Highlights of This Month’s Review:
1. Overview of the Markets and Our Outlook
2. Don’t Forget the True Meaning of the Season Ahead
3. Retail Sales
4. The Federal Reserve
The Markets:
November saw the Dow Jones Industrials top 16,000 for the first time, and the S&P 500 Index peak above 1,800 for the first time. The primary reasons – record profits (S&P Dow Jones Indices) and low interest rates compliments of Federal Reserve policy. The NASDAQ Composite has yet to reclaim the former glory of the 2,000 Internet bubble. It’s not back to its March 10, 2000 closing high of 5,048.62 (24/7 Wall St), but it did reclaim 4,000 for the first time since September 2000 (Big Charts). We could continue to be in a topping phase for the stock market that very well might limit much upside from here.
Interest rates moved back and forth during the past month. The 30 year fixed mortgage rate now stands at approximately 4.38% and the 15 year fixed rate is at 3.42%. The high for the 30 year mortgage for this year was back on July 5th when it hit 4.7%. (Bankrate.com) Our portfolios for all risk levels are still underweighted in stock exposure, and have underperformed our various risk targets so far this year since we first began reducing stock exposure in the first quarter. We remain diversified in our overall asset allocation, and have seen signs of a possible stock market “topping” process since July and continue to see this possibility as of this date. We do not feel the risk/reward ratio for adding to stocks at this time is favorable. Our outlook regarding interest rates as we move into 2014 is to see rates possibly move lower or in a sideways pattern, which should help keep bond prices stable. We will keep you advised.
Let’s Not Forget the “True” Meaning of Christmas:
Unless any leftovers remain, the memory of Thanksgiving turkey and all the fixings are quickly drifting into the rear-view mirror, and the hustle and bustle of the holiday season is at hand. Christmas brings back so many memories. Many of us can’t help but be reminded of the annual specials that graced (and still grace) the airwaves.
Some that come to mind include Dr. Seuss’ How the Grinch Stole Christmas, Rudolph the Red-Nosed Reindeer, and of course, A Charlie Brown Christmas. Charles Schultz chronicled life through the eyes of young children; yet, their take on ordinary events was that of an adult with a keen perspective. Without a doubt, that held true in the Peanut’s special.
In some respects, not much has changed since the show originally aired in the 1960s. Then, as now, Christmas is heavily commercialized. Charlie Brown sensed the ‘artificialness’ of the holiday season when he chose that scrawny little Christmas tree over a shiny aluminum one. But it took his pal Linus to drive the point home when he recited the real meaning of the season from the Book of Luke. As Linus so eloquently summed it up, “That’s what Christmas is all about, Charlie Brown.”
The “Fight” for Retail Sales:
Nonetheless, the ideal is far from reality. Holiday shopping is big business for the nation’s retailers. Seasonal employment rises and the short period can generate between 20-40% of an annual stores’ sales (National Retail Federation or NRF).
A slow economic recovery and an adequate-at-best job market may not provide the holiday cheer many businesses count on. Much may depend on that store’s niche, its clientele and discounts offered. The NRF announced on October 3rd it expects sales in November and December to “marginally increase 3.9% to $602.1 billion,” up from a 3.5% rise in 2012 and a 10-year average annual growth of 3.3% (NRF press release). The rise comes despite six fewer shopping days between Black Friday and Christmas. Headwinds include a recent dip in consumer confidence (Conference Board data) and overall sluggishness in consumer spending this year.
Note: 2013 encompasses data from January 2013 – October 2013; Retail sales ex-autos, ex-gas stations provides us with so-called core sales. Excluding gasoline stations helps to filter out changes in gasoline prices.
Take a look at the chart above, which compares the average monthly change in key categories in the retail universe in 2012 to the first ten months of 2013. With the exception of autos, spending has slowed from 2012’s pace.
The Markets and the Fed
Much has been made over the Fed’s $85 billion in monthly bond purchases and a fed funds rate that has been kept near zero since late 2008. The Fed is trying to use low interest rates to spark increased consumer and business spending, fuel gains in housing, and quicken the pace of economic growth. In turn, that would speed up hiring.
When the Fed is convinced the recovery has entered a more permanent phase, it would likely end its bond-buying program and begin hiking the fed funds rate. For savers searching for safe fixed income investments, that day can’t come too soon. While the focus remains on job creation and the unemployment rate, the Fed is also carefully monitoring prices.
Over the many decades, central bankers were concerned about rising prices. At 1.0%, the Consumer Price Index (CPI) is below the Fed’s longer-run target of 2.0% year-over-year, and it gives ammunition for those at the Federal Reserve who would like to maintain current monetary policy amid nagging fears that the end to monthly bond purchases could tip the balance towards deflation. We haven’t experienced a sustained period of deflation, or falling prices, since the 1930s. Odds of such an event are low, but it is something the Fed very much wants to avoid.
The Japanese economy has been stuck in a modest deflationary cycle for about 15 years (St. Louis Federal Reserve data), the yield on its 10-year government bond remains firmly below 1% (Bloomberg), and Japanese stocks would have to more than double in price just to re-capture the all-time high reached in1990 – that’s nearly a quarter of a century ago!
Let’s try not to follow the crowds that get caught up in the turmoil and confusion the end of the year brings. Maybe a healthy balance is what’s needed. There is a real desire to express gratitude through gifts for loved ones and cherished friends. But it’s difficult to put a price on the real meaning of the season and time spent with family and those close to us. Have a great week!
God Bless,
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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.
2 The NASDAQ Composite is an unmanaged index of 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.
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