In this Q4 recap: Equities maintain their momentum to close out a strong year on Wall Street, helped by a slight thaw in the U.S.-China trade dispute and some better-than-expected domestic economic data.

Quarterly Economic Update

A review of Q4 2019, Presented by Marc Aarons at Money Managers, Inc.

THE QUARTER IN BRIEF
Movement in U.S.-China trade negotiations, an accommodative Federal Reserve, evidence of decent economic growth – all this brought some fourth-quarter tailwinds to Wall Street. The S&P 500 advanced 8.53% in the final three months of the year. Foreign stock markets also posted Q4 gains, and some clarity emerged regarding the Brexit. Gold and oil both posted Q4 gains. Home buying tapered off. As the quarter ended, a new federal law was passed, affecting both retirement savers and retirees.¹

DOMESTIC ECONOMIC HEALTH
In the fourth quarter, traders reacted to even the tiniest bits of news concerning U.S.-China trade relations. New 15% tariffs were scheduled for select Chinese imports on December 15. Those tariffs were never implemented, for on December 13, Chinese and U.S. officials announced an agreement on a preliminary trade pact. In this “phase-one” deal, to be signed in Washington this month, the U.S. agrees to phase out existing tariffs on Chinese products, and China agrees to buy more U.S. crops. The phase-one deal also made a start in addressing the most pressing issue in Sino-American trade relations: the protection of U.S. intellectual property in China.²

The Federal Reserve made its third interest rate cut of the year in October – the third cut in three meetings. Then, it signaled that it may not adjust short-term interest rates for all of 2020. In December, the central bank’s newest dot-plot (a chart used to convey the benchmark interest rate outlook for coming quarters) showed that none of the 17 members of the Federal Open Market Committee expected a rate cut in 2020, and only four anticipated any kind of rate hike. Currently, the target range for the federal funds rate is 1.50-1.75%.³

In terms of economic indicators, the fall increase in hiring was surprising news for labor market analysts. The Department of Labor said that employers added 156,000 net new jobs in October; then, 266,000 in November. These numbers hinted at an economy picking up rather than slowing down. Unemployment was at 3.6% in October, declining to 3.5% in November. The broader U-6 unemployment rate (which counts the underemployed as well as the unemployed) was at 7.0% in October and 6.9% a month later.⁴

Consumer spending, according to the Department of Commerce, rose by 0.4% in November, improving on an October increase of 0.3%. Through November, retail sales were up 3.5% year-over-year, with respective October and November gains of 0.4% and 0.2%. During Q4, the Bureau of Economic Analysis revised its Q3 gross domestic product estimate up from 2.0% to 2.1%.⁴

Households maintained their optimism; however, in December, the Conference Board’s Consumer Confidence Index recorded its fourth decline in five months. With revisions factored in, the index went from 126.1 in October to 126.8 in November to 126.5 in December. The University of Michigan’s consumer sentiment gauge, on the other hand, had its best reading since May in December, rising to 99.3. It rose in each month of Q4, ascending to 95.5 in October and 96.8 in November.^5,6

Inflation picked up in the fourth quarter; the Consumer Price Index rose 2.1% in the 12 months ending in November, 0.3% higher than the annualized inflation seen a month earlier. The core CPI (which factors out energy and food costs) was up 2.3% year-over-year in November.⁴

Manufacturing seemed to stand out as the U.S. economic weak spot in Q4. The Institute for Supply Management’s Factory Purchasing Managers Index was below 50 for the whole quarter (indicating an economic sector that is shrinking). The December reading of 47.2 was the poorest since June 2009. ISM’s PMI for the larger service sector of the economy was above 50 in both October and November (54.7, and then 53.9).^4,7

The quarter also saw the passage of the Setting Up Every Community for Retirement Enhancement (SECURE) Act, a major piece of legislation impacting traditional retirement accounts. Under the SECURE Act, the age for required minimum distributions (RMDs) from these accounts rises from 70½ to 72. (This change affects only those who turn 70½ in 2020 or later.) The SECURE Act also lets seniors with earned income keep contributing to these accounts after age 70.^4,8

GLOBAL ECONOMIC HEALTH
The IHS Markit Purchasing Managers Index (PMIs) for the eurozone factory sector was at 46.3 in December; a number below 50 indicates a sector in which activity is contracting. Seven of eight countries measured by this index saw manufacturing weaken further in December; Germany’s factory sector was in the poorest shape by the end of the quarter, according to Markit’s data summary. Factory sectors in Italy and the Netherlands showed their most dramatic monthly contraction since 2013 in December.⁹

The Caixin China General Manufacturing PMI for China was at 51.5 by December, down a bit from 51.8 in November. The rate of new Chinese factory orders declined in Q4, but there was a small gain for export orders. China’s state factory PMI had a poorer reading of 50.2 in both November and December. As Q4 ended, China’s government announced it would reduce cash reserve requirements for the nation’s banks, which would effectively pour another 800 billion yuan into China’s financial system.^9,10

While the quarter opened with much uncertainty about when (and even if) the Brexit would occur, some of this ambiguity was resolved by the end of the year. The Conservative (Tory) Party won a decisive victory in December’s United Kingdom general election, and Boris Johnson remained Prime Minister. As a consequence, the Brexit may occur by the extended January 31 deadline set by the European Union, as Johnson and the Conservatives appear to have the votes needed to approve a revised Brexit deal. Their next task: forging a working trade pact with the European Union before 2020 ends.¹¹

WORLD MARKETS
Gains far outnumbered losses last quarter. The largest advances were made by emerging-market benchmarks: Argentina’s Merval jumped 43.36%, Russia’s RTS rose 16.12%, and Brazil’s Bovespa climbed 10.41%. In the Asia-Pacific region, there were three improvements worth mentioning: Japan’s Nikkei 225 gained 8.74%; China’s Shanghai Composite, 4.99%; South Korea’s Kospi, 6.53%. France’s leading stock index, the CAC 40, gained 5.29%; Germany’s benchmark, the DAX, added 6.61%.¹²

In the midst of all this, a couple of stock indices failed to advance. Thailand’s Set50 index slipped 2.00% in the quarter, and Australia’s ASX 200 benchmark went sideways, losing 0.06%.¹²

COMMODITIES MARKETS
What were the best-performing commodities of the quarter? Well, there were several gains of 10% or more, and at the top of the list, there is coffee, which rose 23.88% on the Intercontinental Exchange (ICE) in Q4. Soybean oil advanced 17.67%; palladium, 16.56%; WTI crude oil, 14.70%. RBOB gasoline gained 12.23%; wheat, 11.19%. WTI crude ended the quarter trading at $61.18 a barrel. Gold rose 3.41% in Q4, with the price hitting $1,523.10 on the New York Mercantile Exchange (NYMEX) on December 31.^13,14

Some other futures took Q4 losses. Natural gas fell 15.69% for the quarter, and Q4 brought setbacks of 5.36% for orange juice, 2.94% for corn, and 2.45% for the U.S. Dollar Index, which ended the year at 96.16.¹³

REAL ESTATE
When Freddie Mac conducted its last Primary Mortgage Market Survey of the decade (December 26), it measured the average interest rate on a 30-year conventional mortgage at 3.74%, and the mean interest rate for a 15-year conventional mortgage was at 3.19%. Three months earlier (September 26), the average interest on the 30-year home loan was at 3.64%, while the average interest on the 15-year loan was at 3.16%.¹⁵

30-year and 15-year fixed rate mortgages are conventional home loans generally featuring a limit of $484,350 ($726,525 in high-cost areas) that meet the lending requirements of Fannie Mae and Freddie Mac, but they are not mortgages guaranteed or insured by any government agency. Private mortgage insurance, or PMI, is required for any conventional loan with less than a 20% down payment.

The pace of home buying decelerated during the fall. National Association of Realtors’ reports showed residential resales down 1.5% in October and 1.7% in November. Still, sales were up 2.7% year-over-year. By November, the median sale price of an existing home was $271,300, a 5.4% increase from November 2018. The NAR said that there was less than four months of existing home inventory in both October and November; it views six months of inventory as a sign of a balanced market.^4,16

New home sales, by the estimation of the Census Bureau, fell 2.7% in October, but bounced back with a 1.3% gain a month later. Groundbreaking on new housing developments had definitely picked up from 2018. Federal government data showed housing starts up 13.6% year-over-year in November, with permits for future construction up 11.1% year-over-year.^4,17

T I P   O F   T H E   Q U A R T E R
You may not want to abbreviate the year 2020 on financial, insurance, legal, and health care documents you sign or date. If you write “2/1/20” and there is enough space left after the “20,” an unscrupulous party could add a couple of numerals and change that date to 2/1/2018 or 2/1/2017, and so on.

 LOOKING BACK, LOOKING FORWARD

As the chart below reveals, the big Wall Street benchmarks surged in the fourth quarter. Their Q4 gains capped off one of the better years of the decade for domestic stocks. Both the Nasdaq Composite and S&P 500 had their best years since 2013. The quarter-ending settlements: Dow, 28,538.44; S&P, 3,230.78; Nasdaq, 8,972.60.^18,19

Sources: barchart.com, treasury.gov – 12/31/19^18,20,21

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 at maturity given expected inflation.

