports affirmed that the economy was indeed in good condition. Even after nine years of recovery from the Great Recession, the pace of hiring was still noteworthy: the Department of Labor’s October jobs report said that 250,000 net new jobs were created in the tenth month of the year. Annualized wage growth was at 3.1%, the best in ten years; headline unemployment was at 3.7%, and U-6 unemployment (unemployed and the marginally employed), at 7.4%. According to a Census Bureau report, the pace of retail sales improved 0.8% in October, quite a change from the 0.1% retreat a month before. Finally, as the month ended, the Department of Commerce announced a 0.6% rise in personal spending in October along with a 0.5% improvement for personal incomes.4,5
Burgeoning economies go hand in hand with inflation, and the annualized gain in the Consumer Price Index did grow in October to 2.5% from the previous 2.3%. The yearly advance for the core CPI ticked down 0.1% to 2.1%, however. The federal government affirmed third-quarter growth at 3.5% in its third GDP estimate.5
Consumer confidence indices retreated slightly from recent lofty heights. The University of Michigan’s monthly barometer ended the month at 97.5, down from 98.3; the Conference Board’s index declined to 135.7 from the prior 137.9.5
Now to the factory front. The latest monthly reports from the Institute for Supply Management showed its manufacturing purchasing manager index at 57.7, below the 59.8 level it was at in September. ISM’s service sector PMI dipped 1.3 points last month to 60.3. While these were descents, both readings were quite strong. Hard goods orders declined 4.4% last month, but that mostly had to do with aircraft orders in the defense industry; minus defense and plane orders, they were simply flat for October.5,6
Industrial output rose 0.1% in October, while manufacturing production advanced 0.3%. The Producer Price Index rose 0.6% in October; a 7.6% jump for wholesale gas prices was instrumental in the gain. The October PPI increase left yearly wholesale inflation at 2.9%.5,7
GLOBAL ECONOMIC HEALTH
Last month, lawmakers in the United Kingdom scheduled a parliamentary vote on a draft of the Brexit deal for December 11. If Parliament supports the plan created by Prime Minister Theresa May’s government, the next step would be a vote on a withdrawal agreement from the European Union, pursuant to a European Parliament vote and approval from the E.U. Council. If May’s deal is defeated in London, then the U.K. government will have 21 days to make a choice: it could authorize a renegotiation of the Brexit with the E.U., break off ties with the E.U. without any deal, schedule another U.K. referendum on the Brexit, or call for a general election. May’s deal received formal approval from E.U. leaders in late November.8
On November 30, President Donald Trump, Canadian Prime Minister Justin Trudeau, and Mexican President Enrique Peña Nieto formally signed the United States-Mexico-Canada Agreement (USMCA), the trade pact designed to replace the North American Free Trade Agreement (NAFTA). The accord must still be approved by the legislature of each member nation, and approval may not be easy on Capitol Hill. In the east, the major news item was the evident deceleration in Chinese factory output. China’s official manufacturing PMI dipped to 50.0 in November, meaning no month-over-month expansion for the sector. (Anything below 50 means contraction.) Some analysts see China’s GDP declining to the vicinity of 6.0% in 2019, which would be its poorest GDP in three decades. Its government may need to resort to an economic stimulus if things weaken further.9,10
WORLD MARKETS
Many foreign stock markets saw November gains. Among the biggest: the Hang Seng in Hong Kong, 7.81%; the Merval in Argentina, 6.99%; the Nifty 50 and Sensex in India, at a respective 6.65% and 6.80%. Japan’s Nikkei 225 rose 4.17%, South Korea’s Kospi added 4.08%, MSCI’s Emerging Markets index improved 4.06%, and Russia’s Micex advanced 4.02%. In Spain, the IBEX gained 3.08%; in Brazil, the Bovespa added 3.01%. There were also gains of 2.04% for Canada’s TSX Composite, 1.26% for Taiwan’s TSE 50, 0.96% for the MSCI World index, 0.82% for the FTSE Eurofirst 300, and 0.78% for the Shanghai Composite.11,12
Some indices suffered November setbacks. Germany’s DAX lost 0.27%, the United Kingdom’s FTSE 100, 0.79%. Australia’s All Ordinaries fell 2.35%, while Mexico’s Bolsa retreated 4.15%.11
COMMODITIES MARKETS
