Highlights of this Week’s Update:
- Terror hits France and is a vivid reminder of the evil that still exists in the world.
- Volatility hits stocks with a negative week.
- Interest rates dip with lower stock prices.
- Oil prices continue to slide along with gold.
- Earnings are the longer term key to stock prices.
- Any rate hike at this time would mostly be for symbolic reasons.
- S. economy still looks to grow slowly.
READ ON FOR FURTHER DETAILS…………………………………………….
Terror Strikes Again:
The tragic terrorist attacks that unfolded in Paris over the weekend have left an indelible mark on so many of us. The horrific nature of what transpired is difficult to comprehend, but it’s a sad reminder of the world we live in.
As the world stood by the U.S. after 9-11, we stand with the brave souls who are dealing with the horror in their midst. Our thoughts and prayers are with them.
It would be normal to expect the global financial markets to approach this week very cautiously after such terrible events, as they bring renewed uncertainty and a reminder of what true terror still exists in this world and can happen anywhere and at any time.
The Markets:
Volatility crept back into the stock market again last week, with the Dow Jones Industrial Average dropping 3.71% and the broader based S&P 500 giving up 3.63%. The Dow is now down 3.24% for 2015 as of Friday’s close. Even though the first two weeks of November have produced negative stock market results, this comes after the best October in 4 years which saw gains in excess of 8%. (MarketWatch)
With stock prices declining last week, interest rates fell and the yield for the 10 year U.S. Treasury dropped to 2.28% by the end of the week. (U.S. Treasury) The fixed rate for a 30 year mortgage on Friday ranged from 3.875%-4.29%, while 15 year fixed rates were 3.25%-3.47%. (Bankrate.com)
Oil prices continued to fall, and the West Texas Intermediate Crude closed out Friday at $40.73 per barrel, while gold fell to $1,081.50 per ounce. (CNBC)
Growing expectations the December 16th Federal Reserve meeting will bring about the first in what is expected to be a series of gradual rate hikes played a big role in snapping a six-week winning streak in the major market indexes (MarketWatch data).
Concerns over a possible interest rate hike in December helped add to last week’s market results. Yes, we’ve heard chatter about rate hikes before that didn’t come to pass, and long-term investors should look past tweaks in Fed policy that create short-term volatility.
Any hike, however, would be a mostly symbolic move. It would represent the first increase in the fed funds rate in almost 10 years, and would start to get short-term rates off the emergency levels implemented during the late-2008 economic tailspin.
While Fed policy can influence stocks, corporate profits and expectations of profit growth are probably the biggest drivers of equity prices. Using monthly data going back to 1900 (Robert Shiller, PhD, Yale.edu), there is a 95% correlation between S&P 500 earnings and the S&P 500 Index!
While earnings will likely decline slightly when third quarter data are complete and are forecast to drop again in Q4, analysts expect a resumption in growth in 2016 (Thomson Reuters). Of course, forecasts beyond a couple of quarters become very problematic because there are so many variables to contend with. But expectations the U.S. economy will remain on an upward though unimpressive track helped cushion the decline in August and September and encouraged investors last month.
In other words, it’s the fundamentals that are the biggest influence on stocks over the longer term.
The Economy
Last week’s release of retail sales for October highlighted the consumer remains cautiously engaged. Retail sales rose just 0.1% (U.S. Commerce Dept.). And that came despite a 0.5% decline in the volatile autos category and a 0.9% drop at gasoline stations (lower gasoline prices reduce gross receipts at gas stations). If we pull out the two volatile categories, so-called “core sales” increased a modest 0.3% in October (U.S. Commerce Dept.), which is the seventh rise in eight months.
Sales ex-autos, gas stations = core sales
The graph above offers several takeaways—
- Comparing data points that plot the changes versus one year ago aid in establishing trends and help put volatile monthly numbers into context.
- The focus here is on ‘core sales,’ which have held in a modestly positive range for over three years.
- Look past the dips in early 2014, as the brutal winter temporarily hurt sales. In turn, look past the spike in January 2015, which occurred thanks to a very easy comparison the prior year.
- Since the beginning of the year, core sales have held in a narrow range of growth, but growth has been positive – up 3.5% from the prior year as of October.
- ‘Retail sales’ have consistently exceeded ‘sales ex-autos’ due to strong auto sales. Auto sales have been one of the few very bright spots in the economy.
We wish you all a safe week ahead, and are here to answer any questions or concerns. Please be sure to call us today for your personal year-end review if you have not already done so. We appreciate the privilege to be of service.
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.
5 New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results.
6 London Bullion Market Association; gold fixing pricing at 3 p.m. London time; Prices can and do vary; past performance does not guarantee future results.
Looming Risks Overlooked