The opening quarter of 2020 got off to a bullish start, with a 330-point gain (and a new record close) for the Dow Industrials on January 2. With the phase-one U.S.-China trade deal slated to be signed and the economy not giving off distinct signals of slowing, traders entered the new quarter seeing some upside in the market. Questions are on the horizon, though. Can geopolitical tensions in the Middle East be managed? Will the next earnings season meet forecasts? While the market opened 2020 with a rally, there are certainly potential headwinds around.²²

Q U O T E   O F   T H E   Q U A R T E R

“Age is… wisdom, if one has lived one’s life properly.”

MIRIAM MAKEBA

 Marc Aarons may be reached at (714)887-8000 or Marc@OCMONEYMANAGERS.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.)

^{MMI Disclosure}

^{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. 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 MERVAL Index (MERcado de VALores, literally Stock Exchange) is the most important index of the Buenos Aires Stock Exchange. The RTS Index (Russia Trading System) is a free-float capitalization-weighted index of 50 Russian stocks traded on the Moscow Exchange, calculated in U.S. dollars. 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. 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 SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. 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 CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The DAX 30 is a blue-chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The SET50 index is calculated from the prices of 50 selected SET (Stock Exchange of Thailand) stocks. The S&P/ASX 200 index is a market-capitalization weighted and float-adjusted stock market index of stocks listed on the Australian Securities Exchange. The index is maintained by Standard & Poor’s and is considered the benchmark for Australian equity performance. Intercontinental Exchange (ICE) is an American company that owns exchanges for financial and commodity markets, and operates 12 regulated exchanges and marketplaces. 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 – us.spindices.com/indices/equity/sp-500 [12/31/19]
2 – cnbc.com/2019/12/13/china-says-it-has-agreed-to-us-trade-deal-text-indicates-next-step-is-signing.html [12/13/19]
3 – investors.com/news/economy/fed-meeting-dow-jones-reaction-3-big-questions/ [12/11/19]
4 – investing.com/economic-calendar [12/31/19]
5 – investing.com/economic-calendar/cb-consumer-confidence-48 [1/3/20]
6 – tradingeconomics.com/united-states/consumer-confidence [1/3/20]
7 – marketwatch.com/story/us-manufacturing-slumps-worsens-in-december-as-ism-index-falls-to-10-year-low-2020-01-03 [1/3/20]
8 – marketwatch.com/story/with-president-trumps-signature-the-secure-act-is-passed-here-are-the-most-important-things-to-know-2019-12-21 [12/25/19]
9 – nasdaq.com/articles/daily-markets%3A-2020-looks-to-begin-the-way-2019-ended-2020-01-02 [1/2/20]
10 – asiatimes.com/2020/01/article/china-slowing-caixin-purchasing-mgr-data-confirm/ [1/2/20]
11 – forbes.com/sites/pascaledavies/2019/12/15/for-europe-the-brexit-battle-is-just-getting-started [12/15/19]
12 – barchart.com/stocks/indices/world-indices?viewName=performance [12/31/19]
13 – barchart.com/futures/performance-leaders?viewName=chart&timeFrame=3m [12/31/19]
14 – marketwatch.com/investing/future/gold [1/2/20]
15 – freddiemac.com/pmms/archive.html?year=2019 [1/2/20]
16 – marketwatch.com/story/existing-home-sales-fell-17-in-november-as-americans-struggled-to-find-affordable-properties-2019-12-19 [12/12/19]
17 – economy.com/united-states/residential-housing-starts [1/2/20]
18 – barchart.com/stocks/indices?viewName=performance [12/31/19]
19 – abcnews.go.com/Business/stocks-post-biggest-year-gain-2013/story?id=68008745 [12/31/19]                                                        
20 – barchart.com/stocks/indices?viewName=performance [9/30/19]
21 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldAll [12/31/19]
22 ­- cnbc.com/2020/01/02/dow-futures-point-to-a-higher-open.html [1/2/20]}

The post Quarterly Economic Update appeared first on Money Managers, Inc..

THE QUARTER IN BRIEF

In this Q2 recap: stocks rise, fall, and then soar, as the Federal Reserve shifts its thinking and new chapters unfold in the ongoing U.S.-China trade dispute.

A review of Q2 2019, Presented by Marc Aarons at Money Managers, Inc.

The S&P 500 certainly rollercoastered during the second quarter of 2019, but it also gained 3.8% across those three months. U.S.-China trade negotiations unwound, but as the quarter ended, they showed signs of resuming. The Federal Reserve grew dovish. Yields on longer-term Treasury notes dipped and so did mortgage rates. Consumers were confident, and consumer spending stayed strong. Mixed data emerged from the housing sector. Gold outperformed oil as well as many other commodities. The Brexit was delayed, and central banks in other countries elected to lower benchmark interest rates.¹

DOMESTIC ECONOMIC HEALTH On May 5, President Trump announced that U.S. tariffs of 10% on $200 billion of Chinese products would rise to 25% and that virtually all other imports coming to the U.S. from China would “shortly” face tariffs. China retaliated, declaring that it would hike tariffs already imposed on $60 billion worth of American products effective June 1. The trade talks between officials from the world’s two largest economies then hit a six-week standstill. On June 29, however, President Trump announced at the Group of 20 summit in Japan that formal bilateral trade negotiations would soon resume and that the U.S. would hold off on tariffs slated for another $300 billion in Chinese goods.^2,3

The other big story of the quarter was the change of outlook at the Federal Reserve. The central bank did not adjust rates up or down during Q2, but its June policy statement noted that Fed officials would “act as appropriate” to try and sustain economic growth. The latest dot-plot, gathering opinions from Fed officials on where interest rates might be in the near future, showed nothing like consensus.⁴

The quarter ended with most futures traders believing that the Fed would make some kind of rate adjustment as soon as July. Perhaps the Fed was also revising its expectations in light of declining inflation. The May Consumer Price Index showed just a 1.7% annualized advance. Back in May 2018, inflation was running at a yearly pace of 2.8%.^4,5

Some other indicators pointed to a soft patch in the economy in the spring, perhaps nothing more. The Department of Labor reported 205,000 net new jobs in April, but only 90,000 net new jobs in May; unemployment did remain at 3.6% in both months, with the U-6 jobless rate, including the underemployed, actually descending from 7.3% to 7.1%. The prime gauge of U.S. manufacturing health – the Institute for Supply Management Purchasing Managers Index – dropped notably to 52.8 in April, then declined to a 12-month low of 52.1 in May.^6,7

Even so, consumer spending remained solid. Personal spending improved 0.5% in May, building on the 0.3% April gain. Retail sales, coincidentally, were also up 0.5% in May and 0.3% in April. Personal incomes rose 0.5% in both months. A lagging indicator worth noting: as the quarter ended, the Bureau of Economic Analysis affirmed that the economy grew 3.1% during Q1.^6,8

Key consumer confidence indexes stayed at high levels. The Conference Board’s consumer confidence index was at 129.2 in April, then at 134.1 in May and 121.5 in June. The University of Michigan’s consumer sentiment index hit an 8-month peak of 100.0 in May and ended the quarter at 98.2. ^9,10

GLOBAL ECONOMIC HEALTH

The Fed was not the only central bank reconsidering monetary policy during Q2. Policymakers in Australia, Chile, India, New Zealand, and Russia all cut interest rates after May 1 in an effort to stimulate their respective economies. Globally speaking, that constituted the most easing seen since the first half of 2016. Markets in Europe benefited from comments by Mario Draghi, President of the European Central Bank. Draghi said that he was prepared to loosen monetary reins in order to stimulate lethargic European Union country economies.^11,12

The Brexit was delayed. After an acrimonious spring in Parliament that saw no progress toward ratifying a new trade pact between the United Kingdom and the European Union, the E.U. postponed the Brexit deadline until October 31. Prime Minister Theresa May announced that she would resign, and based on election results, either current U.K. foreign secretary Jeremy Hunt or prior U.K. foreign secretary Boris Johnson will replace her later this month. Johnson, widely considered the favorite, has told the media that while he does not want the U.K. to leave the E.U. without a deal, the U.K. would do well to prepare “confidently and seriously” for that possibility.^13,14

WORLD MARKETS

Gains were numerous in the quarter, with Argentina’s Merval recording the largest at 26.02%.  There was one other double-digit Q2 advance: Russia’s Micex added 10.97%. Germany’s DAX improved by 8.58%; Brazil’s Bovespa rose 6.97%. Other gains of note: France’s CAC 40, 4.58%; the Euro Stoxx 50, 3.64%; the MSCI World, 3.35%; India’s Sensex, 3.04%; Canada’s TSX Composite, 1.74%; Japan’s Nikkei 225, 1.42%.^15,16

The quarterly retreats included the 0.31% loss for the MSCI Emerging Markets benchmark, the 0.34% retreat for Spain’s IBEX, and the 0.61% decline of China’s Shanghai Composite.^15,16

COMMODITIES MARKETS

Examining second-quarter commodities performance, palladium had the best quarter among the metals, rising 18.23%. Wheat finished first among the key crops, up 12.22%. Ethanol topped the energy futures, advancing 8.74%. Coffee rose 12.06%; corn, 9.51%; gold, 8.63%. Gold ended Q2 at a price of $1,412.50 on the New York Mercantile Exchange. RBOB gasoline added 4.56% of value in Q2, and silver rose 1.25% to a NYMEX value of $15.27 on June 28.^17,18

There were also copious losses in the quarter. Some were minor: soybeans declined 0.36%; the U.S. Dollar Index, 0.61%; platinum, 0.98%; West Texas Intermediate crude, 2.16%. WTI crude settled at $58.20 per barrel on June 28 after a 9.07% June surge. Copper fell 6.06%; cotton, 17.86%; natural gas, 18.70%.^17,18