A barrel of oil was worth only $50.42 on the NYMEX at the close on November 30. WTI crude dropped 21.80% for the month. Heating oil sank 19.00%, and unleaded gasoline plummeted 20.22%. Natural gas? Quite the opposite. With winter quickly appearing, the value of that commodity jumped 41.29%.13
In crops, soybeans rose 6.74%, and coffee fell 7.88%. In between those extremes, wheat gained 2.84%; cotton, 2.37%; corn, 0.76%. Sugar retreated 2.43%, and cocoa, 3.73%. Copper advanced 4.38% in November; gold also improved, gaining 0.70% to close out the month at a COMEX value of $1,222.10 an ounce. Silver and platinum lost ground last month: silver was off 1.94%; platinum, 4.57%. As November concluded, silver was worth $14.14 an ounce. The U.S. Dollar Index ended November at 96.79 after a one-month loss of 0.35%.13,14
REAL ESTATE
In mid-November, the National Association of Realtors reported a 1.4% October gain for existing home sales. On November 29, however, it said that its pending home sales index had weakened by 2.6% in the tenth month of the year, so the autumn improvement in the pace of residential resales may prove fleeting.5
October also brought less new home buying: sales fell 8.9%. (It must be noted that these initial numbers tend to be revised later.) The Census Bureau also announced a 0.6% decline for building permits in October, but housing starts did pick up 1.5%.5
In terms of mortgages, only adjustable-rate loans grew significantly more expensive in November. The average rate on a 5/1-year ARM was 4.04% on November 1, according to Freddie Mac, but 4.12% on November 29. Mean interest on the 30-year, fixed-rate mortgage went from 4.83% to 4.81% in that period; the average interest rate for the 15-year FRM went from 4.23% to 4.25%.15
Annual home price gains were clearly lessening: the latest 20-city S&P CoreLogic Case-Shiller home price index showed only 5.1% appreciation in the 12 months ending in September.5
T I P O F T H E M O N T H
Many couples buy life insurance when they start a family, insuring both partners (even if one elects to stop working). There is a good reason to insure both partners: If a stay-at-home spouse or partner passes away and is uninsured, a surviving spouse could face sizable expenses to pay for childcare and other household needs.
LOOKING BACK, LOOKING FORWARD
Closing at 7,330.54 on November 30, the Nasdaq Composite eked out a monthly gain of 0.34%. The S&P 500’s 1.79% November rise left it at 2,760.17 at the end of the month, while the small-cap Russell 2000 ascended 1.45% to 1,533.27. (The Russell ended November down 0.15% YTD, lagging well behind the performance of the big three.) The Dow Jones Industrial Average advanced 1.68% to 25,538.46.1,17
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.
While words from Jerome Powell gladdened investors last month, Wall Street expects another interest rate move from the Fed this month. On November 30, the CME Group’s FedWatch tool put the chances of a December 19 rate hike at 82.7%. The market has probably priced in a hike, but the Street may not be in the mood for a Santa Claus rally, given the seemingly entrenched perception that the business cycle has seen its peak and the glory days of this bull market have faded. This month, investors will carefully examine the latest jobs report and Fed policy statement, react to the new agreement between the U.S. and China to suspend further trade tariffs, and watch what happens with the Brexit parliamentary vote and the OPEC-Russia meeting early in the month. Hopefully, a turbulent year for equities will end on a positive note.22,23
Q U O T E O F T H E M O N T H
“I am certain there is too much certainty in the world.”
MICHAEL CRICHTON
UPCOMING RELEASES
Here is the docket for the rest of the year: the latest Department of Labor employment report and the initial December University of Michigan consumer sentiment index (12/7), the November wholesale inflation report (12/11), November consumer inflation (12/12), November retail sales and industrial production (12/14), November housing starts and building permits (12/18), an interest rate decision at the Federal Reserve and a fresh existing home sales snapshot from the National Association of Realtors (12/19), the Conference Board’s newest leading indicator index (12/20), November personal spending and hard goods orders, the latest PCE price index, and the final assessment of Q3 growth (12/21), November new home sales and the Conference Board’s December consumer confidence gauge (12/27), and November pending home sales and the year’s final University of Michigan consumer sentiment index reading (12/28).
