Stocks Weakening?

This Week’s Highlights:

1. The stock market indices are showing signs of possibly “topping” and weakness is starting to show.
2. We remain cautious, with continued underweighting in the stock/equity area for all risk levels.
3. Economic news remains mixed, but we should soon see if the winter weather was to blame for short term economic weakness.
4. The Federal Reserve talks longer term for a low interest rate environment.

READ ON FOR FURTHER DETAILS…………………………………………………………………

 The Markets:

The major market indices like the Dow Jones Industrials and the S&P 500 Index have shown signs of some weakening over the past week.  The Dow suffered two back-to-back days of triple digit declines and as of 4/7/14 sits with approximately a 2% loss so far this year. (Google Finance)

The Federal Reserve’s decision to start winding down quantitative easing (QE), which is the popular term for its monthly bond-buying program, may also be playing a role in the recent struggles for the stock market in general.  Interest rates remain low – a plus for stocks, but the hefty injections of cash by the Fed have also played a part in boosting shares, especially the more growth-oriented speculative shares. If the Fed remains on its current path, those bond buys could cease by year-end.

Still, the parts of the market known for steadier returns and regular dividends, such as more value oriented stocks, have held up quite well over the last month (StockCharts).

Our Outlook:

The financial markets so far in 2014 have acted as we have been expecting.  Stocks are struggling to move higher, while both fixed income/bonds and the “alternative” segments of the markets have produced positive results.  Our portfolios continue to fare well relative to risk so far this year.  We remain underweighted in the stock/equity category for all risk levels, and continue to search for stocks of companies that appear undervalued in this market environment.  We expect either some type of market correction moving forward, or at best, a possible sideways movement for stocks in the longer term.  We will keep you advised.

Winter morphs into spring

The harsh winter is slowly becoming a memory and we are beginning to see a modest pick-up in economic activity. Last Friday, the Bureau of Labor Statistics announced that nonfarm payrolls increased by a respectable 192,000 in March, following an upwardly revised 197,000 in February. That’s much better than December-January’s average of 114,000 (BLS).

Yellen and low interest rates

This leads us to a speech given last Monday by Fed Chief Janet Yellen. Among many of its functions, the Federal Reserve is probably best known for setting and influencing interest rates.  Yellen spent a considerable amount of time discussing why she believes there are still plenty of problems in the labor market, and why keeping interest rates low for an extended period can help to boost economic activity and job growth.

Yellen cited 5 reasons why she believes labor market woes are cyclical (due to the Great Recession) and can be remedied, in part, by a Fed policy of low interest rates:

1.  There are nearly 7 million people who work part-time but want full-time work.

2.  The drop in the unemployment rate has failed to “raise wages for workers as in past recoveries.” It’s a supply/demand issue. With a few exceptions, businesses have an ample pool of labor to choose from and aren’t feeling compelled to lift salaries.

3.  The “extraordinarily large share of the unemployed who have been out of work for six months or more.” Note we’re still well above the peak level seen in prior recessions such as 1982, 1991 and 2001. Yet the last recession officially ended in June 2009 (NBER).

4.  Quit rates are “noticeably below levels before the recession.” Workers are more reluctant to leave jobs if they fear they may not find a suitable replacement.

5.  The drop in the Labor Force Participation Rate from 66% to 63%. Some of the decline is due to baby boomers that are beginning to retire, but Yellen believes “a significant amount of the decline” can be traced to the slow economic recovery.

Bottom line

The above makes for great conversation among academics, analysts and economists. For the average investor, it means Yellen believes a continuation in low interest rates can encourage businesses and consumers to spend, which should boost hiring.  It may be some time before savers in C.D. type assets can expect higher yields.

God Bless,

Your TEAM at F.I.G. Financial Advisory Services, Inc.

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¹ The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly.  Past performance does not guarantee future results.

³ The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly.  Past performance does not guarantee future results.