REAL ESTATE

Home loans grew cheaper in Q2, and home buying picked up as the quarter drew to a close. The National Association of Realtors noted a 2.5% increase for existing home sales in May; although, the annualized sales pace was still 1.1% beneath year-ago levels. May was the fifteenth straight month showing a year-over-year decline. (April had seen a retreat of 0.4%.) New home sales, which make up only about 10% of the U.S. residential real estate market, were down 3.7% in April and another 7.8% in May. The S&P CoreLogic Case-Shiller 20-City Composite Home Price NSA Index, a lagging indicator, showed a 2.5% yearly gain as of April.^6,19

Not that long ago (November), the average interest rate for a 30-year, fixed-rate mortgage was near 5%. Contrast that with where it was as the second quarter ended: 3.73%, according to mortgage reseller Freddie Mac’s June 27 Primary Mortgage Market Survey. Back on March 28, Freddie Mac calculated the average interest rate on a 30-year FRM at 4.06%. As for 15-year, fixed-rate mortgages, their average interest rate went from 3.57% to 3.16% between the March 28 and June 27 surveys.^19,20

30-year and 15-year fixed-rate mortgages are conventional home loans generally featuring a limit of $484,350 ($726,525 in high-cost areas) that meet the lending requirements of Fannie Mae and Freddie Mac, but they are not mortgages guaranteed or insured by any government agency. Private mortgage insurance, or PMI, is required for any conventional loan with less than a 20% down payment.

The Census Bureau said that housing starts surged 6.8% in April, then retreated 0.9% a month later. The pace of permits issued for new residential construction improved by 0.2% in April and 0.3% in May.⁶

T I P   O F   T H E   Q U A R T E R

If you are switching jobs (or plan to), make sure to explore the available options for the assets you have saved and invested in your workplace retirement plan.

LOOKING BACK, LOOKING FORWARD

Time for a look at stock index performance. The S&P 500 gained 3.93% in April, dropped 6.58% in May, and climbed 6.89% in June. It hit a new, all-time peak in intraday trading on June 21: 2,964.03. The benchmark closed the quarter at 2,941.76.^1,21

The Dow Jones Industrial Average settled at 26,599.96 on the last trading day of the quarter; the Nasdaq Composite, at 8,006.24. Early in June, the yield on the 10-year Treasury went under 2%, a development that occurred multiple times in that month.^22,23

Sources: tradingview.com, barchart.com, treasury.gov – 6/28/19^23,24,25

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends. 10-year TIPS yield = projected return at maturity given expected inflation.

All in all, it was quite a quarter, with stocks getting as much of a lift from Federal Reserve policy moves and White House tweets as from earnings. As Q3 starts, traders are wondering if a rate cut and a U.S.-China trade deal are in store for the summer; there is also some ambiguity about the economy’s momentum. Companies are expected to start reporting second-quarter earnings in mid-July.  

Q U O T E   O F   T H E   Q U A R T E R

“The great thing in this world is not so much where we are, but in what direction we are moving.”

OLIVER WENDELL HOLMES, JR.

Marc Aarons  may be reached at (714)887-8000 or Marc@OCMONEYMANAGERS.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.)

MMI DISCLOSURE

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. 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 MERVAL Index (MERcado de VALores, literally Stock Exchange) is the most important index of the Buenos Aires Stock Exchange. The MICEX 10 Index is an unweighted price index that tracks the ten most liquid Russian stocks listed on MICEX-RTS in Moscow. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt 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 CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The EURO STOXX 50 is a stock index of Eurozone stocks designed by STOXX, an index provider owned by Deutsche Börse Group. The MSCI World Index is a free-float weighted equity index that includes developed world markets and does not include emerging markets. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. 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. 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 MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The IBEX 35 is the benchmark stock market index of the Bolsa de Madrid, Spain’s principal stock exchange. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai 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 – money.cnn.com/data/markets/sandp/ [6/28/19]

2 – piie.com/blogs/trade-investment-policy-watch/trump-trade-war-china-date-guide [5/31/19]

3 – bloomberg.com/news/articles/2019-06-29/xi-trump-agree-to-restart-trade-talks-china-says [6/29/19]

4 – bloomberg.com/news/articles/2019-06-19/fed-scraps-patient-rate-approach-in-prelude-to-potential-cut [6/19/19]

5 – ycharts.com/indicators/us_inflation_rate [6/27/19]

6 – investing.com/economic-calendar/ [6/28/19]

7 – instituteforsupplymanagement.org/ISMReport/MfgROB.cfm [6/3/19]

8 – marketwatch.com/tools/calendars/economic [6/28/19]

9 – investing.com/economic-calendar/cb-consumer-confidence-48 [6/27/19]

10 – tradingeconomics.com/united-states/consumer-confidence [6/30/19]

11 – global-rates.com/interest-rates/central-banks/central-banks.aspx [6/25/19]

12 – bloomberg.com/news/articles/2019-06-27/ecb-seen-cutting-rates-in-september-as-draghi-reloads-stimulus [6/27/19]

13 – bbc.com/news/uk-politics-48497953 [6/7/19]

14 – reuters.com/article/us-britain-eu-johnson/boris-johnson-says-he-is-serious-about-no-deal-brexit-threat-idUSKCN1TP2SR [6/24/19]

15 – tradingview.com/markets/indices/quotes-us/ [6/28/19]

16 – msci.com/end-of-day-data-search [6/28/19]

17 – barchart.com/futures/performance-leaders?viewName=chart&timeFrame=3m [6/28/19]

18 – money.cnn.com/data/commodities/ [6/28/19]

19 – tinyurl.com/y245hx5o [6/21/19]

20 – freddiemac.com/pmms/archive.html [6/27/19]

21 – cnbc.com/2019/06/21/it-was-a-monumental-week-for-markets-with-major-milestones-in-stocks-bonds-gold-and-oil.html [6/21/19]  

22 – wsj.com/market-data [6/28/19]

23 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldAll [6/28/19]

24 – tradingview.com/markets/indices/quotes-us/ [6/28/19]

25 – barchart.com/stocks/indices?viewName=performance [3/29/19]

The post Quarterly Economic Update appeared first on Money Managers, Inc..

In this Q1 recap: the Federal Reserve alters its outlook, the truce in the trade dispute holds, the real estate market strengthens, and stocks make an impressive comeback from Q4, even as growth concerns mount.

A review of Q1 2019, Presented by Marc Aarons at Money Managers, Inc

THE QUARTER IN BRIEF

The strongest first quarter for stocks in 21 years featured all kinds of news. Central banks revised their outlook on monetary policy, seeing less robust economies in 2019. Faint glimmers of progress emerged in the U.S.-China trade dispute. Concerns over near-term corporate earnings and bond yields grew. The possibility of a “hard” Brexit loomed in Europe. The real estate market showed signs of heating up again. As the closing bell rang on the last trading day of March, the Standard and Poor’s 500 notched a 13% gain for the first three months of the year.¹

DOMESTIC ECONOMIC HEALTH

Late last year, the Federal Reserve was forecasting two interest rate hikes for 2019 and maintaining a fairly hawkish outlook. On March 20, the central bank veered away from all that. It cut its 2019 growth forecast for the economy by 0.2% to 2.1%, indicated it would not raise interest rates this year, and projected just one quarter-point hike through 2021. At a press conference immediately after the release of the March policy statement, Fed Chairman Jerome Powell shared his view that the “growth of economic activity has slowed,” but he added that Fed policymakers did not foresee a recession developing.²

The financial markets reacted swiftly. Demand for longer-term Treasury notes rose. By March 22, the yield on the 10-year Treasury had fallen dramatically, to the point where the yield on the 2-year Treasury exceeded it. (Bond yields fall when bond prices rise.) Economists refer to this as an inverted yield curve. Some economists see an inverted yield curve as a recession signal, while others disagree. The sudden flight to longer-term Treasuries did seem to reflect a lessening of risk appetite among institutional investors. Just six days after the Fed made its pivot, the CMEGroup’s FedWatch Tool, which tracks 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.^3,4

Some of the incoming data during the quarter seemed to correspond with the Fed’s revised assessment of the economy, but some did not. (Some was actually delayed as an effect of the federal government shutdown that carried into late January.)