T H E M O N T H L Y R I D D L E
It is often surrounded by water and at risk from waves, and it has a fin rather than a sail or motor, but without water and waves, there would be no real use for it. What is it?
LAST MONTH’S RIDDLE: It is as old as the world, and yet new each month. What is it?
ANSWER: The moon.
Keystone Team may be reached at 920-969-0717 or admin@kfgwi.com www.KFGWI.com
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Securities and Advisory Services Offered Through Harbour Investments, Inc. FoxRiver Tax Centers LLC is privately held and is not affiliated with Harbour Investments, Inc.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs, or expenses. Investors cannot invest directly in indices. All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The MERVAL Index (MERcado de VALores, literally Stock Exchange) is the most important index of the Buenos Aires Stock Exchange. The Nifty 50 (NTFE 50) is a well-diversified 50-stock index accounting for 13 sectors of the Indian economy. It is used for a variety of purposes such as benchmarking fund portfolios, index-based derivatives and index funds. The BSE SENSEX (Bombay Stock Exchange Sensitive Index), also-called the BSE 30 (BOMBAY STOCK EXCHANGE) or simply the SENSEX, is a free-float market capitalization-weighted stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE). Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The Korea Composite Stock Price Index or KOSPI is the major stock market index of South Korea, representing all common stocks traded on the Korea Exchange. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The MICEX 10 Index is an unweighted price index that tracks the ten most liquid Russian stocks listed on MICEX-RTS in Moscow. The IBEX 35 is the benchmark stock market index of the Bolsa de Madrid, Spain’s principal stock exchange. The Bovespa Index is a gross total return index weighted by traded volume & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The FTSE TWSE Taiwan 50 Index consists of the largest 50 companies by full market value and is also the first narrow-based index published in Taiwan. The MSCI World Index is a free-float weighted equity index that includes developed world markets and does not include emerging markets. The FTSEurofirst 300 Index comprises the 300 largest companies ranked by market capitalisation in the FTSE Developed Europe Index. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The DAX 30 is a Blue-Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The FTSE 100 Index is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. The All Ordinaries (XAO) is considered a total market barometer for the Australian stock market and contains the 500 largest ASX-listed companies by way of market capitalization. The Mexican Stock Exchange, commonly known as Mexican Bolsa, Mexbol, or BMV, is the only stock exchange in Mexico. The US Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.
In this month’s recap: stocks make history, consumer confidence rises, the housing market’s summer slump continues, and a new trade pact might replace NAFTA.
Monthly Economic Update
Presented by your Keystone Financial Team, September 2018
THE MONTH IN BRIEF
Wall Street had much to celebrate in August. The S&P 500 and Nasdaq Composite both reached historic heights, with the Nasdaq crossing two 1,000-point milestones in a calendar year for the first time since 1999. The current bull market became the longest on record. U.S. stock exchanges outperformed many others around the world, as imposed tariffs and currency troubles in the emerging markets gave overseas investors pause. Major commodities largely lost ground. U.S. economic indicators were again strong for the most part, aside from those in the housing sector.1
DOMESTIC ECONOMIC HEALTH
As August ended, the White House was trying to forge a new multi-national trade deal to replace the North American Free Trade Agreement (NAFTA). Mexico and the U.S. tentatively agreed to a new trade pact that would increase wages for Mexico’s workers, keep Mexican agricultural exports free from U.S. import taxes, and require 75% of the value of vehicles sold in North America to be produced in either America, Canada, or Mexico (a 12.5% increase). The Trump administration hoped to have Canada join the preliminary accord by September 1, but it decided not to do so, partly due to a disagreement over the treatment of dairy prices. Negotiations between the U.S. and Canada are set to continue this month.2,3
The most respected consumer confidence index in America displayed a remarkably high reading in August. The Conference Board’s barometer reached 133.4, gaining 5.5 points from its (revised) July mark. The University of Michigan’s index ended August at a solid 96.2; its initial August mark was 95.3.4
