In This Week’s Update:
1. Stock indices remained negative and saw an accelerated decline at the end of last week. Emerging Markets have provided some new concerns for the global economy and currencies as we begin 2014.
2. Our portfolios at all risk levels have remained underweighted in stock/equity exposure and we continue to monitor the current markets as we move into 2014. We have been expecting a “correction” to occur and we might be seeing the start of what we have been anticipating now for several months. We will keep you advised.
3. First FED meeting of 2014 will be this week under it’s new president-Janet Yellen. There is an expectation for another small “taper” of their monthly bond buys, but with the recent weaker economic news, it is very difficult to second guess the Fed decisions. Their announcement of this week’s decision will be announced around 1:15PM central time on Wednesday.
READ ON FOR MORE DETAILS………………………..
The Markets and Economy:
We’re almost through January, the weather is unusually cold in parts of the country, and we’ve hit a new round of turbulence in the stock markets. Prices don’t consistently move in one direction and last week was a good reminder. As of Friday’s close, the Dow Jones Industrial is now down just over 4% to start the New Year. The broader based Standard & Poor’s 500 stock index has dropped approximately 3.11% so far in the first 24 calendar days of 2014.
We have remained underweighted in our overall exposure for all risk levels to stocks/equities anticipating some type of stock market decline over the past several months. We may be seeing the start of something bigger to the downside with the current weakness and volatility. If so, we hope to take advantage of lower prices for stocks/equities at some point in the future. Only time will tell, and we will keep you advised. In the meantime, we believe patience will pay-off for us in the coming year.
Much of the blame for the latest pothole in the road can be attributed to international events, and in particular, emerging markets. Weakness started on Thursday after a Purchasing Managers Index (PMI) of manufacturing in China unexpectedly fell to a six-month low (Markit Economics) – see Figure 1.
Put in perspective, the index registered a reading that places it in the middle of the range we’ve seen over the last three years (Markit Economics). Nonetheless, emerging markets, which have benefited in the past from strong Chinese growth, reacted negatively. Potentially more concerning – China’s unofficial Beige Book, which is a quarterly look at business conditions, contained a comment that the “credit transmission is broken (Wall Street Journal).” That’s jargon for liquidity issues in the banking system beyond what we normally might see heading into the Chinese New Year. It’s something that bears watching.
Note: Readings above 50 suggest expansion, readings below 50 suggest contraction
The fallout: currencies tumbled. Turkey’s lira fell to a record low against the dollar, Argentina’s peso had its worst daily decline since 2002, and the Russian ruble and South African rand slid to five-year lows (Wall Street Journal, Bloomberg).
Emerging market economies have been the beneficiaries of the so-called “hot money” from the Fed. Worries about an impending reduction, or “tapering” have weighed on developing economies, especially those with trade deficits because they depend on foreign cash inflows. Beneficiaries included longer-term U.S Treasuries, which have seen rates drop and prices rally since the start of the year.
Corporate Earnings Shift into Higher Gear:
While global events were felt in the U.S., 4th quarter earnings season is well underway. After a sluggish start and a number of high-profile misses (Wall Street Journal, Bloomberg), last week’s spate of reports is helping to lift overall numbers. Of the 122 S&P 500 companies have reported earning so far, 64% have topped analyst expectations, which is just ahead of the long-term average of 63% (Thomson Reuters). Other issues for concern remain, however, with earnings expectations in many cases having been reduced and revenues are still sluggish to fuel future earnings.
Get Ready for the FED:
This week’s Fed meeting is quickly coming into focus. The Federal Reserve began paring back monthly bond buys at the December meeting, implementing a very modest $10 billion tapering to $75 billion.
The Fed has said it’s buying bonds in order to hold down rates, stimulate economic activity, and boost hiring. But December’s 74,000 rise in nonfarm payrolls (BLS) came in well below expectations (Bloomberg). Predicting monthly payroll numbers is not an exact science, and government data can reflect, on occasions, outliers, i.e., outsized gains or weakness in job creation.
Outguessing the Fed is always dicey at best, and last week’s problems in emerging markets could complicate matters. Nonetheless, the Fed still appears to be on track for another cutback in purchases at Wednesday’s meeting.
“We’re likely to continue on a path of gradual, measured reductions in the pace of (bond) purchases, assuming the economy tracks as we expect it to,” San Francisco Fed President John Williams said in an interview early in the month (Wall Street Journal).
Besides, Fed officials would like to move away from bond buys and use what’s called “forward guidance” to let investors and the general public know it wants to keep the fed funds rate at near zero for a considerable period of time.
We appreciate the privilege to serve each of you and look forward to working together in the years to come. Be sure to call now if you have not yet scheduled your year-end review and personal planning session.
God Bless,
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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