Inflation pressure eased. In October, the Consumer Price Index showed a 2.5% annualized advance. By February, inflation was running at just 1.5%.⁵

Job creation surged, then fell off. There were 311,000 net new jobs in January, but just 20,000 in February. From January to February, though, the unemployment rate declined from 4.0% to 3.8%, and the broader U-6 rate, encompassing the underemployed, dropped from 8.1% to 7.3%. (The federal government shutdown may have affected some of the above numbers.)⁶  

The quarter also ended with the Bureau of Economic Analysis downgrading fourth-quarter gross domestic product (GDP). The prior estimate was 2.6%; the revised estimate was 2.2%.⁷

One important consumer confidence gauge rose and fell during the quarter: the Conference Board’s index declined sharply to 124.1 in March, after hitting a 3-month peak of 131.4 in February. The University of Michigan’s consumer sentiment index performed better: it started the quarter with a drop of 7.1 points in January, but by late March, it was at 98.4, a tenth of a point above where it was in December.^8,9

The Institute for Supply Management’s monthly purchasing manager index, following manufacturing activity, was nowhere near 60 (a level it reached last summer), but remained well above 50 (the mark delineating sector expansion from industry contraction). ISM’s manufacturing PMI was at 56.6 in January, 54.2 in February, and 55.3 in March.¹⁰

GLOBAL ECONOMIC HEALTH

Financial markets worldwide breathed a collective sigh of relief as the trade dispute between the U.S. and China eased. Negotiations between the two nations continued during the quarter, but no deal emerged. While some trade analysts see an agreement being reached in the second quarter, there are doubts that such an accord will resolve the issue at the center of the tariff fight – the concern that Chinese firms are using their technologies to steal U.S. intellectual property. In March, President Trump said that he would prefer leaving 25% tariffs on $50 billion of Chinese products in place, even if a new trade deal was forged.¹¹

The quarter ended without a Brexit or even an accepted Brexit path – with the United Kingdom facing a potentially unpleasant outcome. The revised Brexit deal, which Prime Minister Theresa May brought to Parliament, was rejected for a third time in late March, raising the possibility of the U.K. leaving the European Union on April 12 without any kind of defined trade agreement. The European Central Bank surprised financial markets in early March with a decision to revive some of the economic stimulus measures it had recently ended, and it also indicated that would leave interest rates unchanged until at least 2020. The latest forecast from the Organization for Economic Cooperation and Development (OECD) projects only 1% growth for the eurozone this year and less than that for the economies of Germany, Japan, and the United Kingdom.^12,13

WORLD MARKETS

The S&P 500 was just one of many equity benchmarks advancing double digits in the first quarter. In fact, nearly every foreign stock index posted a quarterly gain of some kind. China’s Shanghai Composite surged 26.77%; Italy’s FTSE MIB, 16.17%; Hong Kong’s Hang Seng, 14.41%; France’s CAC 40, 13.10%; all outperformed the S&P for Q1. Other notable gains: Canada’s TSX Composite, 12.42%; Euro Stoxx 50, 11.66%; Germany’s DAX, 9.16%; Brazil’s Bovespa, 8.56%; the United Kingdom’s FTSE 100, 8.19%; India’s BSE Sensex, 8.11%; Japan’s Nikkei 225, 7.56%; South Korea’s KOSPI, 6.19%. MCSI’s World index rose 11.88% in the quarter; MSCI’s Emerging Markets index, 9.56%.^14,15

COMMODITIES MARKETS

Oil outgained all other major commodities during the quarter. The value of West Texas Intermediate crude rose 29.98% on the New York Mercantile Exchange (NYMEX), taking the per-barrel price to $60.18 at the March 29 close. Other major Q1 advances: unleaded gasoline, 25.52%; palladium, 14.98%; copper, 9.29%; platinum, 6.59%; lumber, 6.07%; cotton, 5.61%. The significant retreats: natural gas, 4.21%; cocoa, 6.44%; corn, 6.98%; coffee, 9.22%; wheat, 11.76%. Gold gained but 0.29% for the quarter, while silver lost 2.65%. On the NYMEX Commodity Exchange, gold was worth $1,290.80 per ounce at the close on March 29; silver, $15.10 per ounce. The U.S. Dollar Index closed out Q1 1.27% higher at 97.20.^16,17

REAL ESTATE

Is a buyer’s market returning? As the quarter ended, some real estate industry journalists and analysts wondered if that was the case. Existing home sales surged 11.8% in February, according to the National Association of Realtors. That was the largest monthly gain seen since December 2015. While residential resales were still down 1.8%, year-over-year, this latest NAR report was certainly encouraging. NAR chief economist Lawrence Yun cited “lower mortgage rates, more inventory, rising income, and higher consumer confidence” as contributing factors in the increase. Additionally, the Census Bureau said that the pace of new home buying improved 4.9% during February; economists surveyed by Reuters had forecast a 1.3% advance.^18,19

As Yun noted, cheaper home loans factored in to all this. The decline in longer-term Treasury yields influenced mortgage rates. By the last week of March, a 30-year, fixed-rate mortgage was carrying an average interest rate of just 4.06%, according to the calculations of mortgage buyer Freddie Mac. Compare that with 4.95% as recently as November. (The 15-year, fixed-rate mortgage carried an average interest rate of just 3.57% as March ended.)²⁰

In February, the median sale price of an existing home was $249,500, representing a year-over-year increase of 3.6%. The median new home purchase price was $315,300, and that was down 3.6% from a year earlier.^18,19

Retirees aiming to increase their income over time should not overlook the potential of dividend-paying stocks.

T I P   O F   T H E   Q U A R T E R

LOOKING BACK, LOOKING FORWARD

As the table below shows, the major U.S. equity benchmarks recorded great gains in the quarter. The closing settlements on the last trading day of Q1: Dow Jones Industrial Average, 25,928.68; S&P 500, 2,834.40; Nasdaq Composite, 7,729.32. The S&P Smallcap 600 ended the quarter at 939.30, advancing 11.17%.²¹

Sources: barchart.com, treasury.gov – 3/29/18^21,22,23

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.

Just as the bulls seemed beaten down, they came running right back. After diving nearly 14% in the last three months of 2018, the S&P 500 rebounded more than 13% in the opening quarter of 2019. While consumer spending is still strong, many analysts still see slightly less economic growth this year (between 2%-2.5%). Stock market analytics firm FactSet is now projecting 4% profit growth for S&P 500 firms in 2019; when 2018 ended, the projection was near 10%. Economies in Europe and China appear to be less robust, and that could put a drag on the revenue of S&P 500 companies, 40% of which comes from outside the U.S. An abrupt April Brexit could also be a negative for global equity markets. The financial markets showed great resilience in Q1, forcing some financial firms to reconsider their full-year outlook.¹

Q U O T E   O F   T H E   Q U A R T E R

“The secret of joy in work is contained in one word – excellence. To know how to do something well is to enjoy it.”

PEARL BUCK

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MMI Email Disclosure

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. 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 FTSE MIB is the benchmark stock market index for the Borsa Italiana, the Italian national 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 CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. 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 EURO STOXX 50 is a stock index of Eurozone stocks designed by STOXX, an index provider owned by Deutsche Börse Group. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The Bovespa Index, best known as Ibovespa, is the benchmark index of about 60 stocks that are traded on the B3 (Bovespa: BOlsa de Valores do Estado de São PAulo). The FTSE 100 Index is a share index of the 100 most highly capitalized companies listed on the London Stock Exchange. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. 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 MSCI World Index is a free-float weighted equity index that includes developed world markets and does not include emerging markets. The CBOE Volatility Index^® is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The S&P SmallCap 600® measures the small-cap segment of the U.S. equity market. 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 – tinyurl.com/y23en223/ [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 – ycharts.com/indicators/us_inflation_rate [4/1/19]

6 – investing.com/economic-calendar/ [3/31/19]

7 – marketwatch.com/tools/calendars/economic [3/29/19]

8 – investing.com/economic-calendar/cb-consumer-confidence-48 [3/31/19]

9 – tradingeconomics.com/united-states/consumer-confidence [3/31/19]

10 – instituteforsupplymanagement.org/ISMReport/MfgROB.cfm [4/1/19]

11 – pbs.org/newshour/economy/new-round-of-u-s-china-trade-talks-set-to-begin-in-beijing [3/28/19]

12 – cnbc.com/2019/03/29/brexit-general-election-speculation-grows-after-may-loses-vote.html [3/29/19]

13 – nytimes.com/2019/03/07/business/ecb-european-economy-stimulus.html [3/7/19]

14 – investing.com/indices/major-indices [3/31/19]

15 – msci.com/end-of-day-data-search [3/29/19]

16 – barchart.com/futures/performance-leaders?viewName=chart&timeFrame=3m [3/31/19]

17 – money.cnn.com/data/commodities/ [3/29/19]

18 – nar.realtor/newsroom/existing-home-sales-surge-11-8-percent-in-february [3/22/19]

19 – cnbc.com/2019/03/29/new-home-sales-february.html [3/29/19]

20 – tinyurl.com/y27puujx [3/29/19]

21 – barchart.com/stocks/indices?viewName=performance [3/29/19]

22 – barchart.com/stocks/indices?viewName=performance [1/1/19]

23 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldAll [3/29/19]

The post Quarterly Economic Update appeared first on Money Managers, Inc..

In this Q4 recap: waves of volatility hit Wall Street, trade pacts and disputes make headlines, oil takes a plunge, and the economy continues to perform well.

Quarterly Economic Update

A review of Q4 2018

Presented by Marc Aarons @Money Managers, Inc. 