The latest Department of Commerce snapshot of consumer spending and incomes looked good: personal spending was up 0.4% for July, wages up 0.3%. Appropriately, July also witnessed a retail sales advance of 0.5%.4
As for job creation, the July report from the Department of Labor showed payrolls expanding by a net 157,000 positions; a Reuters poll of economists had forecast a gain of 190,000. Despite the miss, the main jobless rate ticked down 0.1% to 3.9%, while the broader U-6 rate, encompassing underemployed Americans, declined 0.3% to a 17-year-low of 7.5%. Annual wage growth remained at 2.7%.5
Yearly inflation, unfortunately, was running above 2.7%. The July Consumer Price Index measured it at 2.9% through July, the highest number seen since February 2012. (The headline Producer Price Index was flat for July; that left its year-over-year gain at 3.3% and the annualized advance of the core PPI at 2.7%.)6,7
The service sector and the factory sector expanded at a noteworthy pace in July, by the estimation of the Institute for Supply Management. ISM’s purchasing manager index for the manufacturing industry fell from a very high 60.2 reading to a mark of 58.1, but this nonetheless signals impressive expansion. The Institute’s non-manufacturing gauge dropped 3.4 points to 55.7 in July, still a good reading.8
GLOBAL ECONOMIC HEALTH
Emerging market currencies continued to be hit hard in August. Nations holding large amounts of dollar-denominated debt have been put in a tough situation with the Federal Reserve raising interest rates and the greenback gaining strength. The Turkish lira dropped 18.5% on August 10, after President Trump’s pledge to double tariffs on imported Turkish aluminum and steel; through mid-August, it was down 40% versus the dollar on the year. Argentina’s peso slipped to a record low early in the month, several weeks after the nation received a $50 billion bailout from the International Monetary Fund. In late August, Argentina raised its benchmark interest rate from an already astonishing 45% to 60%, with its banking officials stating it would remain that high through the end of November. Hopefully, these troubles will not prove contagious.9,10
As August concluded, it appeared the European Union and United Kingdom were willing to reset their October Brexit withdrawal treaty deadline. Meanwhile, Italy made noise about possibly vetoing the new E.U. budget, as its 10-year note yields spiked to levels approaching those seen in the 2012 European debt crisis. Concerns about China’s powerhouse economy losing some of its momentum were eased a bit last month. The country’s official manufacturing purchasing managers index displayed a decent 51.3 reading, topping the 51.0 consensus forecast of economists polled by Reuters; its official service sector PMI improved 0.2 points to 54.2, although new orders for the sector weakened. U.S. tariffs are still set to impact $200 billion worth of Chinese exports in the coming months.11,12
WORLD MARKETS
Chinese stocks did not fare well in August: the Shanghai Composite descended 5.25%. Other notable benchmarks took sizable losses: Spain’s IBEX 35 fell 4.78%; the U.K.’s FTSE 100, 4.08%; Germany’s DAX, 3.45%; Brazil’s Bovespa, 3.21%; the MSCI Emerging Markets index, 2.90%; the FTSE Eurofirst 300, 2.60%; Hong Kong’s Hang Seng, 2.43%. France’s CAC 40 lost 1.90%; Canada’s TSX Composite, 1.04%; Mexico’s Bolsa, 0.30%.13,14
Now onto better news: the August advances. India’s Nifty 50 gained 2.85%, and its Sensex improved 2.76%. The Nikkei 225 rose 1.38%; South Korea’s Kospi, 1.20%; Taiwan’s TSE 50, 1.09%; Russia’s Micex, 1.07%; MSCI’s World index, 1.04%; the Australian All Ordinaries, 0.97%.13,14
COMMODITIES MARKETS
Cocoa was the big winner among headlining commodities in August, rising 7.70%. Heating oil and natural gas also scored big wins, respectively adding 5.61% and 5.03%. Crude’s August gain of 2.12% was also noteworthy; oil settled at $69.88 a barrel on the NYMEX August 31. The U.S. Dollar Index and sugar also notched small monthly gains, the former improving 0.63%, the latter 0.19%.15,16
Key metals suffered another month of setbacks. Gold lost 1.75% to end the month at $1,206.90 on the COMEX; silver, 7.02%, to wrap up the month at $14.43. Platinum futures slid 6.31%; copper futures, 6.38%. Unleaded gasoline took a tumble, losing 5.99%. Several major crop futures had a rough month: corn lost 5.44%; soybeans, 7.75%; wheat, 6.40%; coffee, 10.74%; cotton, 8.71%.15
REAL ESTATE
August was another subpar month for home buying. The National Association of Realtors said existing home sales fell 0.7% during July, after declining 0.6% for June. Subsequently, the Census Bureau announced a 1.7% July retreat for new home sales, following a (revised) 2.4% June pullback. The NAR’s pending home sales index, which measures housing contract activity in the resale market, dipped 0.7% in July after its (revised) 1.0% gain a month earlier.4
Data again affirmed that homes and home loans had become less affordable. In its June edition, the 20-city S&P CoreLogic Case-Shiller index showed home values rising 6.3% in the past 12 months (the gain had been 6.5% in the May edition). Freddie Mac’s Primary Mortgage Market Survey of August 30 reported the average interest rate on a conventional mortgage at 4.52%; in the first PMMS of 2018 (January 4), the mean interest rate was just 3.95%. Similar increases occurred for the average interest rate on the 15-year FRM, which went from 3.38% to 3.97% in that span, and the mean rate for the 5/1-year ARM, which rose from 3.45% to 3.85%.4,17
The Census Bureau’s latest monthly report on U.S. residential construction activity showed that the pace of building permits issued increased by 1.5% in July, while the rate of housing starts increased by 0.9%.4
T I P O F T H E M O N T H
New parents? You may not have to spend as much to clothe and entertain your child as you think. Financially speaking, pre-owned clothes and toys are a thrifty choice, as babies and toddlers grow fast and change interests quickly.
LOOKING BACK, LOOKING FORWARD
Jumping 5.71% in a month, the Nasdaq Composite cracked the 8,000 ceiling for the first time, settling at 8,109.54 on August 31. The Russell 2000 also had a fine month, climbing 4.19% to finish August at 1,740.75; that left its YTD gain at 13.37%. The S&P 500 advanced 3.03% to 2,901.52 during its own record-setting month; across the three months ending in August, it gained 7.25%. Blue chips followed suit: the Dow Industrials rose 2.16% last month to 25,964.82. The CBOE VIX was fairly flat in August, up 0.23% to 12.86 and ending the month at +16.49% on the year.16
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS real yield = projected return at maturity given expected inflation.
What do you say about a nine-and-a-half-year-old bull market that sends the S&P 500 to an all-time high? Do you marvel at it? Do you question it? Do you worry about what might be ahead? If you are an experienced investor, you probably do all three. Despite this or that prognostication, the expiration date for this amazing bull is ultimately anyone’s guess. Cautious optimism may be warranted given what has been happening with tariffs and certain currencies. The healthy economy we see now could wane in coming quarters, when the business cycle enters the phase where supply exceeds demand (at some point, it will happen). The bulls may decide to just mill around in September and wait for the next earnings season to begin; whether they sit on the sidelines or not, this may be a good time to review the state of your investments and see just how much of your portfolio is held in equities. If you have not done this in the past few years, think about doing it today. An abrupt Wall Street downturn might seem improbable at the moment, but a nine-and-a-half-year-old bull market that suddenly propels stocks to record peaks also definitely qualifies as an improbability.
Q U O T E O F T H E M O N T H
“He who limps still walks.”
STANISLAW LEC
UPCOMING RELEASES
The important news items across the balance of September include: ISM’s August non-manufacturing PMI and the ADP payroll report and Challenger job-cut numbers for August (9/6), the Department of Labor’s August employment report (9/7), a new Producer Price Index (9/12), the latest Consumer Price Index (9/13), the initial September University of Michigan consumer sentiment index, August retail sales, and August industrial production (9/14), August housing starts and building permits (9/19), a new NAR report on existing home sales and the Conference Board’s August leading indicators index (9/20), the latest S&P CoreLogic Case-Shiller home price index and Conference Board consumer confidence index (9/25), a Federal Reserve interest rate decision and fresh Census Bureau data on new home sales (9/26), reports on August pending home sales and durable goods orders and the third estimate of Q2 GDP (9/27), and then August personal spending, the August PCE price index, and the final September University of Michigan consumer sentiment index (9/30).
T H E M O N T H L Y R I D D L E
Two parents have four girls, and each girl has one brother. Given this, how many people are in this family?
LAST MONTH’S RIDDLE: The 22nd and 24th Presidents had the same biological mother and father yet were not brothers. How was this possible?
ANSWER: Grover Cleveland was both the 22nd President and the 24th President.
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Keystone Financial Group, Inc Disclosers
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