THE QUARTER IN BRIEF

Wall Street saw many ups and downs in the last three months of 2018. The fourth quarter concluded with bulls and bears vying for control of the market and with the S&P 500 suffering a 13.97%, three-month loss. The Federal Reserve sent conflicting signals about its implementation of monetary policy normalization, to the frustration of investors. No real progress was made in resolving the U.S.-China trade war, and the Brexit appeared to reach a standstill. The price of oil dropped sharply. The housing market gained a bit of momentum as home prices and mortgage rates both declined. The quarter was quite newsworthy, but its major headlines raised some troubling questions about the direction of the markets.¹

DOMESTIC ECONOMIC HEALTH

On the whole, the economy looked quite good in the fall. Consumer spending increased 0.8% for October and 0.4% for November, with retail sales up 1.1% in the tenth month of the year and 0.2% in the eleventh. Retailers benefited from a great holiday sales season: on an annualized basis, consumer purchases made between November 1 and December 24 were up 5.1% compared to the same period in 2017.^2,3

Consumer confidence indices declined from strikingly high levels, but were still notably strong. The Conference Board index hit 137.9 in October, 136.4 in November, and 128.1 in December. Having its best year since 2000, the University of Michigan’s monthly consumer sentiment gauge came in at 98.6 for October, 97.5 for November, and 98.3 for December; it averaged 98.4 for 2018.^4,5

Both the service and factory sectors were booming, according to the Institute for Supply Management’s monthly purchasing manager indices. ISM’s non-manufacturing index was above 60 in both October and November (60.3, then 60.7); its manufacturing index rose from 57.7 in October to 59.3 in November.⁶

How was the jobs picture? Nonfarm payrolls expanded with 237,000 net new jobs during October; the November gain was 155,000. During both months, average yearly wage growth was at 3.1%. The main jobless rate held at 3.7%; the underemployment (U-6) rate moved north from 7.4% to 7.6%.^2,7

Inflation was advancing just 2.2% a year by November; the 12-month increase had approached 3% as recently as July. Falling fuel costs helped tame inflation pressure. As a result, the average non-supervisory worker saw his or her inflation-adjusted income rise 1.0% in the 12 months ending in November, the most since 2016. On the wholesale front, producer prices jumped 0.6% in October, but rose only 0.1% during November. (Speaking of producers, industrial production was up 3.9% year-over-year in November; overall durable goods orders rose 0.8% for November after a 4.3% fall during the prior month.)^2,8

In late December, the Bureau of Economic Analysis stated the economy had expanded 3.4% in the third quarter, revising its previous estimate of 3.5%. With growth like that, it not be surprising that the Federal Reserve made its fourth rate move of the year in December, taking the target range on the federal funds rate to 2.25-2.5%. Top Fed officials sounded alternately dovish and hawkish during the fourth quarter. In October, Fed chair Jerome Powell commented that interest rates were “a long way” from neutral, irritating Wall Street. A month later, both he and Fed vice chair Richard Clarida remarked that the benchmark interest rate was close to a “neutral” level. December’s rate increase came with a relatively hawkish dot-plot, projecting two more hikes in 2019.^2,9

The U.S. and China did little to address the tariffs they had imposed on each other earlier in the year. At the start of December, both nations did agree to a 90-day truce on introducing new import taxes. Even so, the U.S. was slated to hike tariffs on as much as $200 billion of Chinese imports as the year began.¹⁰

 GLOBAL ECONOMIC HEALTH

Overseas, manufacturing economies in the east and west seemed to be decelerating. In fact, December marked the eighth consecutive month of a downward trend in weighted average Markit flash PMI readings of U.S., Japan, and European Union member countries. The mean factory PMI reading among those nations was the poorest in two years last month. China’s economy slowed in each month of the quarter, according to a Bloomberg Economics tracker, which cited reduced consumer demand for goods and services as much as the impact of tariffs. In November, the nation’s official factory PMI sat at 50.0, the break-even point between sector growth and contraction. In Q3, China’s annualized gross domestic product was expanding at a 6.5% pace; in Q1, the annualized GDP reading had been at 6.8%.¹¹

The European Union (and the world) waited for the Brexit to proceed. U.K. leaders, however, spent the quarter debating if it should unfold according to the deal that Prime Minister Theresa May had presented to the European Union. By December, May’s deal faced almost certain rejection in Parliament. There were three other options: another national referendum on the Brexit, a no-deal Brexit that would leave big businesses with headaches, or a “managed,” no-deal Brexit with some bilateral trade arrangements put in place. The deadline for the Brexit was still set for March 29. On December 13, the European Central Bank confirmed that its longstanding, asset-purchase program would wrap up at the end of 2018. Interest rate hikes could be in the ECB’s plans this year; euro-area consumer prices have been rising only about 1% annually for the past six years. Real, annualized GDP for the euro area through the first three quarters of 2018 was just 1.2%, a pace far off the 2.7% GDP seen in 2017.^12,13

WORLD MARKETS

As bearish sentiment mounted in Q4, marquee equity indices steadily descended. Most of the 13-week declines were sizable: in the west, France’s CAC 40 slid 13.89%; Germany’s DAX, 13.80%; the United Kingdom’s FTSE 100, 10.41%. In the east, India’s Sensex lost just 0.44%; Hong Kong’s Hang Seng, 6.99%; Japan’s Nikkei 225, 17.02%; Australia’s All Ordinaries, 9.74%; China’s Shanghai Composite, 11.61%. To our north, the TSX Composite retreated 10.89% in Q4. MSCI’s Emerging Markets index fell 7.85% during the quarter; its World index tumbled 13.74%.^14,15

COMMODITIES MARKETS

While equities had a dismal quarter, some commodity futures posted significant Q4 gains. Take cocoa, which advanced 16.04%, and palladium, which rose 12.32%. Sugar improved 7.41% in Q4; gold, 6.61%; silver, 4.86%; soybeans, 2.68%; corn, 1.90%. The U.S. Dollar Index added 1.62%. At the closing bell on December 31, gold and silver were respectively worth $1,284.50 and $15.54 per ounce on the COMEX.^16,17

What notable commodities lost value in the quarter? Here is a list. Platinum fell 3.22%; coffee, 3.78%; wheat, 4.55%; natural gas, 4.70%; cotton, 6.59%; copper, 6.63%; RBOB gasoline, 37.41%; WTI crude, 37.54%. WTI crude ended Q4 at just $45.83 a barrel on the NYMEX.^16,17

REAL ESTATE

While the real estate market cooled off in 2018, the pace of home buying began to improve in the fourth quarter. By the estimations of the National Association of Realtors, existing home sales rose 1.4% in October and 1.9% in November. Perhaps sellers were lowering prices to meet prospective buyers on their turf. By November, NAR noted a median sale price of $257,700, which was merely 4.2% higher than in November 2017.^2,18

A dip in mortgage rates could also have been a factor. In the last Freddie Mac survey of 2018 (December 27), the average interest rate for a conventional home loan was 4.55% nationally; it had been 4.72% three months earlier. (Rates on 15-year, fixed loans and 5/1-year, adjustable loans were respectively at 4.01% and 4.00% in the December 27 survey, compared with 4.16% and 3.97% in late September.)¹⁹

Even so, NAR’s pending home sales index measuring monthly housing contract activity showed declines of 2.6% in October and 0.7% in November. New home purchases fell 8.9% in October. (We do not yet know about November new home sales, as the release of that Census Bureau report was delayed due to the federal government shutdown.)²

Home builders broke less ground in October, then started more projects (and took out more permits) in November. Census Bureau data showed housing starts down 1.6% for October, up 3.2% a month later; building permits were down 0.4% in the tenth month of the year, but up 5.0% in the eleventh.²

T I P   O F   T H E   Q U A R T E R
If you are within a few years of retiring, schedule a review of your retirement strategy. You do not want to risk basing your withdrawal rate or your investment selection on out-of-date assumptions.

 LOOKING BACK, LOOKING FORWARD

The fourth quarter is often hot for stocks, but this past one was ice cold. Equity investors grew concerned about the Federal Reserve’s plans for 2019, the evident economic deceleration in China and Europe, and a narrowing spread between long-term and short-term Treasury yields that risked becoming an inversion. The S&P 500 closed out 2018 at 2,506.85; the Dow Jones Industrial Average, at 23,327.46; the Nasdaq Composite, at 6,635.28; their quarterly performances are noted in the table below. The CBOE VIX volatility index surged 109.74% in the quarter to 25.42.^1,9

If you are wondering how the small caps fared, the short answer is: even worse than the big three. The S&P SmallCap 600 lost 20.43% in Q4; the Russell 2000, 19.39%.^1,20

Sources: barchart.com, wsj.com, bigcharts.com, treasury.gov – 12/31/18^1,21,22

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.

The fourth quarter of 2018 was the poorest quarter on Wall Street in 11 years. Was the welcomed, large-cap rebound at the end of December a hint of better times ahead? Earnings season is about to start, and it might be just what the Street needs; before it begins, investors may tread cautiously. Wall Street cannot “resume normal programming” fast enough for some market participants, but the path toward stability may not be an easy one; the volatility seen in December may take weeks to moderate. In sum, 2019 presents investors with many more uncertainties than 2018 did, and patience will be required to contend with them. Patience, in fact, may be an investor’s greatest friend this quarter and year.²³

Q U O T E   O F   T H E   Q U A R T E R

“Time is the most valuable thing a man can spend.”

tHeOphrastus

 Marc Aarons may be reached at (714)887-8000 or Marc@OCMONEYMANAGERS.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.)}

^{MMI Disclosure}

^{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. 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 CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. 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 most highly capitalized companies listed on the London Stock Exchange. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. 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 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 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. 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 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 CBOE Volatility Index® is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The S&P SmallCap 600® measures the small-cap segment of the U.S. equity market. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. 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 [1/1/19]
2 – investing.com/economic-calendar/ [12/28/18]
3 – cbsnews.com/news/2018-holiday-sales-soar-to-6-year-high/ [12/20/18]
4 – investing.com/economic-calendar/cb-consumer-confidence-48 [12/27/18]
5 – tradingeconomics.com/united-states/consumer-confidence [12/27/18]
6 – instituteforsupplymanagement.org/ISMReport/NonMfgROB.cfm?SSO=1 [12/6/18]
7 – bloomberg.com/news/articles/2018-12-07/u-s-payrolls-rise-below-forecast-155-000-as-wage-gain-misses [12/7/18]
8 – marketwatch.com/story/cheaper-gas-tamps-down-consumer-inflation-in-november-cpi-shows-2018-12-12 [12/12/18]
9 – forbes.com/sites/jjkinahan/2018/12/19/hawkish-now-dovish-later-fed-hikes-but-lowers-projected-2019-rate-projections [12/19/18]
10 – scmp.com/news/china/diplomacy/article/2179505/us-china-trade-war-timeline-first-tariffs-90-day-truce [12/26/18]
11 – bloomberg.com/news/articles/2018-12-27/december-early-indicators-show-china-slowed-for-a-seventh-month [12/27/18]
12 – nasdaq.com/article/british-ministers-split-over-next-brexit-steps-if-pms-deal-fails-20181220-00145 [12/20/18]
13 – tinyurl.com/ycbvf56h [12/28/18]
14 – news.morningstar.com/index/indexReturn.html [12/31/18]
15 – msci.com/end-of-day-data-search [12/31/18]
16 – barchart.com/futures/performance-leaders?viewName=chart&timeFrame=3m [12/31/18]
17 – money.cnn.com/data/commodities/ [12/31/18]
18 – cleveland.com/business/2018/12/ohio-us-home-sales-down-in-november-from-last-years-levels.html [12/19/18]
19 – freddiemac.com/pmms/archive.html [1/1/19]
20 – money.cnn.com/data/markets/russell/?page=33 [1/1/19]
21 – quotes.wsj.com/index/SPX [9/28/18]
22 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldAll [12/31/18]
23 – cnbc.com/2018/12/31/stock-market-wall-street-stocks-eye-us-china-trade-talks.html [12/31/18]}

The post Quarterly Economic Update-A review of Q4 2018 appeared first on Money Managers, Inc..

In this Q3 recap: stocks climb, U.S. economic indicators shine, yearly inflation decreases slightly, and a trade war gets underway.

A review of Q3 2018,

Presented by Marc Aarons  at Money Managers, Inc. 

THE QUARTER IN BRIEF

The third quarter of 2018 shall be remembered as a great one for stocks. The Dow Industrials, Nasdaq Composite, and S&P 500 all rose more than 7% in three months as bullish investors maintained their confidence in the face of some momentous news developments. Consistently strong economic indicators and impressive corporate profits helped motivate the summer rally. While the prospect of a global trade war did not ruffle Wall Street, investors in other regions shouldered more worry about the imposition of tariffs. Meanwhile, the Federal Reserve continued raising interest rates, the housing market cooled, and wage growth improved.¹

DOMESTIC ECONOMIC HEALTH

The trade war with China that began in the second quarter intensified in the third, even while both nations attempted to resume negotiations. On July 6, China and the U.S. each imposed import taxes on $34 billion worth of each other’s products. August 23 saw both parties expand the tariffs to cover $50 billion in goods. On September 24, the U.S. placed a 10% tariff on $200 billion more of Chinese imports, slated to rise to 25% in 2019. China retaliated with further tariffs on its end, assessing levies on $60 billion more of American-made products reaching its borders.²

Apart from a trade war, there was also a crucial trade deal at the end of the quarter. On September 30, the U.S., Canada, and Mexico agreed to a trilateral update for the North American Free Trade Agreement (NAFTA). The tentative accord must now be approved by the respective governments of all three nations. It stipulates that cars in the NAFTA region must be built with 75% or more of their parts manufactured in the three nations, or face tariffs; additionally, 40-45% of cars being built in the region will have to be made by workers paid at least $16 an hour. The agreement would also institute new trade secret and intellectual property standards and environmental regulations intended to thwart unlawful animal, fish, and timber importation and permit easier access to Canada’s dairy market.³

Federal Reserve officials decided on another quarter-point interest rate hike. The September 26 decision took the federal funds rate to a target range of 2.00-2.25%. Notably, the latest Federal Open Market Committee statement removed the word “accommodative,” symbolically shutting the door on the easy money era. In the press conference after that news release, though, Fed chairman Jerome Powell referred to the new funds rate level as “accommodative.” This was the central bank’s third rate move of 2018, and one more is widely expected in December. The FOMC now projects 3.1% growth for the economy in 2019, as opposed to the prior forecast of 2.8%.⁴

Consumers were keenly optimistic this summer. The Conference Board’s monthly consumer confidence index shows excellent readings of 127.9, 134.7, and 138.4 for July, August, and September, respectively. Those numbers include revisions to the July and August readings. In September, the University of Michigan’s consumer sentiment index settled at 100.1, only the third time in the last 14 years it has topped 100.^5,6

The Institute for Supply Management’s factory sector and service sector purchasing manager indices signaled that businesses were in good shape as well. ISM’s service sector index went from 55.7 in July to 58.5 for August, and its manufacturing PMI went from 58.1 in July to 61.3 a month later.⁷

The July and August employment reports from the Department of Labor were fair to good. July saw employers add a mediocre 147,000 net new jobs, but that improved to 201,000 the next month. More importantly, the annual rise in worker wages improved to 2.9% in August from 2.7% in July, approaching the level economists have long wanted to see in this recovery. In both months, the headline unemployment rate was just 3.9%; the underemployment (U-6) rate ticked down to 7.4% in August from 7.5%.⁸

Annualized inflation lessened in Q3. The Consumer Price Index displayed a yearly increase of 2.9% in July, then 2.7% in August; yearly core consumer inflation went from 2.4% to 2.2%. The Producer Price Index actually retreated 0.1% in August after a flat July; that retreat took its yearly advance down to 2.8% from the previous 3.3%.⁹

Other key indicators largely offered good news. By the end of the third quarter, the Bureau of Economic Analysis had delivered its third estimate of Q2 GDP: 4.2%. Hard goods orders were up 4.5% in August, following a 1.2% dip in July. Retail sales jumped 0.7% in July, but just 0.1% in August. Industrial output was up 0.4% in both those months; manufacturing output rose 0.3% in July and 0.2% a month later. Last but certainly not least, personal income rose 0.3% in both July and August.⁹

GLOBAL ECONOMIC HEALTH

Apart from the NAFTA update and the U.S.-China tariff battle, there was plenty of other news drawing the attention of investors here and abroad.

As the quarter ended, just six months remained until the Brexit, and the question was whether the United Kingdom’s separation from the European Union would be hard or soft. A hard Brexit would leave a free trade agreement in place, much like Canada has with the E.U., whereby the U.K. could recast its trade and immigration policies and create its own commerce regulations. Prime Minister Teresa May is against this Brexit route; some estimates forecast it could deliver a long-term economic blow of 5% of GDP. May has pushed for her “Chequers” proposal, which would allow seamless trade between the U.K. and E.U. while allowing freedom of movement to and from the E.U. for the U.K. population and autonomy over its services. E.U. leaders and the U.K.’s Labour party, however, oppose this “soft” Brexit concept. Italy put a scare into E.U. leadership when its populist coalition government moved to run a 2.4% annual deficit through 2021, a risky move given that its debt equals 130% of its GDP. Italian leaders aimed to lower taxes, provide a basic income, and lower the qualification age for retirement pensions.^10,11

Were tariffs already impacting China’s economy? Perhaps. The nation’s official factory PMI slipped to 50.8 in September, a 7-month low; the private Caixin/Markit manufacturing PMI hit 50.0, showing a sector on the verge of contraction. Export orders contracted for the fourth month in a row. While India’s economy was growing 8.2% through the first half of 2018, its rupee had lost about 13% against the dollar by the time Q3 ended, a painful consequence given the upturn in crude oil prices; similar currency slides affected Argentina and Turkey.^12,13

WORLD MARKETS

The Nikkei 225 was the one major foreign index that performed as well as its American counterparts during the quarter. It rose 8.14%. The MSCI World Index also had a fine Q3, improving 4.53%. France’s CAC 40 also went into the plus column with a gain of 3.31%; India’s Sensex advanced 2.27%, and the Australian All Ordinaries added 0.57%.^14,15

On the other hand, Hong Kong’s Hang Seng slumped 4.03% for the quarter. MSCI’s Emerging Markets index fell 2.02%, and the United Kingdom’s FTSE 100 lost 1.66%. Canada’s premier benchmark, the TSX Composite, settled 1.26% lower for the quarter, and the Shanghai Composite declined 0.92%. The German DAX index retreated just 0.48%.^14,15

COMMODITIES MARKETS

Palladium and oats finished first and second in commodity performance across the past three months, logging respective gains of 15.73% and 11.47%. RBOB gasoline advanced 6.97%; WTI crude, 5.38%; wheat, 1.90%; natural gas, 1.38%; the U.S. Dollar Index 0.09%. WTI crude settled at $73.56 on the NYMEX at the end of the quarter.^16,17

There is also a long list of losers from Q3. Corn retreated 2.66%; platinum, 4.27%; soybeans, 4.30%; gold, 5.19%; copper, 6.30%; cotton, 8.59%; silver, 8.95%; sugar, 13.31%; coffee, 14.05%; cocoa, 16.89%. Lumber was the worst performer during the three months ending in September, dropping 31.91%. Gold closed the quarter at $1,196.20 on the COMEX, silver at $14.69.^16,17

REAL ESTATE

Existing home sales make up the vast majority of residential real estate transactions, and according to the National Association of Realtors, they declined 0.7% in July and went flat in August. NAR’s pending home sales index did bode well for the near future, as it showed housing contract activity down 0.8% for July, then 1.8% for August. One signal that seller expectations seemed to be moderating: the sudden difference in annual price appreciation for the 20-city S&P CoreLogic Case-Shiller home price index. The July edition (the latest available) showed prices rising 5.9% year-over-year, down from 6.4% in June.⁹

The Census Bureau did find the pace of new home sales 3.5% improved in August after a 1.6% decline for July. It also measured a 9.2% jump for housing starts in August, in contrast to a 0.3% dip a month earlier. (Building permits increased by 1.5% in July, but then slipped 5.7% in August.)⁹

On June 28, Freddie Mac’s Primary Mortgage Market Survey calculated a 4.55% average interest rate on a 30-year home loan. The mean rate on the 30-year FRM in the September 27 edition of the PMMS: 4.72%. Average interest rates for 15-year FRMs and 5/1-year ARMs were respectively 4.04% and 3.87% back on June 28; they stood at 4.16% and 3.97% on September 27.¹⁸

T I P   O F   T H E   Q U A R T E R
Why would a single parent consider buying a permanent life insurance policy? One, to ease the financial strain on your household from the loss of your income if you pass away. Two, the amount of life insurance coverage provided by your employer is likely not enough. Three, it offers you a way to build an estate.

 LOOKING BACK, LOOKING FORWARD

The third quarter definitely flipped the usual Wall Street yearly script, in which bulls take the summer off between spring and fall rallies. No such behavior in 2018: the three major indices rose as much in the third quarter as some analysts felt they would all year. As the table below shows, the Dow Jones Industrial Average led the way in Q3 rather than the Nasdaq Composite. The small-cap Russell 2000 advanced 3.26% in Q3, and the accepted volatility index for Wall Street, the CBOE VIX, slipped 24.67%. The Dow ended the quarter at 26,458.31; the S&P 500, at 2,913.98; the Nasdaq, at 8,046.35.^1,19

In Q3, the current bull market became the longest in the annals of Wall Street, driving stocks to new record heights. The Nasdaq topped both 7,000 and 8,000, marking the first time it had crossed a pair of 1,000-point thresholds since 1999.²⁰

Sources: wsj.com, bigcharts.com, treasury.gov – 9/28/18^{1,19,21,22,23}

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.

The third quarter was not only remarkably rewarding for investors, but also remarkably tranquil: during the quarter’s last 70 trading sessions, the S&P 500 did not make a single 1% move. That kind of calm may be rare in Q4, which quickly presents investors with both the fall earnings season and a midterm election. CNBC just polled a sample of Wall Street strategists, and their consensus forecast calls for the S&P 500 to advance 1.7% further during the remainder of 2018. Whether the index lives up to that projection or not, this does seem to be a worthwhile time to stay invested in equities. Economic indicators are still solid, for the most part; the latest GDP reading is impressive, and wages are keeping pace with inflation. Investors who want some reassurance might find it in the fact that since 1946, the S&P has never retreated in the 12 months after a midterm election. Wall Street is nothing if not unpredictable, of course, and some legendary market falls have happened early in fourth quarters – but currently, there is much to be optimistic about, and that optimism may persist through the end of the year.²⁴

Q U O T E   O F   T H E   Q U A R T E R

“The past is to be respected and acknowledged, but not to be worshiped. It is our future in which we will find our greatness.”

pierre trudeau

 Mark Aarons, (714)877-8000, Marc@ocmoneymanagers.com, https://ocmoneymanagers.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.)

^{«MMI Disclosure»}

^{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. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. 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. 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 MSCI World Index is a free-float weighted equity index that includes developed world markets and does not include emerging markets. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. 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 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 MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The FTSE 100 Index is a share index of the 100 most highly capitalized companies listed on the London 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 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 Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The CBOE Volatility Index® is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. 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 – quotes.wsj.com/index/SPX [9/30/18]
2 – bloomberg.com/news/articles/2018-09-18/the-trade-war-is-on-timeline-of-how-we-got-here-and-what-s-next [9/18/18]
3 – tinyurl.com/y79gdr2y [9/30/18]
4 – thestreet.com/markets/fed-raises-us-interest-rates-as-trump-tax-cuts-heat-up-economy-14724854 [9/26/18]
5 – investing.com/economic-calendar/cb-consumer-confidence-48 [9/30/18]
6 – tradingeconomics.com/united-states/consumer-confidence [9/30/18]
7 – instituteforsupplymanagement.org/ISMReport/NonMfgROB.cfm?SSO=1 [9/6/18]
8 – crainscleveland.com/government/us-economy-added-201000-jobs-august-while-unemployment-held-39 [9/7/18]
9 – investing.com/economic-calendar/ [9/30/18]
10 – irishtimes.com/news/world/uk/brexit-explainer-the-three-options-available-with-six-months-to-go-1.3647403 [10/1/18]
11 – interest.co.nz/currencies/96102/italy-rejects-fiscal-discipline-set-clash-eu-risk-aversion-rises-euro-falls-nz-govt [9/30/18]
12 – cnbc.com/2018/09/30/china-factory-sector-hurt-in-september-as-trade-frictions-bitec.html [9/30/18]
13 – money.cnn.com/2018/09/17/investing/inr-rupee-indian-currency/index.html [9/17/18]
14 – news.morningstar.com/index/indexReturn.html [9/30/18]
15 – msci.com/end-of-day-data-search [9/28/18]
16 – barchart.com/futures/performance-leaders?viewName=chart&timeFrame=3m [9/30/18]
17 – money.cnn.com/data/commodities/ [9/28/18]
18 – freddiemac.com/pmms/archive.html [9/29/18]
19 – markets.wsj.com/us [9/28/18]
20 – seattletimes.com/business/what-to-do-with-the-market-back-at-record-highs/ [9/1/18]
21 – bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=9%2F28%2F17&x=0&y=0 [9/28/18]
21 – bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=9%2F28%2F17&x=0&y=0 [9/28/18]
21 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=9%2F28%2F17&x=0&y=0 [9/28/18]
21 – bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=9%2F29%2F08&x=0&y=0 [9/28/18]
21 – bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=9%2F29%2F08&x=0&y=0 [9/28/18]
21 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=9%2F29%2F08&x=0&y=0 [9/28/18]
22 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [9/28/18]
23 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [9/28/18]
24 – nerdwallet.com/blog/investing/stock-market-outlook/ [9/28/18]}

The post Quarterly Economic Update appeared first on Money Managers, Inc..

In this Q2 recap: tariffs take center stage, U.S. data signals solid growth, oil gains 18.4%, and the S&P 500 rises nearly 3%.

A review of Q2 2018, Presented by Marc Aarons @ Money Managers, Inc.

THE QUARTER IN BRIEF
At the end of 2018, economists and journalists may look back on the second quarter and see the moment when a global trade war began. Whether one is truly underway or not, the fact is that Q2 was a good quarter for equities. The S&P 500 gained 2.93% in three months, and while the blue chips had their struggles, tech shares ascended once again. Many foreign benchmarks also had a good quarter, even as the Trump administration’s planned import taxes on U.S. trading partners drew tariffs in kind and bred pessimism overseas. Our labor market and manufacturing and service industries continued to look healthy, and consumer confidence and spending reports were largely encouraging. Existing home sales tailed off. Oil made quite a comeback, aided by supply concerns. It was a quarter in which relatively strong economic data was overshadowed by a shift in the playing field for global trade.¹

DOMESTIC ECONOMIC HEALTH
The Trump administration had begun imposing import taxes early in the year, but in the second quarter, the international tariff spat truly grew heated. U.S. duties against metals imported from Mexico, Canada, and European Union nations were met by 25% taxes levied by the E.U. on American jeans, bourbon, orange juice, and other products, and Canada, India, and Mexico announced duties on select imports from America as well. Then the U.S. supplemented its earlier tariffs with new 25% taxes on $34 billion of Chinese imports (set to take effect July 6), and threatened to impose further 10% duties on another $200 billion of Chinese products and a 20% tariff on autos coming out of the E.U. China replied to the new tariff on $34 billion of its exports with an equal tariff on U.S. goods, to be implemented July 6.²
Interest rates moved north in Q2. The Federal Reserve made its second rate move of the year on June 13, taking the target range for the federal funds rate 0.25% higher to 1.75%-2.00%. A new wrinkle was found in the Federal Open Market Committee’s latest dot-plot consensus projection: it suggested four quarter-point rate hikes would occur this year rather than three.³  April saw consumer spending jump 0.6%, but the May number was just a third of that. Consumer wages were up 0.3% in April, then advanced another 0.4% a month later. Retail purchases were up 0.4% in April; then, 0.8% for May.^4,5
Some of the data in the previous paragraph might seem a bit contradictory, but the takeaway was clear: consumers were playing a strong role in keeping the economy healthy. While consumer confidence indices fell during Q2, they were still at lofty levels. The University of Michigan’s index came in at 98.8 in April, then 98.0 in May and 98.2 in June; its historical average is 86.4. The Conference Board announced successive readings of 128.7, 128.0, and 126.4 for its consumer confidence index in April, May, and June, respectively.^6,7
Inflation pressure also mounted during the quarter. The headline Consumer Price Index showed a 2.5% annualized gain through April, and that increased to 2.8% in May; core consumer prices were up 2.1% in a year through April; then, 2.2% as of May. Yearly wholesale inflation jumped from 2.6% in April to 3.1% in May.⁵
Even with those production costs rising, the manufacturing and service sectors of the economy continued their fast growth. The Institute for Supply Management’s factory purchasing manager index improved from 57.3 in April to 58.7 in May, and its service sector PMI also rose across those two months, ascending from 56.8 to 58.6. (At the top of July, more good news rolled in: the factory PMI had climbed to 60.2 in June.) Perhaps these readings would decline in summer, as the federal government reported hard goods orders declined 1.0% in April and 0.6% in May.^4,5
Unemployment declined even further in the second quarter. The headline rate was just 3.9% in April, and it ticked down to 3.8% a month later. In tandem, the U-6 rate, encompassing underemployed workers, fell to 7.6% in May from 7.8% in April. April brought 159,000 net new jobs to the economy, and the Department of Labor said that 223,000 more were created in May.⁵

In late June, the Bureau of Economic Analysis concluded that the economy grew at a middling 2.0% annual pace in Q1. That was still the best first-quarter number since 2015. As the third quarter started, the Federal Reserve Bank of Atlanta’s GDPNow model estimated 3.8% GDP for Q2 (the estimate had been up at 4.8% as recently as June 14).^4,8

GLOBAL ECONOMIC HEALTH
China is coping with U.S. tariffs at an inopportune time. While its official growth target of 6.5% for 2018 may still be met, several signs point to its economy decelerating. Through May, its annualized retail sales pace was the slowest in 15 years, and its year-over-year export growth slipped from 3.7% in April to 3.2% in May. Fixed asset investment growth also tailed off to an 18-month low in the quarter. Given that consumer spending, capital investment, and exports are the pillars of the nation’s economy, this news was troubling. Additionally, the yuan hit a 6-month low versus the dollar in May. China’s central bank had been tightening in step with the Federal Reserve, but it broke ranks in Q2 and left its benchmark interest rate unchanged; it also cut its reserve requirement ratio for commercial banks by 1% in April and another 0.5% in June. Japan, meanwhile, warned the U.S. that it could impose import taxes of its own on U.S. products, especially if the Trump administration announced car tariffs in addition to the existing levies on steel and aluminum from Japan.^9,10

The European Union held its breath as power struggles played out in Italy and Spain: the ascension of the Five-Star Movement and League party in the former country, the replacement of one Prime Minister (Mariano Rajoy) with another (Pedro Sanchez) in the latter. So far, neither country has made noise about exiting the euro. Eurozone yearly inflation accelerated during the quarter, reaching 1.9% in May – the most in 13 months, just beneath the European Central Bank’s 2.0% target. This was a factor contributing to the sunset of the ECB’s longstanding asset-purchase campaign. The ECB announced it will gradually phase out this effort in the fourth quarter and stop buying bonds entirely in 2019. At their June 14 meeting, ECB policymakers also pledged to hold interest rates at current levels through the summer of 2019.¹¹
WORLD MARKETS
The MSCI Emerging Markets index took it on the chin during the quarter: it slipped 8.66% (and was down 7.68% after six months of 2018). The MSCI World index, on the other hand, gained 1.09% in three months.¹²
How did other major benchmarks do in the quarter? Results were mostly positive. The winners included the CAC 40 in France, +3.02%; the United Kingdom’s FTSE 100, +8.22%; Japan’s Nikkei 225, +3.96%; India’s Sensex, +7.45%; Australia’s All Ordinaries, +6.89%; Canada’s TSX Composite, +5.92%. The losers included the German DAX index, -0.82%; Hong Kong’s Hang Seng, -3.78%; China’s Shanghai Composite, -10.14%.¹³

COMMODITIES MARKETS
WTI crude soared 18.42% in the second quarter, leading all commodities except for the international oil benchmark, Brent crude (up 18.92%). WTI crude ended the quarter at $74.25, with supply concerns pushing up the NYMEX price by about $10 during the second half of June alone. Other notable Q2 gains: orange juice, 12.72%; lumber, 12.64%; RBOB gasoline, 9.70%; wheat, 6.19%; the U.S. Dollar Index, 5.56%; cotton, 4.38%; natural gas, 3.85%; palladium, 3.02%.^14,15

Numerous commodities suffered Q2 setbacks. Some of the significant losses: silver, 1.53%; copper, 3.73%; cocoa, 4.18%; sugar, 4.82%; coffee, 7.24%; gold, 7.25%; platinum, 8.60%; corn, 11.61%; soybeans, 18.66%. Gold finished the quarter at $1,254.20 on the COMEX; silver, at $16.06.^14,15

REAL ESTATE
Once again, mortgage rates ascended. As a look at Freddie Mac’s March 29 and June 28 Primary Mortgage Market Surveys shows, interest rates on adjustable-rate home loans made the biggest move. The mean rate on a 5/1-year ARM was 3.66% on March 29, but 3.87% on June 28. Rates on 30-year FRMs averaged 4.55% in the June 28 PMMS, up from 4.44% in late March. Regarding the refinancer’s favorite, the 15-year FRM, the story was similar: a 3.90% mean interest rate on March 29, a 4.04% mean rate on June 28.¹⁶

With the housing market presenting buyers with gradually rising mortgage rates, thin inventory, and high prices, it is little wonder that the pace of home buying decelerated in Q2. The National Association of Realtors found sales slowing 2.7% in April, and then another 0.4% in May. NAR’s pending home sales index, the nation’s top measure of housing contract activity, also weakened. It retreated 1.3% in April and then 0.5% a month later.^4,5

As for new home sales, the story told by Census Bureau reports was slightly different. They were up 14.1% year-over-year through May; they fell 3.7% in April, but surged 6.7% a month later. The median sale price had declined $10,600 in 12 months to $313,000, and the inventory of new homes on the market actually grew 1% from April to May.¹⁷

Groundbreaking, as tracked by the Census Bureau, increased 5.0% for May after a 3.1% reversal during April. Building permits fell 1.8% for April and 4.6% a month afterward.⁵

T I P   O F   T H E   Q U A R T E R
Are you a freelancer? Here is a mid-year reminder to get ready for taxes. See if you can calculate how much you’ll have to pay the I.R.S. in April 2018. Start setting aside a little money per month, so that you can pay the bill with ease.

LOOKING BACK… LOOKING FORWARD
The small caps came in first in the second quarter: the Russell 2000 rose 7.43% to 1,643.07. After its sizable Q2 advance, the Nasdaq Composite stood at 7,510.30. The Dow ended the quarter at 24,271.41, the S&P 500 at 2,718.37. The CBOE VIX? The stock market’s primary fear gauge settled at 16.09 on June 29, down 19.43% in three months.¹

Sources: wsj.com, bigcharts.com, treasury.gov – 6/29/18^{1,18,19,20,21}

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.

So, what could this third quarter hold for equities? Can the market retain its upward bias, maybe even strengthen it as the summer proceeds? It is possible, but bulls will have to overcome some big factors: the major headwinds from the multinational tariffs fight, perceptions that growth may be slowing or moderating in China and the European Union, rising inflation, and the ongoing normalization of monetary policy by the Federal Reserve. Then again, the recent ISM PMIs, consumer confidence surveys, the labor market, and decent-to-good retail sales and consumer spending figures seemed to affirm the economy’s health this spring; the first estimate of Q2 GDP may also impress investors. In addition, the Fed’s monetary policy remains essentially supportive. If the trade battles continue to siphon enthusiasm from Wall Street, however, bulls may trot to the sidelines and stay there for much of the quarter.

Q U O T E   O F   T H E   Q U A R T E R

“Politeness and consideration for others is like investing pennies and getting dollars back.”

Thomas Sowell

Marc Aarons, 714-887-8000 or marc@ocmoneymanagers.com

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MMI Disclosures

CITATIONS:

1 – quotes.wsj.com/index/SPX [6/29/18]

2 – marketwatch.com/story/trade-war-tracker-here-are-the-new-levies-imposed-and-threatened-2018-06-22 [6/22/18]

3 – forbes.com/sites/advisor/2018/06/19/fed-now-hinting-at-four-potential-rate-hikes-in-2018/ [6/19/18]

4 – marketwatch.com/economy-politics/calendars/economic [6/29/18]

5 – investing.com/economic-calendar/ [6/30/18]

6 – ycharts.com/indicators/consumer_sentiment [7/2/18]

7 – investing.com/economic-calendar/cb-consumer-confidence-48 [7/2/18]

8 – forbes.com/sites/chuckjones/2018/07/01/second-quarter-u-s-gdp-growth-forecast-drops-1-in-two-weeks/ [7/1/18]

9 – scmp.com/week-asia/opinion/article/2153142/trade-war-looms-us-looks-confident-china-not-so-much [6/30/18]

10 – tinyurl.com/yafqsgwk [6/29/18]

11 – focus-economics.com/regions/euro-area [6/27/18]

12 – msci.com/end-of-day-data-search [6/29/18]

13 – news.morningstar.com/index/indexReturn.html [6/30/18]

14 – barchart.com/futures/performance-leaders?viewName=chart&timeFrame=3m [7/1/18]

15 – money.cnn.com/data/commodities/ [6/29/18]

16 – freddiemac.com/pmms/archive.html [7/2/18]

17 – tradingeconomics.com/united-states/new-home-sales [6/25/18]

18 – markets.wsj.com/us [6/29/18]

19 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=6%2F30%2F08&x=0&y=0 [6/29/18]

20 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [6/29/18]

21 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [6/29/18]

^{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. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. 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. 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 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 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 most highly capitalized companies listed on the London 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. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. 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 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 DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt 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 Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The CBOE Volatility Index® is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. 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}

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